Bloch and Brearley: Employment Covenants and Confidential Information: Law, Practice and Technique 9781780432182, 9781784512385, 9781784512347

Citation preview

Bloch and Brearley: Employment Covenants and Confidential Information Law, Practice and Technique Fourth Edition

Bloch and Brearley: Employment Covenants and Confidential Information Law, Practice and Technique Fourth edition

Selwyn Bloch QC Littleton Chambers

Kate Brearley Partner, Stephenson Harwood LLP With contributions by: Jeremy Lewis, Barrister Gavin Mansfield QC Adam Solomon QC Kiersten Lucas, Solicitor Purvis Ghani, Solicitor Craig Rajgopaul, Barrister Alexander Robson, Barrister

BLOOMSBURY PROFESSIONAL Bloomsbury Publishing Plc 41–43 Boltro Road, Haywards Heath, RH16 1BJ, UK BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2018 Copyright © Selwyn Bloch and Kate Brearley, 2018 All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www.nationalarchives.gov.uk/doc/open-governmentlicence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2018. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN:

HB: ePDF: ePub:

978-1-78043-218-2 978-1-78451-234-7 978-1-78451-233-0

Typeset by Evolution Design & Digital Ltd (Kent) To find out more about our authors and books visit www.bloomsburyprofessional.com. Here you will find extracts, author information, details of forthcoming events and the option to sign up for our newsletters

For our families

Preface It is difficult to imagine that 25 years have passed since the first edition of this book. It was then fewer than 300 pages in length. In the intervening period the topics we cover have been heavily litigated, leading to both clarification and increasing complexity in the law and practice in this field. We are fortunate to be working in such a fascinating area. The courts constantly struggle to draw a fair line between freedom of contract and freedom of competition. Whilst encouraging legitimate entrepreneurial activity of employees, the courts must protect the legitimate interests of employers who have invested time, energy and money in their businesses, including training and encouraging those who may, ironically, become their greatest source of future competition. Since the 3rd edition there has been so much development in law and practice in this area that some chapters have been largely re-written, while others have been substantially amended and expanded. Changes in the law have continued apace as we worked to complete this edition. Most recent changes have included the following: •

in February 2018 the Government published its decision not to proceed with possible legislation in relation to restrictive covenants in employment contracts (see Chapter 1);

•

in the same month the Government issued its ‘Consultation on draft Regulations concerning trade secrets’ together with draft Regulations aimed at transposing into English law the EU Trade Secrets Directive published on 8 June 2016 (Directive 2016/9430) (see Chapter 6);

•

in April 2018 the Supreme Court gave its decision in Morris-Garner v One Step (Support) Ltd [2018] UKSC 20 making significant changes to the law as previously understood in regard to ‘Wrotham Park’ damages, now to be known as ‘negotiating’ damages; (see Chapter 16); and

•

also in April, hot on the heels of the decision in Morris Garner, the Supreme Court gave its decision in Newcastle upon Tyne NHS Foundation Trust v Haywood [2018] UKSC 22 on the question of when in the context of a contractual dispute the notice period begins to run if an employee is dismissed on written notice posted to him (see Chapter 9).

In view of the ever broadening subject matter, we have been fortunate to be joined by contributors from both sides of the legal profession, to whom we are very grateful for their dedicated work whilst in the middle of busy practices, namely, Jeremy Lewis, and Gavin Mansfield QC (both of whom contributed to the 3rd edition) as well as our new contributors, Adam Solomon QC, Kiersten Lucas, Purvis Ghani, Craig Rajgopaul and Alexander Robson. vii

Preface

We are very grateful to the numerous other Littleton Chambers barristers and Stephenson Harwood solicitors who have helped with research, checking and the numerous other tasks that were necessary for the preparation of this edition, namely from Littleton Charlotte Davies, Nicholas Goodfellow, Marc Delehanty, Mark Humphreys, Sophia Berry, Grahame Anderson and Georgina Leadbetter and from Stephenson Harwood, Barbara Allen, Anika Chandra, Jonathan Kirsop, Alison Llewellyn, Rob Jacob, Simon Alibert, Louis Flannery QC, Sean Jeffery, Jane Leech and Richard Freedman. Particular thanks must also go to Julia Cooper, Kate’s PA, for all her help and support and her unfailing good humour in the face of competing demands for her time. We are grateful also to members of the legal profession for their contribution in all its forms including, generous endorsement of passages by the judiciary, citation of this book in court by counsel and comments from those who have taken the trouble to make suggestions for improvement. We thank our editorial team, especially Kiran Goss who has worked with us on all four editions and also Claire Banyard for their endless patience and persistence. We hope that this substantially re-written edition will be found useful by our readers. The law is as stated on 28 February 2018 but wherever possible we have included cases and statutory changes since then as we have gone through the process of finalising this edition. Lastly, as ever, we express our heartfelt thanks to our respective spouses and children who have endured (almost without complaint) the diversion from family life that working on this book has inevitably caused. Selwyn Bloch QC and Kate Brearley London April 2018

viii

Contents

[References are to page number] Prefacevii Table of Statutes xxv Table of Statutory Instruments xxxi Table of Cases xxxv Chapter 1   Aim and synopsis of the book

1

Selwyn Bloch QC and Kate Brearley Introduction2 The employee as a source of competition 2 The employer as an obstacle to the employee 2 Types of competitive activity 3 Restraint of trade doctrine 3 1. General structure of this book 4 The employment relationship (Chapter 2) 4 The implied duty of fidelity (Chapter 3) 4 Employee fiduciary duties (Chapter 4) 5 Express terms of the contract of employment (Chapter 5) 5 Confidential information (Chapter 6) 5 Database rights (Chapter 7) 5 Practical steps to protect the employer’s interests (Chapter 8) 5 Termination of employment (Chapter 9) 6 Potential conflicts between ex-employer and ex-employee (Chapters 10–13) 6 Legitimate protection for the ex-employer (Chapter 10) 6 Reasonableness of express covenants (Chapter 11) 6 Drafting restrictive covenants (Chapter 12) 6 Introducing/varying restrictive covenants (Chapter 13) 7 Remedies available to the (ex-)employer (Chapters 14–16) 7 Interim remedies: general (Chapter 14) 7 Specific interim remedies (Chapter 15) 7 Final remedies (Chapter 16) 7 The international element (Chapter 17) 8 Discovering competitive activity/team moves (Chapters 18 and 19) 8 Discovering competitive activity: the immediate practical issues (Chapter 18) 8 ix

Contents

Team moves (Chapter 19) 2. Balancing the interests of employer and employee: an introduction 2(a) Implied duty of fidelity/fiduciary duties 2(b) Express terms applying during employment 3. Balancing the interests of an ex-employer and ex-employee: introduction 3(a) End of implied duty of fidelity/fiduciary duties 3(b) Terms applying after employment 4. Rejection of proposed legislative intervention

8 8 9 10 11 11 11 12

Chapter 2   The employment relationship

15

Kate Brearley and Purvis Ghani Introduction15 1. Who is an employee? 17 1(a) Contract of employment or contract for services? 20 1(b) The tests 22 1(c) Relevant factors 23 1(d) The power of the parties to dictate the status of the contract 32 1(e) Directors as employees 33 1(f) Members of limited liability partnerships as employees 37 1(g) Ex-employees as independent contractors 38 2. The creation of the contract of employment 39 2(a) Commencement of the employment relationship 40 2(b) The form of the contract 40 2(c) The terms of the contract 41 2(d) Written statement of particulars of employment 42 Chapter 3   The implied duty of fidelity

45

Selwyn Bloch QC and Jeremy Lewis A. Introduction: the duty of fidelity 46 Nature of the duty of fidelity: overview  46 Duration of the duty of fidelity 48 The duty of fidelity and fiduciary duties 49 B. The duty of fidelity and business protection 51 1. Competition during employment 51 1(a) Working time 52 1(b) Spare time 53 2. Preparations during employment to compete after employment has  ended55 2(a) Prohibited activities 62 2(b) Permitted activities 69 3. Preparatory activity during garden leave 73 4. Duty of disclosure to the employer 76 4(a) Wrongdoing 78 4(b) Information concerning acts preparatory to competition/ answering questions by the employer 90 4(c) Inventions, discoveries and copyright 100 x

Contents

Appendix to Chapter 3   Preparatory activity during employment to compete after employment

105

Chapter 4   Employee fiduciary duties

109

Selwyn Bloch QC and Jeremy Lewis Introduction110 1. When does an employee who is not a director owe fiduciary duties? 112 1(a) The Fishel test for fiduciary obligations 112 1(b) Circumstances indicative of a fiduciary relationship 117 1(c) De facto directors 132 1(d) Shadow directors 139 1(e) Other workers 141 1(f) Members of limited liability partnership 142 1(g) Fiduciary duties to other group companies 145 2.  Scope of fiduciary duties 145 2(a) Overview: the statutory framework for directors and dangers in extrapolating to non-director employees 145 2(b) Directors’ duties: the Companies Act 2006 146 2(c) The duty to act within powers/for proper purposes 148 2(d) Good faith and promotion of company’s interests 150 2(e) Duty to exercise independent judgment 155 2(f) Duty to exercise reasonable care, skill and diligence 155 2(g) The no conflict and no profit rules 156 2(h) Exploitation of business opportunities during the employment relationship/directorship168 2(i) Fiduciary duty and preparation to compete 175 2(j) Exclusion from management/garden leave 188 2(k) Duty of disclosure 196 2(l) Exploitation of business opportunities after ceasing employment/directorship214 2(m) Comparison of the position of employees with and without relevant fiduciary duties 232 Chapter 5   Express terms of the contract of employment

239

Kate Brearley and Purvis Ghani Introduction240 1. Terms recording/extending obligations included within the duty of fidelity241 1(a) A general statement of the duty of fidelity 245 1(b) Working hours 245 1(c) Control of outside activities 248 1(d) Non-poaching of employees 250 1(e) Disclosure of information and reporting procedures 253 1(f) Identifying the employer’s property 257 1(g) Confidentiality and the protection of trade secrets 257 1(h) Patents, copyright and certain other intellectual property 258 xi

Contents

2. Terms which define the employee’s role 260 2(a) Job title, duties and reporting line 262 2(b) Joint appointments 264 2(c) Mobility 264 2(d) Interaction with the press/media and social media  266 2(e) Garden leave 269 2(f) Special case of fiduciaries 269 3. Terms pertaining to termination 270 3(a) What justifies summary dismissal 270 3(b) Notice required to terminate the contract 277 3(c) Controlling the employee’s communications regarding his departure295 3(d) Garden leave 296 3(e) Return of property 306 3(f) Resignation from offices 309 3(g) Miscellaneous terms 311 Chapter 6   Confidential information

315

Selwyn Bloch QC and Craig Rajgopaul Introduction316 Different kinds of business information 318 Practical effect of the distinction between different types of information 319 When is it necessary to distinguish between trade secrets, mere confidential information and general skill and knowledge? 320 Uncertainty in the law regarding different categories of information 320 1. Requirements of confidential information 321 1(a) Quality of confidence 322 1(b) Circumstances importing an obligation of confidence 323 1(c) Detrimental breach 324 2. Distinction between trade secrets, mere confidential information and skill and knowledge: detail 325 2(a) Definition of trade secrets 326 2(b) Other definitions of trade secrets 329 2(c) EU Trade Secrets Directive definition of trade secrets 330 2(d) Impact of European Convention on Human Rights and Human Rights Act 1998 and possible effect on definitions of trade secrets and confidential information 331 2(e) Case study on trade secrets: Faccenda in detail 335 2(f) Conclusion regarding the distinction between trade secrets and mere confidential information 338 2(g) Distinction between general skill and knowledge and confidential information/trade secrets (including relevance that information is remembered) 339 2(h) Non-confidential information 342 2(i) Can (mere) confidential information be protected by express covenant?343 3. Express confidentiality covenants 347 xii

Contents

4. 5. 6. 7.

Confidential information must be properly identified 352 Restricted shelf life of confidential information 355 Confidential information received by third parties 355 Injunctions to protect confidential information affecting vested rights of third parties 357 8. Confidential information disclosed in pre-employment period 357 9. Jointly owned confidential information 359 10. Defences 359 10(a) Publication 360 10(b) Public interest defence 361 10(c) Effect of repudiatory breach of contract in relation to breach of confidence369 10(d) Whistleblowing 369 Appendix to Chapter 6   Examples of cases showing the difference between confidential information and skill and knowledge371 Non-technical information 371 Technical information 374 Chapter 7   Database rights

379

Gavin Mansfield QC Introduction379 1. Databases qualifying for the database right 380 1(a) Database 380 1(b) Fruit of substantial investment 381 1(c) Territorial qualification 384 2. Infringement of the database right 385 3. Duration of the database right 387 4. Ownership of the database 388 5. Remedies 390 6. Allocation of claims 391 Chapter 8   Practical steps to protect the employer’s interests during employment

393

Kate Brearley and Kiersten Lucas Introduction394 1. Ensuring that the employee is motivated and properly rewarded during employment 395 1(a) What are the benefits to the employer of motivated and properly rewarded employees? 395 1(b) How does the changing working landscape impact employee motivation and reward? 396 1(c) Practical steps designed to motivate and properly reward employees398 xiii

Contents

2. Maximising the possibility of detecting competitive activities during employment408 2(a) General principles regarding taking practical steps to detect competitive activities during employment 408 2(b) Practical steps to detect competitive activities during employment411 Appendix to Chapter 8 Remuneration in the financial services sector and corporate governance requirements for executive pay in listed companies Is there a general right to privacy in the workplace? Guidelines for maintaining confidentiality

437

Chapter 9   Termination of employment

453

437 442 449

Kate Brearley Introduction453 1. When does employment end? 455 1(a) Significance of the date of termination 455 1(b) Methods of termination 456 1(c) Notice: general principles 457 1(d) Date of termination: notice/termination by the employer 460 1(e) Date of termination: notice/termination by the employee 469 1(f) Date of termination: repudiatory breach 470 2. Repudiatory breach 472 2(a) Effect of a repudiatory breach 472 2(b) Repudiatory breach and collateral contracts 476 2(c) What amounts to a repudiatory breach? 478 2(d) Acceptance of repudiatory breach 497 Appendix to Chapter 9   Flow chart; keeping the contract alive 512 Chapter 10   Legitimate protection for the ex-employer

513

Selwyn Bloch QC and Craig Rajgopaul Introduction513 1. Implied duties after termination of employment: trade secrets/ confidential information 514 2. Express covenants in the contract of employment of the ex-employee 516 2(a) General statement of the doctrine of restraint of trade 516 2(b) Legitimate interests of the ex-employer 521 2(c) Reasonable protection of legitimate interests: introduction 529 2(d) The special position of the vendor-employee 530 3. Competition law 535 Appendix to Chapter 10 536 Introduction536 Article 101/Chapter 1 536 xiv

Contents

Article 102/Chapter 2 Consequences of breach/finding of infringement Merger control Interplay between the Competition Act 1998 and post-termination restrictive covenants Chapter 11   Reasonableness of express covenants

541 541 542 543 545

Selwyn Bloch QC and Jeremy Lewis 1. Introduction 548 1(a) Overview 548 1(b) Current trends 549 1(c) Ambit of this chapter 550 2. Criteria relevant to reasonableness of all covenants 551 2(a) Requirement to focus on the time the contract was entered into 552 2(b) Position of the employee 552 2(c) Nature of the business of employer (including where a business activity has ceased) 553 2(d) Nature of the employee’s work 554 2(e) ‘Mere shareholding’ by ex-employee in new business 555 2(f) Competition by ex-employee as principal only or also as agent for a company in which he has an interest? 558 2(g) Duration 560 2(h) Whether covenant usual or unusual 566 2(i) Period of notice 566 2(j) Consideration for the covenants 567 2(k) Equality or inequality of bargaining power 567 2(l) Reasonableness to be assessed excluding improbabilities 569 3. Criteria relevant to reasonableness of non-competition covenants 569 3(a) Overview of the approach to non-competition covenants 569 3(b) Whether a non-competition covenant is appropriate 571 3(c) Considerations relevant to geographical scope 590 3(d) Scope of restriction on business activity and role 594 4. Covenants against soliciting/dealing with customers/prospective customers602 4(a) Meaning of ‘solicitation’ (by an ex-employee) and similar phrases602 4(b) The preferred type of covenant to protect customer connection 606 4(c) Criteria relevant to reasonableness of non-solicitation/dealing covenants: generally (including personal dealings limitations) 607 4(d) Who is a customer/client? 608 4(e) Quality of contact 610 4(f) Knowledge of customers absent contact 610 4(g) Problem of loyalty 612 4(h) Problems with ‘large’ clients 613 4(i) Former customers and customer backstop periods 614 4(j) Usual need for personal connection limitation/personal backstop periods 620 xv

Contents

4(k) Cases where the courts do not insist on personal contact/ connection limitation 624 4(l) Future customers 628 4(m) Potential customers 628 4(n) Limitation of customers by area 632 4(o) ‘The employee’s customers’ – brought with him to the employer 632 4(p) Non-solicitation of persons who are not customers 634 4(q) Period of non-solicitation/non-dealing covenants 634 5. Non-dealing covenants 636 6. Covenants against enticing/employing/arranging employment for fellow employees/consultants and anti-team moves and related covenants638 6(a) Meaning of solicitation 638 6(b) Permissibility in principle of non-poaching obligations 638 6(c) Application to working relationships other than employees 639 6(d) Scope of the restriction 639 6(e) Non-employment covenants 643 6(f) Team move clauses 644 7. Covenants requiring disclosure of job offers/disclosure of covenants to prospective employer 645 8. Covenants against the disclosure/use of trade secrets and confidential information 647 9. Supplier/non-interference covenants 647 10. Other types of post-termination clauses 648 11. Combining different types of covenant 649 11(a)  Combining non-competition and non-solicitation/dealing covenants649 11(b)  Combining covenants with ‘garden leave’ 650 12. Indirect covenants and payments made under such covenants 654 12(a) Generally 654 12(b)  Forfeiture of benefits due to post-termination competitive activity 655 12(c) Payment/forfeiture linked to continued employment 659 12(d)  Recovery of payments under an unenforceable covenant 661 13. Ancillary clauses seeking to strengthen or preserve restrictive covenants 662 14. Covenants in termination/settlement agreements/contractual or court undertakings663 15. Covenants combined with forfeiture/liquidated damages or penalty clauses666 16. Termination ‘howsoever caused’ 672 Appendix to Chapter 11 Examples of duration

674 674

Chapter 12   Drafting restrictive covenants

683

Kate Brearley Introduction684 1. Why are express restrictive covenants important to the ex-employer? 685 xvi

Contents

2. Drafting the covenants: preparatory steps 686 2(a) Criteria for enforceability 687 2(b) When must the covenant be reasonable? 687 2(c) The courts’ approach to the interpretation of restrictive covenants 690 2(d) Rectification of mistakes 710 2(e) Nature of business/role of the employee/likely competitive activity712 2(f) Information checklist 714 3. Drafting the covenants 717 3(a) Types of covenant 717 3(b) Ambit of the specific covenants 719 3(c) General drafting points 732 Appendix to Chapter 12   Case studies Case study 1:   Excel Copiers (UK) Limited and Brian Thomas Case study 2:   Smith & Jones HR Services Limited and Ian Simpson

744 744 755

Chapter 13   Introducing/varying restrictive covenants

767

Kate Brearley, Kiersten Lucas and Jeremy Lewis (TUPE issues) Introduction769 1. Introducing restrictive covenants 769 1(a) Introduction of restrictive covenants as part of the offer of employment769 1(b) Introduction of restrictive covenants during the currency of the employment782 1(c) Consideration 810 1(d) Introduction of restrictive covenants on termination of employment818 2. Taxation and restrictive covenants 822 2(a) Taxation on the introduction of restrictive covenants generally 822 2(b) Taxation on the introduction of restrictive covenants on termination of employment 823 2(c) Taxation on the renewal of restrictive covenants in severance agreements824 3. Variation of restrictive covenants 825 4. Reviewing restrictive covenants 827 4(a) Role of the employee altered 828 4(b) Acquisition of a business 828 5. TUPE transfers – special problems with construing, enforcing, varying or introducing restrictive covenants 828 5(a) When do the Regulations apply? 829 5(b) What do the Regulations do? 832 5(c) Can the parties contract out of the Regulations? 833 5(d) How do the courts/employment tribunals construe the Regulations?833 5(e) Commonly asked questions by employers 834 xvii

Contents

5(f) Interpretation of existing restrictive covenants in the context of a TUPE transfer 835 5(g) Introduction/variation of restrictive covenants in the context of a TUPE transfer 841 5(h) Dismissal 853 5(i) Service provision changes and involuntary TUPE transfers 854 5(j) Objections to the TUPE transfer and other pre-transfer terminations857 Appendix to Chapter 13   Guidelines on introducing covenants during employment 1. Deciding whether to introduce covenants 2. Formulating a strategy for introducing/varying covenants 2(a) Timing 2(b) Method 2(c) Consultation/discussion 2(d) Timescale for acceptance 2(e) Dealing with objectors 2(f) Dealing with those who do not respond 2(g) Collective consultation obligations

862 862 863 863 864 865 865 866 866 867

Chapter 14   Interim remedies: general

869

Selwyn Bloch QC, Adam Solomon QC and Alexander Robson Introduction871 1. Jurisdiction 873 2. Exercise of discretion 873 2(a) Serious issue to be tried 874 2(b) Balance of convenience 874 2(c) The position under the Civil Procedure Rules 880 2(d) The importance of compliance with Rules, Practice Directions and Court Orders 881 3. The range of interim remedies 882 4. Preliminary considerations 883 4(a) Pre-action correspondence/notice to respondent? 883 4(b) The return date 889 4(c) Which court? 889 4(d) Cross-undertaking as to damages 890 4(e) Which respondents? 893 5. The evidence: strength of the case 894 5(a) Introduction 894 5(b) Detail 895 5(c) Section 12 Human Rights Act 1998 898 5(d) Practical conclusions 900 6. Obtaining the evidence 902 7. Witness statements or other evidence in writing 903 7(a) Form 903 7(b) General contents checklist 904 xviii

Contents

7(c) Witness statements/statements of case/court records/hearings in breach of confidence cases – maintaining confidence 905 8. Documentation generally 910 8(a) A claim form 910 8(b) An application notice 911 8(c) Particulars of claim 911 8(d) A witness statement or witness statements (or affidavit, in the case of freezing or search orders) 912 8(e) Draft minute of order 912 8(f) Skeleton arguments/chronologies/cast lists/authorities/time estimates/court bundles 912 8(g) Costs schedules 913 8(h) Acts required of a respondent to an application for an interim injunction913 9. Procedure for obtaining interim injunctions 914 9(a) Without notice 914 9(b) On notice 914 10. Undertakings by respondent 914 10(a) Undertakings to the court 914 10(b) Contractual undertakings by respondent 915 11. Order for speedy trial 917 12. Interim declarations 918 13. Summary judgment 918 14. Pre-action disclosure 919 14(a) Pre-action disclosure against the prospective defendant 919 14(b) Pre-action disclosure against third parties 920 14(c) Tactical considerations: pre-action disclosure/questions as against prospective respondent/third parties 921 14(d) Orders for early provision of witness statements and disclosure of evidence 922 14(e) Correspondence seeking pre-action or early disclosure/information925 15. Stay in favour of mediation 926 16. Serving interim orders 926 17. Committal proceedings 927 18. Trial or settlement 928 19. Costs orders 930 19(a) Costs of interim hearing 930 19(b) Payment on account of costs 931 19(c) Basis of assessment of costs 932 19(d) Part 36 offers/other offers 933 19(e) Costs liability of third parties 935 20. Appeals 937 21. Litigants in person 938 Chapter 15   Specific interim remedies

939

Selwyn Bloch QC and Gavin Mansfield QC Introduction941 xix

Contents

1. Prohibitory injunctions to restrain breaches of restrictive covenants 941 2. Garden leave injunctions 942 2(a) Introduction 942 2(b) Continuation of the employment contract 943 2(c) Prohibition on specific performance of an employment contract 944 2(d) Development of the garden leave injunction 945 2(e) The ‘right to work’ 949 2(f) Negativing the right to work – garden leave clauses 951 2(g) Payment of salary and compulsion to work: Sunrise Brokers953 2(h) Restraint of trade and the enforcement of garden leave 955 2(i) When and for how long garden leave will be ordered 959 2(j) Interplay between garden leave and restrictive covenants 960 2(k) Summary of garden leave considerations 962 3. Confidentiality injunctions 964 4. Springboard injunctions 965 4(a) The Springboard principle 965 4(b) Classic statement of principles: Terrapin and Roger Bullivant966 4(c) The modern restatement of principles: QBE v Dymoke967 4(d) Confidential information cases 969 4(e) Extension to breaches other than breach of confidence 972 4(f) Types of springboard offer 973 4(g) The duration of springboard relief 979 4(h) Controversy concerning the springboard doctrine 980 4(i) Interim or final order? 985 4(j) The patent infringement analogy 986 5. Orders relating to documents 987 5(a) Introduction 987 5(b) Property of the ex-employer 990 5(c) Detention, preservation and inspection orders 991 5(d) Interim mandatory injunctions 992 5(e) Orders for delivery up, search or inspection of electronic devices993 5(f) Orders for provision of witness statements and early disclosure of evidence 998 6. Search orders 1000 6(a) Nature of the order 1000 6(b) Usual relief – standard form of search order 1001 6(c) Requirements for search order 1002 6(d) Limits on the use of search orders: proportionality 1003 6(e) Safeguards where the search order is granted 1004 6(f) Can a respondent refuse to comply? 1020 6(g) Applications to discharge 1021 6(h) Cross-examination of respondent on his affidavit 1023 6(i) Foreign defendants 1024 Appendix to Chapter 15

xx

1026

Contents

Chapter 16   Final remedies

1035

Selwyn Bloch QC, Adam Solomon QC and Jeremy Lewis Introduction1036 1. Damages for breach of the employment contract 1038 1(a) Normal measure 1038 1(b) Damages where there is no demonstrable financial loss: Wrotham Park damages (now known as ‘negotiating damages’)1040 2. Damages for inducing breach of contract and other economic torts 1045 2(a) The economic torts: inducement of breach tort compared with conspiracy1045 2(b) Measure of loss for economic torts 1046 2(c) Exemplary damages for economic torts 1047 3. Damages for breach of confidence 1047 3(a) Damages for breach of confidence in a contractual context 1047 3(b) Damages for breach of confidence outside contractual context 1049 3(c) Claim for loss of profits for breach of confidence 1051 3(d) Stage of proceedings at which damages are assessed 1051 3(e) Further breaches of confidence not proved at trial 1052 3(f) Date at which damages are assessed 1052 3(g) Exemplary damages for breach of confidence 1052 3(h) Damages in addition to or in lieu of an injunction 1053 4. Account of profits 1053 4(a) When is an account of profits available? 1054 4(b) Account of profits for breach of contract 1054 4(c) To what profits is the claimant entitled? 1055 5 Choice between an account of profits and damages 1056 6. Permanent injunctions 1058 6(a) Discretion to grant or refuse 1058 6(b) Need to frame injunction precisely 1061 7. Delivery up/destruction 1061 8. Declarations 1063 9. Receiver 1064 10. Rectification 1064 11. Remedies for breach of fiduciary duty 1064 11(a) Remedies against the fiduciary 1065 11(b) Remedies against third parties in connection with breach of fiduciary duty 1076 11(c) Limitation 1079 12. Costs 1079 Annex: limitation and breach of fiduciary duty 1080 Chapter 17   International elements

1093

Gavin Mansfield QC Introduction1094 1. Jurisdiction 1095 xxi

Contents

1(a) The Recast Brussels I Regulation 1(b) Cases outside the Recast Brussels I Regulation 1(c) Jurisdiction to grant provisional relief 2. Competing jurisdictions 2(a) Cases within the Recast Brussels I Regulation 2(b) Cases outside the Recast Brussels I Regulation 3. Applicable law 3(a) Claims in contract 3(b) Claims other than in contract 3(c) Concurrent claims 3(d) Type of relief claimed 4. Evidence 4(a) Proceedings in England 4(b) Overseas proceedings 5.  Recognition and enforcement of judgments 5(a) Recast Brussels I Regulation Member States 5(b) Recognition and enforcement of judgments where the Recast Brussels I Regulation does not apply

1096 1112 1114 1116 1116 1116 1121 1122 1126 1128 1129 1130 1130 1134 1135 1135 1137

Chapter 18   Discovering competitive activity: the immediate practical issues1139 Kate Brearley, Kiersten Lucas and Alexander Robson (Case Study 2) Introduction1141 Overview1141 Ambit of this chapter 1142 1. Reacting to the discovery of competitive activity 1144 2. Preliminary issue 1: instructing the legal team and other advisers 1144 2(a) The legal team 1146 2(b) Forensic IT, accountancy and public relations advisers 1153 3. Preliminary issue 2: allocation of responsibilities to the (ex-) employer’s core internal management team 1157 4. Preliminary issue 3: should the employee be suspended? 1159 4(a) An express right to suspend 1161 4(b) An implied right to suspend 1162 4(c) Pay during suspension 1163 4(d) Restraining suspension 1163 4(e) The suspension meeting and letter 1164 4(f) Disadvantages to the employer of suspension 1168 5. Applying the three basic steps: discovery of competitive activity during employment1169 5(a) Gathering information 1169 5(b) Taking key decisions 1178 5(c) Settling a strategy to reflect the key decisions 1200 6. Applying the three basic steps: discovery of competitive activity after employment has ended 1200 6(a) Gathering information 1200 6(b) Taking key decisions 1202 xxii

Contents

6(c) Settling a strategy to reflect the key decisions 7. Letters before claim 7(a) Letters before claim to the (ex-)employee 7(b) Letters before claim to the poaching employer 8. Alternative dispute resolution (‘ADR’) 8(a) Why should the (ex-)employer mediate? 8(b) What are the advantages of mediation? 8(c) When should the mediation process be started? 8(d) What are the cost consequences of mediating the dispute? 8(e) What other factors need to be taken into account?

1203 1204 1205 1225 1227 1229 1237 1241 1243 1244

Appendix 1 to Chapter 18   Customer/client risk analysis regarding the (ex-)employee’s competitive activity

1246

Appendix 2 to Chapter 18   Key decisions and strategy – Case Study 1 Case study 1:   Excel Copiers Limited and Brian Thomas

1247 1247

Appendix 3 to Chapter 18   Key decisions and strategy – Case Study 2 Case study 2:   Smith & Jones HR Services Limited and Ian Simpson

1253 1253

Appendix 4 to Chapter 18   Letter before claim to the ex-employee in Case Study 2

1259

Appendix 5 to Chapter 18   Documentation for proceedings against the ex-employee in Case Study 2

1266

Appendix 6 to Chapter 18   Arbitration: an overview

1290

Appendix 7 to Chapter 18   Alternative Dispute Resolution (‘ADR’): an overview

1300

Appendix 8 to Chapter 18   Useful materials

1305

Chapter 19   Team moves

1339

Selwyn Bloch QC, Kate Brearley and Gavin Mansfield QC Introduction1340 1. The team move threat 1341 2. Employee obligations 1342 2(a) Duties of disclosure/reporting obligations 1343 2(b) Other aspects of the implied duty of fidelity/fiduciary duties 1345 2(c) Express terms 1345 3. Claims against the poaching employer/financial backer/headhunters 1346 4. Economic torts 1348 4(a) Potential claims against third parties 1348 4(b) Knowing inducement of breach of contract 1348 xxiii

Contents

4(c) Conspiracy 4(d) Causing loss by unlawful means 4(e) Dishonest assistance in the breach of fiduciary duties 5. Detection of team moves 5(a) Offsite meetings of a group 5(b) Unusual absence patterns/travel plans 5(c) Text messaging and instant messenger services 5(d) Unusual alliances 5(e) Apparently unconnected telephone calls to team members 5(f) Sudden interest in employment terms 5(g) Furtive behaviour amongst a group of employees 5(h) Unexplained changes to previous patterns of behaviour 5(i) Resignations of junior employees 5(j) Voluntary/‘manufactured’ resignations as a statutory director 5(k) Other unusual behaviour 6. (Ex-)employer’s response to a team move 6(a) Strategic considerations 6(b) Retaining/splitting the team 6(c) ‘Selling’ the business 6(d) Application of TUPE 7. Key points for the team and the poaching employer/financial backer 7(a) Using a third party to recruit team members 7(b) The team 7(c) The poaching employer 7(d) The financial backer

1351 1353 1354 1355 1357 1357 1358 1358 1358 1358 1359 1359 1359 1359 1359 1360 1360 1361 1363 1364 1365 1366 1367 1369 1370

Index1371

xxiv

Table of Statutes [References are to paragraph number]

Administration of Justice Act 1920... 17.162, 17.163 Arbitration Act 1996................18AppA6.12, 18AppA6.22, 18AppA6.29, 18App6.30, 18App6.32, 18App6.40 s 9, 12, 17, 18, 24................. 18AppA6.12 43....................................... 18AppA6.9 44....................................... 18AppA6.42, 18AppA6.43 (3), (5)............................18AppA6.40 59, 63–65...........................18AppA6.15 66.......................................18AppA6.12, 18AppA6.49 68..........................................18AppA6.7 69..........................................18AppA6.7 Chancery Amendment Act 1858....... 16.41, 16.70 Children Act 1989 Pt IV (ss 31–42)............................. 15.235 s 31................................................ 14.81 Pt V (ss 43–52).............................. 15.235 s 98................................................ 15.235 Civil Evidence Act 1968 s 14................................................ 15.231 Civil Evidence Act 1995................... 16.03 Civil Jurisdiction and Judgments Act 1982.................................... 17.30 s 25............................ 17.61, 17.62, 17.63, 17.66, 17.67, 17.165 (1)............................................ 17.56 (2)............................................ 17.64 (7)..................................... 17.63, 17.67 41................................................ 17.15 Civil Procedure Act 1997 s 7.......................................15.197, 15.260 Companies Act 1985 s 727.............................................. 4.220 (1).......................................... 4.220

Companies Act 2006........... 2.60, 3.14, 4.02, 4.56, 4.59, 4.87, 4.89, 4.91, 4.94, 4.142, 4.146, 4.160, 4.165, 4.166, 4.167, 4.169, 4.207, 4.215, 4.217, 4.265, 4.270, 4.271, 4.273, 4.274, 4.276, 4.285, 4.298, 4.299, 4.307, 8App1.12, 12.81, 12.152, 15.35, 16.76, 16.126, 18.160 Pt 10 (ss 154–259)......................... 5.83 s 168, 169...................................... 5.143 Pt 10 Ch 2 (ss 170–181)............ 4.87, 4.90 s 170(2).......................... 3.09, 4.92, 4.140, 4.215, 4.217, 4.264, 4.274, 4.276, 4.277, 4.280, 4.281, 4.282, 4.283, 4.284, 4.285, 4.291, 4.307 (3)............................4.88, 4.90, 4.281 (4)........................ 4.93, 4.127, 4.151, 4.216, 4.218, 4.265, 4.277, 4.278, 4.281, 4.284, 4.285, 4.291, 16.126 (5).......................................... 4.75 171................................  4.88, 4.91, 4.99, 16.76, 16.83 (b).......................................... 4.100 172.............................. 3.86, 4.91, 4.100, 4.103, 4.109, 4.110, 4.111, 4.112, 4.113, 4.116, 4.143, 4.176, 4.209, 4.215, 4.218, 4.219, 4.221, 4.226, 4.227 4.228, 4.233, 4.234, 4.239, 4.243, 4.250, 4.262, 4.284, 4.311, 4.316, 16.76, 16.77, 16.85, 16.108, 16.121, 16.130, 16.131 (3).......................................... 4.98 173........................................4.91, 4.113, 4.114, 16.76 xxv

Table of Statutes Companies Act 2006 – contd s 173(3).......................................... 4.114 174............................  4.91, 4.113, 4.115, 4.116, 4.227, 16.76, 16.77 175................................4.91 4.92, 4.118, 4.127, 4.137, 4.138, 4.140, 4.141, 4.145, 4.146, 4.147, 4.148, 4.151, 4.158, 4.219, 4.227, 4.274, 4.279, 4.282, 4.284, 4.287, 4.291, 4.316, 16.76, 16.77, 16.90 (1)................................. 4.140, 4.215, 4.280, 4.282 (2).......................4.141, 4.162, 4.169, 4.280, 4.282, 4.284 (4).......................................... 4.144 (a)...................4.143, 4.161, 4.166 (5).......................................... 4.144 (a)..................................... 4.146 (6).......................................... 4.147 (7).......................................... 4.140 176.............................. 4.91, 4.92, 4.118, 4.137, 4.139, 4.140, 4.144, 4.156, 4.158, 4.274, 4.282, 4.284, 16.76 (4).................................. 4.143, 4.161 (5).......................................... 4.140 177...........................  4.91, 4.118, 4.137, 4.138, 4.145, 4.227, 16.76, 16.85 (6).......................................... 4.138 178.............................................. 16.76 (2)...................................4.115, 16.77 180(1).......................................... 4.146 (3).......................................... 4.145 (4).......................................... 4.156 (a)..................................... 4.95 182..................................... 4.137, 4.138, 4.144, 4.227 (1), (2), (6)............................ 4.138 186.............................................. 16.77 187.............................................. 4.75 Pt 10 Ch 4 (ss 188–226)................ 4.145 s 188...............................  2.79, 4.145, 5.90 189........................................ 4.145, 5.90 190–221...................................... 4.145 222.............................................. 4.145 (1).......................................... 5.90 223–226...................................... 4.145 228.............................................. 2.66 (1)..............................2.53, 2.67, 2.76 (a)..................................... 2.66 229.............................................. 2.66 xxvi

Companies Act 2006 – contd s 229(1), (2)................................... 2.66 230.............................................. 2.66 232(4).......................................... 4.156 239........................................ 4.95, 4.156 (2).......................................... 4.95 (3), (4)................................... 4.96 (6)............................4.95, 4.96, 4.144 (a)..................................... 4.95 251.......................................... 2.60, 4.72 252.............................................. 4.96 257.............................................. 4.99 275(1).......................................... 4.276 281, 282...................................... 4.95 793.............................................. 4.100 994.............................................. 16.108 1157.......................... 4.78, 4.120, 4.221, 4.223, 4.224, 4.225 (1)........................................  4.219, 4.220 1159............................................ 5.11 1161, 1162.................................. 5.13 Sch 7.............................................. 5.13 Company Directors Disqualification Act 1986............................. 4.73, 10.86 Competition Act 1998 Pt I Ch I (ss 1–16)...................10.58, 10.59 Pt I Ch 2 (ss ss 17–24)............10.58, 10.82 s 47A.............................................. 10.84 s 47B.............................................. 10.84 Contempt of Court Act 1981 s 11................................................ 14.100 Contracts (Applicable Law) Act 1990.................................17.92, 17.108 Contracts (Rights of Third Parties) Act 1999........... 12.144, 13.170, 13.178 s 6.................................................. 13.178 Copyright, Designs and Patents Act 1988.......................................... 7.32 s 3A(1)......................................... 7.5, 7.19 9(3).............................................. 3.148 11(1).................................... 3.148, 3.149 (2)......................................  3.149, 7.42 Pt I Ch IV (ss 77–89)............... 3.147, 5.48 s 96................................................ 7.50 97................................................ 7.50 (1)............................................ 7.51 (2)........................................ 7.51, 7.52 98................................................ 7.50 99.........................................7.53, 15.169 100.............................................. 15.169 213.............................................. 3.152 214(2).......................................... 3.152 215(1)–(3)................................... 3.152 267.............................................. 3.152 County Courts Act 1984 s 38................................................ 14.6

Table of Statutes County Courts Act 1984 – contd s 40................................................ 14.56 Data Protection Act 1998.....8.53, 8.54, 8.59, 8.64, 8.65, 8.93, 8.103, 18.73, 18.118, 18.188 s 7.................................................. 18.186 8(2)(a)......................................... 18.188 51........................................  8.60, 18.74 55........................................ 8.60, 18.118 Electronic Communications Act 2000.......................................... 13.20 Employment Act 2008 s 3.................................................. 5.80 Employment Agencies Act 1973 s 6(1).............................................. 11.208 Employment Protection (Consolidation) Act 1978 s 1.................................................. 13.46 Employment Relations Act 1999...... 2.78 s 10................................................ 18.101 Employment Rights Act 1996...... 2.9, 5.110, 9.126, 13.167, 13.173, 17.101, 17.111 s 1............................ 2.53, 2.76, 2.77, 2.83, 2.84, 2.85, 2.86, 13.46 (4)(c)......................................... 5.17 (f).......................................... 5.61 (h)......................................... 5.67 (j).......................................... 2.83 2(1).............................................. 5.17 4......................................2.77, 2.83, 2.86 11...........................2.86, 2.87, 2.88, 2.89 13(1)(b)....................................... 5.117 27A.............................................. 2.27 (1)......................................... 2.27 27B.............................................. 2.27 43B.............................................. 6.168 43J, 47B...................................... 6.168 –75K..................................... 8.24 80................................................ 5.113 80F–80I....................................... 8.24 86.................................2.79, 5.90, 5.113, 9.8, 13.72 (2)............................................ 18.87 (3).......................................... 9.8, 5.90 95(1)(b)....................................... 9.6 (c)............................... 9.140, 13.63 96(1)(c)....................................... 9.152 97................................................ 9.2 98.....................................  9.152, 13.173, 18.2, 18.101 (1)........................... 5.80, 13.73, 18.98 (a)....................................... 9.152 (b)....................13.73, 13.77, 13.78, 18.98, 18.99 (2).....................................  5.80, 13.73, 13.76, 18.98

Employment Rights Act 1996 – contd s 98(4)...........................5.80, 13.73, 13.77, 13.78, 18.98 103A............................................ 6.168 109.............................................. 13.167 124A...................................13.80, 18.101 139(1).......................................... 13.66 203...................................11.273, 13.138 (2).......................................... 13.138 (f)...................................... 13.138 230(3)..................................1.11, 2.8, 2.9 (b).........................2.11, 2.13, 2.14 Employment Tribunals Act 1996 s 18(1)(d)....................................... 13.138 Enterprise Act 2002...........................  s 188.............................................. 10.85 s 190.............................................. 10.85 s 204.............................................. 10.86 Enterprise and Regulatory Reform Act 2013.................................... 10.85 Equality Act 2010..........................  2.9, 2.12 s 83(2)............................................ 2.9 (a)....................................... 2.14 Equal Pay Act 1970 s 1.................................................. 2.82 Evidence (Proceedings in Other Jurisdictions) Act 1975............. 17.151 s 2(1)–(3)....................................... 17.151 (4).............................................. 17.151 (a)......................................... 17.151 Foreign Judgments (Reciprocal Enforcement) Act 1933............. 17.162, 17.163 s 2(2).............................................. 17.162 Fraud Act 2006..................... 15.234, 15.235, 15.236, 15.238 s 13.....................................15.233, 15.235 (4)............................................ 15.235 Health and Safety at Work etc Act 1974.......................................... 8.20 Human Rights Act 1998............... 6.41, 6.42, 6.76, 8.25, 8.53, 8.54, 11.234, 14.86, 15.240, 15.241, 18.73 s 2.................................................. 6.41 3...............................6.41, 8.25, 8App2.1 6.................................................. 6.41 12.................................. 6.2, 6.41, 6.166, 14.67, 14.80, 14.83, 15.76 (3)......................................  6.49, 14.81 (4)............................................ 6.49 Sch 1.............................................. 14.85 Income Tax (Earnings and Pensions) Act 2003 s 5.................................................. 2.64 62................................................ 5.103 xxvii

Table of Statutes Income Tax (Earnings and Pensions) Act 2003 – contd s 225.................... 13.111, 13.112, 13.114, 13.116, 13.117 226...................................13.111, 13.112 401........................................2.70, 5.103, 13.113, 13.114 401–404...............................5.103, 5.104 402........................................ 2.70, 5.103 402D.................................. 5.105, 13.113 403.............................................. 2.70 404.............................................. 2.70 Income Tax (Trading and Other Income) Act 2005 Pt 2 (ss 3–259)............................... 2.43 Industrial Relations Act 1971............ 13.76 Insolvency Act 1986 s 8(1).............................................. 14.81 214.............................................. 4.107 Interpretation Act 1978..................... 13.20 Limitation Act 1939.......................... 16.115 Limitation Act 1980..............16.106, 16.117, 16.118, 16.119, 16.132 s 2.................................................. 16.117 5.......................................16.117, 16.120 21....................... 16.108, 16.109, 16.110, 16.111, 16.115, 16.117 (1)....................16.108, 16.114, 16.124 (a)..............16.108, 16.110, 16.113, 16.114, 16.117 (b).............  16.108, 16.110, 16.111, 16.112, 16.113, 16.114, 16.117 (3)...................16.108, 16.110, 16.111, 16.117, 16.121 23.....................................16.106, 16.119 29(5)............................................ 16.122 32....................................16.106, 16.108, 16.118, 16.123 (1)................................. 16.123, 16.124 (a)....................................... 16.126 (b).............. 16.127, 16.128, 16.131 (2).................................16.128, 16.131 (3), (4A).................................. 16.123 36....................................16.108, 16.110, 16.115, 16.118 38................................................ 16.110 Limited Liability Partnerships Act 2000.......................................... 4.82 s 4(4).............................................. 2.68 6(1).............................................. 4.82 Lord Cairns’ Act see Chancery Amendment Act 1858 Mental Health Act 1983.................... 5.81 National Insurance Contributions Bill 2018................................... 5.105 National Minimum Wage Act 1998.. 2.42 xxviii

Official Secrets Act 1989.................. 16.11 Patents Act 1977...................... 3.145, 3.157, 3.158, 5.46 s 39................................................ 3.153 (1)..........................3.145, 3.156, 3.157 (a)....................................... 3.154 (b)....................................... 3.155 (2)..........................3.145, 3.146, 3.156 (3)............................................ 3.145 40(1), (2), (4).............................. 3.157 42(2).....................................3.145, 3.157 (3)............................................ 3.157 43(4)............................................ 3.145 Powers of Attorney Act 1971 s 1(1).............................................. 5.144 Public Interest Disclosure Act 1998...................................6.168, 6.169 Registered Designs Act 1949 s 2.................................................. 3.152 Regulation of Investigatory Powers Act 2000.............................. 8.53, 18.73 Restrictive Trade Practices Act 1956.......................................... 6.153 Senior Courts Act 1981 s 19................................................ 16.71 37................................................ 15.194 (1).......................................14.6, 14.15 50................................................ 16.41 51................................................ 14.163 72.................................... 15.232, 15.235, 15.237 (5)............................................ 15.237 Sch 1.............................................. 14.56 Small Business, Enterprise and Employment Act 2015 s 153.............................................. 2.27 Social Security Contributions and Benefits Act 1992...................... 13.111 Sch 1 para 3A(2).................................. 13.119 Theft Act 1968...................... 15.234, 15.236, 15.238 s 31.....................................15.233, 15.235 Torts (Interference with Goods) Act 1977 s 4.................................................. 15.165 Trade Union and Labour Relations (Consolidation) Act 1992.......... 13.66 s 188...........................13.28, 13.62, 13.66, 13.68, 13.69, 13.70, 13.170, 13AppA.7, 13AppA.16 (2)....................................13AppA.25 (4)....................................13AppA.26 (7).......................................... 13.70 188A(1)................................13AppA.22, 13AppA.23

Table of Statutes Trade Union and Labour Relations (Consolidation) Act 1992 – contd s 189.............................................. 13.70 193...................................... 13AppA.24 195...................................... 13.66, 13.68 207A..............  5.80, 9.135, 13.80, 18.101 236........................................ 9.41, 15.10 296.............................................. 2.14 Trustee Act 1925 s 68(17).......................................... 16.110

Unfair Contract Terms Act 1977....... 2.80, 17.99 s 3.................................................. 2.80 Value Added Tax Act 1994 Sch 1 para 1(1)..................................... 2.46 UNITED STATES United States Code Title 28 s 1782................................. 17.85, 17.86

xxix

Table of Statutory Instruments [References are to paragraph number]

Agency Workers Regulations 2010, SI 2010/93................................. 2.20 Civil Jurisdiction and Judgments Act 1982 (Interim Relief) Order 1997, SI 1997/302........... 17.62 Civil Jurisdiction and Judgments Order 2001, SI 2001/3929......... 17.15 Civil Procedure (Modification of Enactments) Order 1998, SI 1998/2940............................. 14.125 Civil Procedure Rules 1998, SI 1998/3132.................... 14.28, 14.29, 14.30, 14.45, 14.52, 14.56, 14.85, 14.86, 14.101, 14.123, 14.124, 14.134, 14.142, 15.182, 16.01, 18.75, 18.211, 18.233, 18AppA7.3, 18AppA7.4 Pt 1 (rr 1.1–1.4)............................. 18.155 r 1.1......................................14.28, 15.204, 18.233, 18AppA7.4 (2)........................................... 14.173 1.3..........................................18AppA7.4 1.4..........................................18AppA7.4 (e).....................................18AppA7.4 3.1(2)(a)....................................... 14.53 (b)...................................... 14.120 (5)........................................... 18.235 (7)........................................... 11.276 (m)....................................App18A7.1 3.4................................................ 18.235 (2)........................................... 14.83 3.9..........................................14.30, 14.31 (1).....................................14.30, 14.31 (2)........................................... 14.31 3.12–3.18..........................16.107, 18.110 PD 3E.................................16.107, 18.110 5.4................................................ 14.100 5.4B–5.4D................................... 14.100 Pt 6 (rr 6.1–6.52)................ 14.113, 17.59 r 6.3–6.15....................................... 17.55

Civil Procedure Rules 1998, SI 1998/3132 – contd r 6.16...................................... 17.55, 17.59 6.17–6.19..................................... 17.55 6.20.......................... 14.143, 17.55, 17.57 6.21–6.25..................................... 17.55 6.26...................................... 14.51, 17.55 6.27–6.29..................................... 17.55 6.36............................ 15.260, 17.6, 17.56 6.40............................................. 17.59 (3)(a)..................................... 17.59 (iii)............................... 17.59 (3)(b), (c).............................. 17.59 PD 6B............................ 17.6, 17.56, 17.57 7.4(1)(b)...................................... 14.103 PD 16............................................. 16.23 19.2(2)......................................... 14.64 Pt 22 (rr 22.1–22.4)....................... 14.106 22.1.............................................. 14.103 (6)......................................... 14.103 Pt 23 (rr 23.1–23.23.12).... 14.100, 14.112, 14.147, 15.250 r 23.3(2)(b).................................... 14.104 23.6(b)......................................... 14.104 23.7.............................................. 14.113 (1)(b).................................... 14.4 (4)......................................... 14.53 23.9.............................................. 14.146 (2)......................................... 14.50 23.10............................................ 15.250 PD 23............................................. 14.112 PD 23A...................................14.33, 14.39 Pt 24 (rr 24.1–24.6)................ 3.70, 14.32, 18.235 r 24.2.....................................14.83, 14.124 Pt 25 (rr 25.1–25.15)........... 14.28, 14.112, 15.157 r 25.1..................................... 7.53, 15.156, 15.180, 15.181, 15.196, 16.67 (1)......................................... 15.158 (a)................... 14.6, 14.28, 15.156 xxxi

Table of Statutory Instruments Civil Procedure Rules 1998, SI 1998/3132 – contd r 25.1(1)(b).......................... 14.32, 14.123 (c), (d)...................15.157, 15.171 (e)..........................15.157, 15.165 (h).........................15.157, 15.197 (3)......................................... 15.158 25.2.............................................. 14.103 (3)............................. 14.103, 15.229 25.3(1)......................................... 14.39 (3)......................................... 14.40 25.10................................ 14.142, 18.256 PD 25...................................14.28, 14.103, 14.107, 14.112 PD 25A....................... 14.40, 14.45, 14.51, 14.52, 14.55, 14.63, 14.103, 14.104, 14.106, 14.107, 15.164, 15.198, 15.203, 15.213, 15.215, 15.217, 15.219, 15.221, 15.225, 15.229, 15.235, 15.236, 15App Pt 26 (rr 26.1–26.11)..................... 18.233, 18AppA7.5 r 26.4................................. 14.142, 18.233, 18.235, 18.258, 18AppA7.5 29.2(2)......................................... 14.120 Pt 31 (rr 31.1–31.23).........14.129, 15.160, 15.181, 17.132 r 31.7.............................................. 15.182 31.8.............................................. 17.132 31.12............................................ 15.181 31.14............................................ 15.181 31.16...................... 14.32 14.125, 14.127, 15.159, 15.191, 15.194, 18.177 (3)(a)–(d)............................ 14.125 (4)(a)................................... 14.128 31.17..................................14.32, 14.129, 14.132, 18.177 (2), (3)................................ 14.129 31.22............................................ 14.98 (2), (3)................................ 14.98 Pt 32 (rr 32.1–32.20)..................... 14.87 r 32.3.............................................. 17.135 32.6.............................................. 14.87 32.7(2)......................................... 15.256 PD 32............................................. 14.87 r 33.4.............................................. 16.03 Pt 34 (rr 34.1–34.24)..........17.138, 17.140 r 34.8...................................15.255, 17.150 34.9.............................................. 17.150 (1)......................................... 17.150 34.10............................................ 17.150 34.13....................17.135, 17.141, 17.145 34.16–34.21................................. 17149 xxxii

Civil Procedure Rules 1998, SI 1998/3132 – contd r 34.22............................................ 17.149 34.23.................................17.140, 17.149 PD 34..................................17.138, 17.140 Pt 36 (rr 36.1–36.30).........14.150, 14.158, 14.159, 14.160, 14.161, 16.107, 18.241 r 36.1(2)......................................... 14.161 36.6.............................................. 14.158 36.13............................................ 14.158 36.17(4)(d).................................. 14.159 36.20............................................ 14.158 Pt 38 (rr 38.1–38.8)....................... 18.110 r 39.2(1)......................................... 14.56 (3)......................................... 14.98 PD 39............................................. 14.99 PD 39A.......................................... 14.98 r 40.20............................................ 16.71 Pt 44 (rr 44.1–44.20).......... 14.152, 16.107 r 44.2.............................................. 18.237 (8)......................................... 14.155 44.3(2)......................................... 14.152 (b).................................... 14.157 (3).............................14.152, 14.157, 14.161 44.4.............................................. 14.157 44.6.............................................. 14.154 PD 44............................................. 14.154 Pt 45 (rr 45.1–45.47)..................... 16.106 Pt 46 (rr 46.1–46.19)..................... 16.107 46.1(1)–(3).................................. 14.128 46.2.............................................. 14.162 Pt 47 (rr 47.1–47.26)..................... 16.107 Pt 48 (rr 48.1–48.10)..........16.107, 18.211 48.1(2)......................................... 14.128 Pt 52 (rr 52.1–52.30)..................... 14.167 r 52.3(2)......................................... 14.167 52.4(2), (3).................................. 14.170 PD 52............................................. 14.167 63.13............................................ 7.54 PD 63............................................. 7.54 Pt 74 (rr 74.1–74.50).......... 17.156, 17.162 r 74.6.............................................. 17.162 81.3(c)......................................... 14.144 81.4.............................................. 14.147 (3)......................................... 14.147 81.5(2)......................................... 14.144 81.6.............................................. 14.143 81.7.............................................. 14.145 81.8.............................................. 14.143 (1)......................................... 14.144 81.10(1)–(3)................................ 14.147 (4), (5)................................ 14.148 81.90............................................ 14.143 PD 81............................................. 14.143

Table of Statutory Instruments Claims in respect of Loss or Damage arising from Competition Infringements (Competition Act 1998 and Other Enactments (Amendment)) Regulations 2017, SI 2017/385..................... 10.84 Collective Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations 2014, SI 2014/16...........13.131, 13.132, 13.148, 13.151, 13.156, 13.163, 13.172 Consultation of Employees Regulations 2004, SI 2004/3426............................. 2.78 Copyright and Rights in Databases Regulations 1997, SI 1997/3032................... 7.1, 7.2, 7.22, 7.29, 8.72 reg 12(1).................... 7.8, 7.22, 7.32, 7.36 13............................................. 7.13 (1)........................................ 7.8 (2)........................................ 7.9 14(1)........................................ 7.40 (2)........................... 7.41, 7.42, 7.49 (5)........................................ 7.40 17(1)........................................ 7.37 (3).....................................7.38, 7.39 County Court Remedies Regulations 1991, SI 1992/1222................... 14.6 Electronic Identification and Trust Services for Electronic Transactions Regulations 2016, SI 2016/696............................... 13.20 Employment Equality (Age) Regulations 2006, SI 2006/1031 Sch 8 para 25........................................ 13.167 Employment Tribunals (Constitution and Rules of Procedure) Regulations 2013, SI 2013/1237 Sch 1 r 76(1)(a).................................... 2.88 Fixed-term Employees (Prevention of Less Favourable Treatment) Regulations 2002, SI 2002/2034 reg 8............................................... 9.6 Flexible Working Regulations 2014, SI 2014/1398............................. 8.24 Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, SI 2008/410 Sch 8.......................................... 8App1.12

Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendent) Regulations 2013, SI 2013/1981.........................8App1.12 Limited Liability Partnership Regulations 2001, SI 2001/1090............................. 4.82 reg 7............................................... 4.82 (9), (10).................................. 4.82 Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009, SI 2009/1804............................. 4.87 National Minimum Wage Regulations 2015, SI 2015/1724.................2.11, 2.13, 2.42 Rules of the Supreme Court 1965, SI 1965/1776............................. 14.52 Order 14A...................................... 14.124 Shared Parental Leave Regulations 2014, SI 2014/3050................... 8.24 Telecommunications (Lawful Business Practice) (Interception of Communications) Regulations 2000, SI 2000/2699.............  8.53, 18.73 Transfer of Undertakings (Protection of Employment) Regulations 1981, SI 1981/1794..................13.157, 13.168 reg 5....................................13.142, 13.143 Transfer of Undertakings (Protection of Employment) Regulations 2006, SI 2006/246.1.23, 9.6, 13.1, 13.61, 13.73, 13.130, 13.132, 13.133, 13.134, 13.137, 13.143, 13.151, 13.157, 13.158, 13.168, 13.177, 13.181, 13.187, 13AppA.1, 18.82, 18.98, 18.136, 19.96, 19.98, 19.99 reg 2(1).......................................... 19.97 3(1)(a)........................... 13.132, 13.176 (b).......................... 13.132, 13.175, 13.176, 13.173, 13.176 (ii)................................. 19.97 (2).......................................... 13.132 (2A)....................................... 13.175 3(3)(a)(ii)................................. 13.175 (b)...................................... 13.175 4....................... 13.141, 13.143, 13.178 4A............................................ 13.139 4(1).................13.137, 13.139, 13.142, 13.150, 13.174 (3)............................... 13.137, 13.169 xxxiii

Table of Statutory Instruments Transfer of Undertakings (Protection of Employment) Regulations 2006, SI 2006/246 – contd reg 4(4)..................13.137, 13.150, 13.168 (5)(a)........................... 13.160, 13.161 (b)..............13.160, 13.161, 13.162 (5A)...............13.160, 13.164, 13.166 (5B).............................13.160, 13.162 (5C)........................................ 13.163 (7)..................13.135, 13.137, 13.185 (8).......................9.6, 13.185, 13.186, 13.187, 13.188 (9).................................... 9.6, 13.173 (11).................................. 9.6, 13.173 7(1)................. 13.137, 13.139, 13.141, 13.169, 13.173, 13.174 (2)..................13.137, 13.173, 13.174 (3A)....................................... 13.174 (4)...............................13.141, 13.173

xxxiv

Transfer of Undertakings (Protection of Employment) Regulations 2006, SI 2006/246 – contd reg 8(7).......................................... 13.173 9............................................... 13.161 18..................................13.138, 13.174 Working Time Regulations 1998, SI 1998/1833..................2.9, 2.11, 2.13, 3.18, 5.19, 5.22, 5.23, 5.129, 8.20 reg 2(1).......................................... 2.14 4............................................... 5.18 (1).......................................... 8.20 5........................................... 5.18, 5.20 9............................................... 5.18 13........................................5.23, 5.129 15............................................. 5.129 20(a)........................................ 5.19

Table of Cases [References are to paragraph number]

1st Choice Recruitment v Hancock [2003] EWHC 2332 (QB)......................................14.76 20:20 London Ltd v Riley [2012] EWHC 1912 (Ch).................................  5.8, 11.268, 11.269 32Red plc v WHG (International) Ltd [2013] EWHC 815 (Ch)....................................16.20 A A v B plc [2002] EWCA Civ 337, [2003] QB 195, [2002] 3 WLR 542, [2002] 2 All ER 545, [2002] EMLR 21, [2002] 1 FLR 1021, [2002] 2 FCR 158, [2002] HRLR 25, [2002] UKHRR 457, 12 BHRC 466, [2002] Fam Law 415, (2002) 99(17) LSG 36, (2002) 152 NLJ 434, (2002) 146 SJLB 77....................................... 6.50, 6.150 AAH Pharmaceuticals Ltd v Birdi [2011] EWHC 1625 (QB).......................................4.53 AB v CD [2014] EWCA Civ 229, [2015] 1 WLR 771, [2014] 3 All ER 667, [2014] 2 All ER (Comm) 242, [2014] CP Rep 27, [2014] 1 CLC 899, [2014] BLR 313, 153 Con LR 70, [2014] CILL 3497............................................................. 14.15, 11.285 ABC News Intercontinental Inc v Gizbert [2006] UKEAT/0160/06..............................2.29 ABK Ltd v Foxwell [2002] EWHC 9 (Ch)..................................................................1.33, 3.24 ADS Aerospace Ltd v EMS Global Tracking Ltd [2012] EWHC 2904 (TCC), 145 Con LR 29.................................................................................................  18.242, 18.259 A-G v Barker [1990] 3 All ER 257, CA..................................................................... 6.49, 6.78 A-G v Blake [1998] Ch 439, [1998] 2 WLR 805, [1998] 1 All ER 833, [1998] EMLR 309, (1998) 95(4) LSG 33, (1998) 148 NLJ 15, (1998) 142 SJLB 35, CA............3.10, 4.231, 4.270, 4.276, 4.292, 15.133, 16.50 A-G v Blake [2001] 1 AC 268, [2000] 3 WLR 625, [2000] 4 All ER 385, [2000] 2 All ER (Comm) 487, [2001] IRLR 36, [2001] Emp LR 329, [2000] EMLR 949, (2000) 23(12) IPD 23098, (2000) 97(32) LSG 37, (2000) 150 NLJ 1230, (2000) 144 SJLB 242, HL............................................................................  16.11, 16.14, 16.15, 16.16, 16.19, 16.44. 16.45 A-G v Guardian Newspapers Ltd (No 2) sub nom A-G v Observer Ltd [1988] 2 WLR 805, (1988) 138 NLJ Rep 47, (1988) 132 SJ 566, CA; [1990] 1 AC 109, [1988] 3 WLR 776, [1988] 3 All ER 545, [1989] 2 FSR 181, (1988) 85(42) LSG 45, (1988) 138 NLJ Rep 296, (1988) 132 SJ 1496, HL........................6.10, 6.12, 6.76, 6.123, 6.138, 6.141, 6.143, 6.154, 6.157, 6.160, 15.130, 15.133, 15.136, 16.41, 16.42, 16.50, 16.51 A-G v Observer Ltd see A-G v Guardian Newspapers (No 2) A-G v Times Newspapers [2001] EWCA Civ 97, [2001] 1 WLR 885, [2001] EMLR 19, (2001) 98(9) LSG 38, (2001) 145 SJLB 30......................................................15.133 A-G of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988, [2009] 2 All ER 1127, [2009] 2 All ER (Comm) 1, [2009] Bus LR 1316, [2009] BCC 433, [2009] 2 BCLC 148............................................................................................2.4, 12.26 xxxv

Table of Cases A-G of Zambia v Meer Care & Desai (a firm) [2007] EWHC 952 (Ch)........................16.103 AIB Group (UK) plc v Mark Redler & Co Solicitors [2014] UKSC 58, [2015] AC 1503, [2014] 3 WLR 1367, [2015] 1 All ER 747, [2015] 2 All ER (Comm) 189, [2015] PNLR 10, [2015] WTLR 187, 19 ITELR 216, (2014) 158(43) SJLB 49...16.90 AN Computer Technology Ltd v 4-Sight (unreported, 14 January 1992)......................15.244 ASE plc v Kendric [2014] EWHC 2171 (QB)....................................................  11.69, 11.288 AT Poeton (Gloucester Plating) Ltd v Horton [2000] ICR 1208, [2001] FSR 14, (2000) 23(8) IPD 23060...............................................................  6.33, 6.89, 6.114, 6App AT & T Istel Ltd v Tully [1992] QB 315, [1992] 2 WLR 112, [1992] 2 All ER 28, (1992) 89(2) LSG 32, (1992) 142 NLJ 88.................................................. 15.231, 15.237 Aas v Benham [1891] 2 Ch 244, CA.........................................................  4.162, 4.163, 4.164 Abbey National plc v Fairbrother [2007] IRLR 320.......................................................9.66 Abbott v Long [2011] EWCA Civ 874, [2012] RTR 1...................................................18.241 Abbycars (West Horndon) Ltd v Ford UKEAT/0472/07/DA................................ 9.148, 9.149 Aberdeen City Council v McNeill [2013] CSIH 102, 2014 SC 335, 2014 SLT 312, [2015] ICR 27, [2014] IRLR 113, 2014 GWD 1-15...............................................9.159 Aberdeen Rly Co v Blaikie (1854) 1 Macq 461.............................................................4.119 Abou-Rahmah v Abacha [2006] EWCA Civ 1492, [2007] 1 All ER (Comm) 827, [2007] Bus LR 220, [2007] 1 Lloyd’s Rep 115, [2007] WTLR 1, (2006-07) 9 ITELR 401:.16.103 Abrahall & others v Nottingham City Council & another [2018] EWCA Civ 796,.......13.42, 13.51, 13.53 Abrahams v Performing Rights Society [1995] ICR 1028, [1995] IRLR 486.....  5.107, 5.109, 5.110, 5.111, 5.112, 5.113, 9.36 Accidia Foundation v Simon C Dickinson Ltd [2010] EWHC 3058 (Ch).....................16.88 Ackroyds (London) Ltd v Islington Plastics Ltd [1962] RPC 97...................................16.70 Adam Phones Ltd v Goldschmidt [1999] 4 All ER 486, [2000] CP Rep 23, [2000] FSR 163, (1999) 22(11) IPD 22110........................................................................15.245 Adams v Charles Zub Associates Ltd [1978] IRLR 551................................................9.109 Adams v GKN Sankey Ltd [1980] IRLR 416.................................................................9.15 Adams v Union Cinemas Ltd [1993] 3 All ER 136......................................................5.91, 9.8 Adamson v B & L Cleaning Services Ltd [1995] IRLR 193.................................... 3.46, 3App Addison v London Philharmonic Orchestra [1981] ICR 261.........................................2.52 Adorn SPA Ltd v Amjad [2017] EWHC 1313 (QB)................................................11.9, 11.23 Advantage Business Systems Ltd v Hopley [2007] EWHC 1783 (QB) ............11.139, 11.189, 11.290, 12.49, 12.106 Aerostar Maintenance International Ltd v Wilson [2010] EWHC 2032 (Ch)................19.31 Affinity Financial Awareness Ltd v Ferguson [2016] EWHC 2319 (QB)......................11.160 Agip (Africa) Ltd v Jackson [1990] Ch 265, [1989] 3 WLR 1367, [1992] 4 All ER 385:.4.46 Agoreyo v London Borough of Lambeth [2017] EWHC 2019 (QB).......................5.87, 18.48 Aiden Shipping Co Ltd v Interbulk Ltd, The Vimeira (No 2) [1986] AC 965, [1986] 2 WLR 1051, [1986] 2 All ER 409, [1986] 2 Lloyd’s Rep 117, (1986) 130 SJ 429...14.162 Airbus Operations Ltd v Withey [2014] EWHC 1126 (QB)..............4.21, 4.50, 4.120, 16.100 Air Canada v Lee [1978] ICR 1202, [1978] IRLR 392, (1978) 13 ITR 574..................9.133 Aird v Prime Meridian Ltd [2006] EWCA Civ 1866.....................................................18.229 Airfix Footwear Ltd v Cope [1978] ICR 1210, [1978] IRLR 396, (1978) 13 ITR 513.....2.45 Akavan Erityisalojen Keskusliitto AEK ry v Fujitsu Siemens Computers Oy (Case C44/08) [2009] IRLR 944.......................................................................................13.69 Albany International BV v Stichting Bedrifspensioenfonds Textielindustrie (Case C-67/96) [1999] ECR I-5751, [2000] 4 CMLR 446...............................................10.68 Alcan Extrusions v Yates [1996] IRLR 327....................................................................13.38 Alec Lobb Garages Ltd v Total Oil Great Britain Ltd [1985] 1 WLR 173, [1985] 1 All ER 303, [1985] 1 EGLR 33, (1985) 273 EG 659, (1985) 82 LSG 45, (1985) 129 SJ 83........................................................................................................................13.99 Alemo-Herron v Parkwood Leisure Ltd (Case C-426/11) [2014] 1 CMLR 21, [2014] All ER (EC) 400, [2014] CEC 575, [2013 ICR 1116, [2013] IRLR 744...............13.139, 13.148, 13.152, 13.158, 13.168, 13.179, 13.187 xxxvi

Table of Cases Alfa-Laval Tumba AB v Separator Spares International Ltd [2012] EWCA Civ 1569, [2013] 1 WLR 1110, [2013] 2 All ER 463, [2013] 2 All ER (Comm) 177, [2013] CP Rep 9, [2013] ILPr 10, [2013] ICR 455, [2013] FSR 22............... 17.26, 17.31, 17.40 Al Hajeri v Bennett [2013] EWHC 2552 (QB)..................................................14.137, 18.179 Allan Janes LLP v Johal [2006] EWHC 286 (Ch), [2006] ICR 742, [2006] IRLR 599, (2006) 156 NLJ 373.......................................................11.174, 11.290, 12.14, 13.4, 13.6 Allen v Jambo Holdings Ltd [1980] 1 WLR 1252, [1980] 2 All ER 502, (1980) 124 SJ 742..........................................................................................................................14.59 Allen v Robles [1969] 1 WLR 1193, [1969] 3 All ER 154, [1969] 2 Lloyd’s Rep 61, (1969) 113 SJ 484...................................................................................................9.131 Allfiled UK Ltd v Eltis [2015] EWHC 1300 (Ch), [2015] Info TLR 223, [2016] FSR 11.....................................................................................................3.9, 3.12, 3.13, 4.218, 4.264, 4.282, 4.284, 4.298, 11.3, 14.8, 14.70, 18.1 Alliance Paper Group v Prestwich [1996] IRLR 25......................... 5.36, 10.17, 10.45, 10.47, 10.48, 11.81, 11.208, 11.235, 11.290, 11.292, 12.114, 12.126 Allied Dunbar (Frank Weisinger) Ltd v Weisinger [1988] IRLR 60.......... 10.17, 10.49, 11.43, 11.78, 11.79, 11.80, 11.81, 11.193, 11.288, 13.96, 13.109 Allied Maples Group Ltd v Simmonds & Simmonds [1995] 1 WLR 1602, [1995] 4 All ER 907, [1996] CLC 153, 46 Con LR 134, [1955-95] PNLR 701, (1995) 145 NLJ 1646, [1995] NPC 83, (1995) 70 P & CR D14, CA.......................................16.7 Allison v Horner [2014] EWCA Civ 117.......................................................................16.124 Al Rawi v Security Service [2011] UKSC 34, [2012] 1 AC 531, [2011] 3 WLR 388, [2012] 1 All ER 1, [2011] UKHRR 931, (2011) 108(30) LSG 23, (2011) 155 (28) SJLB 31...................................................................................................................15.214 Altertext Inc v Advanced Data Communications Ltd [1985] 1 WLR 457, [1985] 1 All ER 395, [1985] ECC 375, [1986] FSR 21, (1985) 82 LSG 1715, (1985) 129 SJ 247..........................................................................................................................15.260 Amaryllis Ltd V McLeod UKEAT/0273/15/RN.............................................................13.175 Amber Size & Chemical Co Ltd v Menzel [1913] 2 Ch 239...................................  6.70, 14.92 American Cyanamid & Co v Ethicon Ltd [1975] AC 396, [1975] 2 WLR 316, [1975] 1 All ER 504, [1975] FSR 101, [1975] RPC 513, (1975) 119 SJ 136............. 6App, 14.9, 14.10, 14.18, 14.20, 14.21, 14.22, 14.28, 14.67, 14.70, 14.71, 14.72, 14.73, 14.74, 14.76, 14.78, 14.79, 14.81, 14.83, 14.92, 14.150, 14.153, 15.123, 15.177, 15.185, 17.128 Amway Corp v Eurway International Ltd [1973] FSR 213, [1974] RPC 82.................6App Andrew v Barclays Bank plc [2012] CTLC 115.............................................................18.235 Antaios Compania Naviera SA v Salen Rederierna A.B, The Antaois [1985] AC 191, [1984] 3 WLR 592, [1984] 3 All ER 229, [1984] 2 Lloyd’s Rep 235, (1984) 81 LSG 2776, (1984) 128 SJ 564.................................................................................12.25 Anton Piller KG v Manufacturing Processes Ltd [1976] Ch 55, [1976] 2 WLR 162, [1976] 1 All ER 779, [1976] FSR 129, [1976] RPC 719, (1975) 120 SJ 63..........15.197, 15.201 Antović and another v Montenegro [2017] ECR 70838/13..........................8.120, 8AppA2.10 Aon Ltd v JLT Reinsurance Brokers Ltd [2009] EWHC 3448 (QB), [2010] IRLR 600.................................................................................. 14.135, 14.137, 15.192, 18.179 Aparau v Iceland Frozen Foods plc [1996] IRLR 119.................................  9.75, 13.47, 13.48 Apis-Hristovich EOOD v Lakorda AD (Case C-545/07) [2009] Bus LR 1554, [2009] ECR I-1627, [2009] 3 CMLR 3, [2009] ECDR 13............................................. 7.31, 7.33 Arab Monetary Fund v Hashim (No 6) (The Times, 24 July 1992)...............................17.88 xxxvii

Table of Cases Arbuthnot Fund Managers Ltd v Rawlings [2003] EWCA Civ 518....................  11.3, 11.144, 11.168, 11.181, 12.17, 12.38, 12.39, 12.42, 12.106, 12.122 Arcadia Group Brands Ltd v Visa Inc [2015] EWCA Civ 883, [2015] Bus LR 1362, [2015] 2 CLC 437, [2015] 5 CMLR 16..................................................................16.129 Arena Corp Ltd (in provisional liquidation) v Schroeder [2003] EWHC 1089 (Ch).....15.207 Arkin v Borchard Lines Ltd [2005] EWCA Civ 655, [2005] 1 WLR 3055, [2005] 3 All ER 613, [2005] 2 Lloyd’s Rep 187, [2005] CP Rep 39, [2005] 4 Costs LR 643, (2005) 155 NLJ 902................................................................................................14.162 Arklow Investments Ltd v Maclean [2000] 1 WLR 594, (2000) 144 SJLB 81.......... 4.19, 4.53 Arnold v Britton [2015] UKSC 36, [2015] AC 1619, [2015] 2 WLR 1593, [2016] 1 All ER 1, [2015] HLR 31, [2015] 2 P & CR 14, [2015] L & TR 25, [2015] CILL 3689...........................................................................................1.22, 12.23, 12.26, 12.27, 12.28, 12.29, 12.30, 12.32, 12.33, 12.35 Arthur H Wilton Ltd v Peebles EAT/835/93...................................................................13.42 Arthur J Gallagher Services UK Ltd & others v Skriptchenkov & others [2016] EWHC 603 (QB)................................................................... 8.124, 15.187, 15.189, 16.69 Ashcourt Rowan Financial Planning Ltd v Hall [2013] EWHC 1185 (QB), [2013] IRLR 637..................................................................................  5.124, 5.129, 5.132, 11.3, 11.20, 11.75, 11.77, 11.80, 11.83, 11.112, 11.113, 11.246, 12.12, 12.21, 12.139, 12.147, 12App Aslam & others v Uber BV & others [2017] IRLR 4.....................................................2.13 Assamoi v Spirit Pub Co (Services) Ltd UKEAT/0050/11/LA......................................9.79 Associated Foreign Exchange Ltd v International Foreign Exchange (UK) Ltd [2010] EWHC 1178 (Ch), [2010] IRLR 964..............................................11.30, 11.185, 11.291, 12.106, 12.140 Astex Therapeutics Ltd v AstraZeneca AB [2016] EWHC 2759 (Ch)...........................18.27 Atkinson v Community Gateway Association [2015] ICR 1, [2014] IRLR 834, EAT...8.102, 8AppA2.18, 9.159 Atlantic Air Ltd v Hoff UKEAT/0602/07/ZT.................................................................9.127 Attrill & others v Dresdner Kleinwort Ltd & another; Anar & others v Dresdner Kleinwort Ltd & another [2012] EWHC 1189 (QB), [2012] IRLR 553, (2012) 109(21) LSG 18............................................................. 13.45, 13.50, 13.51, 13.52, 13.59 Attwood v Lamont [1920] 3 KB 571, CA................................................. 10.15, 10.18, 11.14, 12.48, 12.49, 12.50, 12.59, 13.95 Attwood Holdings Ltd v Woodward [2009] EWHC 1083 (Ch)..................4.198, 4.241, 4.262 Austin Knight (UK) Ltd v Hinds [1994] FSR 52................................................11.122, 11.165 Autoclenz Ltd v Belcher & others [2011] UKSC 41, [2011] 4 All ER 745, [2011] ICR 1157, [2011] IRLR 820, (2011) 161 NLJ 1099, (2011) 155(30) SJLB 31, SC......2.13, 2.18, 2.23, 2.28, 2.39, 2.53, 2.55, 11.46 Aviation & Airport Services Ltd v Bellfield EAT/194/00 (unreported, 14 March 2001).......................................................................................................................13.33 Avrahami v Biran [2013] EWHC 1776 (Ch)............................................... 16.93, 16.95, 16.96 Axiom Business Computers Ltd v Frederick (unreported, 20 November 2003)............11.153, 11.185, 11.289, 12.106 B B (children) (sexual abuse: standard of proof), Re [2008] UKHL 35, [2009] 1 AC 11, [2008] 3 WLR 1, [2008] 4 All ER 1, [2008] 2 FLR 141, [2008] 2 FCR 339, [2008] Fam Law 619, [2008] Fam Law 837...................................................12.71, 16.23 xxxviii

Table of Cases BBC v Harper Collins Publishers Ltd [2010] EWHC 2424 (Ch), [2011] EMLR 6, (2010) 107(40) LSG 23, (2010) 160 NLJ 1426...........................................15.138, 15.141 BFI Optilas v Blyth & others [2002] EWHC 2693 (QB)...............................................11.177 BFS Group Ltd v Fox [2008] All ER (D) 400................................................................11.96 BGC Capital Markets (Switzerland) LLC v Rees [2011] EWHC 2009 (QB), (2011) 108(33) LSG 28......................................................................................................10.14 BSW Ltd v Balltec Ltd [2006] EWHC 822 (Pat), [2007] FSR 1, (2006) 29(6) IPD 29050......................................................................................................................14.10 BTI 2014 LLC v Sequana [2016] EWHC 1686 (Ch), [2017] Bus LR 82, [2017] 1 BCLC 453...............................................................................................................4.107 BW Estates Ltd (No 2), Re [2016] EWHC 2156 (Ch), [2016] BCC 814, [2017] 1 BCLC 240...............................................................................................................16.132 Back Office Ltd v Percival [2013] EWHC 1385 (QB), [2013] Bus LR D60..................11.118 Bairstow v Queen’s Moat Houses plc [2001] EWCA Civ 712, [2002] BCC 91, [2001] 2 BCLC 531............................................................................................................16.92 Baker v British Gas Services (Commercial) Limited [2017] EWHC 2302 (QB)...........13.178 Baker v Gibbons [1972] 1 WLR 693, [1972] 2 All ER 759, (1972) 116 SJ 313............6App Baldwin v Brighton & Hove City Council [2007] ICR 680, [2007] IRLR 232.............9.85 Baldwins (Ashby) Ltd v Maidstone (unreported, 9 June 2011)......................................11.120 Ball (liquidator of PV Solar Solutions Ltd) v Hughes [2017] EWHC 3228 (Ch)..........4.107 Balston Ltd v Headline Filters Ltd [1987] FSR 330............................ 1.33, 3.19, 3App, 4.174, 4.175, 4.176, 4.177, 4.180, 4.181, 4.182, 4.184, 4.185, 4.191, 4.192, 4.197, 4.202, 4.204, 4.206, 4.228, 4.240, 4.249, 4.251, 4.262, 6.84, 6.85, 6.102, 6.120, 6App, 15.99, 15.100, 15.101, 18.1 Balston Ltd v Headline Filters Ltd (No 2) [1990] FSR 385...................  3.26, 3.34, 3.67, 3.71, 3.81, 3.82, 3.83, 3.118, 3App, 6App Banerjee v City & East London Area Authority [1979] IRLR 147................................13.74 Bank Mellat v Nikpour [1982] Com LR 158, [1985] FSR 87.............................15.201, 15.207 Bank of Ireland v Jaffery & another [2012] EWHC 1377 (Ch)...................  4.86, 4.234, 16.90, 16.94, 16.95, 16.96 Bank of Tokyo-Mitsubishi UFJ Ltd v Baskan Gida Sanayi VE Pazarlama AS RHMH [2009] EWHC 1276 (Ch), [2010] Bus LR D1.................................... 14AppA1.24, 19.49 Barbulescu v Romania (Application No 61496/08) [2017] ECHR 742, [2017] IRLR 1032..............................................................................1.17, 8.60, 8.65, 8.93, 8AppA2.5, 8AppA2.6, 8AppA2.13 Barclay v City of Glasgow District Council [1983] IRLR 313......................................9.8 Barings plc (in liquidation) v Coopers & Lybrand [2000] 1 WLR 2353, [2000] 3 All ER 910, [2000] Lloyd’s Rep Bank 225, (2000) 150 NLJ 681................................14.98 Barings plc (No 5), Re [1999] 1 BCLC 433........................................................... 4.114, 4.116 Barnett v Creggy [2014] EWHC 3080 (Ch), [2015] PNLR 13, [2016] WTLR 17.... 16.77, 16.122 Barlow Clowes International Ltd (in liquidation) v Eurotrust International Ltd [2005] UKPC 37, [2006] 1 WLR 1476, [2006] 1 All ER 333, [2006] 1 All ER (Comm) 478, [2006] 1 Lloyd’s Rep 225, [2005] WTLR 1453, (2005–06) 8 ITELR 347, (2005) 102(44) LSG 32, [2006] 1 P & CR DG16.................. 14AppA1.25, 16.103, 19.59 Barnato, Re [1949] Ch 258, [1949] 1 All ER 515, [1949] TR 97, [1949] LJR 1109.....16.72 Barnsley Brewery Co Ltd v RBNB [1997] FSR 462......................................................14.21 Barry Allsuch & Co v Harris (unreported, 4 May 2001)..................................... 11.76, 11.289 Barrymore v News Group Newspapers Ltd [1997] FSR 600.........................................6.150 Bartholomews Agri Food Ltd v Thornton [2016] EWHC 648 (QB), [2016] IRLR 432...................................................................................................11.167, 12.11, 12.153, 13.4, 13.96 xxxix

Table of Cases Baschet v London Illustrated Standard Co [1900] 1 Ch 73............................................17.129 Base Metals v Shamurin [2004] EWCA Civ 1316, [2005] 1 WLR 1157, [2005] 1 All ER (Comm) 17, [2005] BCC 325, [2005] 2 BCLC 171, [2004] 2 CLC 916, (2004) 148 SJLB 1281..................................................................17.120, 17.121, 17.122, 17.124, 17.126 Bashir v Brillo Manufacturing Co [1979] IRLR 295.............................................. 9.133, 9.139 Basic Solutions Ltd v Sands [2008] EWHC 1388 (QB), [2008] All ER (D) 289.... 10.11, 11.2, 11.200, 11.291, 12.32, 12.136 Basildon Academies v Amadi UKEAT/0342/14/RN (27 February 2015)............  3.136, 3.138, 4.253 Bateman & others v Asda Stores Ltd [2010] IRLR 370....................  5.59, 13.34, 13.35, 13.36 Bates v Lord Hailsham of St Marylebone [1972] 1 WLR 1373, [1972] 3 All ER 1019, (1972) 116 SJ 584...................................................................................................14.43 Bates van Winkelhof v Clyde & Co LLP [2014] UKSC 32, [2014] 1 WLR 2047, [2014] 3 All ER 225, [2014] ICR 730, [2014] IRLR 641..............  2.7, 2.68, 4.82, 11.287 Bath & North East Somerset District Council v Mowlem plc [2004] EWCA Civ 115, [2015] 1 WLR 785, [2004] BLR 153, 100 Con LR 1, (2004) 148 SJLB 265........11.285, 14.15 Baturina v Chistyakov [2017] EWHC 1049 (Comm)................................................. 4.40, 4.41 Bauman v Hulton Press Ltd [1952] 2 All ER 1121, [1952] WN 556.............................2.27 Bayer AG v Winter (No 2) [1986] 1 WLR 497, [1986] 1 All ER 733, [1986] FSR 323, (1986) 83 LSG 974, (1985) 136 NLJ 187, (1985) 130 SJ 246....................15.200, 15.258 Beach v Smirnov [2007] EWHC 3499 (QB)..................................................................14.156 Beaman v ARTS Ltd [1949] 1 KB 550, [1949] 1 All ER 465, 65 TLR 389, (1949) 93 SJ 236......................................................................................................................16.126 Beauchamp (Earl) v Winn (1873) LR 6 HL 223.............................................................12.72 Beckett Investment Management Group Ltd v Hall [2007] EWCA Civ 613, [2007] ICR 1539, [2007] IRLR 793, (2007) 151 SJLB 891....................10.37, 10.40, 11.1, 11.3, 11.30, 11.31, 11.201, 11.203, 11.205, 11.235, 11.290, 12.19, 12.47, 12.48, 12.49, 12.50, 12.51, 12.54, 12.59, 12.143, 12App, 17.24 Becu (Jean Claude) & others, Re (Case C-22/98) [1999] ECR I-5665, [2001] 4 CMLR 26.................................................................................................................... 10.66, 10.68 Beechwood House Publishing Ltd (t/a Binleys) v Guardian Products Ltd [2011] EWPCC 22, [2012] ECC 14...................................................................................7.36 Beese v Woodhouse [1970] 1 WLR 586, [1970] 1 All ER 769, (1970) 114 SJ 132.......14.54 Behbehani v Salem [1989] 1 WLR 723, [1989] 2 All ER 143............................15.207, 15.253 Bell v Lever Bros Ltd [1932] AC 161, [1931] All ER 1, HL...................3.91, 3.93, 3.96, 3.97, 3.99, 4.124, 4.232 Belmont Finance Corp v Williams Furniture Ltd (No 2) [1980] 1 All ER 393.....14AppA1.13, 19.51 Beloff v Pressdram Ltd [1973] 1 All ER 241, [1973] FSR 33, [1973] RPC 765............6.144 Benfield Holdings Ltd v Richardson [2007] EWHC 171 (QB)..............................17.88, 17.89 Bennett v Bennett [1952] 1 KB 249, [1952] 1 All ER 413, [1952] 1 TLR 400..............12.53 Benson v Richards [2002] EWCA Civ 1402, [2002] All ER (D) 160 (Oct), (2002) 146 SJLB 231.................................................................................................................14.144 Bents Brewery Co Ltd v Hogan [1945] 2 All ER 570..................................14AppA1.9, 19.33 Berkeley Administration Inc v McClelland (breach of confidence) [1990] FSR 505....6App, 9.5, 9.15 Berliner Verkehrsbetriebe (BVG) v JP Morgan Chase Bank NA, Frankfurt (Case C-144/10) [2011] 1 WLR 2087, [2011] 2 All ER (Comm) 877, [2011] Bus LR 1061, [2012] 1 CLC 632, [2011] ILPr 29, [2011] ECR I-396................................17.50 Bernadone v Pall Mall Services Group Ltd [2000] 3 All ER 544, [2001] ICR 197, [2000] IRLR 487, [2000] Lloyd’s Rep IR 665, (2000) 2 LGLR 1026, (2000) 97(24) LSG 39, CA......................................................................................13.178, 13.179 xl

Table of Cases Berry Birch & Noble Financial Planning Ltd v Berwick [2005] EWHC 1803 (QB).....11.18, 11.161, 11.162, 11.182, 11.183, 11.188, 14.21 Bhimji v Chatwani (No 2) [1992] 1 WLR 1158, [1992] 4 All ER 912, [1992] BCLC 387.................................................................................................15.231, 15.243, 15.248 Bhullar v Bhullar [2003] EWCA Civ 424, [2003] BCC 711, [2003] 2 BCLC 241, [2003] WTLR 1397, (2003) 147 SJLB 421, [2003] NPC 45........................  4.136, 4.141, 4.150, 4.161, 4.166, 4.289, 4.316, 16.79 Bhullar v Bhullar [2017] EWHC 407 (Ch).....................................................................4.95 Big Bus Co Ltd v Ticketgo Ltd [2015] EWHC 1094 (Pat), [2015] Bus LR 867, [2015] FSR 32....................................................................................................................14.127 Bilta (UK) Ltd (in liquidation) v Nazir [2015] UKSC 23, [2016] AC 1, [2015] 2 WLR 1168, [2015] 2 All ER 1083, [2015] 2 All ER (Comm) 281, [2015] 2 Lloyd’s Rep 61, [2015] BCC 343, [2015] 1 BCLC 443, [2015] BVC 20............................  4.98, 18.27 Binns v Firstplus Financial Group plc [2013] EWHC 2436 (QB), [2014] Bus LR 110, (2013) 157 (38) SJLB 41........................................................................................18.235 Biogen Inc v Medeva plc [1993] RPC 475.....................................................................16.64 Birch v Birch [2017] UKSC 53, [2017] 1 WLR 2959, [2018] 1 All ER 108, [2017] 2 FLR 1031, [2017] 3 FCR 111.................................................................................11.276 Birmingham City Council v Wetherill [2007] EWCA Civ 599, [2007] IRLR 781, (2007) 151 SJLB 859......................................................................................9.119, 9.120 Bjorlow (Great Britain) Ltd v Minter (1954) 71 RPC 321.............................................6.27 Black v Sumitomo Corp [2001] EWCA Civ 1819, [2002] 1 WLR 1562, [2003] 3 All ER 643, [2002] 1 Lloyd’s Rep 693, [2002] CPLR 148...............................14.125, 14.126 Blackburn v Aldi Stores [2013] IRLR 846, [2013] ICR D 37........................................9.92 Blockfoil Group v Flay (unreported, 18 December 2001)..............................................11.84 Boardman v Phipps [1967] 2 AC 46, [1966] 3 WLR 1009, [1966] 3 All ER 721, (1966) 110 SJ 853....................................................................4.119, 4.122, 4.136, 4.141, 4.161, 5.76, 16.44 Bonnard v Perryman [1891] 2 Ch 269, [1891-94] All ER Rep 965...............................11.234 Booker McConnell plc v Plascow [1985] RPC 425..............................15.201, 15.217, 15.251 Boor (nee Delahaye) v Minisstre de la Fonction Publique et de la Reforme Administrative; Delahaye v Ministre de la Fonction Publique et de la Reformed Administrative (Case C-425/02) [2004] ECR I-10823, [2005] All ER (EX) 575, [2005] CEC 592, [2005] IRLR 61.................................................13.151, 13.153, 13.174 Bostich Inc v McGarry & Cole Ltd [1964] RPC 173.....................................................16.64 Boston Deep Sea Fishing & Ice Co v Ansell (1888) 39 Ch D 339.........................9.153, 9.155 Bosworth v Arcadia Petroleum Ltd [2016] EWCA Civ 818, [2016] CP Rep 48, [2016] 2 CLC 387............................................................................................17.39, 17.41, 17.51 Bourne Rail Ltd and another v Ashton and others [2018] EWHC 73 (QB)...................16.23 Bowler v Lovegrove [1921] 1 Ch 642................................................................. 10.25, 11.147 Boyo v Lambeth London Borough Council [1994] ICR 727, [1995] IRLR 50.......  9.43, 9.47, 9.123, 18.101 Brace v Calder [1895] 2 QB 253....................................................................................9.121 Bradley v Heslin [2014] EWHC 3267 (Ch)....................................................................18.231 Braganza v BP Shipping Ltd [2015] UKSC 17, [2015] 1 WLR 1661, [2015] 4 All ER 639, [2015] 2 Lloyd’s Rep 240, [2015] ICR 449, [2015] IRLR 487, [2015] Pens LR 431..............................................................................................................8.15, 9.103 Brainbox Digital Ltd v Backbord Media GmbH [2017] EWHC 2465 (QB).........14.60, 14.61, 14.62 Brake Bros Ltd v Ungless [2004] EWHC 2799 (QB)..................... 10.22, 11.48, 11.55, 11.69, 11.77, 11.116, 11.232, 11.288, 15.68 Brandeaux Advisers (UK) Ltd v Chadwick [2010] EWHC 3241 (QB), [2011] IRLR 224............................................................................................9.159, 14.49, 16.70, 16.97 Breakspear v Colonial Financial Services (UK) Ltd (unreported, 30 April 2002), QB..5.114 xli

Table of Cases Breitenfeld UK Ltd v Harrison [2015] EWHC 399 (Ch), [2015] 2 BCLC 275.............4.122, 16.100 Bremer Vulkan Schiffbau und Maschinenfabrik v South India Shipping Co [1981] AC 909, [1981] 2 WLR 141, [1981] 2 All ER 289, [1981] 1 Lloyd’s Rep 253, [1981] Com LR 19, [1981] ECC 151, (1981) 125 SJ 114..................................................9.156 Bridge v Deacons [1984] AC 705, [1984] 2 WLR 837, [1984] 2 All ER 19, (1984) 81 LSG 1291, (1984) 134 NLJ 723, (1984)128 SJ 263, PC................... 10.29, 11.205, 13.99 Bridlington Relay Ltd v Yorkshire Electricity Board [1965] Ch 436, [1965] 2 WLR 349, [1965] 1 All ER 264, (1965) 109 SJ 12..........................................................15.76 Brigden v American Express Bank Ltd [2000] IRLR 94................................................2.80 Brigdens v Lancashire County Council [1987] IRLR 58, CA........................................9.80 Briggs v Oates [1991] 1 All ER 407, [1990] ICR 473, [1990] IRLR 472, (1990) 140 NLJ 208...................................................................................................................9.121 Brindle v HW Smith (Cabinets) Ltd [1972] 1 WLR 1653, [1973] 1 All ER 230, [1973] ICR 12, [1972] IRLR 125, 13 KIR 203, (1973) 8 ITR 69, (1972) 116 SJ 967.......9.13 Brink’s Ltd v Abu-Saleh (No 3) [1996] CLC 133..................................................4.46, 16.103 Brink’s Mat Ltd v Elcombe [1988] 1 WLR 1350, [1988] 3 All ER 188, [1989] 1 FSR 211, (1988) 132 SJ 1555...................................................... 14.46, 14.47, 15.206, 15.207 Bristol & West Building Society v Mothew (t/a Stapley & Co) [1998] Ch 1, [1997] 2 WLR 436, [1996] 4 All ER 698, [1997] PNLR 11...................................... 4.115, 16.117 British Fuels Ltd v Baxendale & another [1999] 2 AC 52, [1998]3 WLR 1070, [1998] 4 All ER 609, [1999] 1 CMLR 918, [1998] ICR 1141, [1998] IRLR 706, (1999) 1 LGLR 123, [1999] BLGR 255, HL.....................................................................13.169 British Home Stores Ltd v Burchell [1980] ICR 303 (EAT)..........................................8.25 British Horseracing Board Ltd v William Hill Organisation Ltd (Case C-203/02) [2005] EWCA Civ 863, [2006] ECC 16, [2005] ECDR 28, [2005] RPC 35, (2005) 155 NLJ 1183........................................................................7.12, 7.15, 7.30, 7.36 British Industrial Plastics v Ferguson [1940] 1 All ER 479........................ 14AppA1.12, 19.37 British Midland Tool Ltd v Midland International Tooling Ltd [2003] EWHC 466 (Ch), [2003] 2 BCLC 523................................................ 1.33, 1.36, 3.4, 3.12, 3.13, 3.32, 3.33, 3.34, 3.35, 3.36, 3.61, 3.69, 3.118, 3.121, 3App, 4.104, 4.127, 4.187, 4.188, 4.192, 4.194, 4.195, 4.198, 4.203, 4.206, 4.232, 4.240, 4.244, 4.245, 4.247, 4.248, 4.253, 4.254, 4.262, 4.266, 4.288, 4.312, 4.317, 6.13, 6App, 16.24, 16.27, 19.18 British Motor Trade Association v Saladori [1949] Ch 556, [1949] 1 All ER 208, 65 TLR 44, [1949] LJR 1304.......................................................................................16.25 British Reinforced Concrete Engineering Co Ltd v Schelff [1921] 2 Ch 563........ 11.89, 12.58 British Steel Corp v Granada Television Ltd [1981] AC 1096, [1980] 3 WLR 774, [1981] 1 All ER 417, (1980) 124 SJ 812................................................................6.148 British Syphon Co Ltd v Homewood (No 2) [1956] 1 WLR 1190, [1956] 2 All ER 897, [1956] RPC 225, (1956) 100 SJ 633...............................................................3.144 Brogden v Investec Bank plc [2014] EWHC 2785 (Comm), [2014] IRLR 924.............11.260 Brogsitter v Fabrication de Montres Normandes EURL (Case C-548/12) [2014] QB 753, [2014] 2 WLR 1600, [2014] 1 All ER (Comm) 965, [2015] CEC 329, [2014] ILPr 20............................................................................17.32, 17.38, 17.39, 17.40, 17.47 Brooks v Olyslager Oms (UK) Ltd [1998] IRLR 590....................................................6.32 Broome v Cassell & Co Ltd (No 1) [1972] AC 1027, [1972] 2 WLR 645, [1972] 1 All ER 801, (1972) 116 SJ 199.....................................................................................16.40 Brown v Bennett [1999] BCC 525, [1999] 1 BCLC 649...............................................16.103 Brown v Southall & Knight [1980] ICR 617, [1980] IRLR 130....................... 9.22, 9.26, 9.28 Buchan v Secretary of State for Employment [1997] BCC 145, [1997] IRLR 80.........2.62 Buchanan v Alba Diagnostics Ltd [2004] UKHL 5, 2004 SC (HL) 9, 2004 SLT 255, 2004 SCLR 273, [2004] RPC 34, (2004) 27 (4) IPD 27034, (2004) 148 SJLB 183, 2004 GWD 5-95..............................................................................................10.17 xlii

Table of Cases Buckland v Bournemouth University Higher Education [2010] IRLR 445.............  9.72, 9.78, 9.89, 9.134, 9.136, 9.140 Bull v Pitney-Bowes Ltd [1967] 1 WLR 273, [1966] 3 All ER 384, 1 KIR 342, (1967) 111 SJ 32........................................................................................11.254, 11.270, 11.271 Bunn v BBC [1998] 3 All ER 552, [1998] EMLR 846, [1999] FSR 70, (1998) 95(28) LSG 31, (1998) 148 NLJ 979.................................................................................14.98 Burnden Holdings (UK) Ltd v Fielding [2016] EWCA Civ 557, [2017] 1 WLR 39, [2016] CP Rep 41............................................................................16.111, 16.113, 16.125 Burroughes v Abbott [1922] 1 Ch 86................................................................... 12.65, 12.69 Business Environment Group Ltd v Wendy Fair (Wembley) Ltd 2005] EWCA Civ 1230........................................................................................................................14.68 Business Seating (Renovations) Ltd v Broad [1989] ICR 729............... 10.41, 11.179, 11.184, 11.290, 12.36, 12.48, 12.107, 14.83 Byrne v Statist Co [1914] 1 KB 622...............................................................................3.150 C C plc v P (Attorney-General intervening) [2007] EWCA Civ 493, [2008] Ch 1, [2007] 3 WLR 437..............................................................................................................15.241 C plc v P (Secretary of State for the Home Office intervening) [2006] EWHC 1226 (Ch), [2006] Ch 549, [2006] 3 WLR 273, [2006] 4 All ER 311, (2006) 156 NLJ 988..........................................................................................................................15.240 CA Parsons & Co Ltd v McLoughlin [1978] IRLR 65...................................................5.82 C&S Associates UK Ltd v Enterprise Insurance Company plc [2015] EWHC 3757 (Comm)...................................................................................................................13.20 CBS Butler Ltd v Brown & others [2013] EWHC 3944 (QB), [2013] Info TLR 263...14.134, 15.182 CBS United Kingdom Ltd v Perry [1985] FSR 421.......................................................15.256 CBT Systems UK Ltd v Campopiano (unreported, 24 July 1995).................................15.99 CC v AB [2006] EWHC 3083 (QB), [2007] EMLR 11, [2007] 2 FLR 301, [2008] 2 FCR 505, [2007] Fam Law 591..............................................................................6.152 CEF Holdings Ltd v Mundey [2012] EWHC 1524 (QB), [2012] IRLR 912, [2012] FSR 35................................................................................. 11.16, 11.20, 11.111, 11.213, 11.289, 11.293, 12.6, 12.99, 12.115, 14.41, 14.52, 14.68, 14.78, 15.88, 17.30, 17.31 CF Partners (UK) Ltd v Barclays Bank plc [2014] EWHC 3049 (Ch)...........................6.14 CMI-Centers for Medical Innovation GmbH v Phytopharm plc [1999] FSR 235, (1998) 21(11) IPD................................................................................ 14.23, 14.92, 15.76 CMS Dolphin Ltd v Simonet [2002] BCC 600, [2001] 2 BCLC 704, [2001] Emp LR 895.............................................................................................. 1.33, 4.25, 4.136, 4.171, 4.264, 4.265, 4.266, 4.267, 4.286, 4.290, 4.295, 4.297, 4.298, 16.79, 16.88, 16.100, 16.102 CR Smith Glaziers (Dunfermline) Ltd v Greenan 1993 SC 161, 1993 SLT 1221, 1993 SCLR 231...............................................................................................................11.55 Cable & Wireless plc v IBM United Kingdom Ltd [2002] EWHC 2059 (Comm), [2002] 2 All ER (Comm) 1041, [2002] CLC 1319, [2003] BLR 89, [2002] Masons CLR 58, (2002) 152 NLJ 1652..................................................................18.257 Callery v Gray; Russell v Pal Pak Corrugated Ltd [2001] EWCA Civ 1117, [2001] 1 WLR 2112, [2001] 3 All ER 833, [2001] 2 Costs LR 163, [2001] Lloyd’s Rep IR 743, [2001] PIQR P32, (2001) 151 NLJ 1129........................................................14.159 Camden v Islington Mental Health & Social Care Trust v Atkinson EAT/0058/07.......18.50, 18.54, 18.61 Camelot Group plc v Centaur Communications Ltd [1999] QB 123, [1998] 2 WLR 379, [1998] 1 All ER 251, [1998] IRLR 80, [1998] EMLR 1, (1997) 94(43) LSG 30, (1997) 147 NLJ 1618, (1998) 142 SJLB 19.....................................................3.114 xliii

Table of Cases Campbell v Frisbee [2002] EWHC 328 (Ch), [2002] EWCA Civ 1374, [2003] ICR 141, [2003] EMLR 3, (2002) 146 SJLB 233..................................  6.42, 6.43, 6.48, 6.49, 6.149, 6.155, 6.167, 9.50, 9.56 Campbell v Mirror Group Newspapers Ltd [2004] UKHL 22, [2004] 2 AC 457, [2004] 2 WLR 1232, [2004] 2 All ER 995, [2004] EMLR 15, [2004] HRLR 24, [2004] UKHRR 648, 16 BHRC 500, (2004) 101(21) LSG 36, (2004) 154 NLJ 733, (2004) 148 SJLB 572.............................................................6.12, 6.42, 6.51, 6.124, 6.149, 6.165 Canadian Aero Service Ltd v O’Malley (1973) 40 DLR (3d) 371, Can SC................3.9, 4.25, 4.264, 4.298 Cantor Fitzgerald International v Bird & others [2002] IRLR 867, [2002] Emp LR 1171................................................................................................................. 9.87, 9.133 Cantor Fitzgerald International v Callaghan [1999] 2 All ER 411, [1999] ICR 639, [1999] IRLR 234.....................................................................................................9.109 Cantor Fitzgerald International v George (unreported, 17 January 1996), CA..............15.64 Cantor Fitzgerald International v Tradition (UK) Ltd (12 June 1998)...........................3.110 Cantor Fitzgerald (UK) Ltd v Wallace [1992] IRLR 215.................................... 10.23, 10.24 Capgemini India Private Ltd v Krishnan [2014] EWHC 1092 (QB) ..... 10.12, 11.160, 11.273, 11.275, 11.276, 13.110, 14.119, 18.199 Capita plc & another v Darch & others [2017] EWHC 1248 (Ch), [2017] IRLR 718; [2017] EWHC 1401 (Ch)................................................. 8.90, 8.93, 8AppA2.14, 11.144, 11.219, 14.34, 14.137, 15.167, 18.171, 18.175, 18.181 Carewatch Care Services Ltd v Focus Caring Services Ltd & others [2014] EWHC 2313 (Ch)................................................................................ 10.88, 11.88, 11.90, 11.288 Caribonum Co Ltd v LeCouch (1913) 109 LT 385........................................................11.95 Carmichael v National Power plc [1999] 1 WLR 2042, [1999] 4 All ER 897, [1999] ICR 1226, [2000] IRLR 43, (1999) 96(46) LSG 38, (1999) 143 SJLB 281, HL ..2.26, 2.29, 2.36 Cartlidge Morland v Thomas [2011] EWHC 2086 (QB)...............................................11.196 Cartwright and others v Tetrad Ltd UKEAT/0262/14 (EAT)..........................................13.54 Catamaran Cruisers Ltd v Williams [1994] IRLR 386..........................................  13.74, 13.79 Caterpillar Logistic Services (UK) Ltd v Huesca de Crean [2011] EWCA Civ 1671, [2012] IRLR 410; [2012] EWCA Civ 156, [2012] 3 All ER 129, [2012] CP Rep 22, [2012] ICR 981, [2012] FSR 33.........................................  6.99, 6.105, 6.106, 6.111, 6.116, 9.4, 10.5, 14.96, 14.105, 15.76, 15.94, 15.121, 16.66, 18.169 Cattley v Pollard [2006] EWHC 3130 (Ch), [2007] Ch 353, [2007] 3 WLR 317, [2007] 2 All ER 1086, [2007] PNLR 19, [2007] WTLR 245, (2007-08) 10 ITELR 1......16.126 Cave v Robinson Jarvis & Rolf [2002] UKHL 18, [2003] 1 AC 384, [2002] 2 WLR 1107, [2002] 2 All ER 641, [2003] 1 CLC 101, 81 Con LR 25, [2002] PNLR 25, [2002] 19 EG 146 (CS), (2002) 99(20) LSG 32, (2002) 152 NLJ 671, (2002) 146 SJLB 109.................................................................................................................16.128 Cavenagh v William Evans Ltd [2012] EWCA Civ 697, [2013] 1 WLR 238, [2012] 5 Costs LR 835, [2012] ICR 1231, [2012] IRLR 679, (2012) 156(23) SJLB 35......16.98 Cavendish Square Holdings BV v Makdessi [2012] EWHC 3582 (Comm), [2013] 1 All ER (Comm) 787..............................................................  11.43, 11.44, 11.78, 11.278, 11.279, 11.280, 11.281, 11.282, 11.284, 11.285, 11.288, 13.99 Cayne v Global Natural Resources plc [1984] 1 All ER 225, CA...............14.11, 14.17, 14.68 Centri-Spray Corp v Cera International Ltd [1979] FSR 175..............................15.175, 15.224 Cerberus Software Ltd v Rowley [2001] EWCA Civ 78, [2001] ICR 376, [2001] IRLR 160, [2001] Emp LR 173..............................................  5.106, 5.107, 5.108, 5.109, 5.113, 5.114, 9.14, 9.36 xliv

Table of Cases Chafer Ltd v Lilley [1947] LJR 231, 176 LT 22.....................................................5.34, 12.134 Chagos Islanders v A-G [2003] EWHC 2222 (QB)........................................................16.126 Chan (Kak Loui) v Zacharia (1984) 154 CLR 178.........................................................4.141 Chandlers (Farm Equipment Ltd v Rainthorpe UKEAT/0753/04.......................... 13.74, 18.99 Chanel Ltd v FW Woolworth & Co Ltd [1981] 1 WLR 485, [1981] 1 All ER 745, [1981] FSR 196, (1981) 125 SJ 202.......................................................................14.116 Chaplin v Hicks [1911] 2 KB 786..................................................................................16.7 Chapman v Letherby & Christopher Ltd [1981] IRLR 440...........................................9.15 Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101, [2009] 3 WLR 267, [2009] 4 All ER 677, [2010] 1 All ER (Comm) 365, [2009] Bus LR 1200, [2009] BLR 551, 125 Con LR 1, [2010] 1 P & CR 9, [2009] 3 EGLR 119, [2009] CILL 2729, [2009] 27 EG 91 (CS), (2009) 153 (26) SJLB 27, [2009] NPC 87, [2009] NPC 86............................................................................... 12.26, 12.67, 12.70 Cheng Yuen v Royal Hong Kong Golf Club [1998] ICR 131 (PC)................................2.49 Chhabra v West London Mental Health Trust [2013] UKSC 80, [2014] 1 All ER 943, [2014] ICR 194, [2014] IRLR 227, [2014] Med LR 111, (2014) 136 BMLR 1....18.54, 18.58 ChipsAway International Ltd v Kerr [2009] EWCA Civ 320.........................................11.88 Christie v Johnston Carmichael [2010] IRLR 1016............................................... 5.127, 15.32 Church of Scientology of California v Kaufman [1973] RPC 635.................................6.155 Churngold Recycllig Ltd v Environment Agency [2014] EWCA Civ 909, [2015] Env LR 13......................................................................................................................15.167 Cia de Seguros Imperio v Heath (REBX) Ltd formery CE Heath & Co (America) Ltd) [2001] 1 WLR 112, [2000] 2 All ER (Comm) 787, [2000] CLC 1543, [2001] Lloyd’s Rep IR 109, [2000] Lloyd’s Rep PN 795, (2000-01) 3 ITELR 134..........16.116, 16.117 Cinpres Gas Injection Ltd v Melea Ltd [2005] EWHC 3180 (Pat), [2006] FSR 36, (2006) 29(3) IPD 29025..........................................................................................14.43 City of London Group plc v Lothbury Financial Services Ltd [2012] EWHC 3148 (Ch).........................................................................................................................4.81 Ciupa and others v II Szpital Miejski im L Rydygiera w Lodzi, now Szpital Ginekologiczno-Polozniczy im dr L Rydygiera sp z z.z w Lodzi (2017) (Case C-429/16)................................................................................................................13.69 Claridge v Daler Rowney Ltd [2008] ICR 1267, [2008] IRLR 672...............................9.66 Clark v Clark Construction Initiatives Ltd & another [2009] BCC 665, [2008] ICR 635, [2008] IRLR 364................................................................................ 2.62, 2.63, 2.66 Clark v Fahrenheit 451 (Communications) Ltd (unreported, 6 June 2000)....................5.92 Clark v Nomura International plc [2000] IRLR 766, QB...............................................8.15 Clark v Oxfordshire Health Authority [1998] IRLR 125, (1998) 41 BMLR 18, CA.....2.36 Clarke v Newland [1991] 1 All ER 397..........................................................................12.97 Clear Edge UK Ltd v Elliot [2011] EWHC 3376 (QB)............ 15.101, 15.118, 15.119, 15.121 Clegg v Pache (deceased) [2017] EWCA Civ 256.........................................................16.88 Clifford Davis Management Ltd v WEA Records Ltd [1975] 1 WLR 61, [1975] 1 All ER 237, (1974) 118 SJ 775.....................................................................................13.99 Clyde & Co LLP v Bates von Winkelhof see Bates van Winkelhof v Clyde & Co LLP Clydesdale Bank plc v Workman [2016] EWCA Civ 73, [2016] PNLR 18...................16.103 Cobbetts LLP v Hodge [2009] EWHC 786 (Ch), [2010] 1 BCLC 30, (2009) 153(17) SJLB 29.............................................................................................................4.52, 16.88 Cobden Investments Ltd v RWM Langport Ltd & others [2008] EWHC 2810 (Ch).....4.111 Coca Cola Co v British Telecommunications plc [1999] ITCLR 365, [1999] FSR 518..........................................................................................................................14.130 Cockram v Air Products plc [2014] ICR 1065, [2014] IRLR 672....................... 9.140, 9.141 Coco v AN Clark (Engineers) Ltd [1968] FSR 415, [1969] RPC 41..............  6.10, 6.11, 6.13, 6.47, 15.77 Coleman (DA) v S & W Baldwin (t/a Baldwins) [1977] IRLR 342...............................9.116 Coleman Taymar Ltd v Oakes [2001] 2 BCLC 749, (2001) 98(35) LSG 32, (2001) 145 SJLB 209................................................................. 3.52, 3.64, 3App, 4.181, 4.186, 4.220 xlv

Table of Cases Collier v Sunday Referee Publishing Co Ltd [1940] 2 KB 647......................................15.27 Collins King & Associates Ltd v Thorn [2016] EWHC 3636 (QB)...............................11.125 Colman Coyle (a firm) v Georgiou EAT/535/00 (unreported, 13 December 2001).......13.64 Colomar Mari v Reuters Ltd EAT/0539/13....................................................................9.133 Columbia Picture Industries Inc v Robinson [1987] Ch 38, [1986] 3 WLR 542, [1986] 3 All ER 338, [1986] FSR 367, (1986) 83 LSG 3424, (1986) 130 SJ 766.............15.210, 15.220, 15.247, 15.254 Comax Secure Business Services Ltd v Wilson & others (unreported, 21 June 2001)..4.28, 4.50 Commercial Bank of the Near East plc v A [1989] 2 Lloyd’s Rep 319, (1989) 139 NLJ 645..........................................................................................................................14.48 Commercial Plastics Ltd v Vincent [1965] 1 QB 623, [1964] 3 WLR 820, [1964] 3 All ER 546, (1964) 108 SJ 599, CA.............................................  6App, 11.13, 11.14, 11.93, 12.11, 12.18, 12.37, 13.4, 16.73 Commerzbank AG v Keen [2006] EWCA Civ 1536, [2006] 2 CLC 844, [2007] ICR 623, [2007] IRLR 132......................................................................................... 2.80, 8.15 Commonwealth Oil & Gas Co Ltd v Baxter [2009] CSIH 75, 2010 SC 156, 2009 SLT 1123, 2009 SCLR 898, 2009 GWD 35-592............................................................4.126 Company’s Application, Re [1989] Ch 477, [1989] 3 WLR 265, [1989] 2 All ER 248, [1989] BCLC 462, [1989] ICR 449, [1989] IRLR 477, [1989] Fin LR 345, (1989) 139 NLJ 542, (1989) 133 SJ 917........................ 6.153, 6.158, 6.159, 6.161, 6.163 Computer Associates plc v Larner (unreported, 15 December 2000).............................14.23 Computershare Investor Services plc v Jackson [2007] EWCA Civ 1065, [2008] ICR 341, [2008] IRLR 70, (2007) 104(44) LSG 32, (2007) 151 SJLB 1434................13.146 Condliffe v Sheingold [2007] EWCA Civ 1043, [2008] LLR 44...................................16.80 Connors Bros Ltd & others v Connors [1940] 4 All ER 189, PC...................................10.47 Consistent Group Ltd v Kalwak [2008] EWCA Civ 430, [2008] IRLR 505 (CA).....2.18, 2.55 Continental Tyre & Rubber (Great Britain) Co Ltd v Heath (1913) 29 TLR 308...10.41, 11.93 Cook v Deeks [1916] 1 AC 554, PC...............................................................................4.97 Cook Industries Inc v Galliher [1979] Ch 439, [1978] 3 WLR 637, [1978] 3 All ER 945, (1978) 122 SJ 367...........................................................................................15.259 Copland v United Kingdom (Application No 62617/00) (2007) 45 EHRR 37, 25 BHRC 216, 2 ALR Int’l 785................................................................... 8.102, 8AppA2.4 Coppage & another v Safety Net Security Ltd [2013] EWCA Civ 1176, [2013] IRLR 970.............................................................................  4.279, 11.28, 11.30, 11.37, 11.157, 11.158, 11.159, 11.164, 11.168, 11.172, 11.173, 11.198, 11.290, 12.11, 12.12, 12.38, 12.43, 12.106, 12.108, 12.120, 13.4 Co-operative Group Ltd v Baddeley [2014] EWCA Civ 658.........................................13.153 Coral Index Ltd v Regent Index Ltd [1970] FSR 13, [1970] RPC 147..........................3.62 Corbiere Ltd v Xu [2018] EWHC 112 (Ch)........................................................15.192, 15.194 Cornwall County Council v Prater [2006] EWCA Civ 102, [2006] 2 All ER 1013, [2006] ICR 731, [2006] IRLR 362, [2006] BLGR 479, (2006) 156 NLJ 372........2.29 Corporate Express v Day [2004] EWHC 2943, QB....................................11.64, 11.65, 11.92, 11.247, 11.288 Coulthard v Disco Mix Club Ltd [2000] 1 WLR 707, [1999] 2 All ER 457, [1999] EMLR 434, [1999] FSR 900...................................................................................16.120 Countrywide Assured Financial Services Ltd v Pollard [2004] EWHC 1214 (Ch).......12.122 Coupland v Arabian Gulf Oil Co [1983] 1 WLR 1136, [1983] 3 All ER 226, (1983) 133 NLJ 893, (1983) 127 SJ 597............................................................................17.126 Couwenbergh v Valkova [2004] EWCA Civ 676...........................................................18.265 Cowell v Quilter Goodison & Co Ltd & QG Management Services Ltd [1989] IRLR 392..........................................................................................................................2.68 Cowl v Plymouty City Council [2001] EWCA Civ 1935, [2002] 1 WLR 803, [2002] CP Rep 18, (2002) 5 CCL Rep 42, [2002] ACD 11, [2002] Fam Law 265, (2002) 99(8) LSG 35, (2002) 146 SJLB 27........................................................................18.234 xlvi

Table of Cases Cranleigh Precision Engineering Ltd v Bryant [1965] 1 WLR 1293, [1964] 3 All ER 289, [1966] RPC 81, (1965) 109 SJ 830......................................... 6App, 15.129, 15.130 Crawford & another v Suffolk Mental Health Partnerhip NHS Trust [2012] EWCA Civ 138, [2012] IRLR 402, [2012] Med LR 246, (2012) 125 BMLR 23....... 18.48, 18.57 Crawford v Swinton Insurance Brokers Ltd [1990] ICR 85, [1990] IRLR 42, EAT......13.164, 13.174 Crawfordsburn Inn Ltd v Graham [2013] NIQB 79.......................................................16.40 Cray Valley Ltd v Deltech Europe Ltd [2003] EWHC 728 (Ch)....................................6App Cream Holdings Ltd v Banerjee [2004] UKHL 44, [2005] 1 AC 253, [2004] 3 WLR 918, [2004] 4 All ER 617, [2005] EMLR 1, [2004] HRLR 39, [2004] UKHRR 1071, 17 BHRC 464, (2005) 28(2) IPD 28001, (2004) 101(42) LSG 29, (2004) 154 NLJ 1589, (2004) 148 SJLB 1215........................................................ 14.81, 15.76 Credit Suisse Asset Management Ltd v Armstrong & others [1996] ICR 882, [1996] IRLR 450, (1996) 93(23) LSG 35, (1996) 140 SJLB 14.................... 5.129, 9.104, 11.35, 11.238, 11.241, 11.242, 11.245, 11.290, 12.138, 13.16, 13.25, 13.44, 13.47, 13.51, 13.57, 15.64, 15.68, 15.70, 18.82 Credit Suisse First Boston (Europe) Ltd v Lister [1999] 1 CMLR 710, [1999] ICR 794, [1998] IRLR 700, (1998) 95(44) LSG 35, (1998) 142 SJLB 269.....13.156, 13.157, 13.158, 13.167, 13.171, 13.172 Credit Suisse First Boston (Europe) Ltd v Padiachy & others [1998] 2 CMLR 1322, [1999] ICR 569, [1998] IRLR 504...............................................13.156, 13.157, 13.158, 13.167, 13.171, 13.172 Cresswell v Board of Inland Revenue [1984] 2 All ER 713, [1984] ICR 508, [1984] IRLR 190, (1984) 81 LSG 1843, (1984) 134 NLJ 549, (1984) 128 SJ 431...........5.62 Croesus Financial Services Ltd v Bradshaw & Bradshaw [2013] EWHC 3685 (QB)...9.55, 11.9, 11.30, 11.39, 11.121, 11.141, 11.160, 11.204, 11.205, 11.290, 12.15, 12.19, 13.4, 13.24, 18.115 Crofter Hand Woven Harris Tweed Co Ltd v Veitch [1942] AC 435, [1942] 1 All ER 147, 1942 SC (HL) 1, 1943 SLT 2...................................................... 14AppA1.21, 19.39 Crossco No 4 Unlimited v Jolan Ltd [2011] EWCA Civ 1619, [2012] 2 All ER 754, [2012] P & CR 16, [2012] 1 EGLR 137, 14 ITELR 615........................................4.40 Crowson Fabrics Ltd v Rider & others [2007] EWHC 2942 (Ch), [2008] IRLR 288, [2008] FSR 17.......................................................................1.33, 3.38, 3.39, 3App, 4.28, 4.177, 6.20, 7.35, 15.145 Crystal Palace FC (2000) Ltd v Bruce [2000] SLR 81, QB...........................................5.36 Cullard v Taylor (1887) 3 TLR 698................................................................................11.16 Cullen Investments Ltd & others v Brown & others [2017] EWHC 1586 (Ch)......4.42, 4.110, 4.165 Cureton v Mark Insulations Ltd [2006] EWHC 2279 (Admin), QB..............................7.49 Customs & Excise Comrs v AE Hamlin & Co [1984] 1 WLR 509, [1983] 3 All ER 654, [1983] STC 780, (1983) 80 LSG 2140, (1984) 128 SJ 246............................15.242 Cuthbertson v AML Distributors [1975] IRLR 228.................................................. 2.89, 5.92 Cyrus Energy Ltd v Stewart [2009] CSOH 53, 2009 GWD 15-235...............................10.53 D D v M [1996] IRLR 192, QB..........................................................................................11.286 D v P see Dyson Technology v Pellerey DPR Futures Ltd, Re [1989] 1 WLR 778, (1989) 5 BCC 603, [1989] BCLC 634, (1989) 133 SJ 977...................................................................................................14.60 Dacas v Brook Street Bureau (UK) Ltd [2004] EWCA Civ 217, [2004] ICR 1437, [2004] IRLR 358 (CA)............................................................................................2.20 xlvii

Table of Cases Dairy Crest Ltd v Pigott [1989] ICR 92, CA....................................................... 11.290, 14.72 Dairy Crest Ltd v Wise (1993) IRLB 491............................................... 9.119, 11.30, 11.199, 11.290, 12.6, 13.122 Daraydan Holdings Ltd v Solland International Ltd [2004] EWHC 622 (Ch), [2005] Ch 119, [2004] 3 WLR 1106, [2005] 4 All ER 73, [2004] WTLR 815, [2004] NPC 49....................................................................................................................4.24 Daventry District Council v Daventry & District Housing Ltd [2011] EWCA Civ 1153, [2012] 1 WLR 1333, [2012] 2 All ER (Comm) 142, [2012] Bus LR 485, [2012] Pens LR 57, [2012] 1 P & CR 5, [2011] 42 EG 120 (CS)..........................12.67 Davies v Davies (1837) 36 Ch D 359..................................................................12.125, 12.126 Davies & others v Hart [2015] EWHC 3121 (QB)..................... 11.274, 13.25, 13.109, 13.110 Davis v New England College of Arundel [1977] ICR 6, (1976) 10 ITR 278...............2.45 Davy International Ltd v Tazzyman [1997] 1 WLR 1256, [1997] 3 All ER 183............14.144 Dawnay Day & Co Ltd v de Braconier d’Alphen [1997] IRLR 285, ChD; [1998] ICR 1068, [1997] IRLR 442, (1997) 94(26) LSG 30, (1997) 141 SJLB 129, CA.........1.41, 5.36, 10.17, 10.20, 10.24, 10.28, 10.30, 10.45, 11.3, 11.36, 11.43, 11.46, 11.69, 11.78, 11.79, 11.80, 11.82, 11.89, 11.208, 11.211, 11.213, 11.214, 11.217, 11.218, 11.220, 11.221, 11.222, 11.225, 11.292, 12.114, 12.117, 12.126, 13.109 Dawson-Damer v Taylor Wessing LLP [2017] EWCA Civ 74, [2017] 1 WLR 3255....18.189 Days Medical Aids Ltd v Pihsiang Machinery Manufacturing Co Ltd [2004] EWHC 44 (Comm), [2004] 1 All ER (Comm) 991, [2004] 2 CLC 489, [2004] UKCLR 384, [2004] ECC 21, [2004] Eu LR 477.................................................................10.61 Deacons v White & Case LLP & others, HCA 2433/2002..................................... 16.26, 16.27 De Bloos Sprl v Bouyer SA (Case 14/76) [1976] ECR 1497, [1977] 1 CMLR 60........17.45 Decorus Ltd v Penfold and Procure Store Limited [2016] EWHC 1421 (QB).........1.33, 3.46, 3.64, 3App, 4.200, 13.17, 13.19, 13.24, 13.90 De Francesco v Barnum (1890) LR 45 Ch D 430..............................14AppA1.9, 15.10, 19.34 Delabole Slate Ltd v Berriman [1985] ICR 546, [1985] IRLR 305....................13.164, 13.174 Delaney v Staples (t/a Montfort Recruitment) [1992] 1 AC 687, [1992] 2 WLR 451, [1992] 1 All ER 944, [1992] ICR 483, [1992] IRLR 191, (1992) 142 NLJ 384....5.113, 9.14 De Lassalle v Guildford [1901] 2 KB 215......................................................................9.59 Dellner Woodville Ltd v Blackham [2012] EWHC 1739 (QB)......................................14.137 Denilauer v SNC Couchet Freres (Case 25/79) [1980] ECR 1553, [1981] 1 CMLR 62............................................................................................................................17.157 Den Norske Bank ASA v Antonatos [1999] QB 271, [1998] 3 WLR 711, [1998] 3 All ER 74, [1998] Lloyd’s Rep Bank 253, CA.................................... 15.231, 15.238, 15.257 Dentmaster (UK) Ltd v Kent [1997] IRLR 636, CA...........................................11.129, 11.175 Denton v TH White Ltd [2014] EWCA Civ 906, [2014] 1 WLR 3926, [2015] 1 All ER 880, [2014] CP Rep 40, [2014] BLR 547, 154 Con LR 1, [2014] 4 Costs LR 752, [2014] CILL 3568, (2014) 164 (7614) NLJ 17.......................................................14.31 Dent Wizard (UK) Ltd v Thomas [2002] EWHC 1671 (QB).........................................12.16 Department for Employment & Learning v Morgan [2016] NICA 2, [2016] IRLR 350..........................................................................................................................2.65 Dering v Earl of Winchelsea 29 ER 1184, (1787) 1 Cox Eq Cas 318............................14.24 Desquenne et Giral UK Ltd v Richardson [1999] CPLR 744, [2001] FSR 1, CA.........14.153 Devere Holding Co Ltd v Belgravia Wealth Management Europe Kft [2014] EWHC 3189 (QB)...............................................................................................................11.173 Devonald v Rossers & Sons [1906] 2 KB 708................................................................15.27 Dewhurst v Citysprint UK Ltd ET/220512/2016............................................................2.13 Diamond Stylus Co Ltd v Bauden Precision Diamonds Ltd [1972] FSR 177, [1973] RPC 675................................................................................................6App, 14.89, 14.91 xlviii

Table of Cases Dietmann v London Borough of Brent [1987] ICR 737; [1988] ICR 842, CA......5.85, 18.101 Digicel (St Lucia) Ltd v Cable & Wireless plc [2010] EWHC 774 (Ch)..............14AppA1.13, 19.51 Dinsdale Moorland Services Ltd v Evans [2014] EWHC 2 (Ch), [2014] 2 Costs LR 217..........................................................................................................................12.147 Direct Media Publishing GmbH v Albert-Ludwigs-Universitat Freiburg (Case C-304/07) [2009] Bus LR 908, [2008] ECR I-7565, [2009] 1 CMLR 7, [2009] CEC 166, [2009] ECDR 3, [2009] EMLR 6, [2008] Info TLR 373, [2009] RPC 10, [2008] WLR (D) 312, ECJ................................................................................7.31 Director of the Serious Fraud Office v Eurasian Natural Resources Corp Ltd [2017] EWHC 1017 (QB), [2017] 1 WLR 4205, [2017] 2 Cr App R 24, [2017] Lloyd’s Rep FC 330, [2018] Crim LR 63............................................................................18.27 Distillers Co (Bottling Services) Ltd v Gardner [1982] IRLR 47........................ 3.107, 3.114, 5.41, 5.82 Dixon v Stenor Ltd [1973] ICR 157, [1973] IRLR 28, (1973) 8 ITR 141......5.100, 9.14, 9.98 D’Jan of London Ltd, Re [1993] BCC 646, [1994] 1 BCLC 561..................................4.225 Doe d Davies v Williams 126 ER 16, (1788) 1 H Bl 25.................................................12.63 Doherty v Allman (1878) LR 3 App Cas 709.................................................................16.59 Don King Productions Inc v Warren (No 1) [2000] Ch 291, [1999] 3 WLR 276, [1999] 2 All ER 218, [1999] 1 Lloyd’s Rep 588, [2000] 1 BCLC 607, [1999] EMLR 402, CA...................................................................................................................4.141 Donohue v Armco [2001] UKHL 64, [2002] 1 All ER 749, [2002] 1 All ER (Comm) 97, [2002] 1 Lloyd’s Rep 425, [2002] CLC 440............................................  17.74, 17.77 Dorma UK Ltd v Bateman [2015] EWHC 4142 (QB), [2016] IRLR 616...........  4.237, 14.79, 14.139, 15.119, 15.121, 15.123, 18.182 Dormeuil Frères SA v Nicolian International (Textiles) Ltd [1988] 1 WLR 1362, [1988] 3 All ER 197, [1989] 1 FSR 255, (1988) 85(33) LSG 43................15.252, 15.253 Douglas v Hello! Ltd (No 1) [2001] QB 967, [2001] 2 WLR 992, [2001] 2 All ER 289.......................................................................................................6.152, 6.155, 16.30 Douglas v Hello! Ltd (No 3) see OBG Ltd v Allan Douglas v Hello! Ltd (No 6) [2003] EWHC 786 (Ch), [2003] 3 All ER 996, [2003] EMLR 31, (2003) 153 NLJ 595, ChD; [2005] EWCA Civ 595, [2006] QB 125, [2005] 3 WLR 881, [2005] 4 All ER 128, [2005] EMLR 28, [2005] 2 FCR 487, [2005] HRLR 27, (2005) 28(8) IPD 28057, (2005) 155 NLJ 82, CA............... 6.3, 16.40, 16.78, 17.125 Douglas Llambias Associates Ltd v Napier (unreported, 31 October 1990).......10.26, 11.146, 11.148 Dowden & Pook Ltd v Pook [1904] 1 KB 45...................................................... 11.93, 12.37 Dowson & Mason Ltd v Potter [1986] 1 WLR 1419, [1986] 2 All ER 418, (1986) 83 LSG 3429, (1986) 130 SJ 841.............................................................. 16.30, 16.31, 16.32 Drake v Ipsos Mori UK Ltd [2012] IRLR 973...............................................................2.29 Dranez Anstalt & others v Hayek & others [2002] 1 BCLC 693, ChD; [2002] EWCA Civ 1729, [2003] 1 BCLC 278, [2003] FSR 32, (2002) 146 SJLB 273.........4.286, 10.13 Dring v Cape Distribution Ltd [2017] EWHC 3154 (QB).............................................14.101 Duarte v Black & Decker Corp [2007] EWHC 2720 (QB), [2008] 1 All ER (Comm) 401.............................................................................. 9.61, 10.14, 11.99, 11.105, 11.106, 11.107, 11.289, 17.109, 17.158 Dubai Bank Ltd v Galadari [1990] 1 Lloyd’s Rep 120, [1990] BCLC 90......................15.244 Dunlop Holdings Ltd v Staravia Ltd [1982] Comm LR 3..............................................15.202 Dunlop Pneumatic Tyre Co v New Garage & Motor Co Ltd [1915] AC 79...................11.281 Dunnett v Railtrack plc [2002] EWCA Civ 303, [2002] 1 WLR 2434, [2002] 2 All ER 850..........................................................................................................................18.241 Dunwoody Sports Marketing v Prescott [2007] EWCA Civ 461, [2007] 1 WLR 2343, [2007] CP Rep 34.........................................................................................13.183, 13.186 Duomatic Ltd, Re [1969] 2 Ch 365, [1969] 2 WLR 114, [1969] 1 All ER 161, (1968) 112 SJ 922...............................................................................................................4.95 xlix

Table of Cases Durant v Financial Services Authority [2004] FSR 573......................................18.188, 18.189 Dymocks Franchise Systems (NSW) Pty Ltd v Todd (Costs) [2004] UKPC 39, [2004] 1 WLR 2807, [2005] 4 All ER 195, [2005] 1 Costs LR 52, (2004) 154 NLJ 1325, (2004) 148 SJLB 971..............................................................................................14.162 Dyno-Rod plc v Reeve [1999] FSR 148...................................................... 11.88, 11.90, 14.73 Dyson Appliances Ltd v Hoover Ltd [2003] EWHC 624 (Pat), [2004] 1 WLR 1264, [2003] 2 All ER 1042..............................................................................................14.156 Dyson Technology v Pellerey [2015] EWHC 3000....................... 3.141, 10.36, 11.96, 11.227, 11.228, 11.288, 15.118 Dyson Technology v Pellerey [2016] EWCA Civ 87, [2016] CP Rep 21, [2016] ICR 688, [2016] IRLR 355.....................................................  14.12, 14.99, 15.2, 16.63, 16.64 Dyson Technology Ltd v Strutt [2005] EWHC 2814 (Ch)....................  11.66, 11.104, 11.288, 12.19, 12.97, 16.61, 16.62, 16.63 E E Ivor Hughes Educational Foundation v Morris & others [2015] IRLR 696...............13.70 E Warsley & Co Ltd v Cooper [1939] 1 All ER 290......................................................6App ED & F Man Capital Markets LLP v Obex Securities LLC [2017] EWHC 2965 (Ch)............................................................................................................... 14.127, 17.56 EDO Technology Ltd v Hills sub nom EDO Technology v Campaign to Smash EDO [2006] EWHC 598 (QB), [2006] All ER (D) 338...................................................14.120 EE & Brian Smith (1928) Ltd v Hodson [2007] EWCA Civ 1210................................14.168 EG Solutions plc v Hughes [2016] EWHC 3206 (QB)............................................ 11.3, 11.23 EMI Group Electronics Ltd v Coldicott (Inspector of Taxes) [2000] 1 WLR 540, [1999] STC 803, [1999] IRLR 630, 71 TC 455, [1999] BTC 294, (1999) 96(32) LSG 34, (1999) 143 SJLB 220, CA............................................................. 5.103, 13.113 EMI Ltd v Pandit [1975] 1 WLR 302, [1975] 1 All ER 418, [1975] FSR 111, [1976] RPC 333, (1974) 119 SJ 136..................................................................................15.201 EMI Ltd v Sarwar & Haidar [1977] FSR 146.................................................................15.198 EMI Records Ltd v British Sky Broadcasting Ltd [2013] EWHC 379 (Ch), [2013] Bus LR 884, [2013] ECDR 8, [2013] Info TLR 133, [2013] FSR 31...........................7.34 EMI Records Ltd v Spillane [1986] 1 WLR 967, [1986] 2 All ER 1016, [1986] STC 374, (1986) 83 LSG 2659, (1986) 136 NLJ 633, (1986) 130 SJ 555.....................15.242 ESL Fuels Ltd v Fletcher & another [2013] EWHC 3726 (Ch).................  14.19, 14.91, 14.99 Eagland v British Telcommunications plc [1993] ICR 644, [1992] IRLR 323..........2.87, 2.89 East England Schools CIC (t/a 4MySchools) v Palmer [2013] EWHC 4138 (QB), [2014] IRLR 191.................................................................... 10.26, 11.18, 11.39, 11.149, 11.170, 11.273, 11.290, 12.55, 12.100, 12.106, 14.117 Eastham v Newcastle United Football Club [1964] Ch 413, [1963] 3 WLR 574, [1963] 3 All ER 139, (1963) 107 SJ 574............................................................................11.220 Eastwood v Magnox Electric plc [2004] UKHL 35, [2005] 1 AC 503, [2004] 3 WLR 322, [2004] 3 All ER 91, [2004] ICR 1064, [2004] IRLR 733, (2004) 101(32) LSG 36, (2004) 154 NLJ 1155, (2004) 148 SJLB 909...........................................18.49 Eaton v Robert Eaton Ltd & Secretary of State for Employment [1988] ICR 302, [1988] IRLR 83.......................................................................................................2.61 Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71, [2016] 3 All ER 641, [2016] 2 All ER (Comm) 413, [2015] Bus LR 1395, [2016] BCC 79, [2016] 1 BCLC 1...............................................................................................  4.100, 4.101, 4.102 Eddie Stobart Ltd v Moreman [2012] ICR 919, [2012] IRLR 356................................13.175 Ehrman v Bartholemew [1898] 1 Ch 671.......................................................................15.14 El-Ajou v Dollar Land Holdings plc (No 1) [1994] 2 All ER 685, [1994] BCC 143, [1994] 1 BCLC 464, [1993] NPC 165....................................................................16.102 Electronic Data Systems Ltd v Hubble (20 November 1987) LEXIS, CA..............5.8, 11.267, 11.268, 11.269 l

Table of Cases El-Hoshi v Pizza Express Restaurants Ltd EAT/085/03......................................... 9.127, 9.133 Ellis v Joseph Ellis & Co [1905] 1 KB 324....................................................................2.68 Elsevier Ltd v Munro [2014] EWHC 2648 (QB), [2014] IRLR 766....................  9.141, 15.52, 15.62, 18.51 Elvee Ltd v Taylor [2001] EWCA Civ 1943, [2002] FSR 48, (2002) 25(3) IPD 25017, (2002) 99(7) LSG 34...............................................................................................15.207 Emerald Construction Co Ltd v Lowthian [1966] 1 WLR 691, [1966] 1 All ER 1013, 1 KIR 200, (1966) 110 SJ 226, CA..................................................... 14AppA1.11, 19.36 Emersub XXXVI Inc & Control Techniques plc v Wheatley (unreported, 18 July 1998)...................................................................................................  9.62, 11.86, 11.288 Eminence Property Developments Ltd v Heaney [2010] EWCA Civ 1168, [2011] 2 All ER (Comm) 223, [2010] 3 EGLR 165, [2010] 43 EG 99 (CS)...................  9.68, 9.71 Energenics Holding Pte Ltd v Neuftec Ltd [2014] EWHC 1845 (Ch)...........................4.66 Energy Renewals Ltd v Borg [2014] EWHC 2166 (Ch), [2014] IRLR 713........11.167, 11.231 Energy Venture Partners Ltd v Malabu Oil & Gas Ltd [2014] EWCA Civ 1295, [2015] 1 WLR 2309, [2015] 1 All ER (Comm) 97, [2015] CP Rep 3, [2014] 2 CLC 569..........................................................................................................................14.61 Enfield Technical Services Ltd v Payne; Grace v BF Components [2008] ICR 30, [2007] IRLR 840, EAT; [2008] EWCA Civ 393, [2008] ICR 1423, [2008] IRLR 500, CA...................................................................................................................2.56 Ennis Property Finance Ltd v Thompson and Another [2017] EHWC 3263 (Ch).........14.139 Enterprise Managed Services Ltd v Dance & others [2011] UKEAT/0200/11/DM......13.153, 13.174 Environment Agency v Churngold Recylcing Ltd [2014] EWCA Civ 909, [2015] Env LR 13................................................................................................................8AppA2.15 Epoch Co Ltd v Character Options [2015] EWHC 3436 (IPEC)...................................14.21 Equico Equipment Finance Ltd v Enright Employment Relations Authority (17 July 2009, NZ)................................................................................................................11.118 Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269, [1967] 2 WLR 871, [1967] 1 All ER 699, (1967) 111 SJ 174..........................1.6, 5.8, 5.27, 11.40, 11.250, 11.263, 13.98, 13.100, 15.48, 15.53 Eurasian Natural Resources Corp v Judge [2014] EWHC 3556 (QB)...............15.168, 18.172, 18.192 Euro Brokers Ltd v Rabey [1995] IRLR 206.......................................................... 10.24, 15.24 Euro RSCG SA v Conran (The Times, 2 November 1992)............................................2.4 Evans v Monmouthshire County Council & Governing Body of St Mary’s Senior School, Caldicot (2001)..........................................................................................18.52 Evening Standard Co Ltd v Henderson [1987] ICR 588, [1987] IRLR 64, [1987] FSR 165....................................................................................  9.41, 15.3, 15.21, 15.25, 15.38 Exchange Telegraph Co Ltd v Central News Ltd [1897] 2 Ch 48..................................6.139 Executive Grapevine International Ltd v Wall [2012] EWHC 4152 (Ch)......................7.33 Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323, [2003] 1 All ER (Comm) 830, [2003] EMLR 25, [2003] FSR 46, (2003) 26(7) IPD 26046, (2003) 100(22) LSG 29, (2003) 147 SJLB 509...................................16.14, 16.17, 16.19 Express & Echo Publications Ltd v Tanton [1999] ICR 693, [1999] IRLR 367, (1999) 96(14) LSG 31, CA....................................................................................2.23, 2.28, 2.39 Extec Screens & Crushers Ltd v Rice [2007] EWHC 1043 (QB), [2007] All ER (D) 95.................................................................................................................11.108, 11.288 Extrasure Travel Insurances Ltd v Scattergood [2003] 1 BCLC 598.............................4.115 F F & C Alternative Investment (Holdings) Ltd v Barthelemy [2011] EWHC 1731 (Ch), [2012] Ch 613, [2012] 3 WLR 10, [2012] Bus LR 891...........................4.82, 4.83, 4.123 FC Shepherd & Co Ltd v Jerrom [1987] QB 301, [1986] 3 WLR 801, [1986] 3 All ER 589, [1986] ICR 802, [1986] IRLR 358, (1986) 130 SJ 665..................................9.6 li

Table of Cases FHR European Ventures LLP v Cedar Capital Partners LLP [2014] UKSC 45, [2015] AC 250, [2014] 3 WLR 535, [2014] 4 All ER 79, [2014] 2 All ER (Comm) 425, [2014] 2 Lloyd’s Rep 471, [2014] 2 BCLC 145, [2014] Lloyd’s Rep FC 617, [2014] 3 EGLR 119, [2014] WTLR 1135, 10 ALR Int’l 635, [2015] 1 P & CR DG1...............................................................................4.135, 4.136, 4.227, 16.78, 16.112 FSS Travel & Leisure Systems Ltd v Johnson [1998] IRLR 382, [1999] ITCLR 218, [1999] FSR 505.............................................................................6.37, 6.75, 6.119, 6App, 10.16, 11.58, 11.59, 11.60, 14.94, 14.96, 15.76 FW Farnsworth Ltd & another v Lacy & others [2012] EWHC 2830 (Ch), [2013] IRLR 198...................................................................... 13.50, 13.57, 13.59, 13.89, 18.82 Faccenda Chicken Ltd v Fowler [1985] 1 All ER 724, [1984] ICR 589, [1984] IRLR 61, [1985] FSR 105, (1984) 134 NLJ 255, ChD; [1987] Ch 117, [1986] 3 WLR 288, [1986] 1 All ER 617, [1986] ICR 297, [1986] IRLR 69, [1986] FSR 291, (1986) 83 LSG 288, (1986) 136 NLJ 71, (1986) 130 SJ 573, CA................ 1.34, 3.1, 3.4, 6.5, 6.21, 6.22, 6.24, 6.28, 6.31, 6.54, 6.55, 6.56, 6.57, 6.58, 6.59, 6.60, 6.61, 6.63, 6.64, 6.69, 6.73, 6.77, 6.79, 6.80, 6.81, 6.83, 6.84, 6.85, 6.86, 6.87, 6.91, 6.92, 6.93, 6.102, 6.110, 6App, 9.4, 10.2, 14.93, 15.85, 16.28 Fairstar Heavy Transport NV v Adkins [2013] EWCA Civ 886, [2013] 2 CLC 272, [2014] EMLR 12, [2014] FSR 8, [2014] Bus LR D2........................ 8AppA2.15, 15.167 Faieta v ICAP Management Services Ltd [2017] EWHC 2995 (QB), [2018] IRLR 227.................................................................................................................. 9.103, 15.65 Farm Assist Ltd (in liquidation) v Secretary of State for the Environment, Food & Rural Affairs [2009] EWHC 1102 (TCC), [2009] BLR 399..................................18.246 Farnworth Finance Facilities Ltd v Attryde [1970] 1 WLR 1053, [1970] 2 All ER 774, [1970] RTR 352, (1970) 114 SJ 354.......................................................................9.131 Fellowes & Son v Fisher [1976] QB 122, [1975] 3 WLR 184, [1975] 2 All ER 829, (1975) 119 SJ 390...................................................................................................14.72 Fenner v Wilson [1893] 2 Ch 656...................................................................................14.58 Fenning Film Service Ltd v Wolverhampton Walsall & District Cinemas Ltd [1914] 3 KB 1171..................................................................................................................7.51 Ferster v Ferster [2016] EWCA Civ 717, [2016] CP Rep 42.........................................18.248 Films Rover International Ltd v Cannon Film Sales Ltd [1987] 1 WLR 670, [1986] 3 All ER 772.....................................................................................................14.83, 15.176 Financial Services Authority v Rourke (t/a JE Rourke & Co) [2002] CP Rep 14, (2001) 98 (46) LSG 36............................................................................................16.71 Financial Services Compensation Scheme Ltd v Larnell (Insurances) Ltd (in liquidation) [2005] EWCA Civ 1408, [2006] QB 808, [2006] 2 WLR 751, [2006] CP Rep 14, [2006] BCC 690, [2006] CPIR 1370, [2006] Lloyd’s Rep IR 448, [2006] PNLR 13......................................................................................................16.108 Financial Techniques (Planning Services) Ltd v Hughes [1981] IRLR 32, CA.............9.80 Finnegan v J & E Davy [2007] IEHC 18........................................................................11.268 Fiona Trust Holding Corp v Privalov [2007] EWHC 39 (Comm), [2008] 2 P & CR G21.......................................................................................  14.24, 14.45, 16.103, 17.120 First Conferences Services Ltd v Bracchi [2009] EWHC 2176 (Ch).............................15.145 First Global Locums Ltd v Cosias (continuation of restraining order) [2005] EWHC 1147 (QB), [2005] IRLR 873...................................................................... 11.150, 12.106 First Subsea Ltd (formerly BSW Ltd) v Balltec Ltd [2014] EWHC 866 (Ch).......... 1.33, 3.56, 4.140, 4.191, 4.197, 4.212, 4.248, 4.302, 12.147, 14AppA1.13, 16.78, 16.79, 16.103, 16.108, 16.111, 16.114, 16.129, 19.51 lii

Table of Cases Fish v Dresdner Kleinwort Benson Ltd [2009] EWHC 2246 (QB), [2009] IRLR 1035........................................................................................................................9.75 Fisher Karpark Industries Ltd v Nichols [1982] FSR 351..............................................15.127 Fitch v Dewes [1921] 2 AC 158, HL.............................................. 10.15, 11.28, 11.93, 11.205 Flanagan v Liontrust Investment Partners LLP [2015] EWHC 2171 (Ch), [2015] Bus LR 1172, [2016] 1 BCLC 177................................................................................11.287 Flatman v Germany [2013] EWCA Civ 278, [2013] 1 WLR 2676, [2013] 4 All ER 349, [2013] CP Rep 31, (2013) 163 (7556) NLJ 16, (2013) 157(15) SJLB 31......14.162, 14.165 Fleming v Secretary of State for Trade & Industry, sub nom Fleming v Xaniar Ltd (in liquidation) 1998 SC 8, 1998 SLT 703, [1997] IRLR 682, 1997 GWD 31-1582...2.62 Flogas Britain Ltd v Calor Gas Ltd [2013] EWHC 3060 (Ch), [2014] FSR 34.............7.51 Foakes v Beer (1884) 9 App Cas 605.............................................................................13.88 Folami v Nigerline (UK) Ltd [1978] ICR 277, EAT.......................................................2.64 Football Dataco Ltd v Sportradar GmbH [2013] 1 CMLR 29, [2013] FSR 4, ECJ; [2013] EWCA Civ 27, [2013] Bus LR 837, [2013] 2 CMLR 36, [2013] ECC 12, CA....................................................................................................... 7.7, 7.16, 7.33, 7.34 Force India Formua One Team Ltd v 1 Malaysia Racing Team Sdn Bhd; Force India Formula One Team Ltd v Aerolab Srl [2012] EWHC 616 (Ch), [2012] RPC 29, ChD; [2013] EWCA Civ 780, [2013] RPC 36, CA...........................6.3, 6.14, 6.72, 6.74, 6.85, 6.96, 6.104, 6.107, 6.108, 6.110, 16.19, 16.20, 16.30, 16.31, 16.41, 17.118 Foreningen af Arbejdsledere v Daddy’s Dance Hall [1998] IRLR 315, ECJ.... 13.150, 13.152, 13.157, 13.167 Forshaw v Archcraft Ltd [2006] ICR 70, [2005] IRLR 600, EAT.........................11.289, 13.77 Forsta AP-Fonden v Bank of New York Mellon SA/NV [2013] EWHC 3127 (Comm)............................................................................................................ 1.35, 4.231 Forster & Sons (Ltd) v Suggett (1918) 35 TLR 87.........................................................11.95 Foskett v McKeown [2001] 1 AC 102, [2000] 2 WLR 1299, [2000] 3 All ER 97, [2000] Lloyd’s Rep IR 627, [2000] WTLR 667, (1999-2000) 2 ITELR 711, (2000) 97(23) LSG 44...................................................................................16.82, 16.105 Foster Bryant Surveying Ltd v Bryant [2007] EWCA Civ 200, [2007] Bus LR 1565, [2007] BCC 804, [2007] 2 BCLC 239, [2007] IRLR 425, [2007] 12 EG 154 (CS), (2007) 104(13) LSG 24, CA.......................................... 1.33, 1.36, 3.13, 3.31, 3.35, 4. 3, 4.25, 4.174, 4.184, 4.190, 4.196, 4.197, 4.198, 4.207, 4.211, 4.218, 4.221, 4.228, 4.248, 4.249, 4.264, 4.265, 4.266, 4.268, 4.271, 4.273, 4.276, 4.279, 4.281, 4.283, 4.284, 4.292, 4.295, 4.297, 4.298, 4.301 Four Marketing Ltd v Bradshaw [2016] EWHC 3292 (QB)..........................................13.125 Fourie v Le Roux [2005] EWCA Civ 204, [2006] 2 BCLC 531, CA; [2007] UKHL 1, [2007] Bus LR 925, [2007] 1 WLR 320, [2007] 1 All ER 1087, [2007] 1 All ER (Comm) 571, [2007] BPIR 24, (2007) 157 NLJ 178, HL..............................14.157, 17.65 Fowler v Fowler 45 ER 97, (1859) 4 De G & J 250.......................................................12.71 Framlington Group plc v Anderson [1995] BCC 611, [1995] 1 BCLC 475..........3.118, 3App, 4.181, 4.182, 4.184, 4.205, 4.262 Franchi v Franchi [1967] RPC 149.................................................................................6.141 Francotyp-Postalia Ltd v Whitehead & others [2011] EWHC 367 (Ch).............12.57, 12.130, 12.131 Frank Wright & Co (Holdings) Ltd v Punch [1980] IRLR 217......................................9.80 Frankson v Secretary of State for the Home Department [2003] EWCA Civ 655, [2003] 1 WLR 1952, [2003] CP Rep 52, [2003] Prison LR 395, [2003] Po LR 197, CA...................................................................................................................14.129 liii

Table of Cases Fraser v Evans [1969] 1 QB 349, [1968] 3 WLR 1172, [1969] 1 All ER 8, (1968) 112 SJ 805................................................................................................... 6.128, 6.154, 15.76 Freistaat Bayern v Verlag Esterbauer GmbH (Case C-490/14) [2015] Bus LR 1428, [2016] ECDR 6.......................................................................................................7.17 Frenkel v Lyampert [2017] EWHC 3121 (Ch)...............................................................14.50 Fulham Football Club (1987) Ltd v Tigana [2004] EWHC 2585 (QB)................ 3.140, 4.317 Furs Ltd v Tomkies (1936) 54 CLR 583.........................................................................4.159 G GD Searle & Co Ltd v Celltech Ltd [1982] FSR 92, CA...........3.33, 3.61, 3.119, 3App, 6App GFI Group Inc v Eaglestone 1994] IRLR 119, [1994] FSR 535..................5.97, 5.126, 5.129, 9.104, 10.24, 11.33, 15.24, 15.25, 15.64, 19.64 GHLM Trading Ltd v Maroo & others [2012] EWHC 61 (Ch), [2012] 2 BCLC 369...3.116, 4.106, 4.108, 4.231, 4.238, 4.257, 16.83, 16.85, 16.126 GMB v MAN Truck & Bus UK Ltd [2000] ICR 1101, [2000] IRLR 636............ 13.66, 13.68, 13.69 GW Plowman & Son Ltd v Ash [1964] 1 WLR 568, [1964] 2 All ER 10, (1964) 108 SJ 216, CA.......................................................................11.152, 11.153, 11.154, 11.156, 11.157, 11.164, 11.165, 11.166, 11.168, 11.172, 11.173, 11.183, 11.184, 11.187, 12.36, 12.107 GW Stephens )& Son v Fish [1989] ICR 324, EAT.......................................................9.133 Gadget Shop v Bug.com [2001] CP Rep 13, [2001] FSR 26, (2001) 24(1) IPD 24004, (2000) 97(27) LSG 38.............................................................................................15.207 Gamatronic (UK) Ltd & another v Hamilton & another [2016] EWHC 2225 (QB), [2017] BCC 670.................................................................... 1.33, 1.36, 3.20, 3.43, 3.138, 4.106, 4.112, 4.113, 4.199, 4.227, 4.242, 4.249, 4.262, 4.301, 16.85, 16.96 Garamukanwa v Solent NHS Trust [2016] IRLR 476.................................... 8.63, 8AppA2.18 Garden Cottage Foods Ltd v Milk Marketing Board [1984] AC 130, [1983] 3 WLR 143, [1983] 2 All ER 770, [1983] Com LR 198, [1983] 3 CMLR 43, [1984] FSR 23, (1983) 127 SJ 460......................................................................................14.18, 14.19 Garside & Laycock Ltd v Booth [2011] IRLR 735........................................................13.74 Gartside v Outram (1856) 26 LJ Ch 113.................................................... 6.143, 6.153, 6.156 Gascol Conversions Ltd v Mercer [1974] ICR 420, [1974] IRLR 155, [1975] KIR 149, [1974] ITR 282, (1974) 118 SJ 219................................................................2.85 Gates v Swift [1981] FSR 57, [1982] RPC 339..............................................................15.198 General Accident Fire & Life Assurance Corp Ltd v Tanter, The Zephyr [1984] 1 WLR 100, [1984] 1 All ER 35, [1984] 1 Lloyd’s Rep 58, (1984) 134 NLJ 35, (1983) 127 SJ 733..............................................................................14AppA1.17, 19.107 General Billposting Co Ltd v Atkinson [1908] 1 Ch 537, CA; [1909] AC 118, HL... 5.4, 5.79, 5.100, 5.127, 5.144, 8.51, 9.49, 9.50, 9.52, 9.53, 9.55, 9.56, 9.60, 9.98, 11.286, 13.63, 15.5, 15.26, 18.115, 19.93 General Nutrition Ltd v Pattni [1984] FSR 403, (1984) 81 LSG 2223..........................15.242 Generics BV v Smith Kline & French Laboratories Ltd (Case C-316/95) [1997] ECR I-3929, [1998] 1 CMLR 1, [1997] CEC 1046, [1997] RPC 801, (1998) 41 BMLR 116, (1997) 94(34) LSG 30.....................................................................................15.149 Generics (UK) Ltd v Yeda Research & Development Co Ltd [2011] EWHC 3200 (Pat).........................................................................................................................16.66 George Silverman Ltd v Silverman (unreported, 2 July 1969).......................................11.82 liv

Table of Cases George Wimpey UK Ltd (formerly Wimpey Homes Holdings Ltd) v VI Construction Ltd (formerly VI Components Ltd) [2005] EWCA Civ 77, [2005] BLR 135, 103 Con LR 67, (2005) 102(9) LSG 28, (2005) 149 SJLB 182, [2005] 2 P & CR DG5.........................................................................................................................12.65 Georgina O’Brien v Bolton St Catherine’s Academy [2017] IRLR 547........................8.25 Gerald Metals v Timis [2016] EWHC 2327 (Ch).................................................. 18AppA6.43 Gerrard Ltd v Michael Reed (2002) 99(9) LSG 28, (2002) 152 NLJ 22, ChD..............11.277, 13.109, 14.119 Ghaith v Indesit Co UK Ltd [2012] EWCA Civ 642, [2012] ICR D 34........................18.241 Gibbs v Leeds United Football Club [2016] EWHC 960 (QB), [2016] IRLR 493........9.8, 9.82, 9.118 Gibson v Ciro Citterio (Menswear) plc (unreported, 8 June 1998).................... 13.164, 13.174 Giles v Tarry & another [2012] EWCA Civ 1886, (2012) 156(38) SJLB 31.................14.144 Gilford Motor Co v Horne [1933] Ch 935, CA...................... 11.8, 11.9, 11.26, 11.27, 11.131, 11.136, 11.138, 11.143, 11.164, 11.165 Gill & Duffus SA v Berger & Co Inc (No 2) [1984] AC 382, [1984] 2 WLR 95, [1984] 1 All ER 438, [1984] 1 Lloyd’s Rep 227, (1984) 81 LSG 429, (1984) 128 SJ 47.....9.58 Gisda Cyf v Barratt [2010] UKSC 41, [2010] 4 All ER 851, [2010] ICR 1475, [2010] IRLR 1073, (2010) 160 NLJ 1457, (2010) 154(39) SJLB 30.....................9.20, 9.21, 9.23 Gledhow Autoparts Ltd v Delaney [1965] 1 WLR 1366, [1965] 3 All ER 288, (1965) 109 SJ 571, CA................................................................................11.40, 11.184, 11.190, 11.197, 12.11, 13.4 Global Energy Horizon Corp v Gray [2012] EWHC 3703 (Ch)..............4.19, 4.34, 4.35, 4.81, 4.86, 4.151, 4.152, 4.154, 4.270, 4.292 Globe Motors Inc v TRW Lucas Variety Electric Steering Ltd & another [2016] EWCA Civ 396, [2017] 1 All ER (Comm) 601, [2016] 1 CLC 712, 168 Con LR 59........................................................................................ 5.149, 12.152, 12App, 13.125 Gogay v Hertfordshire County Council [2000] IRLR 703, [2001] 1 FLR 280, [2001] 1 FCR 455, (2001) 3 LGLR 14, [2000] Fam Law 883, (2000) 97(37) LSG 40.....9.91, 18.48, 18.54 Goldberg v HMRC [2010] UKFTT 346 (TC)................................................................5.103 Golden Eagle Refinery v Associated International Insurance [1998] EWCA Civ 293..17.151 Golden Ocean Group Ltd v Salgaocar Mining Industries PVT Ltd [2012] EWCA Civ 265, [2012] 1 WLR 3674, [2012] 3 All ER 842, [2012] 2 All ER (Comm) 978, [2012] 1 Lloyd’s Rep 542, [2012] 1 CLC 497, [2012] CILL 3161, (2012) 162 NLJ 425...................................................................................................................13.20 Goltdrail Travel Ltd (in liquidation) v Aydin [2014] EWHC 1587 (Ch), [2015] 1 BCLC 89, ChD; [2016] EWCA Civ 371, [2016] 1 BCLC 707, [2016] 1 BCLC 635, CA............................................................................4.96, 4.98, 4.147, 16.90, 16.103 Golstein v Bishop [2013] EWHC 881 (Ch), [2014] Ch 131, [2013] 3 WLR 572..........11.287 Goodinson v Goodinson [1954] 2 QB 118, [1954] 2 WLR 1121, [1954] 2 All ER 255, (1954) 98 SJ 369.....................................................................................................11.270 Google Inc v Vidal-Hall [2015] EWCA Civ 311, [2016] QB 1003, [2015] 3 WLR 409, [2016] 2 All ER 337, [2015] CP Rep 28, [2015] 1 CLC 526, [2015] 3 CMLR 2, [2015] EMLR 15, [2015] FSR 25...........................................................................16.30 Gore v Naheed [2017] EWCA Civ 369, [2017] 3 Costs LR 509, [2018] 1 P & CR 1, [2017] 2 P & CR DG17.............................................................................. 18.239, 18.242 Gorne v Scales [2006] EWCA Civ 311..........................................................................16.33 Gorse v Durham County Council [1971] 1 WLR 775, [1971] 2 All ER 666, 69 LGR 452, (1971) 115 SJ 303...........................................................................................18.50 Graham v Delderfield [1992] FSR 313................................................................... 6App, 14.19 Graham (Sir James) v Ewart 156 ER 1320, (1856) 1 Hurl & N 550..............................12.34 Grandactual Ltd, Re [2005 EWHC 1415 (Ch), [2006] BCC 73.....................................16.108 Gravely v Barnard (1874) LR 18 Eq 518................................................................ 13.93, 13.94 Greck v Henderson Asia Pacific Equity Partners [2008] CSOH 2..................................11.262 lv

Table of Cases Green v St Nicholas Parochial Church Council [2005] UKEAT/0904/04......................2.39 Greenaway Harrison Ltd v Wiles [1994] IRLR 380..............................................  9.101, 13.63 Greer v Sketchley Ltd [1979] IRLR 445, [1979] FSR 197, CA....12.18, 12.107, 14.150, 16.73 Gregory v Wallace [1998] IRLR 387, CA............................  5.109, 5.111, 5.112, 5.113, 5.135 Gresport Finance Ltd v Battaglia [2016] EWHC 964 (Ch)............................................16.113 Grewals (Mauritius) Ltd v Lin [2016] UKPC 11, [2016] IRLR 638..............................9.70 Group Seven Ltd v Nasir; Equity Trading Systems Ltd v Notable Services LLP [2017] EWHC 2466 (Ch), [2018] PNLR 6.........................................................................16.23 Grupo Hotelero Urvasco SA v Carey Value Added SL (formerly Losan Hotels World Value Added I SL) [2013] EWHC 1732 (Comm), [2013] 5 Costs LR 669............14.155 Grupo Torras SA v Al-Sabah (No 1) [1996] 1 Lloyd’s Rep 7, [1995] CLC 1025, [1995] ILPr 667.......................................................................................................17.50 Grupo Torras SA v Al-Sabah (No 5) [2001] Lloyd’s Rep PM 117, [1999] CLC 1469..16.24 Gryf-Lowczowski v Hinchingbrooke Healthcare NHS Trust [2005] EWHC 2407 (QB), [2006] ICR 425, [2006] IRLR 100, [2006] Lloyd’s Rep Med 199, (2006) 87 BMLR 46...........................................................................................................5.85 Guardian Media Group plc v Assocuated Newspapers Ltd (unreported, 20 January 2000).......................................................................................................................14.22 Guess? Inc v Lee Seck Mon [1987] FSR 125.................................................................15.244 Guinness plc v Saunders [1990] 2 AC 663, [1990] 2 WLR 324, [1990] 1 All ER 652, [1990] BCC 205, [1990] BCLC 402, (1990) 87(9) LSG 42, (1990) 134 SJ 457, HL.................................................................................................................. 4.220, 16.88 Gunton v Richmond upon Thames London Borough Council [1981] Ch 448, [1980] 3 WLR 714, [1980] 3 All ER 577, [1980] ICR 755, [1980] IRLR 321, 79 LGR 241, (1980) 124 SJ 792, CA......................................................  9.43, 9.47, 9.123, 18.101 Guvera Limited v Butler and Blinkbox Music Ltd and others UKEAT/0265/16/DM....13.136 Gwembe Valley Development (in receivership) v Koshy (account of profits: limitations) (No 3) [2003] EWCA Civ 1048, [2004] 1 BCLC 131, [2004] WTLR 97, (2003) 147 SJLB 1086............................................................ 4.134, 4.135, 4.146, 4.159, 16.90, 16.92, 16.108, 16.112, 16.114, 16.117, 16.119 H H (minors) (sexual abuse: standard of proof), Re [1996] AC 563, [1996] 2 WLR 8, [1996] 1 All ER 1, [1996] 1 FLR 80, [1996] 1 FCR 509, [1996] Fam Law 74, (1995) 145 NLJ 1887, (1996) 140 SJLB 24................................................... 14.81, 16.23 HLC Environment Projects Ltd, Re [2013] EWHC 2876 (Ch), [2014] BCC 337.........4.100, 4.106, 4.107, 4.108 HMRC v Holland [2010] UKSC 51, [2010] 1 WLR 2793, [2011] 1 All ER 430, [2011] Bus LR 111, [2011] STC 269, [2011] BCC 1, [2011] 1 BCLC 141, [2011] BPIR 96, [2010] STI 3074................................................................. 4.57, 4.58, 4.61, 4.69, 4.70 HMRC v Sunico A/S [2013] EWHC 941 (Ch), [2013] STI 1713.............. 14AppA1.24, 19.48 Hadley v Baxendale 156 ER 145, (1854) 9 Ex 341.................................................. 16.6, 16.28 Hadmor Productions Ltd v Hamilton [1983] 1 AC 191, [1982] 2 WLR 322, [1982] 1 All ER 1042, [1982] ICR 114, [1982] IRLR 102, (1982) 126 SJ 134, HL............14.167 Haigh v Brooks (1839) 10 Ad & El 309, 113 ER 119....................................................13.94 Haines v Hill [2007] EWCA Civ 1284 (Ch), [2008] Ch 412, [2008] 2 WLR 1250, [2008] 2 All ER 901, [2008] 1 FLR 1192, [2007] 3 FCR 785, [2007] BPIR 1280, [2008] WTLR 447, [2008] Fam Law 199, [2007] 50 EG (CS), (2007) 151 SJLB 1597, [2007] NPC 132............................................................................................13.83 Halcyon House Ltd v Baines [2014] EWHC 2216 (QB)................... 3.99, 3.136, 3.138, 4.192, 4.217, 4.232, 4.253 Halford v United Kingdom (Application No 20605/92) [1997] IRLR 471, (1997) 24  EHRR 523, 3 BHRC 31, [1998] Crim LR 753, (1997) 94(27) LSG 24, ECtHR..................................................................................................... 8.102, 8AppA2.4 Hall v Cognos Ltd [1998] ET/1803325/97.....................................................................13.20 lvi

Table of Cases Hall (Inspector of Taxes) v Lorimer [1992] 1 WLR 939, [1992] STC 599, [1992] ICR 739, (1992) 136 SJLB 175.................................................................................. 2.17, 2.25 Hall (Inspector of Taxes) v Lorimer [1994] 1 WLR 209, [1994] 1 All ER 250, [1994] STC 23, [1994] ICR 218, [1994] IRLR 171, 66 TC 349, [1993] STI 1382, (1993) 90(45) LSG 45, (1993) 137 SJLB 256................................................................2.17, 2.47 Hall v Woolston Hall Leisure Ltd [2001] 1 WLR 225, [2000] 4 All ER 787, [2001] ICR 99, [2000] IRLR 578, (2000) 97(24) LSG 39, (2000) 150 NLJ 833, CA.......2.56 Hallmark Cards Inc v Image Arts Ltd [1977] FSR 150, (1976) 120 SJ 606, CA...........15.242, 15.245, 15.250 Halsey v Milton Keynes General NHS Trust [2004] EWCA 576, [2004] 1 WLR 3002, [2004] 4 All ER 920.....................................................................  18.229, 18.230, 18.232, 18.234, 18.238, 18.265 Hanco ATM Systems Ltd v Cashbox ATM Systems Ltd & others [2007] EWHC 1599 (Ch).........................................................................................................  3.46, 4.27, 4.234 Handelskwekerij G J Bier BV v Mines de Potasse d’Alsace SA [1978] QB 708..........17.48 Hanley v Pease & Partners Ltd [1915] 1 KB 698...........................................................18.55 Hanover Insurance Brokers Ltd v Schapiro [1994] IRLR 82........ 10.28, 11.8, 11.119, 11.129, 11.192, 11.208, 11.214, 11.220, 12.36 Hanson v Royden (1867-68) LR 3 CP 47.......................................................................13.88 Harakas v Baltic Mercantile & Shipping Exchange Ltd [1982] 1 WLR 958, [1982] 2 All ER 701, (1982) 126 SJ 414...............................................................................6.164 Harbro Supplies Ltd v Hampton [2014] EWHC 1781 (Ch)...........  4.271, 4.272, 4.278, 4.281, 4.284, 4.294, 4.307 Hardy v Tourism South East London [2005] IRLR 242.................................................13.69 Hare Wines Limited v (1) Kaur and (2) H&W Wholesale Limited (Dissolved) UKEAT/0131/17/JOJ..............................................................................................13.154 Harley Street Capital Ltd v Tchigirinski (No 1) [2005] EWHC 2471 (Ch)...........14.60, 14.61 Harlow v Artemis International Corp Ltd [2008] EWHC 1126 (QB), [2008] IRLR 629..........................................................................................................................9.137 Harlow Development Corp v Kingsgate (Clothing Productions) (1973) 226 Estates Gazette 1960...........................................................................................................12.68 Harper v National Coal Board [1980] IRLR 260............................................................13.74 Harris & Russell Ltd v Slingsby [1973] 3 All ER 31, [1973] ICR 454, [1973] IRLR 221, 15 KIR 157, (1973) 8 ITR 433........................................................... 3.65, 3App, 9.8 Harris’s Patent, Re [1985] RPC 19.........................................................................3.145, 3.156 Harris Simons Construction Ltd, Re [1989] 1 WLR 368, (1989) 5 BCC 11, [1989] BCLC 202, [1989] PCC 229, (1989) 86(8) LSG 43, (1989) 133 SJ 122................14.81 Harrison v Norwest Holst Group Administration Ltd [1985] ICR 668, [1985] IRLR 240, (1985) 82 LSG 1410......................................................................9.77, 9.127, 9.140 Hart v St Mary’s School (Colchester) Ltd UKEAT/0305/14/DM.......5.59, 13.31, 13.36, 13.37 Haseltine Lake & Co v Dowler [1981] ICR 222, [1981] IRLR 25.................................9.8 Hassan v Odeon Cinemas Ltd [1998] ICR 127, EAT.....................................................18.61 Havai v Solland [2008] EWHC 3280 (Ch).....................................................................16.118 Haynes v Doman [1899] 2 Ch 13...................................................  11.28, 11.46, 12.41, 12.42 Hays Specialist Recuitment (Holdings) Ltd v Ions [2008] EWHC 475 (Ch), [2008] IRLR 904, [2008] All ER 9 (D) 216.................................................  8.97, 14.128, 18.178 Haysport Properties Ltd v Ackerman [2016] EWHC 393 (Ch), [2016] BCC 676, [2016] 2 BCLC 522...............................................4.234, 16.108, 16.113, 16.121, 16.131 Hazel & another v Manchester College [2014] EWCA Civ 72, [2014] ICR 989, [2014] IRLR 392....................................................................................................13.166, 13.169 Helitune Ltd v Stewart Hughes Ltd (No 2) [1994] FSR 422..........................................15.212 Helmet Integrated Systems Ltd v Tunnard [2006] EWCA Civ 1735, [2007] IRLR 126, [2007] FSR 16....................................................................1.33, 3.2, 3.4, 3.11, 3.13, 3.27, 3.28, 3.29, 3.30, 3.31, 3.32, 3.35, 3.38, 3.88, 3.106, 3.115, 4.5, 4.28, 4.32, 4.33, 4.37, 4.45, 4.177, 4.178, 4.197, 4.200, 4.252, 4.300, 4.304, 4.316, 18.1 lvii

Table of Cases Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549, [1967] 3 WLR 1408, [1967] 3 All ER 98, (1967) 111 SJ 830.......................................................................................16.83 Hemsley v Graham [2013] EWHC 2232 (Ch)................................................................4.234 Hendy v Ministry of Justice [2014] EWHC 2535 (Ch), [2014] IRLR 856....................18.54 Henry v London General Transport Services Ltd [2002] EWCA Civ 488, [2002] ICR 910, [2002] IRLR 472, [2002] Emp LR 1031........................................................9.136 Henry Leetham & Sons Ltd v Johnstone-White [1907] 1 Ch 322.......................... 10.34, 10.36 Herbert Clayton & Jack Waller Ltd v Oliver [1930] AC 209, [1930] All ER Rep 414...15.27 Herbert Morris Ltd v Saxelby [1916] 1 AC 688, HL......................1.40, 1.42, 6.68, 6.70, 6.71, 6App, 10.7 10.13, 10.15, 10.21, 10.42, 11.1, 11.13, 11.140, 12.10, 13.95, 13.99, 13.100 Hewcastle Catering Ltd v Ahmed & Elkamah [1992] ICR 626, [1991] IRLR 473, CA...........................................................................................................................2.56 Heyman v Darwins Ltd [1942] AC 356, [1942] 1 All ER 337, (1942) 72 Ll L Rep 65........................................................................................................................9.52, 9.54 Hill v CA Parsons & Co Ltd [1972] Ch 305, [1971] 3 WLR 995, [1971] 3 All ER 1345, (1971) 115 SJ 868, CA..................................................................................5.92 Hill v General Accident Fire & Life Assurance Co plc (No 1) 1999 SLT 1157, 1998 SCLR 1031, [1998] IRLR 641, 1998 GWD 31-1622.............................................9.93 Hill v Harris [1965] 2 QB 601, [1965] 2 WLR 1331, [1965] 2 All ER 358, (1965) 109 SJ 333......................................................................................................................9.59 Hilton International Hotels (UK) Ltd v Protopapa [1990] IRLR 316............................9.82 Hindle Gears Ltd v McGinty [1985] ICR 111, [1984] IRLR 477, (1984) 81 LSG 3254........................................................................................................................9.26 Hinton & Higgs (UK) Ltd v Murphy & Valentine 1988 SC 353, 1989 SLT 450, 1989 SCLR 42, [1989] IRLR 519.................................................10.41, 11.94, 11.155, 11.190, 11.203, 12.146, 12 App Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] Ch 169, [1946] 2 All ER 350, CA..............................................................................................  1.33, 3.4, 3.7, 3.18, 3.21, 3.22, 3.23, 3.45, 5.27, 18.96 Hobbs v Royal Arsenal Co-operative Society Ltd (1930) 23 BWCC 254......................2.42 Hoffmann v Krieg (Case 145/86) [1988] ECR 645, [1990] ILPr 4................................17.158 Hogg v Dover College [1990] ICR 39............................................................................13.38 Hoh v Frosthollow Pty Ltd [2014] VSC 77....................................................................4.231 Holdings TFS v Cantor Fitzgerald (UK) Ltd v McGarr (unreported, 23 October 1992).......................................................................................................................17.108 Holland v Glendale Industries Ltd [1998] ICR 493, EAT..............................................9.128 Hollis v Stocks [2000] UKCLR 658, [2000] IRLR 712, CA...................11.97, 11.115, 11.288 Hollister v National Farmers’ Union [1978] ICR 712, [1978] IRLR 161.......................13.74 Holman v Devon County Council UKEAT/0127/15......................................................18.50 Holmes v QINEQTIQ Ltd [2016] ICR 1016, [2016] IRLR 664....................................13.80 Holterman Ferho Exploitatie BV v Spies von Bullesheim (Case C-47/14) [2016] CEC 456, [2015] ILPr 44, [2016] ICR 90, [2016] IRLR 140......................17.21, 17.27, 17.34, 17.39, 17.40, 17.51 Holyoake & another v Candy & others [2016] EWHC 970 (Ch), [2016] 3 WLR 357, [2016] 2 All ER (Comm) 711.................................................................................18.189 Home Counties Dairies Ltd v Skilton [1970] 1 WLR 526, [1970] 1 All ER 1227, 8 KIR 691, (1970) 114 SJ 107, CA..............................................10.24, 11.47, 12.36, 12.42 Homer v Ashford and Ainsworth (1825) 3 Bing 322......................................................13.93 Hone v Abbey Forwarding Ltd (in liquidation) [2014] EWCA Civ 711, [2015] Ch 309, [2014] 3 WLR 1676........................................................................................15.254 Horkulak v Cantor Fitzgerald International [2003] EWHC 1918 (QB), [2004] ICR 697, [2003] IRLR 756.............................................................................................9.88 Hornal v Neuberger Products [1957] 1 QB 247, [1956] 3 WLR 1034, [1956] 3 All ER 970, (1956) 100 SJ 915, CA....................................................................................16.23 lviii

Table of Cases Horne v Prudential Assurance Co Ltd [1934] Ch 338....................................................11.270 Horwood & others v Land of Leather Ltd & others [2010] EWHC 546 (Comm), [2010] 1 CLC 423, [2010] Lloyd’s Rep IR 453......................................................13.88 Hosking v Marathon Asset Management LLP [2017] EWHC 300 (Comm), [2017] ICR 791 (Ch), [2017] IRLR 503, [2017] FSR 36..................... 16.39, 16.54, 16.91, 16.95 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41.........4.7 Hounga v Allen & another [2014] UKSC 47, [2014] 1 WLR 2889, [2014] 4 All ER 595, [2014] ICR 847, [2014] IRLR 811, [2014] HRLR 23, 39 BHRC 412, [2014] Eq LR 559...............................................................................................................2.56 House of Spring Gardens Ltd v Waite (No 1) [1985] FSR 173, [1985] JPL 173, (1985) 82 LSG 443, (1985) 129 SJ 64, CA........................................................................15.258 Howard & Palmer Ltd v Colebrook & Everett UKEAT/0416/14/DM (3 March 2015):..3.137, 3.138, 4.253 Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, [1974] 2 WLR 689, [1974] 1 All ER 1126, 118 SJLB 330, (1974) 118 SJ 330, PC..........................................4.101 Hubbard v Vosper [1972] 2 QB 84, [1972] 2 WLR 389, [1972] 1 All ER 1023, (1972) 116 SJ 9...................................................................................................................6.155 Humphreys v Oxford University [2000] 1 All ER 996, [2000] 1 CMLR 647, [2000] ICR 405, [2000] IRLR 183, [2000] Ed CR 246......................................................13.186 Hunter v Senate Support Services Ltd & others [2004] EWHC 1085 (Ch), [2005] 1 BCLC 175...............................................................................................................4.111 Hunter Kane Ltd v Watkins [2003] EWHC 186, ChD..................... 4.263, 4.264, 4.265, 4.271, 4.272, 4.276, 4.277, 4.285, 4.290, 4.291, 4.293, 4.298 Hurst v Bryk [1999] Ch 1, [1998] 2 WLR 269, [1997] 2 All ER 283, CA............. 9.55, 11.287 Hurstanger Ltd v Wilson [2007] EWCA Civ 299, [2007] 1 WLR 2351, [2007] 4 All ER 1118, [2007] 2 All ER (Comm) 1037, [2008] Bus LR 216, [2007] CTLC 59, (2007) 104(16) LSG 23, (2007) 157 NLJ 555, (2007) 151 SJLB 467, [2007] NPC 41.................................................................................. 4.123, 4.151, 16.83, 16.84, 16.88 Hussain v Hussain [1986] Fam 134, [1986] 2 WLR 801, [1986] 1 All ER 961, [1986] 2 FLR 271, [1986] Fam Law 269, (1986) 83 LSG 1314, (1986) 136 NLJ 358, (1986) 130 SJ 341, CA............................................................................................14.145 Hussain v Jurys Inn Group UKEAT/0283/15 (unreported, 3 February 2016)................13.80 Hutchings v Coinseed Ltd [1998] IRLR 190..................................................................3.84 Hutchinson 3G UK Ltd v O2 (UK) Ltd [2008] EWHC 55 (Comm), [2008] UKCLR 83............................................................................................................................14.128 Hydra plc v Anastasi [2005] EWHC 1559 (QB), (2005) 102(33) LSG 23........ 11.128, 11.209, 11.215, 11.225, 11.292, 12.117 Hytrac Conveyors Ltd v Conveyors International Ltd [1983] 1 WLR 44, [1982] 3 All ER 415, [1983] FSR 63, (1982) 126 SJ 728.............................................  14.103, 15.209 Hydrodam (Corby) Ltd (in liquidation), Re [1994] BCC 161, [1994] 2 BCLC 180......4.58 Hynd v Armstrong [2007] CSIH 16, 2007 SC 409, 2007 SLT 299, [2007] IRLR 338, 2007 GWD 8-145....................................................................................................13.165

I IBM United Kingdom Holdings Ltd & another v Dalgleish & others [2014] EWHC 980 (Ch), [2014] Pens LR 335................................................................................9.110 ICAP Management Services Ltd v Berry & BGC Services (Holdings) LLP [2017] EWHC 1321 (QB), [2017] 3 Costs LR 531, [2017] IRLR 811................... 5.129, 11.244, 13.135, 13.136, 15.61 IT Human Resources plc v Land [2014] EWHC 3812 (Ch), [2016] FSR 10.......  4.106, 4.237, 16.128, 16.130 ITC Film Distributors Ltd v Video Exchange Ltd (No 2) [1983] ECC 43, (1982) 126 SJ 672, CA..............................................................................................................15.220 Ifone Ltd v Davies [2005] EWHC 1504 (Ch).................................................................14.121 lix

Table of Cases Imageview Management Ltd v Jack [2009] EWCA Civ 63, [2009] 2 All ER 666, [2009] 1 All ER (Comm) 921, [2009] Bus LR 1034, [2009] 1 Lloyd’s Rep 436, [2009] 1 BCLC 724........................................................................................ 16.88, 16.93 Imam-Sadeque v Bluebay Asset Management (Services) Ltd [2012] EWHC 3511 (QB), [2013] IRLR 344......................................................1.35, 3.3, 3.6, 3.76, 3.78, 3.80, 3.81, 3.83, 3.105, 3.117, 3.118, 3.129, 3.139, 3.142, 3App, 5.30, 5.129, 6.135, 9.4, 18.1 Imam Said Abdul Aziz Al-Rawas v Pegasus Energy [2008] EWHC 617 (QB).............15.254 Imerman v Tchenguiz [2010] EWCA Civ 908, [2011] Fam 116, [2011] 2 WLR 592, [2011] 1 All ER 555, [2010] 2 FLR 814, [2010] 3 FCR 371, [2010] Fam Law 1177, (2010) 154(30) SJLB 32............................................6.20, 6.45, 6.62, 6.124, 16.41 Imperial Group Pension Trusts Ltd v Imperial Tobacco Ltd [1990] PLR 263...............9.110 Imutrans Ltd v Uncaged Campaigns Ltd [2001] 2 All ER 385, [2001] CP Rep 28, [2001] ECDR 16, [2001] EMLR 21, [2001] HRLR 31, [2002] FSR 2, (2001) 24(5) IPD 24031, (2001) 98(14) LSG 40................................................................6.159 Indata Equipment Supplies Ltd (t/a Autofleet) v ACL Ltd [1998] 1 BCLC 412, [1998] FSR 248, (1997) 141 SJLB 216..............................................................................16.30 Independent Sales Solutions v Tomkins [2010] EWHC 3971 (QB)...............................15.109 Independent Workers’ Union of Great Britain v RooFoods Ltd (t/a Deliveroo) [2018] IRLR 84..................................................................................................................2.14 Indicii Salus Ltd v Chandrasekaran [2007] EWHC 406........................ 15.201, 15.202, 15.206 Industrial & Commerce Maintenance Ltd v Briffa [2008] UKEAT/0215/08/2207........5.129 Industrial Development Consultants v Cooley [1972] 1 WLR 443, [1972] 2 All ER 162, (1972) 116 SJ 255..............................................................1.33, 4.133, 4.171, 4.269, 4.297, 9.40, 16.7, 16.43, 16.52 Industrial Furnaces Ltd v Reaves [1970] RPC 605................................................. 16.67, 16.68 Industrial Rubber Products v Gillon [1977] IRLR 389, (1977) 13 ITR 100..................9.109 Informa UK Ltd v McDougall [2017] CSOH 149, 2017 GWD 40-605.........................11.117 Ingham v ABC Contract Schemes Ltd (12 November 1993) LEXIS, CA..............5.36, 10.28, 11.208 Initial Services v Putterill [1968] 1 QB 396, [1967] 3 WLR 1032, [1967] 3 All ER 145, 2 KIR 863, (1967) 111 SJ 541.........................................  6.144, 6.153, 6.155, 6.159 Inland Revenue Comrs v Duke of Westminster [1936] AC 1, 19 TC 490......................2.70 Innoweb BV v Wegener ICT Media BV (Case C-202/12) [2014] Bus LR 308.............7.32 Inplayer Ltd & another v Thorogood [2014] EWCA Civ 1511......................................14.109 In Plus Group Ltd v Pyke [2002] EWCA Civ 370, [2003] BCC 332, [2002] 2 BCLC 201...........................................................................................4.124, 4.125, 4.140, 4.208, 4.210, 4.215, 4.217 Instone v Schroeder see Macaulay (formerly Instone) v Schroeder Music Publishing Co Ltd Insurance Co v Lloyd’s Syndicate [1995] 1 Lloyd’s Rep 272, [1994] CLC 1303, [1995] 4 Re LR 37...............................................................................16.59, 16.60, 16.63 Intelsec Systems v Grech-Cini [2000] 1 WLR 1190, [1999] 4 All ER 11, [1999] Masons CLR 296...........................................................................14.133, 14.135, 15.192 Intercall Conferencing Services v Steer [2007] EWHC 519 (QB), (2007) 104(14) LSG 24.....................................................................11.106, 11.114, 11.288, 12.92, 12.94 Interfoto Picture Library v Stiletto Visual Programmers Ltd [1989] QB 433, [1988] 2 WLR 615, [1988] 1 All ER 348, (1988) 7 Tr LR 187, (1988) 85(9) LSG 45, (1987) 137 NLJ 1159, (1988) 132 SJ 460....................................................... 13.22, 13.23 International Consulting Services (UK) Ltd v Hart [2000] IRLR 227.............  11.150, 11.163, 11.187, 11.188, 12.106, 12.126, 12App Interoute Telecommunications (UK) Ltd v Fashion Gossip Ltd [1999] TLR 762.........14.43 Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896, [1998] 1 All ER 98, [1998] 1 BCLC 531, [1997] CLC 1243, [1997] PNLR 541, (1997) 147 NLJ 989, HL............................. 12.25, 12.26, 12.27, 12.31, 12.33, 12.34 lx

Table of Cases Invideous Ltd v Thorogood [2013] EWHC 3015 (Ch)...............................  4.165, 4.166, 10.54 Ishaq v Royal Mail Group [2017] IRLR 208............................................................9.90, 9.151 Island Export Finance Ltd v Umunna [1986] BCLC 460....................3.9, 4.264, 4.266, 4.267, 4.270, 4.272, 4.281, 4.286, 4.287, 4.298, 6App Island Records Ltd v Tring International plc [1996] 1 WLR 1256, [1995] 3 All ER 444, [1995] FSR 560...............................................................................................16.52 Item Software v Fassihi [2002] EWHC 3116 (Ch), [2003] BCC 858, [2003] 2 BCLC 1, [2003] IRLR 769, ChD; [2004] EWCA Civ 1244, [2004] BCC 994, [2005] 2 BCLC 91, [2005] ICR 450, [2004] IRLR 928, (2004) 101(39) LSG 34, (2004) 148 SJLB 1153, CA...............................................................  1.35, 3.86, 3.92, 3.96, 3.97, 3.98, 3.99, 3.114, 3.136 , 4.109, 4.226, 4.227, 4.229, 4.231, 4.233, 4.234, 4.237, 4.238, 4.239, 4.249, 4.256, 4.260 Ittihadieh v 5-11 Cheyne Gardens RTM Co Ltd; Deer v Oxford University [2017] EWCA Civ 121, [2017] 3 WLR 811.......................................................................18.189 Ivey v Genting Casinos (UK) Ltd (t/a Crockfords Club) [2017] UKSC 67, [2017] 3 WLR 1212, [2017] Lloyd’s Rep FC 561, [2017] LLR 783.......................... 16.103, 19.59 Ixora Trading Inc v Jones [1990] FSR 251..................................................6.100, 6.101, 6App J J (children) (care proceedings: threshold criteria), Re [2013] UKSC 9, [2013] 1 AC 680, [2013] 2 WLR 649, [2013] 3 All ER 1, [2013] 1 FLR 1373, [2013] 2 FCR 149, [2013] Fam Law 375, (2013) 157(8) SJLB 31................................................16.23 J Pereira Fernandes SA v Mehta [2006] EWHC 813 (Ch), [2006] 1 WLR 1543, [2006] 2 All ER 891, [2006] 1 All ER (Comm) 885, [2006] 2 Lloyd’s Rep 244, [2006] Info TLR 203..........................................................................................................13.20 J Spurling Ltd v Bradshaw [1956] 1 WLR 461, [1956] 2 All ER 121, [1956] 1 Lloyd’s Rep 392, (1956) 100 SJ 317....................................................................................13.22 JA Mont (UK) Ltd v Mills [1993] IRLR 172, [1993] FSR 577.......... 1.8, 1.39, 3.8, 9.4, 12.20, 12.44, 12.153, 13.96, 13.106 JJ Harrison v Harrison [2002] BCLC 162......................................................................16.78 JM Finn & Co Ltd v Holliday [2013] EWHC 3450 (QB), [2014] IRLR 102.......5.129, 11.32, 11.244, 11.263, 11.290, 13.25, 15.51, 15.58, 15.60, 15.61, 15.64 JSC BTA Bank v Ablyazov & another [2017] EWCA Civ 40, [2017] QB 853, [2017] 2 WLR 1563, [2017] 2 All ER 918, [2017] 2 All ER (Comm) 1, [2017] CP Rep 20.......................................................................................................14AppA1.23, 15.200 JSC BTA Bank v Khrapunov [2018] UKSC 19...............................  17.48, 19.40, 19.44, 19.47 JV Strong & Co Ltd v Hamill EAT/1179/00..................................................................9.96 Jack Allen (Sales & Service) Ltd v Smith 1999 SLT 820, [1999] IRLR 19, 1998 GWD 38-1957...................................................................................................................6.20 Jackson v Royal Bank of Scotland plc [2005] UKHL 3, [2005] 1 WLR 377, [2005] 2 All ER 71, [2005] 1 All ER (Comm) 337, [2005] 1 Lloyd’s Rep 366, (2005) 102(11) LSG 29, (2005) 149 SJLB 146..................................................................16.29 Jackson Lloyds Ltd & Mears Group plc v Smith & others UKEAT/0127/13/LA..........13.134 Jacoby v Whitmore (1883) 49 LT 335................................................................ 13.182, 13.186 Jain v Trent Strategic Health Authority [2007] EWCA Civ 1186, [2008] QB 246, [2008] 2 WLR 456..................................................................................................15.207 Jameel v Wall Street Journal SPRL [2006] UKHL 44, [2007] 1 AC 359, [2007] Bus LR 291, [2006] 3 WLR 642, [2006] 4 All ER 1279, [2007] EMLR 2, [2006] HRLR 41, 21 BHRC 471, (2006) 103(41) LSG 36, (2006) 156 NLJ 1612, (2006) 150 SJLB 1392........................................................................................................6.165 lxi

Table of Cases Jeffrey Rogers Knitwear Productions Ltd v Vinola (Knitwear) Manufacturing Co [1985] FSR 184.......................................................................................................15.207 Jesudason v Alder Hey Children’s NHS Foundation Trust [2012] EWHC 4265 (QB)..5.85 Jockey Club v Buffham [2002] EWHC 1866 (QB), [2003] QB 462, [2003] 2 WLR 178, [2003] CP Rep 22, [2003] EMLR 5, (2002) 99(40) LSG 32................  6.155, 6.159 John Lee & Son (Grantham) Ltd v Railway Executive [1949] 2 All ER 581, 65 TLR 604, [1949] WN 373, (1949) 93 SJ 587..................................................................12.62 John Michael Design plc v Cooke & another [1987] 2 All ER 332, [1987] ICR 445, [1987] FSR 402, (1987) 84 LSG 1492, (1987) 131 SJ 595, CA................11.159, 11.160, 11.203, 11.290 Johnson v Agnew [1980] AC 367, [1979] 2 WLR 487, [1979] 1 All ER 883, (1979) 38 P & CR 424, (1979) 251 EG 1167, (1979) 123 SJ 217, HL........................... 16.10, 16.39 Johnson & Bloy (Holdings) Ltd v Wolstenholme Rink plc [1987] IRLR 499, [1987] 2 FTLR 502, [1989] 1 FSR 135..........................................................6.5, 6.64, 6App, 10.2, 14.67, 14.93, 15.85 Jones v Associated Tunnelling Co Ltd [1981] IRLR 477........................... 9.137, 13.46, 13.47, 13.48, 13.49 Jones v F Sirl & Son (Furnishers) Ltd [1997] IRLR 493...........................  9.133, 9.145, 9.146 Jones v University of Warwick [2003] EWCA Civ 151, [2003] 1 WLR 954, [2003] 3 All ER 760, [2003] CP Rep 36, [2003] PIQR P23, (2003) 72 BMLR 119, (2003) 100(11) LSG 32, (2003) 153 NLJ 231, (2003) 147 SJLB 179...............................14.86 Jones Bros (Hunstanton) Ltd v Stevens [1955] 1 QB 275, [1954] 3 WLR 953, [1954] 3 All ER 677, (1954) 98 SJ 870, CA........................................ 14AppA1.9, 19.34, 19.109 Joscelyne v Nissen [1970] 2 QB 86, [1970] 2 WLR 509, [1970] 1 All ER 1213, (1969) 114 SJ 55......................................................................................................... 12.66, 12.71 K Kalfelis v Bankhaus Schroder Muchmeyer Hengst & Co (t/a HEMA Beteiligungsgesell­ schaft mbH) (Case 189/87) [1988] ECR 5565, [1989] ECC 407...........................17.47 Kall-Kwik Printing (UK) Ltd v Rush [1996] FSR 114.............................. 11.55, 11.88, 11.288 Kampelmann v Landschaftsverband Westfalen-Lippe (Case C-235/96) [1997] ECR I- 6907, [1998] 2 CMLR 131, [1998] IRLR 333....................................................2.84 Kavanagh v Crystal Palace FC Ltd [2013] EWCA Civ 1410, [2014] 1 All ER 1033, [2014] BCC 664, [2014] 2 BCLC 438, [2014] ICR 251, [2014] IRLR 139, (2013) 157(45) SJLB 37.....................................................................................................13.165 Kazakhstan Kagazy plc & others v Zhunus & others [2015] EWHC 404 (Comm), 158 Con LR 253.............................................................................................................14.156 Kearns v Glencore [2013] EWHC 3697 (QB)................................................................9.97 Keech v Sandford (1726) Cas temp King 61, 25 ER 223, (1726) Sel Cas Ch 61...........4.136 Keegan v Newcastle United Football Co Ltd [2010] IRLR 94.......................................9.117 Kellogg Brown & Root (UK) Ltd v Ewer UKEAT/0206/16/BA................................5.71, 9.74 Kellogg Brown & Root (UK) Ltd v Fitton UKEAT/0205/16/BA...............................5.71, 9.74 Kerchiss v Colora Printing Inks Ltd [1960] RPC 235......................5.34, 11.95, 11.96, 12.134 Kerner v WX [2015] EWHC 1247 (QB)........................................................................14.129 Kerry Foods Ltd v Lynch [2005] IRLR 681...............................................  9.101, 13.63, 13.74 Kerry Ingredients UK Ltd v Bakkavor Group Ltd [2016] EWHC 2448 (Ch), [2017] 2 BCLC 74.................................................................................................................15.145 Khan & Hemming v Landsker Child Care Ltd UKEAT/0036/12/DM (24 May 2012)..3.67, 3.68, 3.69 Khanna v Lovell White Durrant [1995] 1 WLR 121, [1994] 4 All ER 267, (1994) 91(45) LSG 38............................................................................................14.129, 14.131 Khatri v Cooperative Centrale Raiffeisen-Boerenleenbank BA [2010] EWCA Civ 397, [2010] IRLR 715, (2010) 107(18) LSG 15.............13.45, 13.47, 13.51, 13.58, 13.59 Khouj v Acropolis Capital Partners Ltd & another [2016] EWHC 2120 (Comm), [2017] WTLR 83..............................................................................................8AppA2.15 Killen v Horseworld Ltd [2011] EWHC 1600 (QB)....................................4.151, 4.280, 4.284 lxii

Table of Cases Kimathi v Foreign & Commonwealth Office [2015] EWHC 3116 (QB).......................17.135 Kingsley IT Consulting Ltd v McIntosh & others [2006] EWHC 1288 (Ch), [2006] BCC 875, ChD........................................................................................................4.297 Kircher v Hillingdon Primary Care Trust [2006] EWHC 21 (QB), [2006] All ER (D) 35 (Jan), [2006] Lloyd’s Rep Med 215...................................................................5.85 Kitechnology v Unicor GmbH Plastmaschinen [1994] ILPr 568, [1995] FSR 765.......16.30, 17.47 Kitzing v Fuller [2016] EWHC 804 (Ch).......................................................................15.76 Kleinwort Benson v Glasgow City Council [1999] 1 AC 153, [1997] 3 WLR 923, [1997] 4 All ER 641, [1998] Lloyd’s Rep Bank 10, [1997] CLC 1609, [1998] ILPr 350, (1997) 9 Admin LR 721, (1997) 94(44) LSG 36, (1997) 147 NJ 1617, (1997) 141 SJLB 237..............................................................................................17.47 Kleinwort Benson v Lincoln City Council [1999] 2 AC 349, [1998] 3 WLR 1095, [1998] 4 All ER 513, [1998] Lloyd’s Rep Bank 387, [1999] CLC 332, (1999) 1 LGLR 148, (1999) 11 Admin LR 130, [1998] RVR 315, (1998) 148 NLJ 1674, (1998) 142 SJLB 279, [1998] NPC 145, HL..........................................................11.271 Konamaneni v Rolls Royce Industrial Power (India) Ltd [2002] 1 WLR 1269, [2002] 1 All ER 979, [2002] 1 All ER (Comm) 532, [2003] BCC 790, [2002] 1 BCLC 336, [2002] ILPr 40.................................................................................................17.122 Konski v Peet [1915] 1 Ch 530...............................................................................9.98, 11.180 Kores Manufacturing Co Ltd v Kolok Manufacturing Co Ltd [1959] Ch 108, [1958] 2 WLR 858, [1958] 2 All ER 65, [1958] RPC 200, (1958) 102 SJ 362......... 10.28, 11.208, 11.220 Krombach v Bamberski (Case C-7/98) [2001] QB 709, [2001] 3 WLR 488, [2001] All ER (EC) 584, [2000] ECR I-1935, [2001] ILPr 36.................................................17.158 Kuddus v Chief Constable of Leicestershire [2001] UKHL 29, [2002] 2 AC 122, [2001] 2 WLR 1789, [2001] 3 All ER 193, (2001) 3 LGLR 45, [2001] Po LR 181, (2001) 98(28) LSG 43, (2001) 151 NLJ 936, (2001) 145 SJLB 166, HL......16.26 Kumbu v Primelife (UKEAT/0445/14/LA) [2015] All ER (D) 406 (Jul).......................13.38 Kuwait Oil Tanker Co SAK v Al Bader (No 3) [2000] 2 All ER (Comm) 271, (2000) 97(23) LSG 44................................................................................................19.42, 19.43 Kwik-Fit (GB) Ltd v Lineham [1992] ICR 183, [1992] IRLR 156, (1992) 89(5) LSG 31:.9.8 Kynixa Ltd v Hynes & others [2008] EWHC 1495 (QB)................... 3.12, 3.13, 3.118, 3.133, 3.134, 3.135, 3.138, 3.139, 4.28, 4.244, 4.246, 4.247, 4.248, 4.249, 4.250, 4.254, 4.255, 4.262, 4.312, 10.52, 11.47, 11.288, 19.18 L LCM Wealth Management Ltd, Re [2013] EWHC 3957 (Ch).................... 4.146, 4.147, 4.148 LIFFE Administration & Management v Pinkava [2007] EWCA Civ 217, [2007] Bus LR 1369, [2007] 4 All ER 981, [2007] ICR 1489, [2007] RPC 30........................3.156 LMC Drains Ltd v Waugh [1991] 3 CMLR 172.............................................................13.132 LT Piver Sarl v S & J Perfume Co Ltd [1987] FSR 159.................................................15.242 LTE Scientific Ltd v Thomas [2004] EWHC 7 (QB).....................................................11.288 Lac Minerals Ltd v International Corona Resources Ltd [1990] FSR 441.................4.34, 4.35 Ladbroke Racing Ltd v King (Daily Telegraph, 21 April 1989).............................3.108, 3.114 Laird v Briggs (1881-82) LR 19 Ch D 22.......................................................................12.34 Lancashire Fires Ltd v SA Lyons & Co & others [1997] IRLR 113, [1996] FSR 629, (1996) 19(8) IPD 19068, CA........................................................ 3.25, 3.50, 3App, 6.28, 6.66, 6.87, 6.114, 6App Land Securities Trillium Ltd v Thornley [2005] IRLR 765............................................9.74 Landmark Brickwork Ltd v Sutcliffe [2011] EWHC 1239 (QB), [2011] IRLR 976......11.100, 11.143, 11.176, 11.204, 11.231, 11.289, 12.55, 12.91, 12.99, 12.125, 14.137, 15.192 lxiii

Table of Cases Langston v AUEW (No 2) [1974] ICR 510, [1974] IRLR 182, 17 KIR 74, (1974) 118 SJ 660, NIRC..........................................................................................................15.27 Lansing Linde Ltd v Kerr [1991] 1 WLR 251, [1991] 1 All ER 418, [1991] ICR 428, [1991] IRLR 80, (1990) 140 NLJ 1458.................................6.35, 6.52, 6.64, 6.87, 11.58, 13.47, 14.68, 14.75, 14.79, 15.123 Latchford Premier Cinema Ltd v Ennion [1931] 2 Ch 409............................................9.8 Laughton & Hawley v BAPP Industrial Supplies Ltd [1986] ICR 634, [1986] IRLR 245...................................................................................................3.49, 3.59, 3.66, 3.67, 3.68, 3.69, 3App Lawrence David Ltd v Ashton [1991] 1 All ER 385, [1989] ICR 123, [1989] IRLR 22, [1989] 1 FSR 87, (1988) 85(42) LSG 48................................. 6.82, 6.113, 6.115, 6App, 9.99, 9.100, 11.16, 11.48, 11.213, 14.72, 14.74, 14.75, 14.83, 14.121, 14.153, 15.76, 16.65, 18.199, 18AppA4.1 Lawrie-Blum v Land Baden-Wurttemberg (Case 66/85) [1986] ECR 2121, [1987] 3 CMLR 389, [1987] ICR 483...................................................................................17.21 Lazari v London & Newcastle (Camden) Ltd [2013] EWHC 812 (TCC)......................18.235 Leadmill Ltd v Omare [2002] All ER (D) 145 (Apr)......................................................14.116 Lee Ting Sang v Chung Chi-Keung & another [1990] 2 AC 374, [1990] 2 WLR 1173, [1990] ICR 409, [1990] IRLR 236, (1990) 87(13) LSG 43, (1990) 134 SJ 909....2.17 Leech v Preston Borough Council [1985] ICR 192, [1985] IRLR 337..........................9.15 Leeds Dental Team Ltd v Rose [2014] ICR 94, [2014] IRLR 8.....................................9.69 Legends Live Ltd v Harrison [2016] EWHC 1938 (QB), [2017] IRLR 59........... 10.31, 11.38, 11.45 Leicestershire County Council v Unison [2005] IRLR 920, (2005) 102(42) LSG 24...13.69 Leisure Data v Bell [1988] FSR 367, CA.......................................................................14.83 Le Puy Ltd v Potter [2015] EWHC 193 (QB), [2015] IRLR 554............6App, 11.151, 11.204, 12.106, 12.127, 14.79, 14.138, 15.192 L’Estrange v F Graucob Ltd [1934] 2 KB 394....................................................... 13.17, 13.22 Lewis v Earl of Londesborough [1893] 2 QB 191..........................................................15.175 Lewis v Motorworld Garages Ltd [1986] ICR 157, [1985] IRLR 465, CA.............  9.77, 9.94, 9.145 Lewis & Lewis Property Consultants v Chase Midland plc (unreported, 18 November 2004)................................................................................................................... 4.51, 4.79 Lexi Holdings plc v Luqman [2008] EWHC 2908 (Ch).................................................15.200 Lexi Holdings plc (in administration) v Luqman [2008] EWHC 1639 (Ch), [2008] 2 BCLC 725, ChD; [2009] EWCA Civ 117, [2009] BCC 716, [2009] 2 BCLC 1, CA...........................................................................................................................4.117 Lexi Holdings plc v Stainforth [2006] EWCA Civ 988, (2006) 150 SJLB 984, [2006] NPC 87....................................................................................................................12.62 Leyland Daf, Re; Powdrill v Watson [1995] 2 AC 394, [1995] 2 WLR 312, [1995] 2 All ER 65, [1995] BCC 319, [1994] 1 BCLC 386, [1995] ICR 1100, [1995] IRLR 269, (1995) 92 (17) LSG 47, (1995) 145 NLJ 449, (1995) 139 SJLB 110:.13.47 Lightfoot v D & J Sporting Ltd [1996] IRLR 64, EAT..................................................2.58 Linsen International Ltd v Humpuss Sea Transport PTE Ltd [2010] EWHC 303 (Comm)...................................................................................................................14.45 Lion Laboratories Ltd v Evans [1985] QB 526, [1984] 3 WLR 539, [1984] 2 All ER 417, (1984) 81 LSG 2000, (1984) 81 LSG 1233, (1984) 128 SJ 533............ 6.145, 6.148, 6.155, 6.163, 6.164, 6.166 Little v BMI Chiltern Hospital [2009] All ER (D) 238 (Jun).........................................2.29 Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472, [1978] 1 All ER 1026, (1977) 121 SJ 727.....................................................................  6.81, 6.115, 6.117, 6App, 10.39, 10.43, 11.53, 11.56, 11.63, 11.64, 11.65, 11.66, 11.93, 12.37, 12.39, 12.44, 12.83, 14.94 lxiv

Table of Cases Living Design (Home Improvements) Ltd v Davidson 1994 SLT 753, [1994] IRLR 67.....................................................................................................11.286, 11.287, 12.61 Lloyds Bank Ltd v Bundy [1975] QB 326, [1974] 3 WLR 501, [1974] 3 All ER 757, [1974] 2 Lloyd’s Rep 366, (1974) 118 SJ 714........................................................13.94 Lloyds Bowmaker Ltd v Britannia Arrow Holdings plc [1988] 1 WLR 1337, [1988] 3 All ER 178, (1989) 86(1) LSG 40, (1988) 132 SJ 1527, CA.................................15.207 Locabail International Finance Ltd v Agroexport & Atlanta (UK) Ltd, The Sea Hawk [1986] 1 WLR 657, [1986] 1 All ER 901, [1986] 1 Lloyd’s Rep 317, (1986) 83 LSG 876, (1986) 130 SJ 245...................................................................................14.83 Lock v Cardiff Rly Co Ltd [1998] IRLR 358.................................................................5.82 Lock International plc v Beswick [1989] 1 WLR 1268, [1989] 3 All ER 373, [1989] IRLR 481, (1989) 86(39) LSG 36, (1989) 139 NLJ 644, (1989) SJ 1297....  6App, 14.28, 14.67, 14.92, 14.96, 15.182, 15.202, 15.204, 15.210 Loftus (deceased), Re; Green v Gaul [2006] EWCA Civ 1124, [2007] 1 WLR 591, [2006] 4 All ER 1110, [2006] WTLR 1391, (2006-07) 9 ITELR 107, (2006) 167 NLJ 1365, [2007] 1 P & R DG12...........................................................................16.132 Logan v Comrs of Customs & Excise [2003] EWCA Civ 1068, [2004] ICR 1, [2004] IRLR 63, (2003) 100(37) LSG 31, CA...................................................................9.133 London & Mashonaland Exploration Co Ltd v New Mashonaland Exploration Co Ltd [1891] WN 165.........................................................................4.124, 4.125, 4.126, 4.127 London & Provincial Sporting News Agency Ltd v Levy (1928) MacG Cop Cas 340 (1923-28).................................................................................................................6.122 London & Solent Ltd v Brooks (IDS Brief 389 January 1989, unreported), CA...........10.24, 11.203 London Care Ltd v Ms J Henry and Others UKEAT/0219/17/DA, UKEAT 10220/17/ DA 21 February 2018.............................................................................................13.176 London City Agency (JCD) Ltd v Lee [1970] Ch 597, [1970] 2 WLR 136, [1969] 3 All ER 1376, (1969) 113 SJ 941.............................................................................15.250 London Metropolitan University v Sackur UKEAT/0286/06/ZT.......................13.164, 13.174 London Regional Transport v Mayor of London [2001] EWCA Civ 1491, [2003] EMLR 4...........................................................................................................  6.49, 6.155 London Transport Executive v Clarke [1981] ICR 355, [1981] IRLR 166, (1981) 125 SJ 306......................................................................................................................9.123 Lonmar Global Risk Ltd v West & others [2010] EWHC 2878 (QB), [2011] IRLR 138............................................................................  3.56, 3.88, 3.104, 3App, 4.39, 5.40, 11.30, 11.207, 11.290, 11.292 Lonrho Ltd v Shell Petroleum Co Ltd (No 2) [1982] AC 173, [1981] 3 WLR 33, [1981] 2 All ER 456, (1981) 125 SJ 429...............................  14AppA1.21, 19.39, 19.48 Lonrho plc v Al-Fayed (No 1) [1992] 1 AC 448, [1991] 3 WLR 188, [1991] 3 All ER 303, [1991] BCC 641, [1991] BCLC 779, (1991) 141 NLJ 927, (1991) 135 SJLB 68...................................................................................................................14AppA1.22 López Ribalda and others v Spain (App Nos 1874/13 and 8567/13) [2018] ECHR 1874/13........................................................................................................... 8AppA2.13 Louis v Smellie (1895) 73 LT 226, CA...........................................................................3.62 Lovell & Christmas Ltd v Wall (1911) 104 LT 85...................................................  2.81, 12.70 Lubrizol Corp v Esso Petroleum Co Ltd (No 2) [1993] FSR 53....................................15.212 Lumley v Gye [1843-1860] All ER Rep 208........................... 14AppA1.1, 14AppA1.9, 19.32 Lumley v Wagner 42 ER 687, (1852) 1 De GM & G 604..............................................15.15 Lund v St Edmund’s School Canterbury UKEAT/0514/12 (unreported, 8 May 2012)..13.80 Lunn Poly Ltd v Liverpool & Lancashire Properties Ltd [2006] EWCA Civ 430, [2007] L & TR 6, [2006] 2 EGLR 29, [2006] 25 EG 210, [2006] 12 EG 222 (CS)..... 16.18, 16.19 Lyne-Pirkis v Jones [1969] 1 WLR 1293, [1969] 3 All ER 738, (1969) 113 SJ 568.....12.11 M M3 Property Ltd v Zedhomes Ltd [2012] EWHC 780 (TCC), [2012] CILL 3174........15.180 lxv

Table of Cases M & E Global (Staffing) Solutions Ltd & another v Tudge & others [2016] EWHC 597 (QB).....................................................................................................15.194, 18.180 M & S Drapers (a firm) v Reynolds [1957] 1 WLR 9, [1956] 3 All ER 814, (1957) 101 SJ 44.........................................................................................  11.8, 11.9, 11.40, 11.191, 11.192, 13.95, 13.99 MBNA Ltd v Jones [2015] UKEAT/01/0120/15............................................................5.84 MDA Investment Management Ltd (No 1), Re [2003] EWHC 2277 (Ch), [2005] BCC 783, [2004] 1 BCLC 217, [2004] BPIR 75.............................................................4.107 MPT Group Ltd v Peel [2017] EWHC 1222 (Ch), [2017] IRLR 1092......3.56, 3.141, 15.123, 18.162, 18.173 MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553, [2017] QB 604, [2016] 3 WLR 1519, [2016] 2 Lloyd’s Rep 391, [2016] L & TR 27.......................................................................................... 5.149, 12.152, 12App, 13.85, 13.88, 13.125 Macaulay (formerly Instone) v Schroeder Music Publishing Co Ltd [1974] 1 WLR 1308, [1974] 3 All ER 616, (1974) 118 SJ 734, HL...............................  5.8, 13.99, 15.48 McBride v Falkirk Football & Athletic Club [2012] IRLR 22.......................................9.117 McCall v Initial Supplies Ltd 1992 SLT 67, 1990 SCLR 559............... 13.142, 13.143, 13.146 McClelland v Northern Ireland General Health Services Board [1957] 1 WLR 594, [1957] 2 All ER 129, [1957] NI 100, (1957) 101 SJ 355..................................... 5.88, 9.8 Macdonald v Taree Holdings Ltd [2001] CPLR 439, [2001] 1 Costs LR 147, (2001) 98(6) LSG 45..........................................................................................................14.154 Macfarlane v Glasgow City Council [2001] IRLR 7, EAT.............................................2.39 McKillen v Misland (Cyprus) Investments Ltd [2012] EWHC 521 (Ch)......................4.56 McLennan Architects Ltd v Hones [2014] EWHC 2604 (TCC), [2014] TCLR 6.........15.180 McLory v Post Office [1993] 1 All ER 457, [1992] ICR 758, [1993] IRLR 159...........5.87, 18.52, 18.61 McMaster v Manchester Airport plc [1998] IRLR 112............................................  9.19, 9.22 McMeechan v Secretary of State for Employment [1997] ICR 549, [1997] IRLR 353.2.29 McMillan Williams (a firm) v Range [2004] EWCA Civ 294, [2004] 1 WLR 1858, [2005] ECC 8, (2004) 148 SJLB 384..........................................................18.241, 18.242 Madoff Securities International Ltd (in liqudation) v Raven [2013] EWHC 3147 (Comm), [2014] Lloyd’s Rep FC 95...........................................  4.97, 4.98, 4.101, 4.106, 4.114, 16.90, 16.126 Mahamdia v People’s Democratic Republic of Algeria (Case C-154/11) [2014] All ER (EC) 96, [2013] CEC 452, [2012] ILPr 41, [2013] ICR 1......................................17.21 Mainmet Holdings plc v Austin [1991] FSR 538............................... 6.61, 6.113, 6App, 14.83 Mainstream Properties Ltd v Young see OBG Ltd v Allan Malik v Bank of Credit & Commerce International SA [1998] AC 20, [1997] 3 WLR 95, [1997] 3 All ER 1, [1997] ICR 606, [1997] IRLR 462, (1997) 94(25) LSG 33, (1997) 147 NLJ 917, HL.......................................................  3.97, 9.67, 9.84, 9.85, 9.119 Mallan v May 153 ER 213, (1844) 13 M & W 511........................................................12.33 Malone v Commissioner of Police of the Metropolis (No 2) [1979] Ch 344, [1979] 2 WLR 700, [1979] 2 All ER 620, (1979) 69 Cr App R 168, (1979) 123 SJ 303......6.128, 16.41 Manchester v IBM United Kingdom Ltd [2006] EWHC 39 (Ch)..................................14.95 Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, [1997] 2 WLR 945, [1997] 3 All ER 352, [1997] CLC 1124, [1997] 1 EGLR 57, [1997] 25 EG 138, [1997] 24 EG 122, (1997) 16 Tr LR 432, [1997] EG 82 (CS), (1997) 94(30) LSG 30, (1997) 147 NLJ 846, (1997) 141 SJLB 130, [1997] NPC 81.......12.25 Manor Electronics Ltd v Dickson [1988] RPC 618........................................................15.210 Manoudakis v EasyGroup Holdings Ltd [2011] EWHC 3614 (QB)..............................2.4 Mantis Surgical Ltd v Tregenza [2007] EWHC 1545 (QB)...............................11.288, 14.160 Marathon Asset Management LLP & another v Seddon & others [2017] EWHC 300 (Comm), [2017] ICR 791, [2017] IRLR 503, [2017] FSR 36......................  3.101, 3.112, 3.113, 3.114, 4.309, 6.2, 16.15, 18.102, 18.106, 19.17 lxvi

Table of Cases Marc Rich & Co Holding GmbH v Krasner (unreported, 15 January 1999), CA..........15.207 Marion White Ltd v Francis [1972] 1 WLR 1423, [1972] 3 All ER 857, (1972) 116 SJ 822, CA..........................................................................10.24, 11.39, 11.72, 12.97, 16.72 Maris Interiors LLP v Pleckinger [2011] EWHC 2260 (QB).........................................14.137 Market Investigations Ltd v Minister of Social Security [1969] 2 QB 173, [1969] 2 WLR 1, [1968] 3 All ER 732, (1968) 112 SJ 905.....................................  2.17, 2.20, 2.22 Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72, [2016] AC 742, [2015] 3 WLR 1843, [2016] 4 All ER 441, 163 Con LR 1, [2016] 1 P & CR 13, [2016] L & TR 8, [2016] CILL 3779......................  2.4, 9.62 Marley Tile Co Ltd v Johnson [1982] IRLR 75, CA.......................................... 11.166, 11.203 Marriott v Oxford & District Co-operative Society Ltd (No 2) [1970] 1 QB 186, [1969] 3 WLR 984, [1969] 3 All ER 1126, (1969) 7 KIR 219, (1969) 3 ITR 377, (1969) 113 SJ 655................................................................................9.132, 9.133, 9.136 Mars UK Ltd v Teknowledge Ltd (costs) [1999] 2 Costs LR 44, [2000] FSR 138, (1999) 22(10) IPD 22097................................................................... 6.18, 14.128, 14.156 Marshall v Industrial Systems & Controls Ltd [1992] IRLR 294.....................1.33, 3.46, 3.59, 3.68, 3App Marshall v NM Financial Management Ltd [1995] 1 WLR 1461, [1995] 4 All ER 785, [1995] ICR 1042, [1996] IRLR 20, ChD; [1997] 1 WLR 1527, [1997] ICR 1065, [1997] IRLR 449, CA................................................................... 11.248, 11.252, 11.256, 11.264, 11.270, 11.271, 12.52, 12.53, 12.54 Martin v South Bank University (Case C-4/01) [2003] ECR I-12859, [2004] 1 CMLR 15, [2004] CEC 90, [2004] ICR 1234, [2004] IRLR 74, [2003] OPLR 317, [2003] Pens LR 329...................................................................................  13.151, 13.178 Martin v Yeoman Aggregates Ltd [1983] ICR 314, [1983] IRLR 49.............................9.8 Maschek v Magistratsdirektion der Stadt Wien (Case C-341/15) [2017] CEC 218, [2016] IRLR 801.....................................................................................................5.129 Mason v Provident Clothing & Supply Co Ltd [1913] AC 724, HL..............1.42, 10.7, 10.13, 10.17, 10.23, 11.1, 11.40, 11.98, 12.10, 12.44 Masri v Consolidated Contractors International Co SAL [2008] EWCA Civ 625, [2008] 2 All ER (Comm) 1146, [2008] 2 Lloyd’s Rep 301, [2008] 1 CLC 887, [2008] BLR 391, [2008] ILPr 48.................................................................... 17.83, 17.84 Massey v Crown Life Insurance Co [1978] 1 WLR 676, [1978] 2 All ER 576, [1978] ICR 590, [1978] IRLR 31, (1978) 13 ITR 5, (1978) 122 SJ 791...............2.55, 2.69, 2.70 Matuz v Hungary (Application No 73571/10) [2015] IRLR 74...............................6.48, 6.147 Meade v British Fuels Ltd [1998] IRLR 706, HL..........................................................13.169 Meade-Hill & National Union of Civil & Public Servants v British Council [1996] 1 All ER 79, [1995] ICR 847, [1995] IRLR 478, CA................................................5.69 Mears v Safecar Security Ltd [1983] QB 54, [1982] 3 WLR 366, [1982] 2 All ER 865, [1982] ICR 626, [1982] IRLR 183, (1982) 79 LSG 921........................................2.87 Measures Bros v Measures [1910] 2 Ch 248..................................................................9.122 Medsted Associates Ltd v Canaccord Genuity Wealth (International) Ltd [2017] EWHC 1815 (Comm).............................................................................................16.99 Memory Corp plc v Sidhu (No 1) [2000] 1 WLR 1443, [2000] CPLR 171, [2000] FSR 921..........................................................................  14.45, 14.47, 14.107, 15.198, 15.207 Meretz Investments NV v ACP Ltd [2007] EWCA Civ 1303, [2008] Ch 244, [2008] 2 WLR 904.......................................................... 14AppA1.9, 14AppA1.10, 14AppA1.12, 14AppA1.13, 14AppA1.14, 14AppA1.23, 19.37, 19.38, 19.50, 19.51, 19.52 Merlin Financial Consultants Ltd v Cooper [2014] EWHC 1196 (QB), [2014] IRLR 610...................................................................................................11.85, 11.193, 11.288 Meyer v Scottish Co-operative Wholesale Society Ltd [1959] AC 324, [1958] 3 WLR 404, [1958] 3 All ER 66, 1958 SC (HL) 40, 1958 SLT 241, (1958) 102 SJ 617....4.126 Meyer Dunmore International Ltd v Roger [1978] IRLR 167.......................................5.84 lxvii

Table of Cases Mezey v South West London & St Georges Mental Health NHS Trust (permission to appeal) [2007] EWCA Civ 106, [2007] IRLR 244, (2007) 94 BMLR 25, CA......18.56 Mezey v South West London & St George’s Mental Health NHS Trust [2010] EWCA Civ 293....................................................................................................................5.85 Michael & others v Phillips & others [2017] EWHC 614 (QB).....................................4.67 Michael Wilson & Partners v Emmott [2011] EWHC 1411 (Comm), [2011] Arb LR 55, (2011) 108(25) LSG 20.....................................................................................4.264 Midas IT Services v Opus Portfolio Ltd (unreported, 21 December 1999)......... 15.86, 15.100, 15.101 Mid Suffolk DC v Clarke [2006] EWCA Civ 71, [2007] 1 WLR 980, [2006] Env LR 38, [2006] LLR 284, [2006] 8 EG 174 (CS), [2006] NPC 15................................11.276 Migrant Advisory Service v Chaudri (UKEAT/1400/97) 1999 IRLB 615.....................2.34 Milanese v Leyton Orient Football Club Ltd [2016] EWHC 1161 (QB), [2016] IRLR 601...........................................................................................................3.99, 4.14, 16.96 Milbrook Furnishing Industries Ltd v McIntosh [1981] IRLR 309................................9.81 Miles v Insitu Cleaning Co Ltd UKEAT/0157/12/KN...................................................13.166 Miles v Wakefield Metropolitan Borough Council [1987] AC 539, [1987] 2 WLR 795, [1987] 1 All ER 1089, [1987] ICR 368, [1987] IRLR 193, [1987] 1 FTLR 533, 85 LGR 649, (1987) 84 LSG 1239, (1987) 137 NLJ 266, (1987) 131 SJ 408, HL.......................................................................................................  9.106, 9.111, 15.34 Miller v Karlinski (1945) 62 TLR 85, CA......................................................................2.56 Miller v Stonier [2015] EWHC 2796 (Ch).....................................................................4.42 Miller Brewing Co v Mersey Docks & Harbour Co [2003] EWHC 1606 (Ch), [2004] FSR 5, (2003) 100(31) LSG 32...............................................................................14.64 Milne v Link Asset & Security Co Ltd UKEAT/0867/04 (unreported, 26 September 2005).......................................................................................................................18.55 Minister of Pensions & National Insurance [1968] 1 All ER 433..................................2.52 Ministry of Defence v Griffin [2008] EWHC 1542 (QB)...............................................6.78 Ministry of Defence HQ Defence Dental Services v Kettle [2007] EAT/308/06...........2.81 Ministry of Sounds Holdings Ltd v Cosgrave (unreported, 23 February 1999).............4.194 Mitchell v News Group Newspapers Ltd [2013] EWCA Civ 1537, [2014] 1 WLR 795, [2014] 2 All ER 430, [2014] BLR 89, [2013] 6 Costs LR 1008, [2014] EMLR 13, [2014] CILL 3452, (2013) 163 (7587) NLJ 20.............................................14.31, 14.129 Mitchel v Reynolds (1712) 10 Mod 130, 88 ER 660............................................ 13.93, 13.97 Mitie Managed Services Ltd v French & others [2002] ICR 1395, [2002] IRLR 521, [2002] Emp LR 888................................................................................................13.145 Mitie Security (London) Ltd v Ibrahim UKEAT/0067/10..............................................9.8 Mitsui & Co Ltd v Nexen Petroleum UK Ltd [2005] EWHC 625 (Ch), [2005] 3 All ER 511....................................................................................................................14.125 Mohamud v Wm Morrison Supermarkets plc [2016] UKSC 11, [2016] AC 677, [2016] 2 WLR 821, [2017] 1 All ER 15, [2016] ICR 485, [2016] IRLR 362, [2016] PIQR P11.....................................................................................................9.82 Mouflet v Cole (1872) LR 8 Exch 32.............................................................................12.91 Monster Vision UK Ltd v McKie [2011] EWHC 3772 (QB)...... 11.30, 11.74, 11.143, 11.176, 11.186, 11.222, 11.289, 11.290, 12.60, 12.117 Montgomery v Johnson Underwood Ltd [2001] EWCA Civ 318, [2001] ICR 819, [2001] IRLR 269, [2001] Emp LR 405, (2001) 98(20) LSG 40........................ 2.23, 2.31 Moore v RH McCulloch Ltd [1968] 1 QB 360, [1967] 2 WLR 1366, [1967] 2 All ER 290, 2 KIR 160, (1967) 111 SJ 213........................................................................2.84 Morison v Moat (1852) 21 LJ Ch 248, 68 ER 492, (1851) 9 Hare 241..........................6App Morris Angel & Son Ltd v Hollande [1993] 3 All ER 569, [1993] ICR 71, [1993] IRLR 169......................................................................... 13.143, 13.144, 13.145, 13.146 Morris-Garner v One Step (Support) Ltd [2018] UKSC 20.........................  1.27, 16.11, 16.21 Mortgage Express v Abensons Solicitors [2012] EWHC 1000 (Ch), [2012] 2 EGLR 83, [2012] 27 EG 90, [2012] 18 EG 103 (CS)........................................................16.129 Morton Sundour Fabrics Ltd v Shaw [1966] 2 ITR 84, (1966) 2 KIR 1........................9.8 lxviii

Table of Cases Mosley v News Group Newspapers Ltd [2008] EWHC 1777 (QB), [2008] EMLR 20, (2008) 158 NLJ 1112......................................................................................6.150, 6.163 Mowlem Northern Ltd v Watson [1990] ICR 751, [1990] IRLR 500............................9.8 Mr Clutch Auto Centres v Blakemore UKEAT/0509/13/LA..........................................9.127 Mruke v Khan [2018] EWCA Civ 280...........................................................................9.124 Mulcahy v R (1868) LR 3 HL 306........................................  14AppA1.1, 14AppA1.21, 19.39 Munchkins Ltd v Karmazyn and Others EAT/0359/09..................................................9.133 Munt v Beasley [2006] EWCA Civ 370.........................................................................12.66 Murad & Murad v Al-Saraj & Westwood Business Inc [2004] EWHC 1235 (Ch); [2005] EWCA Civ 959, [2005] WTLR 1573, (2005) 102(32) LSG 31, CA..... 4.40, 4.43, 4.131, 4.134, 4.170, 16.87, 16.88, 16.89, 16.90 Murray v Leisureplay plc [2005] EWCA Civ 963, [2005] IRLR 946, CA........ 11.281, 11.285 Murray v Yorkshire Fund Managers Ltd [1998] 1 WLR 951, [1998] 2 All ER 1015, [1998] FSR 372, (1998) 95(4) LSG 33, (1998) 95(3) LSG 24, (1998) 142 SJLB 45............................................................................................................................6.136 Mustad & Son v Allcock & Co Ltd & Dosen [1964] 1 WLR 109 (Note), [1963] 3 All ER 416, [1963] RPC 41................................................................................6.141, 15.129 Myatt v National Coal Board [2007] EWCA Civ 307, [2007] 1 WLR 1559, [2007] 4 All ER 1094, [2007] 4 Costs LR 564, [2007] PNLR 25.........................................14.162 My Kinda Town Ltd (t/a Chicago Pizza Pie Factory) v Soll & Crunts Investments [1981] Com LR 194, [1982] FSR 147, [1983] RPC 15..........................................16.49 N NIS Fertilisers v Neville [1986] 2 NIJB 70............................................................ 12.11, 12.48 NWL Ltd v Woods (The Nawala) (No 2) [1979] 1 WLR 1294, [1979] 3 All ER 614, [1980] 1 Lloyd’s Rep 1, [1979] ICR 867, [1979] IRLR 478, (1979) 123 SJ 751...............................................................................14.68, 14.69, 14.73, 14.79, 15.123 NZ Netherlands Society “Oranje” Inc v Kuys [1973] 1 WLR 1126, [1973] 2 All ER 1222, [1974] RPC 272, (1973) 117 SJ 565.............................................................4.141 Napier & another v Pressdram Ltd [2009] EWCA Civ 443, [2010] 1 WLR 934, [2009] CP Rep 36, [2009] EMLR 21, [2010] Lloyd’s Rep PN 8, (2009) 106(22) LSG 24, (2009) 159 NLJ 859, (2009) 153 (20) SJLB 41......................................................6.17 National Broach & Machine Co v Churchill Gear Machines Ltd [1965] 1 WLR 1199, [1965] 2 All ER 961, [1965] RPC 516, (1965) 109 SJ 511....................................16.38 National Commercial Bank Jamaica Ltd v Olint Corp Ltd [2009] UKPC 16, [2009] 1 WLR 1405, [2009] Bus LR 1110, [2009] 1 CLC 637............................................14.83 National Grid Electricity Transmission plc v McKenzie [2009] EWHC 1817 (Ch)......16.100 Neary v Dean of Westminster [1999] IRLR 288.......................................................  3.10, 3.93 Nethermere (St Neots) Ltd v Taverna & Gardiner [1984] ICR 612, [1984] IRLR 240, (1984) 81 LSG 2147, (1984) 134 NLJ 544.........................................................2.26, 2.29 Neufeld v A & N Communication in Print Ltd (UKEAT 0177/07/JOJ) [2008] All ER (D) 156 (Apr)..........................................................................................................2.63 New ISG Ltd v Vernon [2007] EWHC 2665 (Ch), [2008] ICR 319, [2008] IRLR 115....13.188 Newcastle upon Tyne NHS Foundation Trust v Haywood [2017] EWCA Civ 153, [2017] ICR 1370, [2017] IRLR 629.................................................  5.98, 9.8, 9.20, 9.24, 9.25, 9.26, 9.28 Newcastle upon Tyne NHS Foundation Trust v Haywood [2018] UKSC 22.................9.8 Newland v Simons & Willer (Hairdressers) Ltd [1981] ICR 521, [1981] IRLR 359, EAT.........................................................................................................................2.56 Newman v Polytechnic of Wales Student Union [1995] IRLR 72.................................9.8 Newtherapeutics Ltd v Katz [1991] Ch 226, [1990] 3 WLR 1183, [1991] 2 All ER 151, [1990] BCC 362, [1990] BCLC 700...............................................................17.50 Niit Technologies Ltd v Chaturverdi [2017] Lexis Citation 134....................................11.222 Nokia Corp v Interdigital Technology Corp [2004] EWHC 2920 (Pat), (2005) 28(5) IPD 28039...............................................................................................................17.88 lxix

Table of Cases Norbrook Laboratories (GB) Ltd v Adair [2008] EWHC 978 (QB), [2008] IRLR 878.................................................................................. 11.111, 11.114, 11.144, 11.163, 11.181, 11.289, 12.125, 12.126 Norcross v Estate of Christos Georgallides [2015] EWHC 2405 (Comm)........ 16.114, 16.129 Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co [1894] AC 535.............. 1.6, 10.13, 10.46, 11.95, 13.97, 13.98 Normalec Ltd v Britton [1983] FSR 318........................................................ 4.28, 4.48, 16.49, 16.53, 16.80, 16.81 Norman v National Audit Office (UKEAT/0276/14) [2015] IRLR 634..........5.58, 5.59, 13.36 Northampton Regional Livestock Centre Co Ltd v Cowling [2014] EWHC 30 (QB); [2015] EWCA Civ 651, [2016] 1 BCLC 431, [2015] 4 Costs LO 477, [2016] PNLR 5.....................................................................................4.128, 4.154, 4.225, 16.88 North Lanarkshiree County Council v Cowan [2008] UKEATS/0028/07.....................13.57 Northrop Grumman Mission Systems Europe Ltd v BAE Systems (Al Diriyah C41) Ltd [2014] EWHC 3148 (TCC), [2015] 3 All ER 782, [2014] TCL 8, 156 Con LR 141, [2014] 6 Costs LO 879, [2014] CILL 3572.................................. 18.223, 18.242 Northstar Systems Ltd, Seaquest Systems Ltd & Ultraframe (UK) Ltd v Fielding & others [2005] EWHC 1638 (Ch), [2006] FSR 17, [2007] WTLR 835, (2005) 28(9) IPD 28069, ChD..........................................................  4.46, 4.56, 4.60, 4.71, 4.74, 4.76, 4.77, 4.78, 4.111, 4.114, 4.131, 4.136, 4.158, 4.266 Norwest Holst Group Administration Ltd v Harrison see Harrison v Norwest Group Administration Ltd Norwich Pharmacal Co v Customs & Excise Comrs [1974] AC 133, [1973] 3 WLR 164, [1973] 2 All ER 943, [1973] FSR 365, [1974] RPC 101, (1973) 117 SJ 567............................................................................................................. 14.130, 15.198 Norwood Laboratories (GB) Ltd v Adair [2008] EWHC 978 (QB), [2008] IRLR 878.11.139 Nottingham Building Society v Eurodynamics Systems plc [1993] FSR 468.....14.83, 15.176, 15.184, 15.185, 15.187 Nottingham Egg Packers & Distributors v McCarthy & Haslett (1967) 2 ITR 223, 2 KIR 302...................................................................................................................2.62 Nottinghamshire County Council v Meikle [2004] EWCA Civ 859, [2004] 4 All ER 97, [2005] ICR 1, [2004] IRLR 703, (2004) 80 BMLR 129, (2004) 148 SJLB 908........................................................................................... 9.146, 9.147, 9.148, 9.149 Nottinghamshire Healthcare v News Group Newspapers Ltd [2002] EWHC 409 (Ch), [2002] EMLR 33, [2002] RPC 49, (2002) 99(18) LSG 36, (2002) 146 SJLB 92, [2002] ECDR CN5..................................................................................................7.52 Nova Plastics v Froggatt [1982] IRLR 146................................................................3.21, 3.23 Novoship (UK) Ltd v Nikitin; Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908, [2015] QB 499, [2015] 2 WLR 526, [2014] WTLR 1521, (2014) 158 (28) SJLB 37................................................................................... 14AppA1.26, 16.48, 16.87, 16.90, 16.103, 19.61 Nucleus Information Systems v Palmer [2003] EWHC 2013 (Ch).................... 15.178, 15.180 O OBG Ltd v Allan [2007] UKHL 21, [2008] 1 AC 1, [2007] 2 WLR 920, [2007] Bus LR 1600, [2007] 4 All ER 545, [2008] 1 All ER (Comm) 1, [2007] IRLR 608, [2007] EMLR 12, [2007] BPIR 746, (2007) 30(6) IPD 30037, [2007] 19 EG 165 (CS), (2007) 151 SJLB 674, [2007] NPC 54...........................  6.3, 6.10, 6.14, 6.44, 6.47, 6.139, 9.50, 14AppA1.1, 14AppA1.2, 14AppA1.3, 14AppA1.5, 14AppA1.6, 14AppA1.7, 14AppA1.8, 14AppA1.9, 14AppA1.11, 14AppA1.12, 14AppA1.14, 14AppA1.20, 15.167, 16.22, 16.30, 16.35, 19.32, 19.35, 19.36, 19.37, 19.52, 19.53, 19.54 lxx

Table of Cases OCS Group UK Ltd v Dadi [2017] EWHC 1727 (Ch)........................................... 14.3, 14.149 ODL Securities Ltd v McGrath [2013] EWHC 1865 (Comm)................................  4.33, 4.236 Oakdene Homes plc (in liquidation) v Turpin (unreported, 1 November 2016).............4.108 Ocean Chemical Transport Inc v Exnor Craggs Ltd [2000] 1 All ER (Comm) 519, [2000] 1 Lloyd’s Rep 446.......................................................................................13.23 Ocular Sciences Ltd v Aspect Vision Care Ltd (No 2) [1997] RPC 289, (1997) 20(3) IPD 20022..............................................................................6.113, 14.17, 14.96, 15.131, 15.136, 16.53, 16.64, 16.65 O’Donnell v Shanahan [2009] EWCA Civ 751, [2009] BCC 822, [2009] 2 BCLC 666............................................................................................4.140, 4.162, 4.164, 4.165, 4.166, 4.169, 4.184, 4.302 Odyssey Entertainment (in liquidation) v Kamp [2012] EWHC 2316 (Ch)......... 4.106, 4.204, 4.221, 4.243, 4.262, 4.279, 4.312 Office Angels Ltd v Rainer-Thomas & O’Connor [1991] IRLR 214, CA.... 1.41, 10.30, 10.45, 11.50, 11.51, 11.73, 11.96, 11.97, 11.130, 11.157, 11.167, 11.208, 12.113, 12.122, 12.123, 13.109 Office Overload Ltd v Gunn [1977] FSR 39, (1976) 120 SJ 147, CA.....................13.99, 14.72 O’Kelly v Trusthouse Forte plc [1984] QB 90, [1983] 3 WLR 605, [1983] 3 All ER 456, [1983] ICR 728, [1983] IRLR 369............................................................. 2.29, 2.36 Omega Group Holdings Ltd v Kozeny [2002] CLC 132................................................17.88 One Step (Support) Ltd v Morris-Garner [2016] EWCA Civ 180, [2017] QB 1, [2016] 3 WLR 1281, [2017] 2 All ER 262, [2016] IRLR 435....................... 4.112, 4.113, 11.87, 11.288, 16.15, 16.21 Osborne & others v Capita Business Services Ltd & others UKEAT/0048/16/RN.......13.166 Otkrite International Investment Management Ltd v Urumov [2014] EWHC 191 (Comm)...................................................................................................4.15, 4.86, 16.23, 16.103, 16.104 Owusu v Jackson (t/a Villa Holidays Bal Inn Villas (Case C-281/02) [2005] QB 801, [2005] 2 WLR 942, [2005] 2 All ER (Comm) 577, [2005] 1 Lloyd’s Rep 452, [2005] ECR I-1383, [2005] 1 CLC 246, [2005] ILPr 25, ECJ...............................17.10 P P & O Nedlloyd BV v Arab Metals Co, The UB TIger [2006] EWCA Civ 1717, [2007] 1 WLR 2288, [2007] 2 All ER (Comm) 401, [2007] 2 Lloyd’s Rep 231, [2006] 2 CLC 985, 116 Con LR 200.......................................................... 16.117, 16.132 P & V Industries Pty Ltd v Porto [2006] VSC 131.........................................................4.231 PA Thomas & Co v Mould [1968] 2 QB 913, [1968] 2 WLR 737, [1968] 1 All ER 963, (1967) 112 SJ 216........................................................................................... 15.76, 16.65 PGF II SA v OMFS Co 1 Ltd [2013] EWCA Civ 1288, [2014] 1 WLR 1386, [2014] 1 All ER 970, [2014] CP Rep 6, [2014] BLR 1, 152 Con LR 72, [2013] 6 Costs LR 973, [2013] 3 EGLR 16, [2013] 44 EG 98 (CS), (2013) 157 (42) SJLB 37.....18.223, 18.232, 18.239, 18.241, 18.255, 18.265 PJS v New Group Newspapers Ltd [2016] UKSC 26, [2016] AC 1081, [2016] 2 WLR 1253, [2016] 4 All ER 554, [2016] EMLR 21, [2016] 2 FLR 251, [2016] HRLR 13, 42 NHRC 111, [2016] FSR 33, [2016] Fam Law 963............6.43, 6.46, 6.140, 14.81 PJSC Vseukrainskyi Aktsionery Bank v Maksimov [2013] EWHC 3203 (Comm).......15.207 PMC Holdings Ltd v Smith & others (unreported, 23 April 2002)................................4.47 PSM International plc v Whitehouse [1992] IRLR 279, [1992] FSR 489..................  6.5, 6.64, 6.130, 14.27, 14.67, 14.93, 15.85, 15.111 Page One Records Ltd v Britton (t/a The Troggs) [1968] 1 WLR 157, [1967] 3 All ER 822, (1967) 111 SJ 944..................................................................................  15.16, 15.17 lxxi

Table of Cases Palfrey v Transco plc [2004] IRLR 916..........................................................................9.8 Paragon Finance plc v DB Thakerar & Co [1999] 1 All ER 400, (1998) 95 (35) LSG 36, (1998) 142 SJLB 243...............................................................16.119, 16.124, 16.126 Park Promotion Ltd (t/a Pontypool Rugby Football Club) v Welsh Rugby Union Ltd [2012] EWHC 2406 (QB)..........................................................................  18.242, 18.259 Parsons v Albert J Parsons & Sons Ltd [1979] ICR 271, [1979] IRLR 117, [1979] FSR 254..................................................................................................................2.64 Patel v Ferdinand (unreported, 11 July 2016).................................................................4.223 Patel v Uite [2012] EWHC 92 (QB)...............................................................................15.180 Patsystems Holdings Ltd v Neilly [2012] EWHC 2609 (QB), [2012] IRLR 979.....11.1, 11.4, 11.7, 11.37, 11.48, 11.289, 12.6, 12.13, 12.16, 12.88, 12.96, 12.123, 13.4, 13.9, 13.85, 13.127, 13.129 Peace v City of Edinburgh Council 1999 SLT 712, 1999 SCLR 593, [1999] IRLR 417, 1999 GWD 8-394....................................................................................................5.85 Pearce v Roy T Ward (Consultants) Ltd [1996] UKEAT/180/96/1110..........................9.57 Peco Arts Inc v Hazlitt Gallery Ltd [1983] 1 WLR 1315, [1983] 3 All ER 193, (1984) 81 LSG 203, (1983) 127 SJ 806..............................................................................16.124 Pederson v Camden London Borough Council [1981] ICR 674, [1981] IRLR 173, CA...........................................................................................................................9.116 Peer International Group v Termidor Music Publishers Ltd [2005] EWHC 1048 (Ch), [2006] CP Rep 2, (2005) 28(7) IPD 28050....................................17.135, 17.147, 17.148 Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd [2009] UKPC 45, [2011] 1 WLR 2370, [2010] BLR 73, [2011] Bus LR D1....................................................16.19 Penfold v Pearlberg [1955] 1 WLR 1068, [1955] 3 All ER 120, (1955) 99 SJ 708.......15.173 Peninsula Business Services Ltd v Sweeney [2004] IRLR 49....... 11.264, 13.12, 13.17, 13.23 Pennwell Publishing (UK) Ltd v Ornstien [2007] EWHC 1570 (QB), [2008] 2 BCLC 246, [2007] IRLR 700......................................................  3.70, 3.109, 3App, 4.13, 4.229, 4.309, 6.93, 6App, 7.25, 7.43, 7.48 Pennyfeathers Ltd v Pennyfeathers Property Co Ltd [2013] EWHC 3530 (Ch)............4.153 Pera Consulting Ltd v Swallowfield plc (unreported, 15 March 1995), CA..................11.285 Pergamon Press Ltd v Maxwell [1970] 1 WLR 1167, [1970] 2 All ER 809, (1970) 114 SJ 453..........................................................................................................17.120, 17.122 Perls v Saalfeld [1892] 2 Ch 149....................................................................................11.16 Persimmon Homes Ltd v Ove Arup & Partners Ltd [2017] EWCA Civ 373.................12.62 Personal Management Solutions Ltd v Brakes Bros Ltd [2014] EWHC 3495 (QB).....6.11, 6.127, 11.273, 13.25 Personnel Hygiene Services Ltd v Rentokil Initial UK Ltd (t/a Initial Medical Services) [2014] EWCA Civ 29.......................................................  6.111, 15.89, 15.102 Peso Silver Mines v Cropper [1966] 58 DLR (2d) 1 (CA, British Columbia)...............4.170 Peter Pan Manufacturing Corp v Corset Silhouette Ltd [1964] 1 WLR 96, [1963] 3 All ER 402, [1963] RPC 45, (1964) 108 SJ 97..........................................15.95, 16.48, 16.70 Petrofina (Great Britain) Ltd v Martin [1966] Ch 146, [1966] 2 WLR 318, [1966] 1 All ER 126, (1965) 109 SJ 1009.............................................................................1.6, 11.249 Petter v EMC Europe Ltd [2015] EWCA Civ 828, [2015] CP Rep 47, [2015] 2 CLC 178, [2016] ILPr 3, [2015] IRLR 847......................................9.61, 14.122, 16.73, 17.26, 17.27, 17.42, 17.79, 18AppA6.11 Phaestos Ltd v Ho [2012] EWHC 2756 (QB)................................................................15.181 Phillips v News Group Newspapers Ltd [2012] EWCA Civ 48, [2012] 2 WLR 848, [2012] 2 All ER 74, [2012] EMLR 14, [2012] FSR 29, (2012) 109(7) LSG 17, (2012) 162 NLJ 295................................................................................................15.237 Phillips v Symes [2003] EWCA Civ 1769, (2003) 147 SJLB 1431...............................15.256 Phoenix House Ltd v Stockman [2017] ICR 84, [2016] IRLR 848................................13.80 Phoenix Partners Group LLP v Asoyag [2010] EWHC 846 (QB), [2010] IRLR 594....10.32, 11.11, 14.14, 14.77 lxxii

Table of Cases Photo Productions Ltd v Securicor Transport Ltd [1980] AC 827, [1980] 2 WLR 283, [1980] 1 All ER 556, [1980] 1 Lloyd’s Rep 545, (1980) 124 SJ 147, HL........ 9.52, 9.53, 9.54 11.286 Picnic at Ascot Inc v Kalus Derigs [2001] FSR 2...........................................................14.154 Pickwell v ProCam CP Ltd [2016] EWHC 1304 (QB), [2016] IRLR 761........11.171, 11.198, 13.5, 13.7, 13.14, 13.50, 13.54, 13.87, 13.92 Pimlico Plumbers Ltd & another v Smith [2017] EWCA Civ 51, [2017] ICR 657, [2017] IRLR 323.................................................................................................2.14, 2.39 Pinckney v KDG Mediatech AG (Case C-170/12) [2013] Bus LR 1313, [2014] CEC 534, [2013] ECDR 15, [2014] ILPr 7, [2014] FSR 18...........................................7.34 Pintorex Ltd v Keyvanfar & others [2013] EWPCC 36..................................................3.20 Piroska v Total Support Services Ltd ET/2351123/10....................................................9.8 Pirtek (UK) Ltd v Joinplace Ltd (t/a Pirtek Darlington) [2010] EWHC 1641 (Ch), [2010] UKCLR 1297..............................................................................................10.88 Pitt v Holt [2013] UKSC 26, [2013] 2 AC 108, [2013] 2 WLR 1200, [2013] 3 All ER 429, [2013] STC 1148, [2013] Pens LR 195, 81 TC 912, [2013] BTC 126, [2013] WTLR 977, 15 ITELR 976, [2013] STI 1805, [2013] 2 P & CR DG14................16.83 Pitzolu v Banca Gesfid SA [2009] ILPr 27.....................................................................17.103 Poly Lina Ltd v Finch & another [1995] FSR 751........................................  6.27, 6.34, 11.95 Polymasc Pharmaceuticals plc v Charles [1999] FSR 711....................................  11.13, 11.95 Power v Regent Security Services Ltd [2007] 4 All ER 354, [2007] ICR 970, [2007] IRLR 226, EAT; [2007] EWCA Civ 1188, [2008] 2 All ER 977, [2008] ICR 442, [2008] IRLR 66, (2007) 104(47) LSG 26, CA.............................. 13.167, 13.168, 13.171 Power Adhesives v Sweeney [2017] EWHC 676 (Ch)........................................... 4.111, 4.224 Practice Direction (HC: Interlocutory Injunctions: Forms) [1996] 1 WLR 1551, [1997] 1 All ER 287, [1996] CLC 1847, [1997] 2 FCR 277, (1996) 146 NLJ 1690............14.107 Pratt v Aigaion Insurance Co [2008] EWCA Civ 1314, [2009] 2 All ER (Comm) 387, [2009] 1 Lloyd’s Rep 225, [2008] 2 CLC 756, [2009] Lloyd’s Rep IR 149..........12.62 Praxis Capital Ltd v Burgess [2015] EWHC 2631 (Ch).............................  9.55, 11.51, 18.115 Prenn v Simmonds [1971] 1 WLR 1381, [1971] 3 All ER 237, (1971) 115 SJ 654.......12.70 Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415, [2013] 3 WLR 1, [2013] 4 All ER 673, [2013] BCC 571, [2014] 1 BCLC 30, [2013] 2 FLR 732, [2013] 3 FCR 210, [2013] WTLR 1249, [2013] Fam Law 953, (2013) 163 (7565) LJ 27, (2013) 157 (24) SJLB 37........................................................ 11.26, 11.27, 16.101 Prestwick Circuits Ltd v McAndrew [1990] IRLR 191, 1990 SLT 654.........................9.75 Primary Group (UK) Ltd v Royal Bank of Scotland [2014] EWHC 1082 (Ch), [2014] 2 All ER (Comm) 1121, [2014] RPC 26................................................ 6.17, 6.126, 16.20 Primlake Ltd (in liquidation) v Matthews Associates & others [2006] EWHC 1227 (Ch), [2007] 1 BCLC 666.......................................................................................4.80 Primlaks (UK) Ltd, Re [1989] BCLC 734......................................................................14.81 Prince Albert v Strange 64 ER 293, (1849) 2 De G & Sm 652......................................6.122 Prince Jefri Bolkiah v KPMG (a firm) [1999] 1 All ER 516, (1998) 95(42) LSG 33, (1998) 148 NLJ 1602, (1998) 142 SJLB 268...........................................  9.4, 10.5, 16.66 Printers & Finishers Ltd v Holloway (No 1) [1965] 1 WLR 1, [1964] 3 All ER 731, [1965] RPC 239, (1965) 109 SJ 47.................................................. 6.12, 6.36, 6.82, 6.84, 6.128, 6App, 11.54 Print Factory (London) 1991 Ltd v Millam [2007] EWCA Civ 322, [2008] BCC 169, [2007] ICR 133, [2007] IRLR 526, (2007) 104(18) LSG 28..................................13.134 Proactive Sports Management v Rooney [2011] EWCA Civ 1444, [2012] 2 All ER (Comm) 815, [2012] IRLR 241, [2012] FSR 16.............................10.10, 11.248, 11.263 Process Development Ltd v Hogg [1996] FSR 45, (1996) 19(2) IPD 19012.................15.243 Project Development Co Ltd SA v KMK Securities Ltd [1982] 1 WLR 1470, [1983] 1 All ER 465, [1982] Com LR 255, (1982) 126 SJ 837..........................................14.64 Promar International Ltd v Clarke [2006] EWCA Civ 332............................................18.263 Pronuptia de Paris GmbH v Pronuptia de Paris Imgard Schillgallis (Case 161/84) [1986] ECR 353, [1986] 1 CMLR 414...................................................................10.88 lxxiii

Table of Cases Prophet v Huggett [2014] EWHC 615 (Ch), [2014] IRLR 618, ChD; [2014] EWCA Civ 1013, [2014] IRLR 797, CA..........................................  5.126, 11.288, 12.22, 12.23, 12.33, 12.44, 12.45, 12.103 Pro-Swing Inc v Elta Golf Inc (2006) DLR (4th) 633....................................................17.164 Protectacoat Firthglow Ltd v Miklos Szilagyi [2009] EWCA Civ 98, [2009] IRLR 365, CA...................................................................................................................2.55 Prout v British Gas plc [1992] FSR 478................................................................. 3.146, 6.121 Provident Financial Group & Whitegates Estate Agency v Hayward [1989] 3 All ER 298, [1989] ICR 160, [1989] IRLR 84..................................... 5.7, 5.15, 5.28, 5.29, 5.30, 5.126, 5.129, 9.104, 15.11, 15.22, 15.23, 15.26, 15.27, 15.62, 15.64 Prudential Assurance Co’s Trust Deed, Re [1934] Ch 338.............................................11.270 Pugliese v Finmeccanica SpA (Case C-437/00) [2004] All ER (EC) 154, [2003] ECR I-3573, [2003] CEC 310, [2003] ILPr 21...............................................................17.103 Pujante Rivera v Gestora Clubs Dir SL & another (Case C-422/14) [2016] ICR 227, [2016] IRLR 51.......................................................................................................13.66 Q QBE Management Services (UK) Ltd v Dymoke [2012] IRLR 458..........1.33, 3.4, 3.12, 3.13, 3.21, 3.54, 3.56, 3.61, 3.91, 3.103, 3.118, 3.120, 3.124, 3.125, 3App, 4.191, 4.206, 5.35, 6.22, 6App, 11.1, 11.51, 11.118, 11.289, 15.86, 15.88, 15.89, 15.98, 15.102, 15.103, 15.122, 15.124, 15.137, 15.139, 15.140, 15.141, 15.143, 15.144, 15.152, 18.1, 19.2, 19.20, 19.31, 19.65 Quarter Master UK Ltd (in liquidation) v Pyke & others [2004] EWHC 1815 (Ch), [2005] 1 BCLC 245.................................................................. 4.121, 4.136, 4.266, 4.294 Quashie v Stringfellow Restaurants Ltd [2012] EWCA Civ 1735, [2013] IRLR 99, (2013) 157(1) SJLB 31.....................................................................2.29, 2.30, 2.35, 2.49 Quickmaid Rental Services Ltd v Reece (1970) 114 SJ 372..........................................9.59 R R v Barnet London Borough Council, ex parte Nilish Shah [1983] 2 AC 309, [1983] 2 WLR 16, [1983] 1 All ER 226, 81 LGR 305, (1983) 133 NLJ 61, (1983) 127 SJ 36............................................................................................................................17.97 R v Pembrokeshire County Council, ex parte Coker [1999] 4 All ER 1007, (2000) 2 LGLR 625, [1999] NPC 87.....................................................................................13.83 R (on the application of Ellson) v London Borough of Greenwich [2006] EWHC 2379 (Admin)...................................................................................................................14.59 R (on the application of Guardian News & Media Ltd) v City of Westminster Magistrates Court [2012] EWCA Civ 420, [2013] QB 618, [2012] 3 WLR 1343, [2012] 3 All ER 551, [2012] CP Rep 30, [2012] EMLR 22, (2012) 109(16) LSG 22, (2012) 162 NLJ 619...............................................................................  14.98, 14.101 R (on the application of Hysaj) v Secretary of State for the Home Department [2014] EWCA Civ 1633, [2015] 1 WLR 2472, [2015] CP Rep 17, [2015] 2 Costs LR 191..........................................................................................................................14.31 RAC Ltd v Allsop (unreported, 3 October 1984)............................................................15.256 RBG Resources plc (in litigation) v Rastogi & others [2002] EWHC 2782 (Ch)..........3.111, 3.114, 3.116, 4.256, 4.257 RBS Rights Issue Litigation, Re [2016] EWHC 3161 (Ch), [2017] 1 WLR 1991, [2017] 1 BCLC 726, [2017] Lloyd’s Rep FC 83....................................................18.27 lxxiv

Table of Cases RCI (Europe) Ltd v Woods (HM Inspector of Taxes) [2003] EWHC 3129 (Ch), [2004] STC 315, 76 TC 390, [2004] BTC 285, [2004] STI 45..........................................13.112 RDF Media Group plc v Clements [2007] EWHC 2892 (QB), [2008] IRLR 207.........9.156, 9.157, 9.158, 18.130 RR Donnelly Global Document Solutions Group Ltd v Besagni [2014] ICR 1008.......13.164 RS Components Ltd v Irwin [1974] 1 All ER 41, [1973] ICR 535, [1973] IRLR 239, (1973) 15 KIR 191, [1973] ITR 569, NIRC.............................. 13.75, 13.76, 13AppA.14 RSS (Wessex) Ltd (t/a Rubicon People v Dawson [2013] EWHC 2309 (QB)...............11.107 Rafael Advanced Defence Systems Ltd v Mectron Engenharia, Industria e Commercio SA [2017] EWHC 597 (Comm).............................................................................15.76 Rai v Somerfield Stores Ltd [2004] ICR 656, [2004] IRLR 124....................................9.8 Rainy Sky v SA Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900, [2012] 1 All ER 1137, [2012] 1 All ER (Comm) 1, [2012] Bus LR 313, [2012] 1 Lloyd’s Rep 34, [2011] 2 CLC 923, [2012] BLR 132, 138 Con LR 1, [2011] CILL 3105........12.23, 12.26, 12.28, 12.30 Rank Film Distributors Ltd v Video Information Centre [1980] 3 WLR 487, [1980] 2 All ER 273, [1980] FSR 242, CA...........................................................................15.239 Ranson v Customer Systems plc [2012] EWCA Civ 841, [2012] IRLR 769, (2012) 156(26) SJLB 31.................................................................1.33, 1.36, 3.1, 3.2, 3.11, 3.13, 3.31, 3.47, 3.51, 3.75, 3.79, 3.82, 3.87, 3.88, 3.90, 3.92, 3.97, 3.98, 3.99, 3.100, 3.109, 3.111, 3.114, 3.121, 3.125, 3.127, 3.128, 3.130, 3.131, 3.135, 3App, 4.7, 4.23, 4.36, 4.82, 4.88, 4.162, 4.172, 4.174, 4.203, 4.214, 4.228, 4.230, 4.252, 4.292, 4.299, 4.302, 4.303, 4.304, 4.311, 4.314, 5.37, 5.39, 5.76, 5.77, 11.126, 18.1, 19.17 Rawlinson v Brightside Group UKEAT/0142/17...........................................................9.90 Reading v A-G [1949] 2 KB 232, [1949] 2 All ER 68, 65 TLR 405, CA; [1951] AC 507, [1951] 1 All ER 617, [1951] 1 TLR 480, (1951) 95 SJ 155, HL...... 4.20, 4.21, 4.44, 4.45, 4.47, 4.48, 4.51 Ready Mixed Concrete (South East) Ltd v Minister of Pensions & National Insurance [1968] 2 QB 497, [1968] 2 WLR 775, [1968] 1 All ER 433, 4 KIR 132, (1967) 112 SJ 14.........................................................................2.23, 2.26, 2.31, 2.32, 2.39, 2.52 Reda v Flag [2002] UKPC 38, [2002] IRLR 747...............................................  5.91, 9.8, 9.93 Reed Executive plc v Reed Business Information Ltd [2004] EWCA Civ 887, [2004] 1 WLR 3026, [2004] 4 All ER 942, [2005] CP Rep 4, [2004] Costs LR 662, [2005] FSR 3, (2004) 27(7) IPD 27067, (2004) 148 SJLB 881.............................18.247 Reed Executive plc v Somers (unreported, 20 March 1986), CA....................... 11.96, 11.137, 11.138, 11.156 Regentcrest plc (in liquidation) v Cohen [2001] BCC 494, [2001] 2 BCLC 80.............4.105 Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, [1942] 1 All ER 378, HL.........4.97, 4.130, 4.132, 4.133, 4.134, 4.136, 4.142, 4.159, 4.170 Regus (UK) Ltd v Epcot Solutions Ltd [2008] EWCA Civ 361, [2009] 1 All ER (Comm) 586............................................................................................................12.43 Reid Minty (a firm) v Taylor [2001] EWCA Civ 1723, [2002] 1 WLR 2800, [2002] 2 All ER 150, [2002] CP Rep 12, [2002] CPLR 1, [2002] 1 Costs LR 180, [2002] EMLR 19................................................................................................................14.157 Reid & Sigrist Ltd v Moss & Mechanism Ltd (1932) 49 RPC 461........................ 6App, 16.70 Reilly v Sandwell Metropolitan Borough Council [2018] UKSC 16.............................5.64 Reinhard v Ondra LLP & others [2015] EWHC 26 (Ch), [2016] 2 BCLC 571.............2.68 Rely-A-Bell Burglar & Fire Alarm Co Ltd v Eisler [1926] Ch 609...............................15.14 Renton Inspection & Technical Engineering (Training Division) Ltd v Renton (unreported, 25 October 1991)................................................................................15.99 lxxv

Table of Cases Reuse Collections Ltd v Sendall [2014] EWHC 3852 (QB), [2015] IRLR 226........3.21, 3.40, 3.73, 3App, 4.29, 6.103, 12.95, 13.91 Rex Stewart Jeffries Parker Ginsberg Ltd v Parker [1988] IRLR 483..........5.110, 5.111, 9.14, 9.98, 10.13, 10.42, 11.6, 11.143, 11.180, 11.201, 11.290, 12.48 Reynolds v Times Newspapers Ltd [2001] 2 AC 127, [1999] 3 WLR 1010, [1999] 4 All ER 609, [2000] EMLR 1, [2000] HRLR 134, 7 BHRC 289, (1999) 96(45) LSG 34, (1999) 149 NLJ 1697, (1999) 143 SJLB 270...........................................6.165 Richard Hunt Investments Ltd v Hunt [2017] EWHC 988 (Ch)....................................4.224 Richardson (Inspector of Taxes) v Delaney [2001] STC 1328, [2001] IRLR 663, 74 TC 167, [2001] BTC 392, [2001] STI 936, (2001) 98(31) LSG 37.......................5.104 Richardson v Koeford [1969] 1 WLR 1812, [1969] 3 All ER 1264, CA.................... 5.91, 9.8 Richborough Furniture Ltd, Re [1996] BCC 155, [1996] 1 BCLC 507.........................4.60 Richmond Pharmacology Ltd v Chester Overseas Ltd [2014] EWHC 2692 (Ch), [2014] Bus LR 1110................................................................................................4.122 Ridge v Baldwin [1964] AC 40, [1963] 2 WLR 935, [1963] 2 All ER 66, (1963) 127 JP 295, (1963) 127 JP 251, 61 LGR 369, 37 ALJ 140, 234 LT 423, 113 LJ 716, (1963) 107 SJ 313, HL............................................................................................15.10 Rigby v Ferodo Ltd [1988] ICR 29, [1987] IRLR 516..........................................  9.136, 13.72 Riordan v War Office [1959] 1 WLR 1046, [1959] 3 All ER 552, (1959) 103 SJ 921 CA...........................................................................................................................9.8 Rio Tinto Zinc Corp v Westinghouse Electric Corp (Nos 1 & 2) [1978] AC 547, [1978] 2 WLR 81, [1978] 1 All ER 434, [1978] 1 CMLR 100, (1978) 122 SJ 32.............17.151 Roadchef (Employee Benefits Trustees) Ltd v Ingram Hill [2014] EWHC 109 (Ch)....16.88 Robb v Green [1895] 2 QB 1; [1895] 2 QB 315, CA..........................  3.1, 3.5, 3.7, 3.62, 3.71, 3App, 10.2, 15.83, 15.84, 16.8 Robb v London Borough of Hammersmith & Fulham [1991] ICR 514, [1991] IRLR 72............................................................................................................................5.85 Robertson and Jackson v British Gas Corp [1983] ICR 351, [1983] IRLR 302, CA.....2.84, 2.85 Robinson v Robinson (unreported, 5 October 2003)......................................................15.200 Robinson v Tescom Corp [2008] IRLR 408...................................................................13.43 Rock Refrigeration Ltd v Jones [1997] 1 All ER 1, [1997] ICR 938, [1996] IRLR 675, (1996) 93(41) LSG 29, (1996) 140 SJLB 226..............................  6.167, 9.50, 9.53, 9.55, 9.56, 9.61, 11.286, 11.287, 12.142 Roger Bullivant Ltd v Ellis [1987] ICR 464, [1987] IRLR 491, [1987] FSR 172, CA:.3.62, 3App, 6.5, 6.13, 6.64, 6.121, 10.2, 15.81, 15.84, 15.85, 15.86, 15.97, 15.98, 15.106, 15.107, 15.110, 15.125, 15.135, 15.136, 15.137, 15.138 Rogers v Maddocks [1892] 3 Ch 346, CA......................................................................11.15 Rogers (deceased), Re [2006] EWHC 753 (Ch), [2006] 1 WLR 1577, [2006] 2 All ER 792, [2006] WTLR 691, (2005-06) 8 ITELR 886, (2006) 103(18) LSG 30, (2006) 156 NLJ 644, [2006] NPC 45......................................................................2.68 Rolf v De Guerin [2011] EWCA Civ 78, [2011] CP Rep 24, [2011] BLR 221, [2011] 5 Costs LR 892, [2011] 7 EG 97 (CS), (2011) 108(8) LSG 20, [2011] NPC 17....18.241 Rolls Royce plc v Unite the Union [2009] EWCA Civ 387, [2010] 1 WLR 318, [2010] ICR 1, [2009] IRLR 576, (2009) 106(21) LSG 15, (2009) 153(20) SJLB 38........16.73 Romero Insurance Brokers Ltd v Templeton [2013] EWHC 1198 (QB).............. 11.30, 11.39, 11.158, 11.290, 12.106 Ronbar Enterprises Ltd v Green [1954] 1 WLR 815, [1954] 2 All ER 266, (1954) 98 SJ 369......................................................................................................................12.59 Rookes v Barnard (No 1) [1964] AC 1129, [1964] 2 WLR 269, [1964] 1 All ER 367, [1964] 1 Lloyd’s Rep 28, (1964) 108 SJ 93............................................................16.26 lxxvi

Table of Cases Rose v Dodd (formerly t/a Reynolds & Dodds Solicitors) [2005] EWCA Civ 957, [2006] 1 All ER 464, [2005] ICR 1776, [2005] IRLR 977.....................................13.132 Rosetti Marketing Ltd v Diamond Sofa Co Ltd [2012] EWCA Civ 1021, [2013] 1 All ER (Comm) 308, [2013] Bus LR 543, [2012] CP Rep 45.............................  4.123, 4.128 Rosler v Hilbery [1925] Ch 250......................................................................................17.56 Rossiter v Pendragon [2002] EWCA Civ 745, [2002] 2 CMLR 43, [2002] ICR 1063, [2002] IRLR 483, [2002] Emp LR 735, (2002) 99(24) LSG 34.............................9.116 Ross River Ltd v Cambridge City Football Club Ltd [2007] EWHC 2115 (Ch), [2008] 1 All ER 1004, [2008] 1 All ER (Comm) 1028, 117 Con LR 129, [2007] 41 EG 201 (CS), (2007) 157 NLJ 1507.............................................................................4.40 Ross River Ltd & another v Waveley Commercial Ltd & others [2013] EWCA Civ 910, [2014] 1 BCLC 545, CA............................................................................  4.40, 4.43 Rousillon v Rousillon [1880] LR 14 Ch 351...................................................... 17.106, 17.108 Routh v Jones [1947] 1 All ER 758, [1947] WN 205, (1947) 91 SJ 354..................6.96, 11.10 Royal Bank of Canada v Centrale Raffeisen-Boorenleenbank [2004] 1 Lloyd’s Rep 471..........................................................................................................................17.83 Royal Bank of Canada v Secretary of State for Defence [2003] EWHC 1841 (Ch)......18.265 Royal Bank of Scotland plc v Hicks [2011] EWHC 287 (Ch).......................................17.87 Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378, [1995] 3 WLR 64, [1995] 3 All ER 97, [1995] BCC 899, (1995) 92(27) LSG 33, (1995) 145 NLJ 888, (1995) 139 SJLB 146, (1995) 70 P & CR D12.......................................................  16.103, 19.59 Royal Mail Group Ltd v Communication Workers Union [2009] ICR 357, [2009] IRLR 108, (2008) 152(47) SJLB 30.......................................................................13.180 Rush Hair Ltd v Hayley Gibson-Forbes & SJ Forbes Ltd [2016] EWHC 2589 (QB), [2017] IRLR 48........................................................................ 11.24, 11.25, 11.27, 11.44, 11.72, 11.288, 12.141, 13.99 Rynda (UK) Ltd v Rhijnsburger [2015] EWCA Civ 75, [2015] ICR 1300, [2015] IRLR 394.....................................................................................................  13.175, 19.97 S S v Chapman [2008] EWCA Civ 800, [2008] ELR 603, (2008) 152 (22) SJLB 29......18.242 S-B (children) (care proceedings: standard of proof), Re [2009] UKSC 17, [2010] 1 AC 678, [2010] 2 WLR 238, [2010] 1 All ER 705, [2010] PTSR 456, [2010] 1 FLR 1161, [2010] 1 FCR 321, [2010] Fam Law 231, (2009) 153(48) SJLB 33....16.23 SBJ Stephenson Ltd v Mandy [2000] IRLR 233, [2000] FSR 286................3.63, 5.127, 6.70, 6.96, 6.101, 10.28, 11.36, 11.208, 11.212, 11.213, 11.215, 11.292, 14.133, 14.162, 14.167, 15.32, 16.29 SES Contracting Ltd v UK Coal plc [2007] EWCA Civ 791, [2007] CP Rep 46, [2007] 5 Costs LR 758, [2007] 33 EG 90 (CS)......................................................14.128 SG & R Valuation Service Co v Boudrais & others 2008] EWHC 1340 (QB), [2008] IRLR 770.....................................................................  5.127, 9.106, 9.107, 11.92, 13.16, 13.17, 13.18, 15.34, 15.35 SKA, PLM v CRH [2012] EWHC 2236 (QB)...............................................................6.151 SW Strange Ltd v Mann [1965] 1 WLR 629, [1965] 1 All ER 1069, (1965) 109 SJ 352.......................................................................................... 11.73, 11.98, 11.130, 12.11 Saatchi & Saatchi Co plc v Saatchi (unreported, 13 February 1995)............ 3.70, 3App, 4.181 Sadler v Imperial Life Assurance Co of Canada Ltd [1988] IRLR 388............11.256, 11.271, 12.47, 12.50, 12.51, 12.52, 12.53, 12.54, 12.130 Sal Oppenheim JR & Cie Kgaa v Rotherwood (UK) Ltd (unreported, 19 April 1996), CA...........................................................................................................................15.207 Saltman Engineering Co Ltd v Campbell Engineering Co Ltd (1948) [1963] 3 All ER 413 (Note), (1948) 65 RPC 203, CA................................  6.10, 6.11, 15.79, 16.37, 16.70 Salveson v Simons [1994] ICR 409, [1994] IRLR 52...............................................  2.56, 2.58 lxxvii

Table of Cases Samengo-Turner v J & H Marsh McLennan (Services) Ltd [2007] EWCA Civ 723, [2007] 2 All ER (Comm) 813, [2007] CP Rep 45, [2007] 2 CLC 104, [2007] ILPr 52, [2008] ICR 18, [2008] IRLR 237.............................9.61, 17.10, 17.23, 17.25, 17.26, 17.78, 17.79, 17.80, 17.81 Sanders v Parry [1967] 1 WLR 753, [1967] 2 All ER 803, (1967) 111 SJ 296........  1.33, 3.50, 3.58, 3.128, 3App, 16.7, 16.8 Satnam Investments Ltd v Dunlop Heywood & Co Ltd [1999] 3 All ER 652, [1999] 1 BCLC 385, [1999] FSR 722, [1999] Lloyd’s Rep PN 201, [1998] EG 190 (CS), (1999) 96(6) LSG 33, (1999) 96(2) LSG 30, [1998] NPC 169, CA...............4.131, 16.48 Savings Advice Ltd v EDF Energy Customers plc [2017] EWHC B1 (Costs)..............18.247 Saxton (deceased), Re [1962] 1 WLR 859, [1962] 2 All ER 618, (1962) 106 SJ 550...15.174, 15.175 Sayers v Clarke Walker [2002] BCLC 16.......................................................................14.170 Schenavai v Kreischer (Case 266/85) [1987] ECR 239, [1987] 3 CMLR 782.......17.21, 17.45 Schering Chemicals Ltd v Falkman Ltd [1982] QB 1, [1981] 2 WLR 848, [1981] 2 All ER 321, (1981) 125 SJ 342.................................................................  6.122, 6.155, 6.163 Schroeder Music Publishing Co Ltd v Macaulay see Macaulay (formerly Instone) v Schroeder Music Publishing Co Ltd Scorer v Seymour-Johns [1966] 1 WLR 1419, [1966] 3 All ER 347, 1 KIR 303, (1966) 110 SJ 526................................................................................10.24, 11.70, 11.76, 11.97, 11.99, 11.140, 12.48 Scottish Co-operative Wholesale Ltd v Meyer [1959] AC 324, [1958] 3 WLR 404, [1958] 3 All ER 66, 1958 SC (HL) 40, 1958 SLT 241, (1958) 102 SJ 617............4.104 Scully UK Ltd v Lee [1998] IRLR 259, CA.................................... 6.117, 6.119, 11.10, 11.17, 11.18, 11.59, 11.95, 12.18, 12.40, 12.107, 14.94, 17.152 Seaconsar (Far East) Ltd v Bank Markazi Jomhuri Islam Iran (service outside jurisdiction) [1994] 1 AC 438, [1993] 3 WLR 756, [1993] 4 All ER 456, [1994] 1 Lloyd’s Rep 1, [1994] ILPr 678, (1993) 143 NLJ 1479, (1993) 137 SJLB 239........17.57 Seager v Copydex (No 1) [1967] 1 WLR 923, [1967] 2 All ER 415, 2 KIR 828, [1967] FSR 211, [1967] RPC 349, (1967) 111 SJ 335...................................  6.138, 16.44, 16.49 Seager v Copydex Ltd (No 2) [1969] 1 WLR 809, [1969] 2 All ER 718, [1969] FSR 261, [1969] RPC 250, (1969) 113 SJ 281............................................16.32, 16.33, 16.64 Sean Hanna Ltd v Barber [2015] EWHC 3113 (QB).....................................................11.72 Secretary of State for Business, Enterprise & Regulatory Reform v Neufeld and Howe [2009] EWCA Civ 280, [2009] 3 All ER 790, [2009] BCC 687, [2009] 2 BCLC 273, [2009] ICR 1183, [2009] IRLR 475, [2009] BPIR 909, (2009) 106(15) LSG 15:.2.63, 2.66 Secretary of State for Business, Innovation & Skills v Akbar [2017] EWHC 2856 (Ch):.4.107 Secretary of State for Business, Innovation & Skills v Chohan [2013] EWHC 680 (Ch), [2015] BCC 755, [2013] Lloyd’s Rep FC 351..............................................4.66 Secretary of State for Business, Innovation & Skills v Knight UKEAT/0073/13..........2.35 Secretary of State for Trade & Industry v Bottrill [2000] 1 All ER 915, [1999] BCC 177, [2000] 2 BCLC 448, [1999] ICR 592, [1999] IRLR 326, (1999) 96(10) LSG 30, (1999) 143 SJLB 73, CA..................................................................................2.62 Secretary of State for Trade & Industry v Deverell [2001] Ch 340, [2000] 2 WLR 907, [2000] 2 All ER 365, [2000] BCC 1057, [2000] 2 BCLC 133, (2000) 97(3) LSG 35, (2000) 144 SJLB 49..........................................................................................4.73 Secretary of State for Trade & Industry v Elms (unreported, 16 January 1997)............4.60 Secretary of State for Trade & Industry v Tjolle [1998] BCC 282, [1998] 1 BCLC 333, (1997) 94(24) LSG 31, (1997) 141 SJLB 119...................................................  4.64, 4.70 Sectrack NV v Satamatics Ltd [2007] EWHC 3003 (Comm), [2007] All ER (D) 312....................................................................................................... 14.45, 14.60, 15.86 Security & Facilities Division v Hayes [2001] IRLR 81, CA.........................................13.30 Seef v Ho [2011] EWCA Civ 186..................................................................................18.241 Sendo Holdings plc (in administration) v Brogan [2005] EWHC 2040 (QB)................10.33 Series 5 Software v Clarke [1996] 1 All ER 853, [1996] CLC 631, [1996] FSR 273, (1996) 19(3) IPD 19024....................................................................... 14.21, 14.22, 14.67 lxxviii

Table of Cases Seward Refrigeration Ltd, Re [1997] 1 All ER 1, [1997] ICR 938, [1996] IRLR 675, (1996) 93 (41) LSG 29, (1996) 140 SJLB 226...................................................9.56, 9.61 Shanks v Unilever plc [2014] EWHC 1647 (Pat), [2014] RPC 29, (2014) 158(23) SJLB 41...................................................................................................................3.157 Sharma v Sharma [2013] EWCA Civ 1287, [2014] BCC 73, [2014] WTLR 111.........4.149, 4.151 Sheet Metal Components Ltd v Plumridge [1974] ICR 373, [1974] IRLR 86, [1974] ITR 238........................................................................................................... 9.133, 13.45 Sheldon v RHM Outhwaite (Underwriting Agencies) Ltd [1996] AC 102, [1995] 2 WLR 570, [1995] 2 All ER 558, [1995] 2 Lloyd’s Rep 197, [1995] CLC 655, [1995] 4 Re LR 168, (1995) 92(22) LSG 41, (1995) 45 NLJ 687, (1995) 139 SJLB 119.................................................................................................................16.127 Shelfer v City of London Electric Lighting Co (No 1) [1895] 1 Ch 287........................16.57 Shenavai v Kreischer (Case 266/85) [1987] ECR 239, [1987] 3 CMLR 782........ 17.21, 17.45 Shepherds Investments Ltd v Walters & others [2006] EWHC 836 (Ch), [2007] 2 BCLC 202, [2007] IRLR 110, [2007] FSR 15, (2006) 150 SJLB 536........1.36, 3.4, 3.12, 3.13, 3.32, 3.34, 3.36, 3.69, 3.121, 3.138, 4.25, 4.26, 4.27, 4.68, 4.174, 4.185, 4.188, 4.192, 4.193, 4.195, 4.197, 4.198, 4.201, 4.203, 4.206, 4.238, 4.242, 4.262, 19.18 Siemens VAI Metal Technologies Ltd v Paul Wurth Ltd (unreported, 1 May 2008)......14.168, 15.113, 15.121 Simpkin v Berkeley Group Holdings plc [2017] EWHC 1472 (QB), [2017] 4 WLR 116.................................................................................................................. 8AppA2.18 Sinclair Investment Holdings v Cushnie [2004] EWHC 218 (Ch).................................14.60 Singh v Cargill TSF Asia Ptr Ltd [2012] SGCA 42.............................  11.257, 11.259, 11.260, 11.261, 11.266 Singularis Holdings Ltd (in official liquidation) v Dalwa Capital Markets Europe Ltd [2017] EWHC 257 (Ch), [2017] 2 All ER (Comm) 445, [2017] Bus LR 1386, [2017] 1 Lloyd’s Rep 226, [2017] 1 BCLC 625, [2017] PNLR 24........................4.107 Sintra Homes Ltd v Beard [2007] EWHC 3071 (Ch).....................................................4.264 Sir WC Leng & Co Ltd v Andrews see WC Leng & Co Ltd v Andrews Skipskreditforeningen v Emperor Navigaion [1998] 1 Lloyd’s Rep 66, [1997] 2 BCLC 398, [1997] CLC 1151.................................................................................12.43 Skyrail Oceanic Ltd (t/a Goodmos Tours) v Coleman [1980] ICR 596, [1980] IRLR 226................................................................................................................. 13.74, 18.99 Smith v Reliance Water Controls Ltd [2003] EWCA Civ 1153, [2004] ECC 38, [2003] Eu LR 874, [2003] All ER (D) 506, CA.............................................................2.16, 2.17 Smith v Secretary of State for Energy & Climate Change [2013] EWCA Civ 1585, [2014] 1 WLR 2283................................................................................................14.125 Smith & Nephew plc v Convatec Technologies Inc (No 2) [2013] EWHC 3955 (Pat), [2014] RPC 22; [2015] EWCA Civ 607, [2015] RPC 32............................15.150, 15.151 Smith & others v Trustees of Brooklands College UKEAT/0128/11/ZT.......................13.153 Smithkline Beecham plc v Apotex Europe Ltd (No 3) [2005] EWHC 1655 (Ch), [2006] 1 WLR 872, [2006] 2 All ER 53, [2005] FSR 44, (2005) 28(10) IPD 28077, ChD; [2006] EWCA Civ 658, [2007] Ch 71, [2006] 3 WLR 1146, [2006] 4 All ER 1078, [2006] CP Rep 39, [2007] FSR 6, (2006) 29(10) IPD 29072, (2006) 103(23) LSG 32, (2006) 156 NLJ 952, CA.................................................14.58 Smithkline Beecham Biologicals SA v Connaught Laboratories Inc (disclosure of documents) [1999] 4 All ER 498, [1999] CPLR 505, [2000] FSR 1, (2000) 51 BMLR 91, (1999) 22(10) IPD 22092.....................................................................14.98 Smithton Ltd (formerly Hobart Capital Management Ltd) v Naggar [2014] EWCA Civ 939, [2015] 1 WLR 189, [2014] BCC 482, [2015] 2 BCLC 22, (2014) 158(29) SJLB 37..............................................................................4.57, 4.59, 4.61, 4.62, 4.63, 4.66, 4.67, 4.69, 4.70, 4.71 lxxix

Table of Cases Socha and others v Szpital Specjalistczny im A Falkiewicza we Wroclawiu (Case C-146/16) [2018] IRLR 72.....................................................................................13.69 Sociedad General de Autores y Editores de España (SGAE) v Rafael Hoteles SA (Case C-306/05) [2007] Bus LR 521, [2006] ECR I-11519, [2007] ECDR 2, [2007] IP&T 521.....................................................................................................7.32 Société Générale, London Branch v Geys [2012] UKSC 63, [2013] 1 AC 523, [2013] 2 WLR 50, [2013] 1 All ER 1061, [2013] ICR 11, [2013] IRLR 122..............5.117, 9.14, 9.25, 9.30, 9.31, 9.32, 9.33, 9.44, 9.45, 9.46, 9.47, 9.55, 9.112, 9.123, 9.124, 13.72, 15.8, 18.115 Société Nationale Industrielle Aerospatiale v Lee Kui Jak [1987] AC 871, [1987] 3 WLR 59, [1987] 3 All ER 510, (1987) 84 LSG 2048.............................................17.83 Société Technique Minière v Machinenbau ULM (Case 56/65) [1966] ECR 235, [1966] CMLR 357...................................................................................................10.76 Sodexo Ltd v Guttridge [2009] EWCA Civ 729, [2009] ICR 1486, [2009] IRLR 721, (2009) 106(30) LSG 13...........................................................................................13.146 Solectron Scotland Ltd v Roper [2004] IRLR 4...............................9.137, 13.46, 13.49, 13.51, 13.53, 13.54, 13.58, 13.59, 13.170 Sony Computer Entertainment Inc v Owen (t/a Neo Technologies) [2002] EWHC 45 (Ch), [2002] ECDR 27, [2002] EMLR 34, [2002] Masons CLR 24, (2002) 25(5) IPD 25031, (2002) 25(5) IPD 25030......................................................................7.49 Sony Corp v Anand [1981] Com LR 55, [1981] FSR 398..............................................15.243 South Carolina Insurance Co v Assurantie Maatschappij de Zeven Provincien NV [1987] AC 24, [1986] 3 WLR 398, [1986] 3 All ER 487, [1986] 2 Lloyd’s Rep 317, [1987] ECC 1, (1986) 83 LSG 2659, (1986) 136 NLJ 751, (1986) 130 SJ 634, HL........................................................................................................... 17.86, 17.88 Southern Counties Fresh Foods Ltd, Re [2008] EWHC 810 (Ch), [2009] 1 FLR 747, [2009] 2 FCR 631, [2008] WTLR 1675.................................................................4.104 Southern Cross Healthcare Co Ltd v Perkins [2010] EWCA Civ 1442, [2011] ICR 285, [2011] IRLR 247........................................................................................ 2.87, 2.89 Spaceright Europe Ltd v Baillavoine [2011] EWCA Civ 1565, [2012] 2 All ER 812, [2012] ICR 520, [2012] IRLR 111.........................................................................13.165 Spafax (1965) v Dommett (1972) 116 SJ 711, CA............................................  11.139, 11.167 Spafax Ltd v Harrison [1980] IRLR 442, CA......................................6.88, 9.110, 10.21, 11.8, 11.142, 11.163, 11.290 Specialist Recruiters International Ltd v Taylor (unreported, 4 July 1989)......  11.139, 11.156, 11.203 Spectron Group Ltd v GFI Net Inc (unreported, 12 December 2000)............................14.153 Speed Seal Products Ltd v Paddington [1985] 1 WLR 1327, [1986] 1 All ER 91, [1986] FSR 309, (1985) 135 NLJ 935...........................................................6.141, 15.129 Spencer v Marchington [1988] IRLR 392............................................................. 9.105, 11.97 Spiliada Maritime Corp v Cansulex Ltd, The Spiliada [1987] AC 460, [1986] 3 WLR 972, [1986] 3 All ER 843, [1987] 1 Lloyd’s Rep 1, [1987] ECC 168, [1987] 1 FTLR 103, (1987) 84 LSG 113, (1986) 136 NLJ 1137, (1986) 130 SJ 925...........17.58, 17.71 Spink (Bournemouth) Ltd v Spink [1936] Ch 544, [1936] 1 All ER 596.......................13.105 Sports Management Group Ltd (in liquidaton), Re [2016] BPIR 1224..........................4.66 Spotless Facilities Services (Uxbridge) Ltd v Jones & others [2012] EWHC 4391 (QB)..............................................................................................  11.107, 13.146, 13.177 Stack v Ajar-Tec Ltd [2015] EWCA Civ 46, [2015] IRLR 474.....................................2.35 Staffordshire Sentinel Newspapers Ltd v Potter [2004] IRLR 752, EAT.......................2.39 Standard Life Health Ltd v Gorman [2009] EWCA Civ 1292, [2010] IRLR 233.........9.107, 11.92, 15.36, 15.39 Standex International Ltd v CB Blades Ltd [1976] FSR 114.........................................11.94 Starcomm Ltd v Knapman & others [2005] EWHC 3344 (Ch)............................... 3.70, 3App lxxx

Table of Cases Starglade Properties Ltd v Roland Nash [2010] EWCA Civ 1314, [2011] Lloyd’s Rep FC 102, [2011] 1 P & CR DG17..........................................  14AppA1.25, 16.103, 19.59 State Trading Corp of India v Golodetz [1989] 2 Lloyd’s Rep 277................................9.158 Steepleglade Ltd v Stratford Investments Ltd [1976] FSR 3..........................................14.153 Steffen Hair Designs v Wright (application for interim injunction) [2004] EWHC 2995 (Ch)................................................................................................................12.45 Steiner (UK) Ltd v Spray (unreported, 1 December 1993)............................................11.72 Stenhouse Australia Ltd v Phillips [1974] AC 391, [1974] 2 WLR 134, [1974] 1 All ER 117, [1974] 1 Lloyd’s Rep 1, (1973) 117 SJ 875, PC................ 1.39, 1.40, 10.7, 10.8, 10.15, 10.19, 10.35, 10.36, 10.37, 11.6, 11.29, 11.132, 11.200, 11.235, 11.248, 11.255, 11.273, 12.10, 12.19, 13.106, 13.107 Stephens v Avery [1988] Ch 449, [1988] 2 WLR 1280, [1988] 2 All ER 477, [1988] FSR 510, (1988) 85(25) LSG 45, (1988) 138 NLJ Rep 69, (1988) 132 SJ 822.....6.155 Stephenson v Delphi Diesel Systems Ltd [2003] ICR 471.............................................2.29 Stephenson v Orca Properties Ltd [1989] 2 EGLR 129.................................................9.8 Stevenson Jordan & Harrison Ltd v MacDonald & Evans [1952] 1 TLR 101, (1952) 69 RPC 10....................................................................................................... 2.21, 6App Stilk v Myrick (1809) 2 Camp 318.................................................................................13.88 Stirling District Council v Allan 1995 SC 420, 1995 SLT 1255, [1995] ICR 1082, [1995] IRLR 301.....................................................................................................13.177 Strongman (1945) Ltd v Sincock [1955] 2 QB 525, [1955] 3 WLR 360, [1955] 3 All ER 90, (1955) 99 SJ 540.........................................................................................9.59 Stuart, Re [1897] 2 Ch 583.............................................................................................4.220 Stupples v Stupples & Co (High Wycombe) Ltd [2012] EWHC 1226 (Ch), [2013] 1 BCLC 729...........................................................................................  4.234, 16.93, 16.97 Subaru Technica International Inc v Burns [2001] All ER (D) 195 (Dec).....................15.18 Sukhoruchkin v Van Bejestein [2014] EWCA Civ 399...........................................  4.78, 14.20 Sulamerica CIA Naciona de Seguros SA v Enesa Engenharia SA [2012] EWCA Civ 638, [2013] 1 WLR 102, [2012] 2 All ER (Comm) 795, [2012] 1 Lloyd’s Rep 671, [2012] 2 CLC 216, [2012] Lloyd’s Rep IR 405..............................................18.257 Sun Printers Ltd v Westminster Press Ltd [1982] IRLR 292, (1982) 126 SJ 260..........6.142 Sun Valley Foods Ltd v Vincent [2000] FSR 825.......................................  15.86, 15.90, 15.96 Sunrise Brokers LLP v Rodgers [2014] EWCA Civ 1373, [2015] ICR 272, [2015] IRLR 57.......................................................................... 5.27, 9.104, 9.107, 9.111, 9.112, 9.113, 9.114, 9.115, 9.143, 11.92, 11.243, 14.13, 15.3, 15.37, 15.39, 15.44, 15.52, 15.55, 15.71 Supercuts Ltd v Woods (unreported, 23 April 1986)......................................................11.72 Swain v West (Butchers) Ltd [1936] 3 All ER 261, CA.................... 3.91, 3.103, 3.104, 3.112, 3.114, 3.117, 3.138, 5.37, 5.40, 5.42 Swain Mason v Mills & Reeve (a firm) [2012] EWCA Civ 498, [2012] STC 1760, [2012] 4 Costs LO 511, [2012] WTLR 1827, [2012] STI 1511.............................18.242 Sweeny v Astle [1923] NZLR 1198................................................................................11.124 Swindle v Harrison [1997] 4 All ER 705, [1997] PNLR 641, [1997] NPC 50..............16.92 Swithenbank Foods Ltd v Bowers [2002] EWHC 2257 (QB), [2002] 2 All ER (Comm) 974...................................................................................................................17.29, 17.31 Sybron Corp v Rochem Ltd [1984] Ch 112, [1983] 3 WLR 713, [1983] 2 All ER 707, [1983] ICR 801, [1983] IRLR 253, (1983) 127 SJ 391..................... 1.35, 3.4, 3.90, 3.91, 3.97, 3.102, 3.114, 3.135, 4.232, 5.37 Symbian Ltd v Christensen [2000] UKCLR 879, [2001] IRLR 77, [2001] Masons CLR 75, CA.....................................................................................3.19, 3.83, 5.28, 5.29, 5.30, 5.129, 9.4, 12.146, 15.48, 15.53 lxxxi

Table of Cases Symphony Group plc v Hodgson [1994] QB 179, [1993] 3 WLR 830, [1993] 4 All ER 143, (1993) 143 NLJ 725, (1993) 137 SJLB 134, CA............................................14.162 Systematica Ltd v London Computer Centre Ltd [1983] FSR 313................................15.201 Systems Reliability Holdings plc v Smith [1990] IRLR 377.......................  6.86, 6.121, 6App, 10.17, 10.51 T T Lucas & Co Ltd v Mitchell [1974] Ch 129, [1972] 3 WLR 934, [1972] 3 All ER 689, (1972) 116 SJ 711, CA.............................................................11.203, 12.49, 12.58, 12.59 TCP Europe Ltd v Perry [2012] EWHC 1940 (QB).......................................................4.49 TFS Derivatives v Morgan [2004] EWHC 3181 (QB), [2005] IRLR 246...............11.1, 11.21, 11.46, 11.63, 11.91, 11.92, 11.102, 11.104, 11.107, 11.109, 11.221, 11.242, 11.247, 11.288, 12.11, 12.16, 12.19, 12.39, 12.46, 12.53, 12.64, 12.92, 12.97, 12.101, 12.117, 12.122, 13.99, 13.100, 15.66, 16.58 TSC Europe (UK) Ltd v Massey [1999] IRLR 22...........................10.17, 10.28, 10.45, 10.46, 10.48, 11.81, 11.208, 11.211, 11.214, 11.216, 11.293, 13.96, 13.102, 14.124 Tamang v Act Security Ltd UKEAT/0046/12/BA..........................................................13.170 Tang Man Sit (deceased) v Capacious Investments Ltd [1996] AC 514, [1996] 2 WLR 192, [1996] 1 All ER 193........................................................................................16.52 Tapere v South London & Maudsley NHS Trust [2009] ICR 1563, [2009] IRLR 972................................................................................................ 13.144, 13.145, 13.146 Target Holdings Ltd v Redferns [1996] AC 421, [1995] 3 WLR 352, [1995] 3 All ER 785, [1995] CLC 1052, (1995) 139 SJLB 195, [1995] NPC 136...........................16.90 Tartsinis v Navona Management Co [2015] EWHC 57 (Comm)...................................12.67 Tata Consultancy Services Ltd v Prashant Ashok Singh Sengar [2014] EWHC 2304 (QB)........................................................................................................................6.11 Tate Access Floors Inc v Boswell [1991] Ch 512, [1991] 2 WLR 304, [1990] 3 All ER 303, (1990) 140 NLJ 963, (1990) 134 SJ 1227.......................................................15.253 Taylor v Connex South Eastern Ltd EAT/1243/99.........................................................13.154 Taylor Stuart & Co v Croft (unreported, 7 May 1997)............. 11.123, 11.201, 11.285, 11.290 Technograph Printed Circuits Ltd v Chalwyn Ltd [1967] FSR 307, [1967] RPC 339...5.34, 12.134 Tees Esk & Wear Valleys NHS Foundation Trust v Harland [2017] ICR 760, [2017] IRLR 486................................................................................................................13.175 Terrapin Ltd v Builders’ Supply Co (Hayes) Ltd (No 1) [1960] RPC 128, (1959) 174 EG 1033................................................................................. 15.79, 15.80, 15.98, 15.129, 15.130, 15.133, 15.135, 15.136, 15.138 Terrapin Ltd v Builders’ Supply Co (Hayes) Ltd [1967] RPC 375................................6.72 Tesco Stores Ltd v Pook [2003] EWHC 823 (Ch), [2004] IRLR 618......................  3.94, 3.95, 3.114, 4.234 Thakkar & another v Patel & another [2017] EWCA Civ 117, [2017] 2 Costs LR 233.............................................................................................................  18.241, 18.259 Theakston v MGN Ltd [2002] EWHC 137 (QB), [2002] EMLR 22..............................6.150 Thermascan Ltd v Norman [2009] EWHC 3694 (Ch), [2011] BCC 535..............4.264, 4.279, 4.287 Thermax Ltd v Schott Industrial Glass Ltd [1981] FSR 289.................15.197, 15.207, 15.210 Thevarajah v Riordan & others [2015] UKSC 78, [2016] 1 WLR 76, [2017] 1 All ER 329, [2015] 6 Costs LR 1119..................................................................................14.116 lxxxii

Table of Cases Thomas v Thomas (1842) 2 QB 851, 114 ER 330.........................................................13.83 Thomas (Hugh) v Farr plc [2007] EWCA Civ 118, [2007] ICR 932, [2007] IRLR 419, (2007) 151 SJLB 296.................................................................. 6.53, 6.90, 6.119, 6App, 11.3, 11.48, 11.56, 11.57, 11.59, 11.60, 11.65, 11.71, 11.106, 11.288, 12.12, 14.94, 16.73 Thomas (Huw) v Hanover Park Commercial Ltd see Thomas (Hugh) v Farr plc Thomas Bates & Son Ltd v Wyndham’s (Lingerie) Ltd [1981] 1 WLR 505, [1981] 1 All ER 1077, (1981) 41 P & CR 345, (1980) 257 EG 381, (1981) 125 SJ 32........12.65 Thomas Marshall (Exports) Ltd v Guinle [1979] Ch 227, [1978] 3 WLR 116, [1978] 3 All ER 193, [1978] ICR 905, [1978] IRLR 174, [1979] FSR 208, (1978) 122 SJ 295................................................................................................. 1.33, 3.20, 3.43, 3App, 5.24, 6.36, 6.88, 9.41, 10.22, 15.20 Thompson v Walton Car Delivery & BRS Automotive Ltd [1997] IRLR 343...............13.170 Thomson v Berkhamsted Collegiate School [2009] EWHC 2374 (QB), [2010] CP Rep 5, [2009] 6 Costs LR 859, (2009) 159 NLJ 1440............................................14.165 Thomson Ecology Ltd v APEM Ltd [2014] IRLR 184.................. 1.33, 1.35, 3.54, 3.57, 3.60, 3.80, 3.81, 3.83, 3.99, 3.115, 3.122, 3.125, 3App, 5.30, 5.35, 5.129, 18.1 Thorne v Heard [1894] 1 Ch 599....................................................................................16.121 Three Rivers DC v Bank of England (No 4) [2002] EWCA Civ 1182, [2003] 1 WLR 210, [2002] 4 All ER 881, [2003] CP Rep 9, [2003] CPLR 181, (2002) 99(39) LSG 40....................................................................................................................14.129 Threlfall v ECD Insght Ltd [2012] EWHC 3543 (QB), [2013] IRLR 185.............. 3.48, 3App, 4.31, 4.315, 11.126 Thurstan Hoskin v Allbright (t/a Jewill Hill & Bennett) [2002] EWCA Civ 249..........11.3, 11.178, 11.273, 11.275, 13.109, 14.118 Tibbles v SIG plc (t/a Asphaltic Roofing Supplies) [2012] EWCA Civ 518, [2012] 1 WLR 2591, [2012] 4 All ER 259, [2012] CP Rep 32, [2013] 1 Costs LO 41........11.276 Tiffin v Lester Aldridge [2012] 1 WLR 1887.................................................................2.68 Tillery Valley Foods Ltd v Channel Four Television Corp [2004] EWHC 1075 (Ch), (2004) 101(22) LSG 31...........................................................................................6.162 Tillman v Egon Zehnder Ltd [2017] EWCA Civ 1054, [2017] IRLR 906.....1.22, 11.4, 11.17, 11.19, 11.20, 11.21, 11.22, 11.30, 11.69, 11.134, 11.180, 11.237, 12.22, 12.50, 12.51, 12.99, 12App Tim Russ & Co (a firm) v Robertson [2011] EWHC 3470 (Ch) ........... 11.50, 11.141, 11.289, 12.97, 13.42, 13.44, 13.57, 13.58, 13.89 Tithebarn Ltd v Hubbard (unreported, Lexis 7 November 1991/IRLIB 449)...........3.55, 3.56, 3.57, 3App Total & E & P Soudan SA v Edmonds [2007] EWCA Civ 50, [2007] CP Rep 20, (2007) 104(9) LSG 30, (2007) 151 SJLB 195........................................................14.128 Total Network SL v HMRC [2008] UKHL 19, [2008] 1 AC 1174, [2008] 2 WLR 711, [2008] 2 All ER 413, [2008] STC 644, [2008] BPIR 699, [2008] BTC 5216, [2008] BVC 340, [2008] STI 938, (2008) 152(12) SJLB 29...............14AppA1.23, 19.47 Towers v Premier Waste Management Ltd [2011] EWCA Civ 923, [2012] BCC 72, [2012] 1 BCLC 67, [2012] IRLR 73............................................4.94, 4.160, 4.169, 4.222 Townsend v Jarman [1900] 2 Ch 698................................................................  13.182, 13.186 Towry EJ Ltd v Bennett [2012] EWHC 224 (QB)......................... 6App, 10.32, 11.12, 11.120, 11.121, 11.130, 11.132, 11.203, 13.184, 16.3 lxxxiii

Table of Cases Tradition Financial Services Ltd v Gamberoni [2017] EWHC 768 (QB), [2017] IRLR 698............................................................................................... 11.6, 11.9, 11.22, 11.39, 11.52, 11.69, 11.114, 11.240, 11.288, 12.138, 13.24, 13.25, 15.68 Transvaal Lands Co v New Belgium (Transvaal) Land & Developmet Co [1914] 2 Ch 488..........................................................................................................................16.83 Trego v Hunt [1896] AC 7................................................................................  11.118, 11.124 Trendtex Trading Corp v Credit Suisse [1982] AC 679, [1981] 3 WLR 766, [1981] 3 All ER 520, [1981] Com LR 262, (1981) 125 SJ 761............................................13.181 Triplex Safety Glass Co Ltd v Scorah [1938] Ch 211, [1937] 4 All ER 693, (1938) 55 RPC 21....................................................................................................  3.143, 5.7, 10.16 Trussed Steel Concrete Co Ltd v Green [1946] Ch 115.................................................2.62 Tullett Prebon Group Ltd v Ghaleb-El Hajjali [2008] EWHC 1924 (QB), [2008] IRLR 760................................................................................................ 11.283, 11.285, 12.148, 13.25, 18.95 Tullett Prebon plc v BGC Brokers LP [2009] EWHC 819 (QB)....................................15.192 Tullett Prebon plc v BGC Brokers LP [2010] EWHC 484 (QB), [2010] IRLR 648, (2010) 154(12) SJLB 37; [2011] EWCA Civ 131, [2011] IRLR 420.......3.60, 3.61, 3.76, 3.126, 3App, 5.30, 5.129, 6.134, 9.4, 9.68, 9.69, 9.71, 9.150, 9.153, 9.154, 9.155, 9.158, 9.159, 10.24, 11.148, 11.221, 11.227, 11.242, 11.244, 11.245, 11.265, 11.268, 12.56, 12.57, 14AppA1.15, 15.50, 15.54, 15.57, 15.64, 15.69, 15.115, 15.121, 15.126, 15.146, 18.51, 18.69, 18.95, 19.2, 19.91, 19.108 Turner v Commonwealth & British Minerals Ltd [2000] IRLR 114, CA............  6.115, 11.14, 11.55, 13.99, 13.100, 13.106 Turner v East Midlands Trains Ltd [2012] EWCA Civ 1470, [2013] 3 All ER 375, [2013] ICR 525, [2013] IRLR 107.........................................................................8.25 Turner v Grovit (Case C-159/02) [2005] 1 AC 101, [2004] 3 WLR 1193, [2004] All ER (EC) 485, [2004] 2 All ER (Comm) 381, [2004] 2 Lloyd’s Rep 169, [2004] ECR I-3565, [2004] 1 CLC 864, [2004] ILPr 25, [2005] ICR 23, [2004] IRLR 899, ECJ..................................................................................................................17.73 Turner v Sawdon & Co [1901] 2 KB 653.......................................................................15.27 Twentieth Century Fox Film Corp v Tryrare Ltd [1991] FSR 58...................................15.242 Twin Benefits Ltd v Barker [2017] EWHC 1412 (Ch)...................................................17.56 Twinsectra v Yardley [2002] UKHL 12, [2002] 2 AC 164, [2002] 2 WLR 802, [2002] 2 All ER 377, [2002] PNLR 30, [2002] WTLR 423, [2002] 38 EG 204 (CS), (2002) 99(19) LSG 32, (2002) 152 NLJ 469, (2002) 146 SJLB 84, [2002] NPC 47.................................................................................................................. 16.103, 19.59 U UBS AG (London Branch) v Kommunale Wasserwerke Leipzig GmbH [2017] EWCA Civ 1567, [2017] 2 Lloyd’s Rep 621...............................................  16.84, 16.103, 16.125 UBS Wealth Management (UK) Ltd v Vestra Wealth LLP [2008] EWHC 1974 (QB), [2008] IRLR 965, (2008) 105(37) LSG 21.............................3.3, 3.4, 3.37, 3.121, 15.86, 15.98, 15.101, 15.103, 15.108, 15.109, 15.114, 15.121, 19.2, 19.27, 19.65 UK Power Reserve v Read [2014] EWHC 66 (Ch)........................  6.118, 11.20, 11.21, 11.60, 11.61, 11.65, 11.288, 12.44, 12.54, 12.55, 12.60, 14.94 lxxxiv

Table of Cases UKLI Ltd, Re [2013] EWHC 680 (Ch), [2015] BCC 755.......................  4.61, 4.64, 4.65, 4.72 Uber BV & others v Aslam & others [2018] IRLR 97...................................................2.13 Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch), [2006] FSR 17, [2007] WTLR 835, (2005) 28(9) IPD 28069.....................................4.46, 4.56, 4.60, 4.71, 4.74, 4.76, 4.77, 4.78, 4.107, 4.111, 4.114, 4.131, 4.136, 4.158, 4.266, 16.78, 16.81, 16.82, 16.87, 16.88, 16.100, 16.102, 16.103, 16.104, 16.105 Under Water Welders & Repairers Ltd v Street & Longthorne [1967] 1 Lloyd’s Rep 364, [1967] FSR 194, [1968] RPC 498, 117 NLJ 547................ 6.13, 6App, 14.90, 14.91 Underwriting Exchange Ltd v Newall [2015] EWHC 948 (QB)............ 11.30, 11.114, 11.289, 14.17, 14.72, 14.153, 18.199 Union of Shop, Distributive & Allied Workers (USDAW) v WW Realisation 1 Ltd (in liquidation) (Case C-80/14) [2015] 3 CMLR 32, [2016] CEC 59, [2015] ICR 675, [2015] IRLR 577........................................................................... 13.67, 13AppA.23 Unison v Capita Business Services Ltd (ET/2431219/2012).........................................13.70 United Association for the Protection of Trade v Killairn EAT/787/84 (unreported, 17 September 1985).....................................................................................5.58, 13.32, 13.33 United Bank Ltd v Akhtar [1989] IRLR 507.................................................. 5.70, 9.75, 13.39 United Bank Ltd v Masood Asif [2000] EWCA Civ 456...............................................5.149 United First Partners Research v Carreras [2018] EWCA Civ 323................................9.149 United International Pictures v Cine Bes Filmcilik ve Yapimcilik As [2003] EWCA Civ 1669, [2004] 1 CLC 401, (2003) 147 SJLB 1396............................................11.281 United Norwest Co-operatives v Johnstone [1994] TLR 104, CA.................................15.231 United Pan-Europe v Deutsche Bank [2000] 2 BCLC 461............................................16.65 United Sterling Corp Ltd v Felton & Mannion [1974] IRLR 314, [1973] FSR 409, [1974] RPC 162.............................................................................................  6App, 14.96 Universal General Insurance Co (UGIC) v Group Josi Reinsurance Co SA (Case C-412/98) [2001] QB 68, [2000] 3 WLR 1625, [2000] All ER (EC) 653, [2000] 2 All ER (Comm) 467, [2000] ECR I-5925, [2001] CLC 893, [2000] CEC 462, [2000] ILPr 549, [2001] Lloyd’s Rep IR 483.........................................................17.10 Universal Thermosensors Ltd v Hibben [1992] 1 WLR 840, [1992] 3 All ER 257, [1992] FSR 361, (1992) 142 NLJ 195.......................................3.62, 3App, 10.2, 14.115, 14.153, 15.86, 15.96, 15.97, 15.136, 15.137, 15.138, 15.219, 15.222, 15.224, 16.34, 16.36 University of Nottingham v Eyett (No 1) [1999] 2 All ER 437, [1999] ICR 721, [1999] IRLR 87, [1999] ELR 141, [1999] OPLR 55, [1999] Pens LR 17, (1999) 96(1) LSG 24....................................................................................................................9.93 University of Nottingham v Fishel [2000] ICR 1462, [2000] IRLR 471, [2001] RPC 22, [2000] Ed CR 505, [2000] ELR 385, (2001) 24(2) IPD 24009.................. 3.10, 3.11, 3.93, 4.5, 4.6, 4.8, 4.13, 4.15, 4.16, 4.17, 4.19, 4.23, 4.25, 4.27, 4.30, 4.45, 4.48, 4.50, 4.53, 4.76, 4.79, 4.162, 4.171, 4.232, 5.76, 16.88 Utilitywise plc v Northern Gas & Power Ltd (unreported, 25 July 2017)......................18.104 Uwug Ltd (in liquidation) v Ball [2015] EWHC 74 (IPEC)...........................................18.242 V VDU Installations Ltd v Intergrated Computer Systems & Cybernetics Ltd [1989] 1 FSR 378.........................................................................................15.217, 15.220, 15.243 Valeo Vision SA v Flexible Lamps Ltd [1995] FSR 205, [1995] RPC 205....................16.41 Vancouver Malt & Sake Brewing Co Ltd v Vancouver Breweries Ltd [1934] AC 181.....11.270 lxxxv

Table of Cases Vandervell Products Ltd v McLeod [1957] RPC 185.....................................................11.94 Van Uden Maritime BV (t/a Van Uden Africa Line) v Kommanditgesellschaft in Firma Deco Line (Case C-391/95) [1999] QB 1225, [1999] 2 WLR 1181, [1999] All ER (EC) 258, [1999] 1 All ER (Comm) 385, [1998] ECR I-7091, [1999] ILPr 73............................................................................................................................17.64 Vapormatic Co Ltd v Sparex Ltd [1976] 1 WLR 939, [1976] FSR 451, (1976) 120 SJ 472..........................................................................................................................15.228 Venture UK Ltd v Image House (Photographers) Ltd & others (unreported, 10 August 2009).......................................................................................................................11.88 Vercoe v Rutland Fund Management Ltd [2010] EWHC 424 (Ch), [2010] Bus LR D141................................................................................................................16.54, 16.55 Vestergaard Frandsen S/A (now called MVF3 APS) v Bestnet Europe Ltd [2013] UKSC 31, [2013] 1 WLR 1556, [2013] 4 All ER 781, [2013] ICR 981, [2013] IRLR 654, [2013] EMLR 24, [2013] RPC 33, (2013) 157(21) SJLB 31..........6.10, 6.17, 6.122, 6.125, 6.127, 6.128, 15.132, 15.138, 15.141, 15.142, 15.145, 15.146, 15.150, 16.20, 16.31 Vidal-Hall v Google Inc [2015] EWCA Civ 311, [2016] QB 1003, [2015] 3 WLR 409, [2016] 2 All ER 337, [2015] CP Rep 28, [2015] 1 CLC 526, [2015] 3 CMLR 2, [2015] EMLR 15, [2015] FSR 25................................................................. 17.47, 17.125 Visage Ltd v Mehan [2017] EWHC 2734 (QB)......................  14.137, 14.153, 14.154, 15.109 Vivendi SA v Richards [2013] EWHC 3006 (Ch), [2013] BCC 771, [2013] Bus LR D63................................................................................................4.77, 4.78, 4.81, 16.103 Viziball’s Application [1988] RPC 213..........................................................................3.145 Vokes Ltd v Heather (1945) 62 RPC 135, CA................................................................16.28 W W v Edgell [1989] 2 WLR 689, [1989] 1 All ER 1089, (1989) 133 SJ 570...................6.161 WAC Ltd v Whillock 1989 SC 397, 1990 SLT 213, 1990 SCLR 193............................12.45 WC Leng & Co Ltd v Andrews [1909] 1 Ch 763, CA..................................6App, 10.16, 11.8, 11.28, 11.34,11.38 W Dennis & Sons Ltd v Tunnard Bros & Moore (1911) 56 Sol Jo 162.........................9.99 WEA Records Ltd v Visions Channel 4 Ltd & others [1983] 1 WLR 721, [1983] 2 All ER 589, [1984] FSR 404, (1983) 127 SJ 362..................................14.85, 15.211, 15.245 WE Cox & Toner (International) Ltd v Crook [1981] ICR 823, [1981] IRLR 443........9.131, 9.134, 9.135, 9.136, 9.140 WL Gore & Associates GmbH v Geox SpA [2008] EWCA Civ 622.............................14.122 WPP Holdings Italy Srl v Benatti [2007] EWCA Civ 263, [2007] 1 WLR 2316, [2007] 2 All ER (Comm) 525, [2008] 1 Lloyd’s Rep 396, [2007] 1 CLC 324, [2007] ILPr 33, (2007) 104(15) LS................................................................ 17.22, 17.23, 17.26, 17.27, 17.46, 17.51 WRN Ltd v Avris [2008] EWHC 1080 (QB), [2008] IRLR 889, (2008) 152(23) SJLB 29, [2008] All ER (D) 276.................................................11.30, 11.134, 11.162, 11.188, 11.235, 11.236, 11.237, 12.13, 12.106, 13.8 Wade v British Sky Broadcasting Ltd [2016] EWCA Civ 1214....................... 6.11, 6.45, 6.74 Wah (aka Alan Tang) v Grant Thornton International Ltd [2012] EWHC 3198 (Ch), [2013] 1 All ER (Comm) 1226, [2013] 1 Lloyd’s Rep 11, [2014] 2 CLC 663.......18.257 Wallace Bogan & Co v Cove [1997] IRLR 453, CA................................................... 9.4, 10.4 Walsh v Shanahan [2013] EWCA Civ 411, [2013] 2 P & CR DG7............16.54, 16.55, 16.87 Walt Disney Productions Ltd v Gurvitz [1982] FSR 446...............................................14.85 Waltham Forest London Borough Council v Omilaju (No 2) [2004] EWCA Civ 1493, [2005] 1 All ER 75, [2005] ICR 481, [2005] IRLR 35, (2004) 148 SJLB 1370....9.67, 9.86, 9.95 Waltons & Morse v Dorrington [1997] IRLR 488, EAT................................................9.133 lxxxvi

Table of Cases Wandsworth London Borough Council v D’Silva [1998] IRLR 193...........  5.57, 5.59, 13.32, 13.33, 13.34, 13.38 Wang v University of Keele [2011] ICR 1251, [2011] IRLR 542..................................9.8 Ward Evans Financial Services Ltd v Fox [2001] EWCA Civ 1243, [2002] IRLR 120, CA.........................................................................................................  3.72, 5.25, 11.127 Wardle Fabrics Ltd v G Myristis Ltd [1984] FSR 263..........................15.207, 15.246, 15.247 Warm Zones v Thurley & another [2014] EWHC 988 (QB), [2014] IRLR 791............8.124, 15.185, 15.187, 16.69 Warner Bros Pictures Inc v Nelson [1937] 1 KB 209.................................15.15, 15.17, 17.129 Warner-Lambert Co v Glaxo Laboratories [1975] RPC 354..........................................14.97 Warnes v Trustees of Cheriton Oddfellows Social Club [1993] IRLR 58......................9.8 Warren v Mendy [1989] 1 WLR 853, [1989] 3 All ER 103, [1989] ICR 525, [1989] IRLR 210, (1989) 133 SJ 1261............................................................. 5.27, 15.12, 15.17, 15.41, 15.42, 15.44 Watchstone Group plc v Quob Park Estate Ltd & others [2017] EWHC 2621 (Ch)......4.102 Weathering Capital (UK) Ltd (in liquidation) v Dabhia [2013] EWCA Civ 71, [2015] BCC 741 ................................................................................................................4.116 Weathersfield Ltd (t/a Van & Truck Rentals) v Sargent [1999] ICR 425, [1999] IRLR 94, [1999] Disc LR 290, (1999) 96(5) LSG 35, (1999) 143 SJLB 39, CA............9.128 Weld-Blundell v Stephens [1919] 1 KB 520, CA; [1920] AC 956, HL.................  6.163, 16.99 Wells v Chave [2014] EWHC 2444 (Ch)........................................................................15.207 Wess v Science Museum Group UKEAT/0120/14/DM....................9.138, 13.57, 13.59, 13.89 Wessex Dairies Ltd v Smith [1935] 2 KB 80, [1935] All ER Rep 75..............3.44, 3.47, 3.71, 3App, 6.68, 11.126 West v Kneels Ltd [1987] ICR 146, [1986] IRLR 430, (1986) 83 LSG 2488................9.8 Western Excavating (ECC) Ltd v Sharp [1978] QB 761, [1978] 2 WLR 344, [1978] 1 All ER 713, [1978] ICR 221, [1978] IRLR 27, (1978) 13 ITR 132, (1987) 121 SJ 814, CA............................................................................. 9.65, 9.83, 9.132, 9.145, 9.146 Westpac Banking Corp v Bell Group Ltd (No 3) [2012] WASCA 157..........................4.231 Wey Education plc & another v Atkins [2016] EWHC 1663 (Ch)..............4.234, 4.237, 16.97 Whaleys (Bradford) Ltd v Bennett & another [2017] EWCA Civ 2143, [2017] 6 Costs LR 1241..................................................................................................................14.157 White v Bristol Rugby Ltd [2002] IRLR 204.................................................................9.143 White v Reflecting Roadstuds Ltd [1991] ICR 733, [1991] IRLR 331, EAT........... 5.70, 9.110 White & Todd v Troutbeck SA [2013] EWCA Civ 1171, [2013] IRLR 949, [2014] ICR D5................................................................................................................2.33, 2.52 White Digital Media Ltd v Weaver [2013] EWHC 1681 (QB)................... 11.3, 11.17, 11.18, 11.167, 11.218, 11.222, 12.21, 12.117 Whitehouse v Charles A Blatchford & Sons Ltd [2000] ICR 542, [1999] IRLR 492....13.154 Whitmar Publications Ltd v Gamage [2013] EWHC 1881 (Ch)................  3.142, 15.107, 18.1 Whittle Contractors Ltd v Smith (unreported, 1 November 1994).................................5.129 Whitwood Chemical Co v Hardman [1891] 2 Ch 416, CA............................................15.17 Wiggle Ltd v Burge [2012] EWHC 4374 (QB)....................................................11.65, 11.289 Wilder v Wilder & Charters (No 2) (1912) 56 Sol Jo 571..............................................15.173 Wilkinson v West Coast Capital & others [2005] EWHC 3009 (Ch), [2007] BCC 717.....................................................................................................  4.167, 4.169, 4.170, 4.209, 4.266 Willetts v Jennifer Trust for Spinal Muscular Atrophy UKEAT/0282/11/SM................9.8 William Hill Organisation Ltd v Tucker [1999] ICR 291, [1998] IRLR 313, (1998) 95(20) LSG 33, (1998) 142 SJLB 140......................................  5.127, 5.138, 9.98, 9.102, 9.103, 15.28, 15.29, 15.30, 15.31, 15.33, 15.48, 15.55, 15.56 Williams v Central Bank of Nigeria [2014] UKSC 10, [2014] AC 1189, [2014] 2 WLR 355, [2014] 2 All ER 489, [2014] WTLR 873, 16 ITELR 740, (2014) 164 (7596) NLJ 16.........................................................................................................16.110, 16.111 lxxxvii

Table of Cases Williams v Fanshaw Porter & Hazlehurst [2004] EWCA Civ 157, [2004] 1 WLR 3185, [2004] 2 All ER 616, [2004] Lloyd’s Rep IR 800, [2004] PLR 29, (2004) 101 (12) LSG 36........................................................................... 16.127, 16.128, 16.129 Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1, [1990] 2 WLR 1153, [1990] 1 All ER 512, 48 BLR 69, (1991) 10 Tr LR 12, (1990) 87(12) lSG 36, (1989) 139 NLJ 1712........................................................................................13.88 Willis Ltd & another v Jardine Lloyd Thompson Group plc & others [2015] EWCA Civ 450, [2015] IRLR 844............................................................ 14.168, 14.169, 15.102, 15.116, 15.117, 15.121, 15.139, 19.2, 19.94 Willoughby v CF Capital plc [2011] EWCA Civ 1115, [2012] ICR 1038, [2011] IRLR 985..........................................................................................................................9.8 Willow Oak Developments Ltd (t/a Windsor Recruitment) v Silverwood [2006] EWCA Civ 660, [2006] ICR 1552, [2006] IRLR 607, (2006) 103(23) LSG 29............................................................................................  13.65, 13.77, 13.78, 13.79 Wilson (Paal) v Partenreederei Hannah Blumenthal [1983] 1 AC 854, [1982] 3 WLR 1149, [1983] 1 All ER 34, [1983] 1 Lloyd’s Rep 103, [1983] Com LR 20, (1982) 126 SJ 835...............................................................................................................9.156 Wincanton Ltd v Cranny & SDM European Transport Ltd [2000] IRLR 716.....11.14, 11.170, 11.289, 12.20, 12.40, 14.167 Windle & another v Secretary of State for Justice [2016] EWCA Civ 459, [2017] 3 All ER 568, [2016] ICR 721, [2016] IRLR 628.............................................  2.11, 2.12, 2.30 Wood v Capita Insurance Services Ltd [2017] UKSC 24, [2017] AC 1173, [2017] 2 WLR 1095, [2017] 4 All ER 615, 161 Con LR 1, [2017] CILL 3971............ 1.22, 12.23, 12.30, 12.31, 12.103 Woodfull v Lindsley [2004] EWCA Civ 165, [2004] 2 BCLC 131, (2004) 148 SJLB 263..........................................................................................................................16.88 Woodbridge & Sons v Bellamy [1911] 2 Ch 326.....................................  13.14, 13.54, 13.87 Woods v W M Car Services (Peterborough) Ltd [1981] ICR 666, [1981] IRLR 347....5.70, 9.69, 9.85, 9.94 Woodward v Hutchins [1977] 1 WLR 760, [1977] 2 All ER 751, (1977) 121 SJ 409............................................................................................6.138, 6.149, 6.155, 6.166 World Online Telecom Ltd v I-Way Ltd [2002] EWCA Civ 413...................................5.149 World Wide Fund for Nature (formerly World Wildlife Fund) v World Wrestling Federation Entertainment Inc [2002] EWCA Civ 196, [2002] UKCLR 388, [2002] ETMR 53, [2002] FSR 33, (2002) 25(4) IPD 25023, (2002) 99(15) LSG 33, (2002) 152 NLJ 363, (2002) 146 SJLB 70............................... 11.273, 13.25, 13.109, 14.119, 16.13, 16.14, 16.15, 16.18, 16.19 Working Mens Club & Institute Union Ltd v Balls UKEAT/0119/11............................9.91 Wrexham Association Football Club Ltd (in administration) v Crucialmove Ltd (2006] EWCA Civ 237, [2007] BCC 139, [2008] 1 BCLC 508, CA............  4.131, 4.133 Wright v Michael Wright Supplies Ltd & Anor [2013] EWCA Civ 234, [2013] CP Rep 32, [2013] 4 Costs LO 630..............................................................................18.230 Wright v North Ayrshire Council [2014] ICR 77, [2014] IRLR 4..................................9.149 Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798, [1974] 2 All ER 321, (1974) 27 P & CR 296, (1973) 118 SJ 420................. 1.27, 16.11, 16.12, 16.13, 16.14, 16.15, 16.16, 16.17, 16.18, 16.19, 16.21, 18.102 Wyatt v Kreglinger & Fernau [1933] 1 KB 793......................11.252, 11.254, 11.257, 11.258, 11.261, 11.270, 11.271 X X (HA) v Y [1988] 2 All ER 648, [1988] RPC 379, (1987) 137 NLJ 1062...................6.146 Xerox Business Services Phillippines Inc Ltd v Zeb UKEAT/0121/16/DM..................13.168 lxxxviii

Table of Cases Y Yardley & Co v Higson [1984] FSR 304........................................................................15.207 Yates Circuit Foil Co v Electrofoils Ltd [1976] FSR 345...............................................6.13 Young, Assignees of Ireland v Timmins 148 ER 1446, (1831) 1 Cr & J 331.................5.27 Young & Woods Ltd v West [1980] IRLR 201........................................................... 2.55, 2.57 Younis v TransGlobal Projects Ltd [2006] UKEAT/504/05...........................................2.29 Your Response Ltd v Data Team Business Media Ltd [2014] EWCA Civ 281, [2015] QB 41, [2014] 3 WLR 887, [2014] 4 All ER 928, [2014] 2 All ER (Comm) 899, [2014] CP Rep 31, [2014] 1 CLC 915, [2014] Info TLR 1, [2015] FSR 23.. 8AppA2.15, 15.167 Yousif v Salama [1980] 1 WLR 1540, [1980] 3 All ER 405, [1980] FSR 444, (1980)124 SJ 480......................................................................................................................15.201 Yukos International UK BV v Merinson [2018] EWHC 335 (Comm)..................17.18, 17.42 Z Zerolight Ltd v Wolff [2016] EWHC 487 (QB)..............................................................13.90 Zockoll Group Ltd v Mercury Communications Ltd (No 1) [1998] FSR 354....14.83, 15.177, 15.185 Zvi Construction Co LLC v University of Notre Dame (USA) [2016] EWHC 1924 (TCC)......................................................................................................................13.125

lxxxix

CHAPTER 1

Aim and synopsis of the book Selwyn Bloch QC and Kate Brearley Introduction The employee as a source of competition The employer as an obstacle to the employee Types of competitive activity Restraint of trade doctrine 1. General structure of this book The employment relationship (Chapter 2) The implied duty of fidelity (Chapter 3) Employee fiduciary duties (Chapter 4) Express terms of the contract of employment (Chapter 5) Confidential information (Chapter 6) Database rights (Chapter 7) Practical steps to protect the employer’s interests (Chapter 8) Termination of employment (Chapter 9) Potential conflicts between ex-employer and ex-employee (Chapters 10–13) Legitimate protection for the ex-employer (Chapter 10) Reasonableness of express covenants (Chapter 11) Drafting restrictive covenants (Chapter 12) Introducing/varying restrictive covenants (Chapter 13) Remedies available to the (ex-)employer (Chapters 14–16) Interim remedies: general (Chapter 14) Specific interim remedies (Chapter 15) Final remedies (Chapter 16) The international element (Chapter 17) Discovering competitive activity/team moves (Chapters 18 and 19) Discovering competitive activity: the immediate practical issues (Chapter 18) Team moves (Chapter 19)

1.1 1.3 1.4 1.5 1.6 1.8 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18 1.19 1.20 1.21 1.22 1.23 1.24 1.25 1.26 1.27 1.28 1.29 1.30 1.31

2. Balancing the interests of employer and employee: an introduction 1.32 2(a) Implied duty of fidelity/fiduciary duties 1.33 2(b) Express terms applying during employment 1.37 3. Balancing the interests of an ex-employer and ex-employee: introduction 1.39 3(a) End of implied duty of fidelity/fiduciary duties 1.39 3(b) Terms applying after employment 1.40 3(b)(i) Legitimate business interests 1.40 3(b)(ii) Only reasonable protection of legitimate interests 1.42 3(b)(iii) Means of protecting legitimate interests 1.43 4. Rejection of proposed legislative intervention

1.44 1

1.1  Aim and synopsis of the book

INTRODUCTION 1.1  Normally, the interests of an employer and those of his employees are aligned. It is to the advantage of both that the business prospers. However, conflicts of interest may and frequently do arise, most commonly where the employee seeks to compete with the employer. 1.2  The aim of this book is to examine this area of conflict primarily from the perspective of the employer and to provide a practical guide on how to deal with the problems presented by the conflict. We will look at the interests which the employer may legitimately protect and the means of obtaining such protection. By defining the interests which the employer may protect we shall, to an extent, be covering the reverse side of the coin, namely the freedom which the employee has to exploit his general skill and knowledge. However, where appropriate, we shall deal specifically with the position viewed from the employee’s perspective.

The employee as a source of competition 1.3  Competition for any business may take a number of forms. One of the principal sources of potential competition to virtually any business, however, is the individuals who work for the business. It is they who operate the business, generate and have access to its closest secrets and are the link between the business and its customers/clients. In effect they are the lifeblood of the business and it is therefore surprising that so few businesses recognise this potential source of competition until they have their first experience of it. In some businesses, for example, highly automated manufacturing businesses, the potential for competition from the workforce generally may be limited. In others, the degree of risk may vary dramatically between different categories of employee. For example, contrast the filing clerk in an advertising agency with a senior executive of the same agency who has a client following which represents a significant percentage of the agency’s turnover. Any employer who underestimates the potential for competition from those who work for him does so at his peril. To a manufacturing business, the loss of a single skilled manual worker will usually be insignificant, but the defection to a competitor of its entire unskilled manual workforce, who were used to working together as a team, could be devastating. Similarly, the assumption that because an individual is a member of the ‘support staff’ he or she is unimportant could prove a costly error. There are many secretaries and personal assistants who are the key to the effective working of their ‘boss’ and without whom that individual would be significantly less effective as a competitor or working for a competitor.

The employer as an obstacle to the employee 1.4 Employers alive to the potential for competition from their employees seek protection by imposing restrictions on employees making it difficult, and sometimes impossible, for them to compete. Such obstacles can be legitimate and enforceable, but that is not always so. The law encourages the development 2

Introduction 1.7

by employees of their skills and talent. It recognises that usually there is an inequality of bargaining power between employer and employee, and so zealously guards the employee against the employer who seeks, in the interest of his business, to stifle the exploitation by the employee of his general skill and knowledge, particularly after the employment has ended.

Types of competitive activity 1.5  Competition by the employee or ex-employee may occur in a number of different forms: • Actual competitive activity during employment, such as soliciting customers of the employer to place business with a competing business, which the employee conducts in his spare time. •

Preparatory activity by an employee who is planning to leave employment and set up in competition with the employer, eg  purchasing an off-theshelf company and office equipment, and copying customer lists and other confidential information.

•

Competitive activity after employment, such as soliciting customers of the ex-employer.

Restraint of trade doctrine 1.6  This doctrine was expressed by Lord Macnaghten in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co [1894] AC 535, at page 565 as follows: ‘The public have an interest in every person’s carrying on his trade freely: so has the individual. 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.’

(See also Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 and Petrofina (Great Britain) Ltd v Martin [1966] Ch 146.) However, if a covenant is designed to protect a legitimate interest of an employer and goes no further than is reasonably necessary to protect that interest, the courts will uphold it. In these circumstances the purpose is not merely to stifle competition. 1.7  In this book we do not consider in detail the general ambit of the restraint of trade doctrine, since in the context of the employment contract there is normally no difficulty in identifying what is a restrictive covenant. That said, occasionally, in relation to contractual restrictions which apply during employment a question may arise as to whether it is in restraint of trade or merely a provision which regulates normal employment relations (eg a total ban on outside working). It is generally safer to assume that such a provision, which may sterilise at least in part the ability of the employee to work, may potentially be in restraint of trade and therefore should be reasonable in its extent: see 5.24–5.31. Even in relation 3

1.8  Aim and synopsis of the book

to restrictions applying after employment has ended, it may be difficult in some cases to determine whether a provision, which seems merely to regulate normal employment/commercial relations, is in effect (indirectly) in restraint of trade: see 11.248–11.251.

1. GENERAL STRUCTURE OF THIS BOOK 1.8 In considering competitive or potentially competitive activity between employee and employer, the law draws a sharp distinction between competition during the existence of the employment relationship and after its termination. In J  A  Mont (UK) Ltd v Mills [1993]  IRLR  172 the Court of Appeal rejected a submission that the distinction between the two stages had become blurred. 1.9  This book is accordingly divided (broadly) into two major parts in which we consider conflict or potential conflict, first, between employer and employee and, secondly, between ex-employer and ex-employee. 1.10  In the first eight chapters we consider the position between employer and employee.

The employment relationship (Chapter 2) 1.11  Increasingly, the workforce of a business will comprise not only employees but also various other types of worker (in the general sense), including agency workers and independent contractors some of whom will be ‘workers’ as defined in section 230(3) Employment Rights Act 2006. The rights and obligations of these different categories of worker, particularly in the context of employee competition, are quite different. Moreover, as the proliferation of case law in recent years shows, the distinction between these various categories of worker is by no means always clear and is an issue on which the Government is currently consulting as part of its response to the Taylor Review of Modern Working Practices published in July 2017. The focus of this book is employee competition and we have therefore taken as our starting point an analysis of precisely who is an employee.

The implied duty of fidelity (Chapter 3) 1.12 In relation to the majority of employees this implied duty forms the bedrock of the employer’s protection against competition during employment. Understanding the scope of the duty is vital for any adviser dealing with employee competition and we have undertaken a detailed analysis of the duty, including (in Chapter 4) drawing distinctions, where they arise, between the implied duty of fidelity and fiduciary duties. For a summary of the comparison of the position of employees with and without relevant fiduciary duties see 4.299–4.317. 4

General structure of this book 1.17

Employee fiduciary duties (Chapter 4) 1.13  In recent years this has become a major area of development in the law. (Ex-)employers have sought to limit the competitive capacity of senior (ex-) employees by relying on implied fiduciary duties as providing more protection to their business than the duty of fidelity which applies to all employees. In this edition we have substantially expanded the chapter on this important topic, carefully distinguishing between the position of Companies Act directors (including shadow and de facto directors) and (other) senior employees with fiduciary duties.

Express terms of the contract of employment (Chapter 5) 1.14 In this chapter we identify, in particular, express terms by which the employer can obtain protection for his interests additional to that provided by the implied duty of fidelity or fiduciary duties. The chapter includes precedent clauses and practical guidance on how specific types of clauses can be used or adapted to the employer’s advantage.

Confidential information (Chapter 6) 1.15  Here we look at the position between employer and employee as well as between ex-employer and ex-employee (since it is difficult to look at the one in isolation from the other). We consider in detail the different categories of an employer’s business information, what information can be protected as confidential and when the right to that protection will be lost. We also look at how best confidential information can be protected and the position where confidential information comes into the possession of third parties.

Database rights (Chapter 7) 1.16  Here we consider database rights within the context of the employment relationship. In the modern technologically advanced workplace, departing employees may often seek to compete illicitly with their (ex-)employer by downloading his information – the (ex-)employer may rely on breaches of the duty of confidence, but may (depending on the circumstances) additionally or alternatively invoke its statute-based database rights.

Practical steps to protect the employer’s interests (Chapter 8) 1.17  Against the backdrop of the changing working landscape we consider the day-to-day practical steps which an employer can take both to minimise the risks of employees competing and to maximise the prospects of detecting any competition at an early stage. Included in the Appendices to this chapter are guidelines on the practical steps an employer can take to protect his confidential information as well as a review of an employee’s right to privacy including in the light of 5

1.18  Aim and synopsis of the book

the decision of the Grand Chamber of the European Court of Human Rights in Barbulescu v Romania [2017] IRLR 1032.

Termination of employment (Chapter 9) 1.18  This chapter marks the dividing line between the two major parts of the book. We look at how and when the employment relationship comes to an end. A key area of focus for this chapter is the effect of repudiatory breach on the employment relationship (and in particular on restrictive covenants) and what constitutes a repudiatory breach.

Potential conflicts between ex-employer and ex-employee (Chapters 10–13) 1.19  In Chapters 10 to 13 we deal primarily with the potential conflicts between ex-employer and ex-employee.

Legitimate protection for the ex-employer (Chapter 10) 1.20 This chapter identifies what interests of the ex-employer are capable of protection and the covenants the ex-employer may use to seek to protect those interests, namely non-competition covenants, customer or supplier non-solicitation/dealing covenants, non-enticement/poaching (of employees) covenants, confidentiality covenants and various other types of covenant.

Reasonableness of express covenants (Chapter 11) 1.21  In this chapter, which is significantly expanded in this edition we consider in detail how the courts approach the assessment of reasonableness of express covenants and provide guidance on the most frequently asked questions on this key topic.

Drafting restrictive covenants (Chapter 12) 1.22  This chapter puts theory into practice and guides the draftsman through the process of the selection and drafting of covenants (mainly post-termination covenants), how to avoid common pitfalls and how his drafting will be interpreted by the courts, including the application of key rules of construction in the light of recent Supreme Court authority (Arnold v Britton [2015] AC 1619 and Wood v Capita Insurance Services Limited [2017] 2 WLR 1095), and the ‘blue-pencil’ (or severance) doctrine, following the recent Court of Appeal decision in Tillman v Egon Zender Limited [2017] IRLR 906. The case studies in this chapter demonstrate how covenants might be drafted in two different scenarios. 6

General structure of this book 1.27

Introducing/varying restrictive covenants (Chapter 13) 1.23  This chapter looks at the complex issues which arise when the employer seeks to introduce or vary restrictive covenants during employment, on termination, or in connection with an acquisition to which the Transfer of Undertaking (Protection of Employment) Regulations 2006 apply. The chapter provides practical guidance on how to manage the process of introduction/variation of covenants.

Remedies available to the (ex-)employer (Chapters 14–16) 1.24 In Chapters 14 to 16 we consider the remedies available to the (ex-) employer to protect his legitimate interests. In the nature of things these disputes usually (but not exclusively) come before the court after the end of employment.

Interim remedies: general (Chapter 14) 1.25  In cases of employee competition, once the (ex-)employer is aware of the competitive activity time is of the essence and the (ex-)employer’s immediate response will often be to seek an interim remedy from the courts. This chapter sets out the general background and principles applicable to the grant of interim remedies.

Specific interim remedies (Chapter 15) 1.26 This chapter looks at the specific interim remedies frequently sought in cases of employee competition including garden leave, restrictive covenant and springboard injunctions and the various orders available in relation to property including delivery up, preservation, inspection and search and seizure orders. Additional focus is given in this edition to springboard injunctions, given their increased use in recent times in team moves cases.

Final remedies (Chapter 16) 1.27  In this chapter we look at the specific final remedies usually sought in cases of employee competition, including damages and account of profits and injunctive relief. We refer to Wrotham Park or (or notional licence-based) damages, given the recent popularity of claims for such damages in restrictive covenant cases and other claims in the area covered by this book. However, in April 2018, shortly before this edition was to be published the Supreme Court gave its decision in Morris-Garner v One Step (Support) Ltd [2018] UKSC 20, overruling the Court of Appeal and making it clear that Wrotham Park damages or ‘negotiation damages’ (as they are now to be called) will not as such be awarded for breaches of restrictive covenants of the type referred to in this book (as opposed to restrictive covenants affecting land). They may, however, still be granted for breach of confidence and infringement of intellectual property rights, see 16.21. 7

1.28  Aim and synopsis of the book

The international element (Chapter 17) 1.28 This chapter addresses the international element of employment and employment-related litigation which nowadays often spans countries and continents. We consider the impact of this international dimension on the kinds of litigation covered by this book.

Discovering competitive activity/team moves (Chapters 18 and 19) 1.29  In Chapters 18 and 19 we tackle the practical issues which arise from the discovery by the (ex-)employer of competitive activities by either an individual (ex-)employee or a team of (ex-)employees. We consider the formulation and implementation of suitable strategies in response to this discovery.

Discovering competitive activity: the immediate practical issues (Chapter 18) 1.30  This chapter deals with the steps the employer needs to take in response to competition by an individual employee. It guides the adviser/the employer through the key stages of information gathering, identifying goals to be achieved and settling and implementing a strategy to achieve those goals. We deal with all the main practical issues that arise, ranging from the appointment of the legal/forensic and PR team, through tricky questions relating to information gathering to strategies to achieve a successful resolution to the threat the competitive activity poses for the employer. The chapter includes a new section on arbitration and an expanded section on alternative dispute resolution. In the Appendices we develop the case studies from Chapter 12 in each case to pursue a different objective. In the first case study (Excel Copiers Ltd & Thomas) the commercial objective is to retain Thomas. In the second case study (Smith & Jones Ltd & Simpson) there is the possibility of proceedings and we illustrate how the initial stages of litigation will develop from the initial letter before claim to the suite of documents required for an interim injunction application.

Team moves (Chapter 19) 1.31 Building on the practical guidance given in Chapter 18, in this chapter we focus on the additional dynamic that flows from a team of employees being involved in the (usually proposed) competitive activity. Team moves are a fertile area of litigation. In this chapter we outline the legal principles governing the economic torts, often at the heart of team move cases.

2. BALANCING THE INTERESTS OF EMPLOYER AND EMPLOYEE: AN INTRODUCTION 1.32 The interests of employer and employee are governed by the express and implied terms of the contract of employment. By way of overview of this book, there 8

Balancing the interests of employer and employee: an introduction 1.35

follows a summary of the main aspects of the duties of employment which relate to competition or potential competition between (ex-)employee and (ex-)employer.

2(a) Implied duty of fidelity/fiduciary duties 1.33  Whilst the employment relationship lasts, the employer is protected against most forms of competition by the employee by virtue of the employee’s duty of fidelity, which is implied into the employment contract. The implied duty of fidelity protects the employer, for example, against the employee: •

who uses his normal working hours to work for others in competition with the employer: Thomas Marshall (Exports) Ltd v Guinle [1979] 1 Ch 227; Gamatronic (UK) Limited and others v Hamilton and Mansfield [2017] BCC 670;

•

who competes in his spare time: Hivac Limited v Park Royal Scientific Instruments Ltd [1946] Ch 169; ABK Ltd v Foxwell [2002] EWHC 9 (Ch);

•

who exceeds the limits of preparations permitted by law to an employee who intends, once his employment has ended, to set up a competing business: Balston Ltd v Headline Filters Ltd [1987]  FSR  330; Helmet Integrated Systems Limited v Tunnard [2007]  IRLR  126 (CA); Crowson Fabrics Limited v Rider and others [2008] IRLR 288; Ranson v Customer Systems Plc [2012] IRLR 769; First Subsea Limited v Balltec Limited [2014] EWHC 866; Decorus Limited v Penfold and Procure Store Limited [2016] EWHC 1421;

•

who diverts business opportunities away from his employer: Industrial Development Consultants v Cooley [1972] 2  All ER  162; CMS  Dolphin Limited v Simonet [2001] 2 BCLC 704; British Midland Tool v Midland International Tooling Limited and others [2003] 2  BCLC  523; Foster Bryant Surveying Limited v Bryant [2007]  IRLR  425 (CA); Ranson v Customer Systems Plc [2012] IRLR 769; or

•

who poaches other employees: Sanders v Parry [1967] 2  All ER  803; Marshall v Industrial Systems & Controls Ltd [1992]  IRLR  294; British Midland Tool Limited v Midland International Tooling Limited and others [2003] 2  BCLC  523; QBE  Management Services (UK) Limited v Dymoke [2012] IRLR 458; Thomson Ecology Limited v Apem Limited [2014] IRLR 184.

1.34  The duty of fidelity also imposes on the employee a duty to keep confidential, and not to use or disclose otherwise than for his employer’s purposes, his employer’s trade secrets and other confidential information: Faccenda Chicken Ltd v Fowler [1986] 1 All ER 617. 1.35  The duty of fidelity can in some circumstances require the employee to make disclosure to the employer of wrongdoing on the part of other employees towards the employer, and to do so even where doing that requires disclosure of his own wrongdoing: Sybron Corporation v Rochem Ltd [1983] 3  WLR  713. That duty now extends to his own wrongdoing – in the case of a fiduciary (Item Software v Fassihi [2004]  IRLR  928 (CA)) and possibly even in relation to senior employees who are not fiduciaries even where 9

1.36  Aim and synopsis of the book

they are not disclosing the wrongdoing of others: Thomson Ecology Limited v APEM  Limited [2014]  IRLR  184 – see 3.99. The duty of fidelity and/or fiduciary duty may extend also to disclosure of other matters (not amounting to wrongdoing) which may negatively affect the employer: Imam-Sadeque v Bluebay Asset Management (Services) Limited [2013]  IRLR  344. There has, however been resistance to this prescriptive (as opposed to proscriptive) approach to fiduciary duties, eg: Forsta AP-Fonden v Bank of New York Mellon SA/NV [2013] EWHC 3127 (Comm). 1.36  Employers often contend that a wider duty not to prepare to compete is cast on employees who are fiduciaries. Fiduciary employees are not merely those who are directors but may also include certain senior employees. This approach met with some success in certain relatively recent first instance decisions (eg British Midland Tool v Midland International Tooling Limited and others [2003] 2 BCLC 523 and Shepherds Investments Limited v Walters [2007] IRLR 110). However, the Court of Appeal has re-asserted an employee’s freedom to prepare for competition after employment, even where he is a fiduciary: Foster Bryant Surveying Limited v Bryant and another [2007]  IRLR  425 (CA); Ranson v Customer Systems Plc [2012]  IRLR  769 (CA) and Gamatronic (UK) Ltd and another v Hamilton and Mansfield [2017] BCC 670.

2(b) Express terms applying during employment 1.37  The employer will normally (and is strongly advised to) seek further protection than that which is automatically granted to him by the implied duty of fidelity. This he will do by negotiating express terms with the employee. By these terms he will seek to protect, or expand the automatic protection afforded by the duty of fidelity in relation to, in particular, his goodwill or business connections and trade secrets or confidential information. Such terms may include restrictions during the employment relationship on the employee: •

undertaking other work (whether competitive or not) and requiring him to devote his whole time and attention to the employer’s business;

•

holding shares or having a financial interest in any competing organisation;

•

using or disclosing for his own purposes the employer’s confidential information (defining and thereby putting the employee on notice as to what the employer regards as confidential).

1.38  Within the broad bounds of public policy and statute, the parties are free to define the employment relationship as they see fit. The employer is entitled during the employment relationship to the fullest protection for his goodwill (including the stability of the workforce) and his confidential information. Whilst the restraint of trade doctrine can apply to terms applying during employment (see 1.7), it is only rarely that terms applying during employment will be struck down as being contrary to public policy. However, the courts will not grant specific performance of a contract of employment (see 15.10–15.13). 10

Balancing the interests of an ex-employer and ex‑employee: introduction 1.42

3. BALANCING THE INTERESTS OF AN EX-EMPLOYER AND EX‑EMPLOYEE: INTRODUCTION 3(a) End of implied duty of fidelity/fiduciary duties 1.39  The implied duty of fidelity comes to an end upon termination of employment: J A Mont (UK) v Mills [1993] IRLR 172 and Stenhouse Australia Ltd v Phillips [1974] 1 All ER 117 (PC). The fiduciary duty of an employee will usually also terminate at the end of employment (or directorship, if he is a director) although in some cases where there has been a diversion of a business opportunity it has been held that the fiduciary duty may be prolonged; the alternative view is that liability is based on breaches which occurred during the time that employment subsisted: see 4.265–4.284.

3(b) Terms applying after employment 3(b)(i) Legitimate business interests 1.40  The ex-employer is not permitted to prevent or inhibit mere competition by the ex-employee. The starting point is that covenants restricting the freedom of the ex-employee to compete with his ex-employer after the end of the employment are void for illegality. However, there are two principal types of business interest which the employer is entitled to seek to protect: •

customer connection or goodwill (and also connection in appropriate cases with prospective customers and with suppliers); and

•

trade secrets or confidential information: Stenhouse Australia Ltd v Phillips [1974] 1  All ER  117 (PC) and Herbert Morris Ltd v Saxelby [1916] 1 AC 688 (HL).

1.41 These are not the only interests capable of protection. Other legitimate interests include an employment agent’s connection with its pool of temporary workers: Office Angels Ltd v Rainer-Thomas and O’Connor [1991] IRLR 214 (CA). An employer also has a legitimate interest in protecting the stability of his workforce (which he may seek to protect by a covenant preventing the enticement by the employee of his former colleagues): Dawnay Day & Co Ltd v de Braconier d’Alphen [1997] IRLR 442 (CA). 3(b)(ii) Only reasonable protection of legitimate interests 1.42  The second hurdle which the ex-employer must surmount is that he must show that the covenants extend no further than is reasonably necessary to protect his legitimate interests: Herbert Morris Ltd v Saxelby [1916]  1  AC  688 (HL) and Mason v Provident Clothing & Supply Co Ltd [1913] AC 724 (HL) at page 733. 11

1.43  Aim and synopsis of the book

3(b)(iii) Means of protecting legitimate interests 1.43  The employer will seek to protect these interests principally by covenants preventing the ex-employee from: •

Competing with the ex-employer (non-competition covenants) and, when confined to a certain geographic area of the ex-employer’s business, area covenants.

•

Soliciting or dealing with customers (or, where appropriate prospective customers and/or suppliers of the employer) (non-solicitation or nondealing covenants); in the case of suppliers the covenant is often in the form of an obligation not to interfere with the relationship between the employer and supplier eg so as to diminish supplies to the employer.

•

Enticing away from the ex-employer’s employment former colleagues of the ex-employee (non-enticement/poaching covenants) or (of more dubious validity): ‘employing’ such former colleagues; also of questionable validity are anti-team moves covenants preventing orchestration of team moves or (even more adventurously) anti-association covenants prohibiting the employee from joining a competitive business which has former colleagues involved in that business.

•

Using or disclosing trade secrets and confidential information of the ex-employer.

Restrictive covenants are generally included in the contract of employment. However, it is also not unusual to find this type of covenant in various schemes designed to reward the employee by reference to the performance of the business in which he works, including long-term incentive schemes, employee benefit schemes and various share schemes: see 11.257 (see also 10.45–10.54).

4. REJECTION OF PROPOSED LEGISLATIVE INTERVENTION 1.44  In May 2016 the Government issued a ‘Call for Evidence’ paper in relation to non-competition clauses. It wanted to explore whether such clauses (and customer non-dealing covenants and covenants preventing poaching of employees) can unfairly hinder workers from moving freely between employers and from developing innovative ideas, translating those ideas into a start-up, and growing their businesses. The focus of this Call for Evidence was to identify whether there were reasons for believing that non-competition clauses written into employment contracts were stifling innovation, particularly for start-up businesses. The Call for Evidence highlighted in particular the risk to which potential entrepreneurs are exposed in relation to potential liability to the former employer for damages and costs, and of the former employee not being paid during the period that the non-competition clause was in force, whilst unable to earn money from a proposed new business. The consultation closed on 19 July 2016. On 7 February 2018 the Government published its: ‘Good Work: a response to the 12

Rejection of proposed legislative intervention 1.45

Taylor Review of modern working practices’. The Government concluded that legislative intervention was unnecessary: ‘The consensus view across the majority of responses was that restrictive covenants are a valuable and necessary tool for employers to use to protect their business interests and do not unfairly impact on an individual’s ability to find other work. Common law has developed in this area for over a century and is generally acknowledged to work well. Having built up a picture of the UK experience via this call for evidence, we have decided it is not necessary to take any further action in this area at this stage.’

1.45  That conclusion coincides with the views of the authors of this book and endorses the sensible balance which the common law has over many years carefully struck between the protection reasonably required by employers against unfair competition by employees (and other workers) and the freedom of former employees/workers to use their skill and knowledge to move to or create their own businesses. On the basis of the well-known principle ‘if it ain’t broke don’t fix it’, we do not see that there is any reason for major legislative interference in this area, whether now or in the foreseeable future. That is not to say that the system is perfect, especially in regard to practical aspects of access to justice. In practice uncertainties as to whether or not covenants are enforceable, or as to their proper construction and therefore scope, combined with the cost risks involved in injunctive and/or declaratory proceedings in the Courts, provide a considerable deterrent to employees challenging a possibly excessive restraint unless the prospective future employer is willing to foot the bill. Consideration of what solutions there may be to this problem is outside the scope of this book.

13

CHAPTER 2

The employment relationship Kate Brearley and Purvis Ghani Introduction

2.1

1. Who is an employee? 2.6 1(a) Contract of employment or contract for services? 2.15 1(b) The tests 2.19 1(b)(i) The control test 2.20 1(b)(ii) The organisational/integration test 2.21 1(b)(iii) The economic reality test 2.22 1(b)(iv) The multiple test 2.23 1(c) Relevant factors 2.24 1(c)(i) Factors in favour of a contract of employment 2.26 1(c)(ii) Factors in favour of a contract for services 2.38 1(c)(iii) The ‘either way’ factors 2.50 1(d) The power of the parties to dictate the status of the contract2.55 1(e) Directors as employees 2.60 1(e)(i) Control and organisation 2.62 1(e)(ii) Method of payment 2.64 1(e)(iii) Form of contractual documentation 2.66 1(f) Members of limited liability partnerships as employees 2.68 1(g) Ex-employees as independent contractors 2.69 2. The creation of the contract of employment 2(a) Commencement of the employment relationship 2(b) The form of the contract 2(c) The terms of the contract 2(c)(i) Types of term 2(d) Written statement of particulars of employment 2(d)(i) Status of the written particulars 2(d)(ii) Failure to comply with statutory obligations 2(d)(iii) Relevance of section 11 applications

2.73 2.74 2.76 2.79 2.82 2.83 2.84 2.86 2.88

INTRODUCTION 2.1  In this book we look principally at issues which arise as a result of there being or having been a contract of employment. In some cases the (ex-) employee may have or have had another role, for example as a Companies Act director, and we will consider how that additional role affects the position. We 15

2.2  The employment relationship

will only do so, however, where the role is additional to the individual’s status as an employee and not where, for example, the individual is a director but not an employee. 2.2  Determining whether there is or has been a contract of employment and preliminary issues relating to the creation and form of the contract are the key topics we will consider in this chapter as follows: •

Who is an employee (2.6).

•

Contract of employment or contract for services? (2.15).

•

The tests (2.19).

•

Factors in favour of a contract of employment (2.26).

•

Factors in favour of a contract for services (2.38).

•

The ‘either way’ factors (2.50).

•

The power of the parties to dictate the status of the contract (2.55).

•

Directors as employees (2.60).

•

Members of limited liability partnerships as employees (2.68).

•

Ex-employees as independent contractors (2.69).

•

The creation of the contract of employment (2.73).

•

Commencement of the employment relationship (2.74).

•

The form of the contract (2.76).

•

The terms of the contract (2.79).

•

Written statement of particulars of employment (2.83).

2.3  It is important to bear in mind that the issue of employment status is under review by the present Government. In March 2015, the previous Coalition Government commissioned a review of the framework for determining employment status in the UK labour market. That review was published in February 2017 and was followed by the publication of the Taylor Review of Modern Working Practices in July 2017. The Chief Executive of the Royal Society of Arts and former adviser to Tony Blair, Matthew Taylor, was commissioned by the current Government to carry out an independent review of employment practices in the modern economy. The Taylor Review looked at the issue of employment status, particularly within the context of the gig economy, and made a number of recommendations (one of which was a re-labelling of ‘worker’ status to ‘dependent contractor’ status). In February 2018 the Government published its response to the Taylor Review, Good work: a response to the Taylor Review of Modern Working Practices. In that response the Government accepts Taylor's point that there is a case for greater clarity in how employment status is determined but does not offer any solution, instead opting for a further consultation process which closes on 1 June 2018. Entitled 'Employment Status Consultation', 16

Who is an employee? 2.7

the paper seeks views on a variety of solutions including codifying an employment status test and introducing an online tool to identify employment status (although query how this would differ from the Employment Status Service online tool introduced in March 2017 by HM Revenue & Customs (see 2.44)). What is clear is that there is unlikely to be any swift action by the Government. With the time and resources required to address Brexit it is unlikely we will see any significant changes in how employment status is determined for some considerable time. 2.4 This book is concerned with those who provide their services under contracts of employment (and not other kinds of contracts). The law in relation to contracts of employment is (in broad terms) well settled. In contrast, it is unclear how far (if at all) many of the principles discussed in this book would apply to contracts for services (referred to at 2.7). This is particularly true in relation to implied terms. In Euro RSCG SA  v Conran (1992) Times, 2 November, Vinelott J did not accept that a consultant owed a duty of fidelity beyond the express terms of the agreement. However, there are some instances where implied terms may apply to contracts for services. In Manoudakis v Easy Group Holdings Ltd [2011] EWHC 3614 (QB), John Bowers QC (sitting as a deputy judge) took the view in relation to a consultancy arrangement which immediately followed a prior employment relationship (and was closely linked to it), that ‘a degree of trust and confidence between the parties’ was required when viewed objectively. However, this view was based on the decision of the Privy Council in Attorney General of Belize v Belize Telecom Ltd [2009] 1  WLR  1988 (to the effect that implication was an essentially interpretative exercise ie part of the exercise of construing the contract) and prior to consideration of that case in Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2016] AC 742 in which the Supreme Court rejected that approach and insisted on the test of ‘necessity’ for the implication of terms. The courts also adopt a different, and generally less stringent approach in assessing the enforceability of restrictive covenants in contracts entered into between parties whom they regard as on a more equal business footing as opposed to contracts of employment. In view of these differences, the first step must be to establish whether a contract is one of employment. 2.5  At the same time as assessing whether the contract is one of employment it is convenient to discuss related questions concerning the creation and form of the contract of employment.

1. WHO IS AN EMPLOYEE? 2.6  An employee is an individual who works under a contract of employment or contract of service: the two phrases are synonymous. 2.7  Broadly speaking, and subject to certain exceptions such as office holders, the law recognises two categories of contract under which an individual may work for another: the contract of employment or service and the contract for services. 17

2.8  The employment relationship

An individual working under a contract for services is often described as an ‘independent contractor’ or ‘self-employed’. It is also possible for an individual working under such a contract to be classified according to statute as a ‘worker’ (although an employee is also a ‘worker’ – see 2.8). In Bates van Winkelhof v Clyde & Co LLP [2014]  IRLR  641, Lady Hale summarised the categories of people under employment law (at paragraph 31): ‘… employment law distinguishes between three types of people: those employed under a contract of employment; those self-employed people who are in business on their own account and undertake work for their clients or customers; and an intermediate class of workers who are self-employed but do not fall within the second class …’

2.8  The status of ‘worker’ was created by legislation. Section 230(3) Employment Rights Act 1996 defines a worker as: ‘… an individual who has entered into or works under (or, where the employment has ceased, worked under) – (a)

a contract of employment, or

(b) any other contract, whether express or implied and (if it is express) whether oral or in writing, whereby the individual undertakes to do or perform personally any work or services for another party to that contract whose status is not by virtue of the contract that of a client or customer of any profession or business undertaking carried on by the individual; and any reference to a worker’s contract shall be construed accordingly.’

2.9  The Working Time Regulations 1998, which apply to ‘workers’, adopts the same definition of ‘worker’ as section 230(3). Unfortunately, there is no uniformity across the employment legislation when looking at the issue of employment status. The Equality Act 2010 has a broader definition of employment than under the Employment Rights Act 1996. Section 83(2) Equality Act defines ‘employment’ as including ‘employment under a contract of employment, a contract of apprenticeship or a contract personally to do work’. 2.10  A detailed review of the concept of worker status is beyond the scope of this book. However, given the attention that worker status has been receiving in the media over the past few years, we have set out in 2.11–2.14 a brief summary of the position of and key characteristics that feature in a worker relationship (where the individual is not an employee). Any reference to cases in the remainder of this chapter involving worker status has been included only to the extent that it informs the question of whether or not an individual is an employee. 2.11  The distinction between workers who are not employees and individuals who genuinely fall within the traditional ‘self-employed’ category is that workers are afforded certain employment protections such as entitlement to holiday under the Working Time Regulations 1998 and a minimum wage as set out in the National Minimum Wage Regulations 2015. The concept of ‘worker’ as defined in section 230(3)(b) Employment Rights Act 1996 is sometimes 18

Who is an employee? 2.13

referred to as a ‘limb (b) worker’ (due to the fact that an employee is also a ‘worker’). As set out in section 230(3)(b), the criteria required to establish that an individual is a ‘worker’ is that there must be in existence a contract, personal service and the other party is not a client or customer of any profession or business undertaking carried on by the individual. Factors that will be considered in assessing if the other party is a client or customer of any profession or business undertaking carried on by the individual include control, exclusivity, method of payment, financial risk and provision of tools and equipment. In addition mutuality of obligation will be a relevant factor: both during the period in which work is undertaken and, in relevant cases, between discreet assignments: Windle & another v Secretary of State for Justice [2016] ICR 721. In Windle, a race discrimination claim involving interpreters who undertook discreet assignments for HM  Courts and Tribunal Services, the Court of Appeal accepted the ultimate question was the nature of the relationship whilst work was being done. However, Underhill LJ continued (at paragraph  23) ‘But it does not follow that the absence of mutuality of obligation outside that period may not influence, or shed light on, the character of the relationship within it’. It followed that the Tribunal had not erred in taking that factor into account in determining that Windle was not an employee within the meaning of section 83 Equality Act 2010 and therefore ineligible to bring a race discrimination claim. 2.12 In Windle the Court of Appeal held that the test for determining whether an individual was engaged under a contract of service or an employee in what they described as ‘the extended sense’ under the Equality Act was essentially the same but as Underhill LJ put it (paragraph 24) ‘In considering the latter question the boundary is pushed further in the putative employee’s favour – or, to put it another way, the passmark is lower.’ 2.13  Worker status has received considerable attention in the past few years as a result of the expansion of the ‘gig economy’ and a number of reported HM Revenue & Customs investigations and employment tribunal claims relating to companies within this sector. The Employment Tribunal decision in Aslam and others v Uber BV and others [2017] IRLR 4 has probably been the most high profile in recent years. The Employment Tribunal looked at the issue of ‘worker’ status in relation to a number of Uber drivers who brought claims for unpaid holiday and unlawful deductions from wages as a result of an alleged failure to pay the minimum wage under the National Minimum Wage Regulations 2015. Following a preliminary hearing, the Tribunal found that the claimants were workers for the purposes of the Employment Rights Act 1996, the Working Time Regulations 1998 and the National Minimum Wage Regulations 2015. Amongst its findings, the Tribunal concluded that the contractual documentation did not correspond with the reality of the relationship between Uber and its drivers, and Uber’s assertion that it is a mosaic of 30,000 small businesses linked by a common platform was ‘faintly ridiculous’. As with most cases on the issue of ‘worker’ status, this case turned heavily on its facts. The Tribunal concluded that the drivers fell within the definition of ‘workers’ as set out in section 230(3)(b) Employment Rights Act 1996 (referred to as ‘limb (b) workers’). Uber appealed 19

2.14  The employment relationship

the Tribunal’s decision and the Employment Appeal Tribunal handed down its decision on 10 November 2017 (Uber BV and others v Aslam and others [2018] IRLR 97). The EAT dismissed Uber’s appeal and, following Autoclenz Ltd v Belcher and others [2011]  IRLR  820 (SC), the Tribunal was entitled to find that the contractual documentation did not reflect the reality of the relationship between the parties and that it was entitled to disregard the terms and labels used in the written agreements. The EAT accepted that the Tribunal had reached permissible conclusions in coming to its decision that Aslam and others were workers. Uber has appealed the EAT's decision. An application to leapfrog to the Supreme Court was rejected and the Court of Appeal is due to hear the appeal in 2018. See also Dewhurst v Citysprint UK  Ltd ET/220512/2016 for another case that concerned the same issue. 2.14 A  recent case that has received considerable media attention is the Court of Appeal decision in Pimlico Plumbers Limited and another v Smith [2017] IRLR 323. Pimlico Plumbers appealed the Employment Tribunal’s decision, upheld by the EAT, that Mr Smith was a worker within the meaning of section 230(3)(b) Employment Rights Act 1996, regulation 2(1) Working Time Regulations 1998 and section 83(2)(a) Equality Act 2010. The Court of Appeal dismissed the appeal. Amongst a number of factors which the Tribunal cited as the basis for concluding Mr Smith was a worker, a key factor was the contractual requirement for Mr Smith to provide his services personally to Pimlico Plumbers. Pimlico Plumbers have appealed to the Supreme Court. The appeal was heard on 20 and 21 February 2018 and the Judgment is currently awaited. Another case that has been in the limelight, which has bucked the recent trend of cases arising out of the gig economy, is the decision of the Central Arbitration Committee (CAC) that Deliveroo riders were not workers within the meaning of section 296 Trade Union Labour Relations (Consolidation) Act 1992. The case of Independent Workers Union of Great Britain v RooFoods Ltd (t/a Deliveroo) [2018] IRLR 84 concerned an application by the Independent Workers’ Union of Great Britain to the CAC for recognition for collective bargaining in respect of Deliveroo riders in Camden, North London. The CAC rejected the Union’s application on the basis that the riders were not workers and therefore not eligible for trade union recognition. The CAC found that the contracts included a substitution clause and that there was evidence of instances where riders had appointed substitutes to deliver food to customers.

1(a)  Contract of employment or contract for services? 2.15  It is important to recognise the existence of the two categories of contract at the outset (ie a contract of service and a contract for services). In the majority of cases, the courts start from the premise that a contract must be either a contract of employment or a contract for services and then decide which of the two the contract most closely resembles. A detailed exposition of how the courts draw the distinction between the two categories is beyond the scope of this book. However, the following is a summary which should be sufficient to answer the question in the majority of cases. 20

Who is an employee? 2.18

2.16 Over the years, the courts have devised a variety of tests to determine whether a contract is one of employment or for services. However, no single test has emerged as the decisive one: Smith v Reliance Water Controls Ltd [2003] EWCA Civ 1153. 2.17  The approach that has been adopted by the courts for some time is to look at all the factors, weigh up those in favour of a contract of employment and those in favour of a contract for services and see where the balance falls. In Market Investigations Ltd v Minister of Social Security [1968] 3 All ER 732 at pages 737 and 738 Cooke J (approved by the Privy Council in Lee Ting Sang v Chung Chi-Keung and Another [1990] 2 AC  374), in considering the application of the organisational/integration test (see 2.21) doubted the viability of drawing up an exhaustive list of relevant factors and rejected the laying down of strict rules on the weight to be given to various factors in particular cases. This view was endorsed by the Court of Appeal in Hall (Inspector of Taxes) v Lorimer [1994] 1 WLR 209, in which the following passage from the judgment of Mummery J at first instance (reported at [1992] 1 WLR 939 at page 944) was approved: ‘In order to decide whether a person carries on business on his own account it is necessary to consider many different aspects of the person’s work activity. This is not a mechanical exercise of running through items on a check list to see whether they are present in, or absent from, a given situation. The object of the exercise is to paint a picture from the accumulation of detail. The overall effect can only be appreciated by standing back from the detailed picture which has been painted, by viewing it from a distance and by making an informed, considered, qualitative appreciation of the whole. It is a matter of evaluation of the overall effect of the detail, which is not necessarily the same as the sum total of the individual details. Not all details are of equal weight or importance in any given situation. The details may also vary in importance from one situation to another. The process involves painting a picture in each individual case.’

See also Smith v Reliance Water Controls Ltd [2003] EWCA Civ 1153. 2.18 Notwithstanding this approach, it is instructive to look at the various tests devised by the courts and the factors that have been regarded as relevant in previous cases. While these will not provide a conclusive answer in future cases, they are the best guidance that can be given and are likely to be of assistance in determining the true nature of any particular contract. One other point to note is that although the written terms of the contract (if any) will be important, it is clear that an employment tribunal or court can disregard any written terms that do not reflect the actual agreement of the parties and are inconsistent with the reality of the relationship between the parties: Autoclenz Ltd v Belcher and others [2011]  IRLR  820 (SC). An intention by the parties to paint a false picture as to the true nature of their respective obligations is not necessary (see Lord Clarke at paragraph  28 disagreeing with Rimer LJ in Consistent Group Ltd v Kalwak [2008]  IRLR  505 (CA) that an intention to mislead was required). 21

2.19  The employment relationship

1(b) The tests 2.19  There are four main tests: (i) the control test; (ii) the organisational/integration test; (iii) the economic reality test; and (iv) the multiple test. 1(b)(i) The control test 2.20 Under this test, if the individual providing services to a company or organisation could be told not only what to do but how and when to do it, the contract was one of service, the degree of control being sufficient to make the individual the servant of the master. Control is not a conclusive test, but it remains an important factor and something which always has to be considered: Market Investigations Ltd v Minister of Social Security [1968] 3 All ER  732 at page 738. Significant weight was put on the control test in the agency worker cases that were decided prior to the introduction of the Agency Workers Regulations 2010. Those regulations and the position of agency workers generally are beyond the scope of this book. However, in summary, an agency worker is an individual who engages with an employment agency to work for a client of that agency, and the Agency Workers Regulations 2010 provide this category of workers with certain statutory rights and protections. In some instances agency workers have been found to be employees of the end user (the agency’s client) partly because in practice it was the end user who exercised control over the activities of the individual: Dacas v Brook Street Bureau (UK) Limited [2004] IRLR 358 (CA). 1(b)(ii) The organisational/integration test 2.21  This test derives from the judgment of Denning LJ in Stevenson Jordan and Harrison Ltd v MacDonald and Evans [1952] 1 TLR 101. The test is whether the individual is ‘part of the business’, as distinct from doing work for the business which is not integrated into that business but is only an accessory to the business. This test may have significant weight where an independent contractor effectively provides exclusive service to a single entity over a period of time. In such a case, it is likely to be particularly difficult to prove that the individual is genuinely an independent contractor. 1(b)(iii) The economic reality test 2.22 Often described as the converse of the organisational/integration test, instead of asking whether the individual is part of the organisation, the question 22

Who is an employee? 2.25

here is whether he is separate from it to the extent that he is performing the services as a ‘person in business on his own account’: Market Investigations Ltd v Minister of Social Security [1968] 3 All ER 732 at page 738. 1(b)(iv) The multiple test 2.23  This test was propounded by McKenna J in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 1 All ER 433 at page 439, where he said that for a contract of employment to exist three conditions had to be satisfied: •

the servant agrees that in consideration of a wage or other remuneration he will provide his own work and skill in the performance of some service for his master;

•

he agrees expressly or impliedly, that in the performance of that service he will be subject to that other’s control in a sufficient degree to make that other master; and

•

the other provisions of the contract are consistent with its being a contract of service.

This test forms the basis of the approach currently adopted by tribunals and courts in determining whether a contract is one of employment or for services. See, for example, Express and Echo Publications Ltd v Tanton [1999] IRLR 367 (CA), Montgomery v Johnson Underwood Limited [2001] IRLR 269 and Autoclenz Ltd v Belcher and others [2011] IRLR 820 (SC).

1(c)  Relevant factors 2.24  Various factors have been found to be relevant in previous cases. Broadly speaking, those factors fall into three categories: •

those which suggest the contract is one of employment;

•

those which suggest the contract is one for services; and

•

what can be described as the ‘either way’ category. Factors in this category can be evidence of either of the two types of contract, depending on the facts.

2.25  In considering the following factors, it is essential to remember that only very rarely will one factor be conclusive in determining the nature of a contract. Furthermore, the weight to be given to any particular factor may vary from case to case, depending on the circumstances – see the passage from the judgment of Mummery J in Hall (Inspector of Taxes) v Lorimer [1992] 1 WLR 939 at page 944, referred to at 2.17. 23

2.26  The employment relationship

1(c)(i)  Factors in favour of a contract of employment 2.26  The following are factors which will normally be evidence of a contract of employment. The first three – personal service, the irreducible minimum of mutuality of obligation and a sufficient degree of control are essential features of a contract of employment: Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 1 All ER 433; Nethermere (St Neots) Ltd v Taverna and Gardiner [1984] ICR 612 (CA); Carmichael v National Power plc [2000] IRLR 43 (HL). Personal service 2.27  Personal service lies at the heart of a contract of employment. An individual who agrees to work personally and exclusively for one business is likely to be an employee: Bauman v Hulton Press Ltd [1952] 2 All ER 1121. On the other hand, the absence of exclusive service is not necessarily fatal to the existence of an employment relationship – for example, an employee could work part-time for more than one employer or be on a ‘zero hours’ contract. In relation to the latter, section 27A(1) Employment Rights Act 1996 defines a zero hours contract as ‘A contract of employment or other worker’s contract under which (a) the undertaking to do or perform work or services is an undertaking to do so conditionally on the employer making work or services available to the worker, and (b) there is no certainty that any such work or services will be made available to the worker’. Section 153 Small Business, Enterprise and Employment Act 2015 inserted sections 27A and 27B into the Employment Rights Act 1996 making exclusivity clauses (ie clauses obliging the individual to work exclusively for the particular organisation) in zero hours contracts unenforceable. Therefore, an individual could be engaged under a ‘zero hours’ contract and found to be an employee despite the lack of exclusivity towards the relevant employer. 2.28  Whether the individual has a right to substitute another to provide the contracted services is also highly relevant to whether there is ‘personal service’ and therefore whether the contract is one of service or for services. In Autoclenz Ltd v Belcher and others [2011]  IRLR  820 (SC), the Supreme Court approving Peter Gibson LJ’s judgment in Express & Echo Publications Ltd v Tanton [1999] IRLR 367 held that if a ‘genuine right of substitution exists, this negates an obligation to perform work personally and is inconsistent with employee status’ (Lord Clarke at paragraph 19). It is also irrelevant that the right of substitution has not been used: Autoclenz (at paragraph 19). See also 2.39 on the issue of personal service and substitution. Mutuality of obligation 2.29  As Elias J noted in Stephenson v Delphi Diesel Systems Ltd [2003] ICR 471, and later as Elias LJ in Quashie v Stringfellow Restaurants Ltd [2013] IRLR 99 (CA) at paragraph 10 ‘Every bilateral contract requires mutual obligations; they constitute the consideration from each party necessary to create the contract.’ It 24

Who is an employee? 2.30

is the nature and extent of any mutual obligations that will determine whether or not there is in place an employment contract as opposed to a contract for services (including whether or not the individual is a ‘worker’ under that contract). Where an individual works intermittently for another, perhaps as and when work is available, there is in principle no reason why the individual should not be employed under an employment contract for each separate engagement, even if of short duration: McMeechan v Secretary of State for Employment [1997]  IRLR  353 and Cornwall County Council v Prater [2006]  IRLR  362. However, the issue that commonly arises is whether an employment contract (commonly referred to as an umbrella contract) continues between engagements, so as to afford the individual the benefit of employment protection rights. The fact that the individual only works casually or intermittently may justify an inference that he or she is engaged to provide services under a contract for services rather than an employment contract. In cases involving casual workers and home workers the mutual obligations have generally been interpreted as an obligation to provide work and an obligation to perform that work: O’Kelly v Trusthouse Forte plc [1983] IRLR 369 and Nethermere (St Neots) Ltd v Taverna and Gardiner [1984] ICR 612, Little v BMI Chiltern Hospital [2009] All ER (D) 238 (Jun) and Drake v Ipsos Mori UK Ltd [2012] IRLR 973. In Carmichael v National Power plc [2000] IRLR 43 the House of Lords rejected the proposition suggested by the Court of Appeal that, where individuals were engaged on a ‘casual, as required’ basis, a term could be implied into the contract to the effect that the employer would provide a reasonable share of the work available in return for which the individual would perform a reasonable amount of the work offered, and returned instead to the approach in O’Kelly v Trusthouse Forte plc. However, it has been held that providing an individual with an open-ended opportunity to work may represent sufficient mutuality of obligation required for an employment contract (Younis v TransGlobal Projects (2006)  UKEAT/0504/05/SM) and the EAT has even implied an obligation to act in good faith in accepting or refusing assignments in order to find mutuality of obligation for an employment contract (ABC  News Intercontinental Inc v Gizbert (2006) UKEAT/0160/06/DM). 2.30  More recently in Quashie, the Court of Appeal upheld the decision of the Employment Tribunal that there was no contract of employment between the parties at any time. Ms Quashie was a lap dancer at Stringfellows club, on the facts Stringfellows were found to have no obligation to provide work for her. Ms Quashie merely notified Stringfellows when she would be away on holiday, her absences not requiring permission of any sort, and there were significant gaps between the occasions when she worked at the clubs. Nor did Stringfellows pay Ms Quashie. She received payments directly from clients at the clubs and paid fees to Stringfellows. On nights when payments from clients were less than the fees due Ms Quashie would be out of pocket; a situation which occurred on a number of occasions. The absence of an obligation to provide work and to pay meant there was no mutuality of obligation that would support the existence of an employment contract. See also in the context of ‘worker status’ the Court of Appeal’s decision in Windle & another v Secretary of State for Justice [2016] ICR 721 (considered briefly at 2.11). 25

2.31  The employment relationship

Control 2.31 A  sufficient degree of control is required for there to be an employment relationship: Montgomery v Johnson Underwood Ltd [2001]  IRLR  269 (CA) Buckley J at paragraph 19 endorsing the guidance of McKenna J in Ready-Mixed Concrete (South East) Ltd v the Minister of Pensions and National Insurance [1968] 2 QB 497. At page 515 McKenna J had summarised the concept of control in the following way: ‘Control includes the power of deciding the thing to be done, the way in which it shall be done, the means to be employed in doing it, the time when and the place where it shall be done. All these aspects of control must be considered in deciding whether the right exists in a sufficient degree to make one party the master and the other his servant. The right need not be unrestricted’.

2.32  An employment relationship may be established even if there is little actual day to day control provided ultimate control over the individual is retained under the contract. Conversely, an individual may be subject to a high degree of control but still be correctly categorised as an independent contractor because of the other relevant factors in the Ready-Mixed Concrete test holding greater weight. Particularly in the case of highly specialised and skilled employees the issue of control is often more about how an individual is controlled in the sense of what the individual can be required to do rather than how the particular task is undertaken. 2.33  The case of White and Todd v Troutbeck SA [2013] IRLR 949 (CA) is a recent illustration of the level of control that is sufficient for there to be an employment relationship. The case concerned two caretakers who worked on a farming estate but had been engaged via an offshore company, Troutbeck. A  dispute occurred and the two caretakers brought claims for unfair dismissal. Troutbeck contended that they did not exercise ‘day-to-day control’ over the caretakers. There were no fixed hours and the caretakers were able to undertake work for others, if they chose to do so. The caretakers were therefore not employees, a contention upheld by the Employment Tribunal. On appeal the EAT overturned the Tribunal’s decision. Upholding the EAT’s decision the Court of Appeal held that the fact that there may be a low level of actual day-to-day control over the activities of the caretakers who were given autonomy in the way that they carried out their duties would not preclude an employment relationship when, viewed in the round and looking at all the surrounding circumstances, a sufficient degree of ultimate control was retained. Sir John Mummery (at paragraph 38) concluded that the absence of actual day-to-day control was not the determinative factor, what was more important was the cumulative effect of the totality of the provisions in the written agreement between the parties and all the circumstances of the relationship created by it. The caretakers were employees and their claims for unfair dismissal and arrears of pay and holiday pay could proceed. Payment of wages/salary 2.34  Where the parties to the contract agree that payment to the individual will be by annual wage or salary payable either weekly or monthly, possibly with 26

Who is an employee? 2.37

agreed review dates, that is evidence of an employment relationship. Attempts to avoid an employment relationship by mis-describing wages or salary will not be effective: see Migrant Advisory Service v Chaudri (unreported UKEAT 1400/97) 1999 IRLB 615, where payments described as ‘voluntary expenses’ were found by the EAT to be wages. 2.35  The absence of an obligation to pay an individual for their work will be an important factor in determining the nature of the relationship between the parties. In Quashie v Stringfellow Restaurants Ltd [2013] IRLR 99 (CA), Stringfellows was under no obligation to pay Quashie for her lap dancing services – she received her own fees from the clients of Stringfellows leaving her open to the possibility of being out of pocket on any given night after payment of the fees/ commission payable to Stringfellows (see 2.30). Considering this together with other relevant factors, the Court of Appeal restored the Employment Tribunal’s decision that Miss Quashie was not an employee. However, the mere fact that contractual salary is not taken will not necessarily negate the existence of a contract of employment: see Secretary of State v Knight UK EAT/0073/13 in which the sole shareholder chose not to take pay in order to keep the company afloat. See also Stack v Ajar-Tec Limited [2015] IRLR 474 where the Court of Appeal held that, although the director and shareholder had worked without pay for three years, this did not automatically mean that he was not an employee. The Court of Appeal restored the decision of the Employment Tribunal that Stack was both an employee and a worker, his claims for both unfair dismissal and unauthorised deductions from wages could therefore proceed. Deduction of tax and employees’ national insurance contributions 2.36  Deduction of tax on a PAYE basis and deduction of Class 1 national insurance contributions from an individual’s pay before he receives it is evidence of an employment contract. Contrast the independent contractor whose fees will not be classed as ‘earnings’ for income tax purposes, is required to account for his own income tax by self-assessment, pays his own national insurance contributions and receives his fee gross. However, it is important to bear in mind that paying income tax and national insurance contributions as an employee is not determinative of an employment relationship. This will be one of many factors to be considered and it is possible for there to be a contract of services irrespective of deductions that have been made under PAYE (see O’Kelly v Trusthouse Forte plc [1984] QB 90 (CA); Clark v Oxfordshire Health Authority [1998] IRLR 125 (CA) and Carmichael v National Power plc [2000] IRLR 43 (HL). Miscellaneous terms 2.37  Inclusion of any of the following terms in a contract will be supportive evidence that the relationship is one of employment: provision of a car/other vehicle; eligibility for automatic enrolment into an automatic enrolment pension scheme; eligibility to join an occupational pension scheme; provision of death in service benefit; provision of permanent health insurance; eligibility to participate in a share option scheme; a right of a business to suspend and the existence of disciplinary and grievance procedures. 27

2.38  The employment relationship

1(c)(ii)  Factors in favour of a contract for services 2.38  The following are factors which will normally be evidence of a contract for services. Ability to send a substitute 2.39 Personal service is the essence of a contract of service. Consequently, where an individual has an unfettered right to send a substitute to perform the agreed duties, that alone will usually be a strong indicator towards the contract being found to be for services: Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 1 All ER  433; Express and Echo Publications Ltd v Tanton [1999]  IRLR  367 (CA), Staffordshire Sentinel Newspapers v Potter [2004] IRLR 752 (EAT), Autoclenz Ltd v Belcher and others [2011]  IRLR  820 (SC). However, the courts will look at the particular circumstances and the nature of any entitlement to send a substitute, including whether or not sending a substitute would be accepted in practice by the employing party. In Macfarlane and another v Glasgow City Council [2001] IRLR 7 the EAT suggested that a very limited ability to delegate (eg in case of illness or other incapacity) is not necessarily fatal to a finding that the contract is one of employment – it will depend on the particular facts in each case. The nature of any duties which can be delegated will be a relevant consideration – if some minor duties cannot be delegated, but the main duties can, the contract will usually be for services: Green v St Nicholas Parochial Church Council (2005) UKEAT/0904/04. The recent Court of Appeal decision in Pimlico Plumbers Limited and another v Smith [2017]  IRLR  323 (which dealt with whether individuals regarded by Pimlico Plumbers as independent contractors were in fact ‘workers’) sets out useful guidance on the subject of personal service and the extent to which substitution would be inconsistent with the principle of providing services personally. Sir Terence Etherton at paragraph 84 summarised the applicable principles as follows: ‘… Firstly, an unfettered right to substitute another person to do the work or perform the services is inconsistent with an undertaking to do so personally. Secondly, a conditional right to substitute another person may or may not be inconsistent with personal performance depending upon the conditionality. It will depend on the precise contractual arrangements and, in particular, the nature and degree of any fetter on a right of substitution or, using different language, the extent to which the right of substitution is limited or occasional. Thirdly, by way of example, a right of substitution only when the contractor is unable to carry out the work will, subject to any exceptional facts, be consistent with personal performance. Fourthly, again by way of example, a right of substitution limited only by the need to show that the substitute is as qualified as the contractor to do the work, whether or not that entails a particular procedure, will, subject to any exceptional facts, be inconsistent with personal performance. Fifthly, again by way of example, a right to substitute only with the consent of another person who has an absolute and unqualified discretion to withhold consent will be consistent with personal performance.’ 28

Who is an employee? 2.45

Ability to work for other businesses 2.40 An ability to work for other businesses without restriction, express or implied, is evidence of a contract for services. A  restriction against working for rival businesses is not necessarily inconsistent with a contract for services; whether or not it is depends on all the facts of the case. For example, if the effect of the restriction is to prevent the individual working for any other businesses whatsoever, the contract is more likely to be one of employment. Payment by fees 2.41  Where payment is to be by an agreed fee payable in one lump sum or in quarterly instalments, in either case on submission of an invoice or invoices, that is evidence of a contract for services. Payment by commission 2.42  Normally individuals paid solely by commission are independent contractors. However, payment by commission only has been found to be consistent with a contract of employment: Hobbs v Royal Arsenal Co-operative Society Ltd (1930) 23 BWCC 254. In practice, contracts of employment providing for payment by commission only, rather than salary and commission, are rare and are potentially much more problematic following the implementation of the National Minimum Wage Act 1998 and National Minimum Wage Regulations 2015. Tax status 2.43  Payment by an individual of tax under Part 2 of the Income Tax (Trading and Other Income) Act 2005 is evidence of a contract for services. However, the mere fact that HM Revenue & Customs have accepted tax on this basis is not conclusive evidence that the individual is an independent contractor. It is persuasive only and HM  Revenue & Customs are at liberty, subject to certain limitations, to change their minds. 2.44  In March 2017, HM Revenue & Customs launched the Employment Status Service, an online tool designed to give a definitive answer on which employers can rely as to whether individuals should be classed as employed or selfemployed for tax purposes and therefore whether PAYE and national insurance contributions should be deducted from their remuneration. The accuracy of this tool is yet to be fully tested and it remains to be seen whether HM Revenue & Customs will challenge the outcome of the tool where the correct information has been entered throughout. Although on its website, HM Revenue & Customs states that it will ‘stand by the result given unless a compliance check finds the information provided isn’t accurate’. 2.45  Of course, as with other factors which are taken into account, an individual’s tax status is not determinative as regards an individual’s employment status: see Davis v New England College of Arundel [1977] ICR 6 and Airfix Footwear Limited v Cope [1978] IRLR 396. 29

2.46  The employment relationship

VAT registration 2.46  Where the individual is registered for Value Added Tax and submits VAT invoices for work done, this suggests the contract is one for services. VAT is payable, inter alia, on sums paid for the provision of services; wages and salaries are specifically excluded. For individuals/businesses providing services on which VAT is payable, registration is compulsory where the value of the anticipated taxable supplies exceeds the statutory registration threshold (which is currently £85,000). Voluntary registration is available where anticipated taxable supplies will not exceed the statutory registration threshold. The obligation to register applies if at the end of any month the value of taxable supplies in the previous 12 months exceeds the statutory threshold or if at any time there are reasonable grounds to believe that the value of taxable supplies in the next 30 days will exceed the statutory threshold: Schedule  1 Value Added Tax Act 1994, paragraph 1(1). For an individual below the statutory threshold wishing to establish that he is an independent contractor, it may be advantageous for him to consider voluntary registration. Provision of tools and equipment 2.47 An independent contractor will normally be responsible for supplying and maintaining his own tools and equipment. Exceptionally, specialist tools or equipment belonging to the business may be used by the independent contractor: see, eg, Hall (Inspector of Taxes) v Lorimer [1994] 1 WLR 209 where Lorimer, who was found to be an independent contractor, performed his role as a vision mixer using premises and very expensive specialist equipment provided by the production companies that engaged him. Financial risk 2.48 An independent contractor bears the risk of his enterprise; he benefits directly from the profits but suffers directly from the losses. Contrast the employee, who generally benefits only indirectly from the profits (with the exception of those whose pay is partly directly linked to profits, for example through a bonus scheme or long-term incentive plan) and is protected from the losses (at least until matters become so severe that pay cuts or redundancies are necessary). 2.49 In Quashie v Stringfellows Restaurants Ltd [2013] IRLR 99 (CA) Quashie was held to be self-employed given that she was responsible for various expenses and therefore took the risk of sometimes making no profit on any given night. Similarly, in Cheng Yuen v Royal Hong Kong Golf Club [1998] ICR 131 (PC) a golf caddy (Cheng Yuen) was licensed by a golf club to offer caddying services, he had a discretion when to work and was remunerated by the golfers, not the club. Cheng Yuen, again, bore the risk of his enterprise and, as such, was deemed to be self-employed. 30

Who is an employee? 2.54

1(c)(iii) The ‘either way’ factors 2.50  The following are factors which may, depending on the surrounding circumstances, be evidence of either a contract of employment or a contract for services. Personal service 2.51  For there to be a contract of employment, the individual must agree to provide his own services rather than those of another. However, an independent contractor is also perfectly free to agree to provide his own services and many, particularly those with very specialist skills eg artistes such as opera singers will do so. Control and organisation 2.52  As referred to at 2.31–2.33, one of the key factors in determining employment status is whether there is a sufficient degree of control (see Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 1 All ER  433). The greater the degree of control that can be exercised by the business over the individual in terms of how, when and where he performs the task and how he organises himself, the more likely the contract is to be one of employment. Conversely, the more autonomy the individual has, the more likely he is to be an independent contractor: Addison v London Philharmonic Orchestra [1981] ICR 261, subject always, however, to whether ultimate control has been retained: White and Todd v Troutbeck SA [2013] IRLR 949 (considered at 2.33). Form of documentation 2.53  The form, as distinct from the content, of the documentation recording the terms of the contract may suggest the type of contract. The fact that an agreement is called a ‘Consultancy Agreement’ or ‘Agreement for Services’, avoids use of the terms ‘employer’ and ‘employee’ and contains terms consistent with a contract for services will be evidence that it is indeed such a contract. However, a court will look at the reality of the relationship and the true agreement between the parties to assess whether or not an individual is an employee: Autoclenz Ltd v Belcher and others [2011] IRLR 820 (SC) (see 2.18). On the other hand, any of the following documents will be evidence of a contract of employment: an agreement entitled ‘Service Agreement’ in a form consistent with a service agreement (ie an expanded version of a contract of employment which is usually reserved for senior executives and/or executive directors); a statement supplied pursuant to section 1 Employment Rights Act 1996 and a memorandum under section 228(1) Companies Act 2006. Reimbursement of expenses 2.54  Such a term is generally indicative of a contract of employment or ‘worker’ status; an independent contractor normally agrees an all-inclusive price for his work. However, as with personal service (see 2.51), reimbursement of expenses is not necessarily inconsistent with a contract for services. 31

2.55  The employment relationship

1(d) The power of the parties to dictate the status of the contract 2.55  There are potential advantages to both parties if the contract under which the individual works is a contract for services. The individual will normally gain the benefit of receiving his fee gross (albeit still subject to the obligations under IR35 in certain cases) whereas the business will avoid having to operate PAYE and make national insurance contributions and will have none of the obligations imposed by statute exclusively on an employer (although obligations applicable to the broader concept of ‘worker’ – for example to give paid holiday – may still be applicable). The temptation, therefore, for parties to describe their contracts as contracts for services is significant. However, describing a contract in this way will be ineffective if the contract is really one of employment – the parties cannot avoid the legal consequences of the employment relationship merely by attaching a different label to the contract: Young and Woods Ltd v West [1980] IRLR 201; Consistent Group Ltd v Kalwak [2008]  IRLR  505; Protectacoat Firthglow Limited v Miklos Szilagyi [2009] IRLR 365 (CA) and Autoclenz Ltd v Belcher and others [2011] IRLR 820 (SC). However, where the contract could genuinely be either a contract of employment or a contract for services, then it is quite legitimate for the parties to so organise themselves as to make their relationship fall into which category they choose: Massey v Crown Life Insurance Co [1978] ICR 590. The intention of the parties should not be disregarded altogether where the situation is finely balanced (see 2.57). 2.56 Parties considering treating their relationship as a contract for services when it is obviously one of employment should exercise caution. Contracts which defraud HM  Revenue & Customs, as such a contract may be found to do, are illegal and void and normally cannot be relied on as the basis of any claim even where either or both parties are ignorant of the illegal character of the agreement: Miller v Karlinski (1945) 62 TLR 85 (CA) applied in Salveson v Simons [1994] IRLR 52, in which the EAT conducted a useful review of the authorities on illegality. An exception arises in relation to discrimination law rights, which are treated slightly differently by the courts for public policy reasons. An employer cannot rely on the illegality of a contract in order to avoid liability for discrimination: Hall v Woolston Hall Leisure Ltd [2000] IRLR 579 (CA) and Hounga v Allen (nee Aboyade-Cole) and another [2014] IRLR 811. A further exception is where the contract is found to be illegal as performed, as distinct from illegal as formed, and one party is innocent of the illegal purpose: Newland v Simons and Willer (Hairdressers) Ltd [1981] ICR 521 (EAT); or at least substantially less culpable than the other: Hewcastle Catering Ltd v Ahmed and Elkamah [1991] IRLR 473 (CA). In those circumstances, the innocent or less culpable party may be able to enforce the contract. Whilst it is arguable that wrongly electing to treat a contract of employment as a contract for services only means that the contract is illegal as performed, where both parties are equally culpable of perpetrating the fraud on HM  Revenue & Customs, as sometimes they will be, the exception will not assist. The rules were clarified further by Elias P  in Enfield Technical Services Ltd v Payne; Grace v BF Components [2007] IRLR 840, a case in which two individuals who had had their employment 32

Who is an employee? 2.60

status called into question had taken advice about their employment status from, in one case, ACAS and in the other HM Revenue & Customs. To prove illegality, Elias P  held that two factors were required: (a) the employee’s knowledge of the facts producing illegality (although not necessarily that it was illegal as a matter of law), and (b) an element of active participation. The Court of Appeal dismissed the appeal ([2008] IRLR 500) strongly approving Elias P’s judgment and agreeing that neither of the contracts were illegal, noting that the individuals clearly had the requisite ‘knowledge’ of the facts but that the crucial question in these particular cases was whether there had been misrepresentation by the employees of the tax position which would have amounted to an element of active participation. There had been no such misrepresentation. 2.57  In cases where there is doubt about the proper status of the contract, the prudent course has been to avoid the risk of an illegality argument by making full disclosure of the relevant facts to HM Revenue & Customs and obtaining their prior approval to treating the individual as self-employed (as had been done in Young and Woods Ltd v West [1980] IRLR 201). Since the launch of HM Revenue & Customs’ online tool the Employment Status Service (outlined more fully at 2.44) in March 2017, this is likely to be the first port of call for an employer seeking to determine the proper status of a particular individual. The ‘employer’ who fails to take this step faces the possibility of being unable to enforce the contract and of particular relevance in the context of the topics covered by this book the restrictive covenants. 2.58 Similarly, tax saving (as distinct from evasion) schemes other than the ‘independent contractor route’ should also only be adopted after careful thought. Whilst a scheme will not necessarily be unlawful because its only purpose is to reduce tax (Lightfoot v D  & J  Sporting Ltd [1996]  IRLR  64 (EAT)), such schemes will almost inevitably come under careful scrutiny by the courts and tribunals. So, for example, in Salveson v Simons [1994]  IRLR  52, after some years of employment at Simons’ suggestion his (then) employer agreed to pay him a reduced salary but pay an amount equal to the reduction to a partnership of Simons and his wife. That partnership declared and paid tax on the sums it received, but provided no services to Simons’ employer. Unsurprisingly, the arrangement was found to be illegal, with the result that Simons could not pursue an unfair dismissal claim. For obvious reasons, pure tax evasion schemes under which, for example, sums are paid but never declared to HM Revenue & Customs should never be contemplated. 2.59  For the use of personal service companies and managed service companies as vehicles to secure independent contractor status, see 2.71–2.72.

1(e)  Directors as employees 2.60  The term ‘director’ in this book is used to refer to a person who holds office as a director of a company in accordance with the provisions of the companies’ legislation. This includes a shadow director as defined in section 251 Companies Act 2006 and a ‘de facto’ director. As to whether an individual is a shadow or 33

2.61  The employment relationship

de facto director see 4.72–4.78 and 4.56–4.71 respectively. It does not include those given the courtesy title of director who are not members of the Board. To the experienced reader this may seem a rather obvious point to make, but it is surprising how often it is wrongly assumed that someone called a director is in fact a director under companies’ legislation. The office of director is held subject to the provisions of the company’s Memorandum and Articles of Association, the Companies Act 2006 and in some instances a shareholders’ agreement. 2.61  A director is an office-holder of a company. He may also be an employee of the company, but that does not by any means follow automatically from his directorship. To be an employee the director must be able to show an express or implied contract of employment between himself and the company: Eaton v Robert Eaton Ltd [1988] ICR 302. To determine whether such a contract exists, the process described above of considering all the facts and balancing those in favour of a contract of employment against those not in favour must be carried out. The factors outlined above will be relevant, but there are certain points, peculiar to directors, that need to be considered in connection with those factors. 1(e)(i)  Control and organisation 2.62  The degree of control exercised over a director may be minimal; this is particularly so in small family companies. A minimal degree of control does not prevent the director being an employee: Trussed Steel Concrete Co Ltd v Green [1946] Ch  115. Even the virtual absence of control over the director, such as occurs when the director owns a controlling interest in the company, will not prevent the director from being an employee if there is a bona fide contract of employment between the company and the director: Nottingham Egg Packers and Distributors Ltd v McCarthy and Haslett (1967) 2 ITR 223. There is no rule of law that precludes an individual who holds a controlling interest in a company from being an employee of that company: Secretary of State for Trade and Industry v Bottrill [1999] IRLR 326 (CA), adopting the comments of the Court of Session in Fleming v Secretary of State for Trade and Industry [1997] IRLR 682 and disapproving the EAT’s earlier decision in Buchan v Secretary of State for Employment [1997] IRLR 80. The EAT reviewed the relevant authorities in Clark v Clark Construction Initiatives Ltd [2008] IRLR 364 and, at paragraph 98, Elias J (P) set out a non-exhaustive list of the factors to be taken into account when determining whether the contract of employment of a majority shareholder should be given effect: as follows: ‘(1) Where there is a contract ostensibly in place, the onus is on the party seeking to deny its effect to satisfy the court that it is not what it appears to be. This is particularly so where the individual has paid tax and national insurance as an employee; he has on the face of it earned the right to take advantage of the benefits which employees may derive from such payments. (2) The mere fact that the individual has a controlling shareholding does not of itself prevent a contract of employment arising. Nor does the fact that he in practice is able to exercise real or sole control over what the company does (Lee). 34

Who is an employee? 2.63

(3)

Similarly, the fact that he is an entrepreneur, or has built the company up, or will profit from its success, will not be factors militating against a finding that there is a contract in place. Indeed, any controlling shareholder will inevitably benefit from the company’s success, as will many employees with share option schemes (Arascene).

(4)

If the conduct of the parties is in accordance with the contract that would be a strong pointer towards the contract being valid and binding. For example, this would be so if the individual works the hours stipulated or does not take more than the stipulated holidays.

(5)

Conversely, if the conduct of the parties is either inconsistent with the contract (in the sense described in para.96) or in certain key areas where one might expect it to be governed by the contract is in fact not so governed, that would be a factor, and potentially a very important one, militating against a finding that the controlling shareholder is in reality an employee.

(6) In that context, the assertion that there is a genuine contract will be undermined if the terms have not been identified or reduced into writing (Fleming). This will be powerful evidence that the contract was not really intended to regulate the relationship in any way. (7)

The fact that the individual takes loans from the company or guarantees its debts could exceptionally have some relevance in analysing the true nature of the relationship, but in most cases such factors are unlikely to carry any weight. There is nothing intrinsically inconsistent in a person who is an employee doing these things. Indeed, in many small companies it will be necessary for the controlling shareholder personally to have to give bank guarantees precisely because the company assets are small and no funding will be forthcoming without them. It would wholly undermine the Lee approach if this were to be sufficient to deny the controlling shareholder the right to enter into a contract of employment.

(8)

Although the courts have said that the fact of there being a controlling shareholding is always relevant and may be decisive, that does not mean that the fact alone will ever justify a tribunal in finding that there was no contract in place. That would be to apply the Buchan test which has been decisively rejected. The fact that there is a controlling shareholding is what may raise doubts as to whether that individual is truly an employee, but of itself that fact alone does not resolve those doubts one way or another.’

2.63 This area of law was reconsidered by the EAT in Neufeld v A  & N Communication in Print Ltd UKEAT 0177/07/JOJ, and the EAT’s finding that Mr Neufeld was an employee upheld by the Court of Appeal in two conjoined appeals brought as test cases to clarify the position: Secretary of State for Business Enterprise and Regulatory Reform v Neufeld and Howe [2009] IRLR 475. The Court of Appeal (Rimer LJ) approved Elias P’s guidance in Clark subject to two key qualifications, namely that: (1) the first factor should not be taken as amounting to a suggestion that the mere production of a written contract shifts the formal burden of proof to the party denying that it is a genuine contract. Rimer LJ doubted that Elias 35

2.64  The employment relationship

J was intending to refer to a legal burden. it may still be necessary for the putative employee to do more than produce documentation to satisfy the tribunal; and (2) Elias J’s sixth factor perhaps put too high the negative effect of the absence of a written document. Whether there is anything in writing will be an important consideration, but the Court of Appeal felt that if the parties’ conduct points towards a true contract of employment ‘we would not wish tribunals to seize too readily on the absence of a written agreement as justifying a rejection of the claim’ (Rimer LJ at paragraph 89). The approach that should be adopted in light of the above case law is to apply a number of different factors before reaching a determination. No one factor should hold dominance over any other. 1(e)(ii)  Method of payment 2.64  The traditional method of remunerating directors, who are not employees, is through fees which must be paid pursuant to section 5 Income Tax (Earnings and Pensions) Act  2003 (ie after deduction of tax and national insurance contributions at source under PAYE) given that the individuals will be ‘office holders’ for tax purposes. Normally the company’s Articles of Association provide for an annual figure to be voted on, and that figure will usually be a more modest amount compared to what the individual may expect to earn by way of salary. The fact that a director’s remuneration was treated as ‘fees and emoluments’ was one of the factors which led the Court of Appeal to conclude that a director was not an employee in Albert J Parsons & Sons Ltd v Parsons [1979] ICR 271. In contrast, a director who is required to work full time for a company in return for a salary is likely to be an employee: Folami v Nigerline (UK) Ltd [1978] ICR 277 (EAT). 2.65  In the Northern Ireland case of Department for Employment and Learning v Morgan [2016] IRLR 350, the Northern Ireland Court of Appeal considered the issue of payment of dividends and whether the receipt of payment in this form is incompatible with an employment relationship. The Court of Appeal upheld the Industrial Tribunal’s decision that, looking at the substance and not the form of the money received by Mr Morgan, the so-called dividend that was paid to him was in reality an emolument for services rendered by him to his employer, and therefore should be treated as salary arising from a contract of employment. 1(e)(iii)  Form of contractual documentation 2.66  Sections 228–230 Companies Act 2006 impose on a company an obligation (subject to certain exceptions) to keep copies of any written contracts of employment between itself and its directors or, if any such contract is not in writing, a written memorandum setting out its terms. The company is under the same obligation where the director is employed by a subsidiary of the company (section 36

Who is an employee? 2.68

228(1)(a)), and shadow directors are treated as directors for the purposes of the section (section 230). The documentation is open to inspection by members of the company (section 229(1)) and any member is entitled, on payment of a fee, to request a copy of the documentation (section 229(2)). It is always important, when deciding whether or not a director is an employee, to bear the provisions of these sections in mind in addition to the factors identified in Clark v Clark Construction Initiatives Ltd [2008]  IRLR  364 as commented on in Secretary of State for Business Enterprise and Regulatory Reform v Neufeld and Howe [2009] IRLR 475 (see 2.62–2.63). If, for example, a written memorandum has been produced in accordance with section 228(1), then when considered alongside all of the other relevant factors, that may be evidence to support the existence of an employment relationship. 2.67 In the event of a dispute/potential dispute between a director and his employing company, section 228(1) can provide a director/employee who has lost his contract, and does not want to arouse suspicion by asking for a copy, an alternative means of access to it, provided he can find a ‘tame’ member to request a copy and pay the required fee or to inspect the document on his behalf.

1(f)  Members of limited liability partnerships as employees 2.68  It has long been established that partners in a traditional partnership cannot also be employees of that partnership (see Ellis v Joseph Ellis & Co [1905] 1  KB  324 and Cowell v Quilter Goodison & Co Ltd and QG  Management Services Ltd [1989] IRLR 392). In relation to members of a limited liability partnership established under the provisions of the Limited Liability Partnerships Act 2000, section 4(4) of the Act makes it clear that members are not generally employees of the LLP, but there is no prohibition on members having that dual status. The section provides that a member will only be an employee if he would be considered as such if the LLP was a partnership. Whilst this certainly implies that members cannot also be employees, the courts have recognised that there is a difference between members of an LLP who share in the profits and those who do not: ie the difference between equity members (partners) who share directly in the profits and losses and salaried members (partners) who have a fixed salary sometimes with the right to participate in a discretionary bonus scheme: see Re Rogers (deceased) [2006] 2 All ER 792 in which Lightman J suggested that members who did not share in the profits were employees of the LLP (see paragraph 15). However, the position in relation to whether members can also be employees at the same time may have been settled by the Supreme Court in Bates van Winkelhof v Clyde & Co LLP [2014] IRLR 641. In this decision, Lady Hale concluded (arguably obiter) that Rimer LJ’s interpretation of section 4(4) Limited Liability Partnerships Act 2000 in Tiffin v Lester Aldridge [2012] 1 WLR 1887 was incorrect and it is arguable that implicit in her analysis is that an individual could not be a member of an LLP and an employee at the same time (see paragraph 21). This was certainly the interpretation that was adopted by Warren J in Reinhard v Ondra LLP and others [2015] EWHC 26 (Ch) (see paragraph 43). 37

2.69  The employment relationship

1(g)  Ex-employees as independent contractors 2.69  It is convenient to deal here with this special category of individuals. The most common circumstances in which an ex-employee of a business may become an independent contractor to that business are: •

where one, or both, of the parties to the contract perceive the advantages of the change in status and agreement is reached on the change: Massey v Crown Life Insurance Co [1978] ICR 590; or

•

the business has had to dispense with the services of a full-time employee but wishes to retain some access to their services; most often nowadays the individual will have been made redundant and the ‘consultancy’ position will be offered as part of the termination package.

These arrangements can have definite advantages for both parties, but they are not without their pitfalls. 2.70 That an individual can continue to do the same work and be properly treated as employed one day and self-employed the next by reason only of an agreement between the parties is accepted: Massey v Crown Life Insurance Co [1978]  ICR  590 and Inland Revenue Commissioners v Duke of Westminster [1936] AC  1. However, such arrangements are open to close scrutiny, particularly by HM Revenue & Customs. If the reality of the situation is that the continuing relationship is one of employment, applying a contract for services label to it will make no difference. Furthermore, the tax treatment of any severance payment made in connection with the purported termination of the employment may also be called into question. Where the employer treats all or the first £30,000 of such a payment as tax free, relying on sections 401–404 Income Tax (Earnings and Pensions) Act 2003, he may well face a successful challenge from HM Revenue & Customs, and a consequent tax liability. Detailed consideration of this type of arrangement is beyond the scope of this book, but suffice to say that great care needs to be taken, particularly with the tax treatment of such arrangements. Making use of HM Revenue & Customs’ Employment Status Service would be prudent – see 2.44. Careful thought should also be given to whether there is any need for indemnities in relation to potential liabilities for income tax and employees’ national insurance contributions (remembering always that the employer cannot be indemnified for employers’ national insurance contributions). 2.71  Because of the real difficulties in making an ex-employee an independent contractor in his personal capacity, it is common practice to hire the ex-employee through his personal service company. By introducing a separate legal entity into the arrangements the parties hope to avoid PAYE and national insurance contributions and, from the ex-employer’s perspective, minimise the risk of employment protection claims. In real terms, the ex-employee is often doing exactly what he did as an employee and simply using the service company as a post box for monies. In such cases, from a tax perspective the effectiveness is likely to be limited, particularly for the ex-employee. In April 2000 the Government introduced legislation to deal with such arrangements where the sole purpose 38

The creation of the contract of employment 2.73

is to avoid liability for PAYE and national insurance contributions. This legislation has become known as the IR35 legislation after the Budget announcement in which it was first proposed – Inland Revenue 35. The legislation allows HM Revenue & Customs to disregard the legal relationship and to look at the reality of the situation in order to determine an individual’s tax status. If, in the absence of the personal service company, the ex-employee would be regarded as an employee of the end user, taking into account the tests set out above, his income will generally be subject to tax and national insurance contributions and the relevant deductions should be made by the personal service company. In 2016, the Government consulted on changes that are being made to public sector engagers of personal service companies (even if through agencies) where the relationship is similar to one of employment. These changes (which are outside the scope of this book) took effect on 6 April 2017 and involve the public sector engager having to make deductions for PAYE and national insurance.  2.72 Following the introduction of the IR35 legislation, it has become common for ex-employees to provide services through managed service companies (‘MSCs’) as an alternative method of trying to avoid PAYE and national insurance contributions. MSCs are intermediary companies through which the services of an individual are provided to an end user. They are managed by a third party ‘scheme provider’ and the individual himself, whilst holding shares in the company, will usually take no part in the management or financial control of the MSC. Although the IR35 legislation already applied in this area, the Government took the view that the rules were not being followed properly and that the administrative burden of enforcing them was too great. It therefore introduced further legislation to deal with such arrangements. The MSC legislation, which came into force in April 2007 for income tax and August 2007 for national insurance contributions, is even stricter than the IR35 legislation and makes this option substantially less attractive for both the ex-employee and the end user company. All MSCs must now deduct PAYE and national insurance contributions at source on sums paid to all individuals in respect of work provided through the MSC – the obligation is not, unlike the IR35 legislation, limited to situations in which, in the absence of the personal service company, the ex-employee would be regarded as an employee of the end user. In addition, HM Revenue & Customs have been given wide powers to recover unpaid national insurance contributions and PAYE from third parties, including, the end user company. Such arrangements should, therefore, only be operated with extreme caution.

2. THE CREATION OF THE CONTRACT OF EMPLOYMENT 2.73  The creation of a contract of employment is subject to the normal rules of the law of contract. There must be an offer made which is accepted without qualification; there must be consideration; and there must, objectively judged, be an intention to create legal relations. While it is not always easy to analyse precisely how the facts of a particular case conform to these criteria, conform they must, otherwise no contract exists as a matter of law. 39

2.74  The employment relationship

2(a)  Commencement of the employment relationship 2.74  The date of commencement of employment may be: •

the date specified in the contract of employment; or

•

the date on which the employee first undertakes work for the employer; or

•

the date the contract of employment was entered into, determined in accordance with the normal contractual principles relating to offer and acceptance.

Sometimes there is a significant gap between the date of entering into the contract of employment and the date employment actually begins, for instance because of the length of notice required to determine the current contract of employment. 2.75  The commencement of the employment relationship is not to be confused with the commencement of the period of continuous employment for the purposes of calculating statutory employment protection rights. The two dates may be coincident, but will not always be the same. For the purposes of this book, the date of commencement of employment will usually be the important date, for example where the length of notice required to terminate or the duration of the covenants increases with length of employment.

2(b) The form of the contract 2.76  With the exception of a very few categories of employee (eg apprentices and crews of merchant ships) under the provisions of section 1 Employment Rights Act 1996 and section 228(1) Companies Act 2006 (see 2.66), there is no requirement that terms of employment should be recorded in writing. Moreover, failure to follow the provisions of section 1 Employment Rights Act 1996 and section 228(1) Companies Act 2006 will not affect the validity of the contract. It follows that a contract of employment can be a purely oral agreement between the parties. Nowadays, however, this is unusual. Partly written and partly oral agreements are much more common, with only the major terms being reduced to writing. The type of documentation and degree of formality varies from industry to industry. However, as a rule of thumb, the more senior the employee the more formal the documents are likely to be, with the possible exception of employees who have risen through the ranks, whose only documentation is often a rather brief initial letter of appointment. The existence of a foreign parent company may also dictate the style of the documentation – eg certain American corporations issue voluminous documentation. 2.77 It is difficult to generalise about the format of documentation issued to employees, but the following are the usual categories in descending order of formality: 40

The creation of the contract of employment 2.80

•

Service Agreements.

•

Short form Service Agreements often called Contracts of Employment.

• Letters of Engagement, sometimes incorporating Staff Handbooks/ Employee Manuals or parts of Collective Agreements with recognised Trade Unions. • Written statements of particulars of employment under section 1 Employment Rights Act 1996 and amendments thereto pursuant to section 4 of the same Act (but see 2.84–2.85 on the status of these), sometimes incorporating the documents referred to in the previous bullet point. 2.78  It was widely anticipated that the introduction of the concept of automatic union recognition in the Employment Relations Act 1999 and the Information and Consultation of Employees Regulations 2004 would lead to a greater emphasis on collectivism in the workplace and that this would have a significant impact on individual employment terms. However, these provisions including their extension to employers with more than 50 employees in April 2008 have not given rise to any significant changes in employment terms. In general, for the moment, the impact of collectivism is limited to a small number of industries (eg the public sector and manufacturing) and is not significant elsewhere. In particular, collectivism is unlikely to have any significant impact on restrictive covenants which, by their very nature, have to be tailored to the individual circumstances of each employee. Clearly, however, lawyers should always be aware of the collective aspects and, in construing a contract of employment, check whether there are any relevant collective terms that are incorporated into the contract.

2(c) The terms of the contract 2.79 The basic rule is that the parties are free to agree whatever terms they choose, subject only to specific statutory and common law restraints. For the purposes of this book the most relevant restraints are: (a) the statutory restraint against providing for notice periods shorter than those specified in section 86 Employment Rights Act 1996, (b) the limitation on the length of directors contracts in section 188 Companies Act 2006 and for relevant companies the limitation on the length of notice periods in the UK Corporate Governance Code, and (c) the common law restraint against an employer seeking to obtain, by way of restrictive covenant, protection without there being any legitimate interest to protect or more than adequate protection for his legitimate interests. 2.80  It was unclear for some time whether the provisions of section 3 Unfair Contract Terms Act 1977 would apply to employment contracts, particularly following the decision in Brigden v American Express Bank Ltd [2000] IRLR 94, in which it was held that although the Act could apply to employment contracts, it was not applicable on the facts of that case. However, following the Court of Appeal decision in Commerzbank AG v Keen [2007] IRLR 132 it is clear that the Unfair Contract Terms Act 1977 cannot apply to the employment relationship, 41

2.81  The employment relationship

as the employee can never be said to be dealing as a ‘consumer’, as required by the Act. 2.81  In practice it is always advisable for the parties to a contract of employment to reach agreement on all relevant matters and to record at least the most important terms of their agreement in writing. To do so minimises the likelihood of dispute. In reducing the terms to writing it is, however, vital to ensure that the written terms accurately reflect what was agreed. This is particularly important where the document is intended to express the entire agreement between the employer and the employee (and whether or not this is the case is a question of fact: Ministry of Defence HQ Defence Dental Services v Kettle [2007] EAT/308/06). The parol evidence rule applies as much to a contract of employment as to any other contract, so that a party will not normally be able to adduce oral or written evidence to contradict or vary the express terms of the contract. Although there are exceptions to the parol evidence rule (see Chitty on Contracts (32nd edition) Vol I, paragraphs 13.100–13.101) and the rule does not apply to an application to rectify the agreement (see Lovell and Christmas Ltd v Wall (1911) 104 LT 85), both parties are better off investing time in ensuring the accuracy of the written agreement rather than risking the cost and uncertainty of seeking to rely on these exceptions. See Chapter 12 for a detailed review of the interpretation of contractual terms. 2(c)(i) Types of term 2.82 There are two basic types of term: express terms and implied terms. Express terms are those explicitly agreed between the parties, eg  where the parties discuss the employee’s salary and agree a figure of £50,000 per annum. Implied terms are those which the parties have not specifically agreed but which nonetheless form part of the contract of employment. Implied terms fall into two broad categories: those which are implied as a matter of common law into employment contracts (these, in so far as they are directly relevant to the subject of this book, are dealt with in detail in Chapter 3); and those that are imposed as a matter of statute, eg  equality clauses under section 66(1) Equality Act 2010. Collectively negotiated terms may be incorporated into a contract either expressly or impliedly.

2(d) Written statement of particulars of employment 2.83  Section 1 Employment Rights Act 1996 provides that, subject to certain exceptions, within two months of an employee commencing employment the employer must provide a written statement of certain particulars of the employment. The particulars to be provided are no more than the basic terms applicable to the everyday operation of the employment. They include matters such as rates of pay; normal hours of work (if any); arrangements for holidays and holiday pay; job title and notice. Also to be included are details of any collective agreements that affect the employee’s terms and conditions (section 1(4)(j)). By virtue 42

The creation of the contract of employment 2.87

of section 4 Employment Rights Act 1996, the particulars provided must be kept up to date and changes notified to the employee within one month of the change. 2(d)(i)  Status of the written particulars 2.84  A document which does no more than provide the particulars required by section 1 Employment Rights Act 1996 is not, as a matter of law, a contractual document. It is persuasive, but not conclusive, evidence of the terms of the contract of employment: Moore v RH  McCulloch Ltd [1966] 1  ITR  484 and Robertson and Jackson v British Gas Corporation [1983] ICR 351 (CA). The importance of this is that a party seeking to argue that the written particulars are inaccurate can do so unfettered by the parol evidence rule. Evidence of discussions that took place, for example before the employee joined, can be used to show the inaccuracy of the written particulars. However, an employer wishing to dispute the accuracy of such a document will face an uphill struggle. Issue of the document was his unilateral act and, if the terms are not accurately recorded, that is no one’s fault but his own. The UK’s interpretation of the status of section 1 statements is consistent with the ECJ approach as expressed in Kampelmann v Landschaftsverband Westfalen-Lippe C235/96 [1998] IRLR 333. 2.85  The fact that an employee has signed acknowledging receipt of written particulars will not alter the status of the document: Robertson and Jackson v British Gas Corporation [1983] ICR 351 (CA). However, where a statement contains particulars other than those required by section 1 Employment Rights Act 1996, or where the employee is required to sign the document not only to acknowledge receipt but also to confirm his agreement to the terms, that may be enough to persuade a tribunal or court that the document has contractual force: see Gascol Conversions Ltd v Mercer [1974] ICR 420. 2(d)(ii)  Failure to comply with statutory obligations 2.86  Section 11 Employment Rights Act 1996 sets out the remedies for breaches of sections 1 and  4. Essentially, the section provides for an application to be made to the Employment Tribunal by the employee only, where the alleged breach is a total failure to comply with either section or where the details given are incomplete, and by either party where the allegation is that the information given is inaccurate. 2.87 The Tribunal’s powers on an application under section 11 Employment Rights Act 1996 were clarified by the Court of Appeal in Eagland v British Telecommunications plc [1992]  IRLR  323. The Tribunal is limited to recording terms covered by section 1 which have been expressly or impliedly agreed between the parties. In the absence of any such agreement the Tribunal is not empowered to ‘invent’ a term – the obiter dictum of Stephenson LJ who considered that reasonable terms could be ‘invented’ and literally written into a contract in Mears v Safecar Security Ltd [1982] IRLR 183 was strongly criticised and disapproved. Similarly, the Tribunal has no jurisdiction on an application under 43

2.88  The employment relationship

section 11 to interpret the agreement reached between the parties: Southern Cross Healthcare Co Ltd v Perkins [2011] ICR 285 (CA). Overturning the decision of the EAT the Court of Appeal in Southern Cross held that interpretation was the exclusive responsibility of the ordinary civil courts and section 11 ‘is not an invitation to judicial creativity even under the rubric of “construction”’ (Maurice Kay LJ at paragraph 29). In Southern Cross the EAT had therefore exceeded its jurisdiction in purporting to interpret a provision relating to holiday entitlement, that task was exclusively the task of the civil courts. 2(d)(iii)  Relevance of section 11 applications 2.88 An application under section 11 Employment Rights Act 1996 can be a speedy and cost-effective way, in particular for an employee, to obtain a determination of the terms of his employment. In the Tribunal in most regions such applications tend to be listed for hearing relatively quickly. The power to award costs against a party arises only where in bringing or conducting proceedings the party has acted ‘vexatiously, abusively, disruptively or otherwise unreasonably in either the bringing of the proceedings (or part) or the way that the proceedings (or part) have been conducted’ (Employment Tribunal (Constitution and Rules of Procedure) Regulations 2013 (SI 2013/1237), Schedule 1, rule 76(1)(a)). Such costs orders are relatively unlikely in the context of section 11 applications. 2.89  In the context of this book an application under section 11 Employment Rights Act 1996 may be used to establish the period of notice the employee is required to give or receive to determine his employment. It is important, however, to remember that it will only be worthwhile making such an application where there is a reasonable prospect of showing that there was a clear and unambiguous agreement on the notice period. In the absence of such an agreement as a matter of common law, a reasonable notice period will be implied and that will be all the Tribunal can record: Cuthbertson v AML Distributors [1975] IRLR 228. Although Parker  LJ suggested in an obiter comment in Eagland v British Telecommunications plc [1992] IRLR 323 at paragraph 20 that the Tribunal ‘may also have power to decide, as would a court of law, the length of such notice’, the better view, particularly in the light of Southern Cross is that currently the Tribunal has no such power under section 11.

44

CHAPTER 3

The implied duty of fidelity Selwyn Bloch QC and Jeremy Lewis A. Introduction: the duty of fidelity  Nature of the duty of fidelity: overview  Duration of the duty of fidelity  The duty of fidelity and fiduciary duties  (a) Distinction between duty of fidelity and fiduciary duties  (b) Impact of fiduciary obligations 

3.1 3.2 3.7 3.10 3.10 3.12

B. The duty of fidelity and business protection 

3.16

1. Competition during employment  1(a) Working time  1(b) Spare time 

3.16 3.20 3.21

2. Preparations during employment to compete after employment has ended  2(a) Prohibited activities  2(a)(i) Preparatory steps in the employer’s time  2(a)(ii) Soliciting the employer’s customers (or suppliers)  2(a)(iii) Entertaining offers from customers  2(a)(iv) Deploying the employer’s resources/staff for the employee’s preparatory activities  2(a)(v) Offering work to other employees/leaving in concert  2(a)(vi) Copying or memorising trade secrets or confidential information  2(b) Permitted activities  2(b)(i) Seeking work with a competitor  2(b)(ii) Indicating an intention to compete in the future  2(b)(iii) Other preparations  3. Preparatory activity during garden leave 

3.26 3.43 3.43 3.44 3.50 3.52 3.53 3.62 3.65 3.65 3.66 3.70 3.75

4. Duty of disclosure to the employer  3.85 4(a) Wrongdoing  3.90 4(a)(i) Duty to report own wrongdoing?  3.90 4(a)(ii) In what circumstances does a duty to report wrongdoing (generally) arise?  3.101 4(a)(iii) To whom should the report be made?  3.116 4(b) Information concerning acts preparatory to competition/answering questions by the employer  3.117 4(b)(i) In what circumstances does a broader duty to report a competitive threat arise?  3.117 4(b)(ii) Is there a duty to answer questions/not to mislead?  3.139 45

3.1  The implied duty of fidelity

4(c) Inventions, discoveries and copyright  4(c)(i) Employees works and intellectual property rights in them: statutorily implied terms  4(c)(ii) Copyright works  4(c)(iii) Other employee works and intellectual property rights in them  4(c)(iv) Summary 

3.143 3.147 3.148 3.152 3.158

Appendix to Chapter 3

A. INTRODUCTION: THE DUTY OF FIDELITY 3.1  Implied into every contract of employment is a term that the employee will serve the employer with good faith and fidelity: Robb v Green [1895] 2 QB 315 (CA); Faccenda Chicken Ltd v Fowler [1986] 3 WLR  288 (CA). The implied term is frequently augmented by express terms, and typical examples are considered in Chapter 5. Indeed the content of the duty of fidelity is to be determined having regard to the other terms of the contract and by the employee’s role and responsibilities: Ranson v Customer Systems Plc [2012] IRLR 769 (CA) at paragraphs 34 and 35. Bearing this in mind, in this chapter we focus on: •

The duty of fidelity – its impact on its own, its content, duration and ambit. Brief reference is made to the impact of the duty of fidelity in parallel with fiduciary duties (where they exist) with fiduciary duties being dealt with in detail in Chapter 4.

•

Competition during employment (during working time and spare time).

•

Preparations during employment to compete after employment has ended – comparing prohibited activities and permitted activities (including activities during garden leave).

•

The duty of disclosure to the employer: the duty to disclose misdeeds and other matters which may negatively affect the employer’s business and to disclose inventions and other intellectual property created in the course of employment.

The closely related topic of fiduciary duties is discussed in Chapter 4.

Nature of the duty of fidelity: overview 3.2  As explained in Ranson v Customer Systems Plc [2012] IRLR 776 (CA), per Lewison LJ at paragraph 43: ‘… the obligation of loyalty is no more than an obligation loyally to carry out the job that the employee agreed to do.’ 46

Introduction: the duty of fidelity 3.4

It follows that the precise ambit of the duty of fidelity varies from one case to the next and depends on what the particular job requires. That in turn necessitates, in the first instance, an analysis of the job description and other contractual terms: Ranson at paragraphs 34–35; Helmet Integrated Systems Limited v Tunnard [2007] IRLR 126 (CA) at paragraph 32. 3.3 It has been suggested that the more senior the staff and the greater the remuneration, the greater the degree of loyalty and diligence which is required: UBS Wealth Management (UK) Ltd v Vestra Wealth LLP [2008] IRLR 965 per Openshaw  J  at paragraph  10. In Imam-Sadeque v Bluebay Asset Management (Services) Limited [2013]  IRLR  344 Popplewell J  acknowledged (at paragraph 138) that this may be ‘over simplistic’. That said, he took into account the seniority of the employee and that he was highly remunerated as being factors in support of a duty of disclosure. He added (at paragraph 138) that: ‘… the duty imposed on someone at high managerial level in a multi-million pound business will involve a heavy burden not to do anything which might result in damage to the interests of that business.’

We suggest that the level of remuneration should not be a central consideration, since the focus should be on the nature of the role and the contractual responsibilities undertaken. However, in practice it will often denote a level of seniority and managerial responsibility which will be highly relevant to an analysis of the requirements of the role. 3.4  Although the precise extent of the duty is not fixed, core common aspects can be identified. Several well-established elements were summarised by HaddonCave J in QBE Management Services (UK) Limited v Dymoke [2012] IRLR 458 (at paragraph 169): ‘(1) It is indisputable that an employee owes his employer a contractual duty of ‘fidelity’, but how far it extends will depend on the facts of each case (per Lord Green MR in Hivac v Park Royal [1946] Ch 169 at paragraph 174). (2) The more senior the staff the greater the degree of loyalty, fidelity and diligence required (per Openshaw J  in UBS Wealth Management (UK) Ltd v Vestra Wealth LLP [2008] IRLR 965 at paragraph 10). (3) The first task of the court is to identify the nature of the employee’s obligations of fidelity and then to decide whether the employee’s activities are in breach (per Moses LJ in Helmet Integrated Systems v Tunnard [2006]  EWCA  Civ 1735, [2007] IRLR 126 at paragraph 32). (4) The mere fact that activities are described by an employee as ‘preparatory’ to competition does not mean that they are legitimate (per Moses LJ in Helmet Integrated Systems v Tunnard [2007] IRLR 126, at paragraph 28). (5) It is a breach of the duty of fidelity for an employee to recruit or solicit another employee to act in competition (see British Midland Tool v Midland International Tooling Ltd [2003] EWHC 466 (Ch), [2003] 2 BCLC 523). (6) Attempts by senior employees to solicit more junior staff constitutes particularly serious misconduct (Sybron Corp v Rochem Ltd [1983] IRLR 253). 47

3.5  The implied duty of fidelity

(7) It is a breach of the duty of fidelity for an employee to misuse confidential information belonging to his employer (see Faccenda Chicken Ltd v Fowler [1986] IRLR 69). (8) The court should ask whether the activities in which the employee is engaged affect his ability to serve his employer faithfully and honestly and to the best of his abilities (see Shepherds Investments Ltd v Walters [2006] EWHC 836 (Ch), [2007] IRLR 110 at paragraph 131).’

3.5  The last of these propositions should not be seen as indicating a purely subjective test of dishonesty: ‘The question is whether such conduct was not what any person of ordinary honesty would look upon as dishonest conduct towards his employer and a dereliction from the duty which the defendant owed to his employer to act towards him with good faith’ (Robb v Green [1895] 2 QB 315 (CA) per Lord Esher (MR) at page 316).

3.6 In Imam-Sadeque v Bluebay Asset Management (Services) Limited [2013] IRLR 344, the court expressly rejected the submission that (subjective) honesty is all that the duty requires. Popplewell J commented (at paragraph 125): ‘The duty is one of loyalty. An honest but misguided disloyalty is no less a breach than a dishonest one.’

Duration of the duty of fidelity 3.7 The implied duty of fidelity is owed throughout the duration of employment – including the employee’s spare time: Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] 1 Ch 169. The duty ceases only when the employment ceases. In the words of Hawkins J in Robb v Green [1895] 2 QB 1 at page 14: ‘The dividing line between [the employee] owing his master a duty and owing him none is that imperceptible period of time between the termination of his service and the moment he acquires freedom of service after his service has terminated.’

3.8  This essential point was reaffirmed by the Court of Appeal in J A Mont (UK) Ltd v Mills [1993] IRLR 172, in which Simon Brown LJ stated (at paragraph 38): “The duty of good faith, in my judgment, arises out of the obligation of loyalty inevitably owed by an employee to an employer. Once the employment relationship ceases, there is no occasion for loyalty. All that is left is a residual duty of confidentiality in respect of the employer’s trade secrets.”

3.9  This is to be contrasted with the fiduciary duty of a senior employee (where such duty is owed) which may (arguably, on one view) extend beyond termination of the employment (Island Export Finance Ltd v Umunna [1986] BCLC 460; Canadian Aero Service Ltd v O’Malley (1973) 40  DLR  (3d) 371 (Can SC); Allfiled UK Limited v Eltis [2016] FSR 11), and in relation to directors does so by virtue of s 170(2) Companies Act 2006 (see 4.274–4.298). 48

Introduction: the duty of fidelity 3.12

The duty of fidelity and fiduciary duties (a)  Distinction between duty of fidelity and fiduciary obligations 3.10  The duty of fidelity has sometimes confusingly been expressed as being a fiduciary duty (Attorney-General v Blake [1998] 1 All ER 833 at page 841 per Lord Woolf MR; Neary v Dean of Westminster [1999] IRLR 288 at paragraphs 18–19 per Lord Jauncey). It is only in some circumstances that an employee may have fiduciary obligations, as pointed out by Elias J in Nottingham University v Fishel [2000] ICR 1461 at pages 1489G–1490B: ‘Circumstances may arise in the context of an employment relationship, or arise out of it, which, when they occur, will place the employee in the position of a fiduciary.’

3.11  The difference in the nature of the two duties was set out in University of Nottingham v Fishel [2000] ICR 1462 (‘Fishel’) (the facts of which are set out at 4.8–4.9). Elias J explained (at pages 1492C–1493H) that, whilst the implied contractual duties of fidelity and mutual trust and confidence require an employee to ‘take into consideration the interests of’ the employer, that is to be distinguished from fiduciary obligations which, where they apply, require the employee to act ‘solely in the interests of his employer’. The distinction was summarised by Lewison LJ in Ranson v Customer Systems plc [2012] IRLR 769 (at paragraphs 41–42) in the following terms: ‘41. As Elias J  pointed out in Fishel the hallmark of a fiduciary is a singleminded duty of loyalty. The duty of loyalty in that context has a precise meaning: “namely the duty to act in the interests of another”. As mentioned, this is not a feature of an employment relationship. In the employment context the duty of loyalty, although given the same label, “is one where each party must have regard to the interests of the other, but not that either must subjugate his interests to those of the other.” Again it is, perhaps, unfortunate that conceptually different things have been given the same label.’ 42. Likewise in Helmet Integrated Systems Ltd v Tunnard Moses LJ said (paragraph 36): ‘An employee owes an obligation of loyalty to his employer but he will not necessarily owe that exclusive obligation of loyalty, to act in his employer’s interest and not in his own, which is the hallmark of any fiduciary duty owed by an employee to his employer. The distinguishing mark of the obligation of a fiduciary, in the context of employment, is not merely that the employee owes a duty of loyalty but of single-minded or exclusive loyalty.”’

(b)  Impact of fiduciary obligations 3.12  The law has always protected the right of an employee during employment to take certain preparatory steps to compete with the employer after employment has ended, whether by establishing a competing business or joining an existing competitive business. As we address in Chapter 4, in recent years employers have sought to establish (in the context of actual or intended litigation) that particular 49

3.13  The implied duty of fidelity

employees are subject to fiduciary duties – in addition to the ordinary duty of fidelity. Generally this has been attempted with a view to seeking to limit more severely competition by (in particular, senior) employees or, more controversially, preparatory steps which they may take during employment to compete when employment has ended. Further, there have been first instance decisions to the effect that fiduciary duties inhibit the normal right of an employee to prepare for competition after the end of employment (British Midland Tool v Midland International Tooling Limited [2003] 2  BCLC  523; Shepherds Investments Limited v Walters [2007]  IRLR  1; Kynixa Limited v Hynes [2008] EWHC 1495; QBE Management Services (UK) Limited v Dymoke [2012] IRLR 458; Allfiled UK Limited v Eltis [2016] FSR 11). On one view, these decisions appear to inhibit preparatory conduct, in particular, by casting a very early and apparently wide duty of disclosure on the employee who has fiduciary duties, not merely to reveal any wrongdoing by colleagues (or possibly the employee’s own wrongdoing) but to inform the employer, as soon as an irrevocable intention to leave the current employment has been formed, of that intention. This has been a problematic development. 3.13  However, the right of an employee, even one with fiduciary duties, to prepare for future competition has been re-emphasised at appellate level: Foster Bryant Surveying Limited v Bryant [2007] IRLR 425 (CA) and Helmet Integrated Systems Limited v Tunnard [2007] IRLR 126 (CA) – see 3.27–3.30. It is our view that the wide duties of early disclosure indicated by the first instance decisions should be seen in the context that those particular decisions concerned team moves. Moreover, the decision in Foster Bryant emphasised the fact-sensitive, pragmatic and merit-based nature of the enquiry as to whether preparatory activities are permissible, or stray into the area where the employee’s ability to serve the current employer faithfully and honestly and to the best of the employee’s abilities is compromised. As further discussed below (3.117–3.138), the first instance decisions where preparatory activity has been found to be impermissible, and where a duty of disclosure arose, have involved clear wrongdoing of which the relevant employees had knowledge (as in British Midland Tool; Shepherds Investments; QBE and Allfiled) or an awareness by the relevant employee that (in addition to themselves) other senior team members had been approached by the relevant competitor (as in Kynixa Limited v Hynes [2008] EWHC 1495). The decisions apparently casting wide duties of disclosure in relation to a competitive threat also need to be read in the light of the Court of Appeal’s reasoning in Ranson v Customer Systems Plc [2012] IRLR 769 (CA), and in particular the emphasis on analysing the employee’s role and contractual terms in order both to determine the content of the duty of fidelity and the existence and scope of any fiduciary duties. 3.14  Further, an important distinction is to be drawn between: •

employees who also hold another role, notably by being a director or a partner, which of itself entails fiduciary duties (in the case of directors put on a statutory basis under the Companies Act 2006); and

•

employees who may owe fiduciary duties by reason of their position as employees only.

50

Competition during employment 3.18

In the latter case, just as the nature of the employee’s role and other express contractual terms shape the content of the duty of fidelity, they also determine whether fiduciary duties are owed to act solely in the interests of the employer (see Chapter 4 at 4.5–4.55). To that end, we suggest that the principal impact of fiduciary obligations in this second category, when compared to the duty of fidelity owed by such employees, will lie in the different remedies available (but see the overview at 4.299–4.317). Equally, however, the very factors which lead to the conclusion that fiduciary obligations are owed in this second category, are liable to lead to the duty of fidelity imposing more exacting standards than would apply to employees who do not owe fiduciary obligations. 3.15  The duty of fidelity is a broad and flexible concept which in its nature is capable of covering matters that might more commonly be regarded as aspects of a fiduciary obligation. Two instances are: (i) a duty not to make a secret profit, and (ii) a duty to avoid undisclosed conflicts of interest. The courts have principally developed the law on those issues in the context of claims for breach of fiduciary duty and they are therefore dealt with in Chapter  4 on fiduciary duties (at 4.313–4.317). We draw together at the conclusion of that Chapter (at 4.299–4.317) the principal potential differences between the effect of fiduciary obligations and the duty of fidelity.

B. THE DUTY OF FIDELITY AND BUSINESS PROTECTION 1. COMPETITION DURING EMPLOYMENT 3.16  While a contract of employment subsists, the employee’s time falls into two categories: •

working time during which the employee is contracted to work for the employer; and

•

spare time, which has been kept free for the employee’s own purposes.

3.17  In some contracts the working hours are well defined: for example ‘Your working hours will be 9.00  am to 5.00  pm Monday to Friday (inclusive)’. In others, particularly those of senior employees, there may be no agreed hours or merely a statement that the employee shall ‘devote his whole time and attention to the business of the employer’. Even in the case of ‘whole time and attention’ clauses, however, the employee is entitled to some spare time: if the proper construction were otherwise, the result would be ludicrous. 3.18  The distinction between working time and spare time is important for three reasons: •

because it is a breach of contract for an employee to do anything other than work for the employer during the contracted working hours, except with the employer’s consent; 51

3.19  The implied duty of fidelity

•

because although the implied duty of fidelity subsists during both working and spare time (Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] 1 Ch 169), the extent of the duty may be less onerous during the employee’s spare time; and

•

for the purposes of determining working time under the Working Time Regulations 1998 (discussed at 5.18–5.21).

3.19  An anomalous kind of ‘spare time’ arises from the practice of employers, who have given or received notice to terminate the contract of employment of a (usually senior) employee, not to require (or permit) the employee to work during the notice period, but to pay the normal salary and benefits. It has been suggested (obiter by Scott J in Balston Ltd v Headline Filters Ltd [1987] FSR 330) that during this period of so-called ‘garden leave’ the duty not to compete may be less onerous than during normal working time. In our view, neither this, nor the even more radical view expressed by him (as Scott V-C) in Symbian Ltd v Christensen [2001] IRLR 77 (at first instance), is correct, and this is supported by more recent authority: see 3.75–3.84.

1(a) Working time 3.20  During the agreed working hours, the employee is not at liberty to do anything else without the employer’s consent. To do so would ordinarily be a breach of the agreement as to working time. Additionally, it may be a breach of the implied duty of fidelity, and will be where the employee is using the employer’s time to compete with the employer: Thomas Marshall (Exports) Ltd v Guinle [1979] 1 Ch 227; and see eg Pintorex Ltd v Keyvanfar and others [2013] EWPCC 36 at paragraph 46. However, depending on the nature of the role, it may still be possible to show that there was no breach on the particular facts. That was found to be the case in Gamatronic (UK) Limited and others v Hamilton and Mansfield [2016]  EWHC  2225; [2017] BCC 670 (at paragraph  147). The defendant employees were responsible for day to day running of the employer’s business as its managing directors. Initial preparatory steps had been taken towards setting up a competing business which included establishing a business plan, and holding initial exploratory meetings with directors of the potential competitor to discuss cooperation between it and a proposed distributor. In concluding that this did not at that stage entail a breach of duty, the deputy Judge (Akhlaq Choudhary QC) commented that in so far as these meetings encroached on working hours at the employer, there was little to suggest that the claimants were neglecting their duties as a result. That was expressly influenced by the consideration (noted at paragraph  147) that if all such preparatory steps were prohibited, a directors’ personal freedom to compete would be seriously inhibited. That was in contrast with later conduct in making a business trip under false pretences, which did entail a breach of the duty of fidelity. The approach in Gamatronic illustrates the fact-sensitive nature of the enquiry involved, but may be regarded as a generous approach to the scope of senior employees to make preparations to compete during working time. It can be explained in part on the basis that the nature of the duties was not such as likely to be affected by some limited time on other 52

Competition during employment 3.22

activities at an early preparatory stage. Generally an employee who undertakes such activities in working time runs the serious risk of being found to have acted in breach of the duty of fidelity.

1(b)  Spare time 3.21  There is no general rule that the implied duty of fidelity prohibits employees (who are not directors) working for another or for themselves in their spare time, even where the work is in the same line of business as the employer. Whether, aside from any express restrictions, the implied term has that effect will turn on the employee’s role and responsibilities and/or access to confidential information and the nature of the outside work. Taking those matters into account may lead to the conclusion that the outside work would give rise to a conflict of interest or risk of misusing confidential information. As such it may affect the employee’s ability to serve the employer faithfully and to the best of the employee’s abilities (see QBE Management Services v Dymoke [2012] IRLR 458 at paragraph 169(8)). That may be a likely conclusion at least in relation to senior employees: see Reuse Collections Ltd v Sendall [2015] IRLR 226 at paragraph 57. The effect of the implied duty of fidelity may also be to prohibit competitive activities outside working hours of less senior employees where those activities are liable to inflict real harm on the employer: see Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] 1 Ch 169 (CA) and Nova Plastics v Froggatt [1982] IRLR 146. In Hivac both companies were engaged in the manufacture of midget valves, which involved skilled manual work. Before Park Royal (which had recently been incorporated) started to trade, Hivac had had a monopoly of the manufacture of midget valves. Without the knowledge of Hivac, Park Royal employed a number of Hivac’s skilled manual workers to work for Park Royal in their spare time. Hivac sought an interim injunction against Park Royal to restrain the employment. The Court of Appeal granted an injunction. In doing so the court said that, although reluctant to impose restrictions which would hamper the employees increasing their earnings in their spare time, the injunction was justified because (per Lord Greene MR at page 178): ‘… it would be deplorable if it were laid down that a workman could consistently with his duty to his employer knowingly, deliberately and secretly set himself to do in his spare time something which would inflict great harm on his employer’s business.’

3.22 In Hivac it was found that what the employees had done was to assist Park Royal to develop its business from the early stages to that of its becoming a competitor of Hivac. The following points should be noted from the judgments in that case: •

The court placed considerable weight on the fact that there was a significant risk that, if the injunction were not granted, Hivac’s confidential information would be disclosed to Park Royal. The court found that no confidential information had been disclosed, but there was almost an inevitability that it would be. Lord Greene MR rejected as impractical the idea that the 53

3.23  The implied duty of fidelity

employees would be able to ensure that Hivac’s confidential information was not disclosed. Where the employee has access to confidential information and there is a real risk that in the course of the spare time activities the employee might, even inadvertently, disclose that information to a competitor, the implied duty of fidelity will prohibit working for that competitor. •

The court drew a distinction between different classes of employee: at one end of the scale were manual workers where a forceful argument could be presented that the implied duty of fidelity would not restrict them outside their working hours. At the other end of the scale were those where the very nature of the employment would be enough to make it clear that certain types of spare time activity would not be permissible. Given as an example was a solicitor’s clerk who, the court said, would be prohibited from working for another solicitor in his spare time.

3.23 The decision in Hivac was applied in Nova Plastics v Froggatt [1982] IRLR 146. Confirming the decision of the Employment Tribunal, the EAT found that the implied duty of fidelity of an employee engaged as an odd job man did not prohibit him from working in a similar capacity for a rival company in the employee’s spare time. Consequently, the employee’s dismissal for doing so was unfair. The Employment Tribunal had concluded correctly that the work the employee was doing for the rival ‘was not contributing very seriously to any competition’. The principle accordingly extracted from Hivac was that spare time activity which is competitive is not necessarily impermissible; it is only so where it may cause serious harm to the (full-time) employer. 3.24  To similar effect is the decision in ABK  Ltd v Foxwell [2002]  EWHC  9 (Ch). The court there rejected the proposition that the giving of any assistance by an employee to a trade competitor of the employer, even though given in the employee’s spare time, necessarily involves a breach of duty. The employee, Mr Foxwell, was a senior employee of ABK, but he was someone whose time was under-utilised by his employer and whose ‘job description’ was vague and unspecific. He was held not to have acted in breach of contract as an employee of ABK in speaking to a trade competitor, Baddow Hall. The line between what he could properly discuss with this competitor and what he could not disclose without being in breach of his obligations as an employee of ABK was not one which was easy to draw. If it could be shown that he had disclosed information that was truly confidential, there would be no difficulty in saying that the employee had crossed the line. The relevant disclosures of information could not be said to have involved a breach of confidence on the part of the employee because they all related to matters in the public domain, and it was found that he did not know nor ought he to have known, that Baddow Hall was about to launch a scheme in direct competition with that run by ABK. However, Mr Foxwell was found to have acted in breach of duty when he went beyond speaking to Baddow Hall, and went to work for them despite still being an employee of ABK. 3.25  The line with impermissible activity was crossed in Lancashire Fires Ltd v SA Lyons & Co [1997] IRLR 113 (CA) (discussed at 3.50) where, having regard 54

Preparations during employment to compete after employment has ended 3.27

to the nature of the defendant employee’s role and familiarity with the claimant’s confidential production processes, spare time activities were held to be in breach of the duty of fidelity. The Court of Appeal stated that any employee with technical knowledge and experience can expect to have spare time activities in the field in which the employer operates carefully scrutinised as to whether they amount to a breach of the duty of fidelity.

2. PREPARATIONS DURING EMPLOYMENT TO COMPETE AFTER EMPLOYMENT HAS ENDED 3.26  As a general rule, in the absence of a valid restrictive covenant, an employee is free once employment has terminated to join a competitor or to establish a rival business. An employee choosing either of these options will normally make some preparations for the future before the employment ends. Leaving a secure employment will inevitably involve a degree of risk and it is only human nature to want to minimise that risk before handing in notice to the employer. Preparatory activity by the employee may, however, in certain circumstances amount to a breach of the duty of fidelity. A  good example of a case involving preparatory conduct by an employee is provided by Balston Ltd v Headline Filters Ltd [1990]  FSR  385. Balston were manufacturers of glass microfibre filter tubes. Mr Head was an employee and a statutory director. Mr Head left his employment and through his company, the defendant, Headline Filters, started production in competition with the claimant, Balston. During his employment/ directorship Mr Head undertook (without informing his employer) the following preparatory steps: •

(before giving notice) entering into a lease for commercial premises for a new business;

•

(after giving notice) purchasing the defendant, an ‘off the shelf’ company, investigating the possibility of setting up a business in competition with the claimant and to that end consulting accountants and solicitors and approaching his bank for financing.

Falconer J held that these acts were permissible preparatory acts by Mr Head. However, it was held that Mr Head acted in breach of the duty of fidelity when he: •

told a customer who contacted him in connection with the claimant’s terms of supply that he was leaving the claimant and would soon be in a position to supply product – which led to a substantial order eventually being placed with the defendant;

•

solicited and recruited one of the claimant’s employees.

3.27 In Helmet Integrated Systems Limited v Tunnard [2007] IRLR 126 (CA) (although a case decided on express terms rather than the implied duty of fidelity) the Court of Appeal emphasised the importance of the employee’s freedom 55

3.28  The implied duty of fidelity

to prepare for competition after employment. In this case, the defendant, Mr Tunnard, was employed as a senior salesman for a company producing and selling protective equipment, including helmets for fire-fighters. He was in a middleranking employment position and was not a director. During his employment with the claimant (Helmet) Mr Tunnard had an idea for a new safety helmet, primarily for fire-fighters. In order to advance the idea he applied for government funding and arranged for product designers to prepare concept drawings of the helmet. There was no allegation of breach of confidence or misuse of confidential information by the defendant, no other employee was involved, he carried out his activities in his own time and he did not enter into any commercial agreement or arrangement or any actual competition prior to the termination of his employment. He owed an express contractual duty at all times to act with the best interests of his employer in mind and to advise on ‘competitor activity’. However, in rejecting the claim that he had acted in breach of his duty of fidelity, the Court of Appeal held (at paragraphs 26, 27 and 49) that his contractual obligations were to be construed in accordance with the principle that: ‘…  whilst he must not compete with his employer during the course of his employment, the duty of fidelity imposes no inhibition on his competing against his former employer once he has left … This freedom to compete, once an employee has left, unrestrained by any enforceable covenant, carries with it a freedom to prepare for future activities, which the employee plans to undertake, once he has left. … Clear words are needed to restrict the ordinary freedom of an employee who is considering quitting his employment and setting up in competition to his former employer.’

3.28  The decision in Helmet represents on one view (when the detailed facts of the case are considered) a generous approach by the court to intensive preparatory activities of the employee. Mr Tunnard’s perception that there was a gap in the market arose from his attendance (presumably in the course of his duties) at a London Fire and Emergency Planning Authority briefing day publicly to consider the development of the next generation of protective clothing, and a further meeting in relation to such equipment. (However, the judge below did not find that this constituted a maturing business opportunity for exploitation by Helmet alone, but merely represented an opportunity for the entire industry as a whole). More significantly, Mr Tunnard discussed the project with a friend, who was a consultant to a UK subsidiary of a rival company engaged in the manufacture and supply of safety clothing and equipment. (The friend had previously acted as consultant to Helmet.) Mr Tunnard showed his friend the drawings, on the basis of confidentiality, and agreed that he should show those drawings to the subsidiary of the rival. All of this activity took place following his notice of resignation but before Mr Tunnard left Helmet’s employment. Arguably, the Court of Appeal were generous to the ex-employee in construing an express term of his contract requiring Mr Tunnard to advise on ‘competitor activity’ very narrowly so as to exclude Mr Tunnard’s own competitive acts. Strikingly, Moses LJ accepted that 56

Preparations during employment to compete after employment has ended 3.31

if Mr Tunnard had learned that a competitor of Helmet proposed to develop a helmet which was a rival to that produced by Helmet and was in the process of preparing a preliminary concept of such a helmet, he would have been under an obligation to report that information. Such activity, even though it consisted merely of preparation and even though such a concept might never be developed, would be information properly described as ‘competitor activity’ within the meaning of the job specification. Moses LJ also accepted that Mr Tunnard would be under an obligation to deploy such information exclusively in the interests of his employer. It would not be open to him to pass it on to someone else for the benefit of that other person, nor would he be permitted to use such information for his own benefit without being in breach of his duty of fidelity to Helmet. However, it did not follow that he was under any obligation, be it fiduciary or otherwise, to inform Helmet of his own activities or such activities undertaken on his own behalf. 3.29  In summary, in Helmet the Court of Appeal concluded that there were two fundamental reasons why Mr Tunnard was under no obligation to report his own activities: •

First, the words of the job specification did not restrict Mr Tunnard’s freedom to prepare for competition on leaving.

•

Secondly, he was under no relevant fiduciary obligation to Helmet. If, by referring to ‘competitor activity’, it was intended to take away Mr Tunnard’s pre-existing right to prepare for competition and make an informed assessment as to whether it was viable, far clearer words would be required. Clear words were needed to restrict the ordinary freedom of an employee who is considering quitting employment and setting up in competition with the former employer.

3.30 The Helmet decision is not without its difficulties. It is interesting that (ignoring the express term which was on its face not intended to cut down the normal duty of fidelity) the various preparatory activities of Mr Tunnard were regarded as consistent with the implied duty of fidelity. The decision can be seen as one which gives considerable latitude to a middle-ranking employee whose preparatory steps: •

Were not seen as dishonest.

•

Did not involve activities within the employee’s job description or concealment of such activities. (As Moses LJ emphasised, at paragraph 48, Mr Tunnard was employed as a salesman, not as a designer, and it was never in their contemplation that he would develop a helmet for the employer.)

•

Did not involve other employees.

3.31  In a similar vein are the (later) decisions of the Court of Appeal in Foster Bryant Surveying Limited v Bryant [2007]  IRLR  425 (CA) and Ranson v Customer Systems Plc [2012] IRLR 769. In Foster Bryant the Court of Appeal 57

3.32  The implied duty of fidelity

emphasised the freedom of employees who are fiduciaries to compete after the end of employment – and to be allowed, while still fiduciaries, to prepare for such future competition. This aspect is more fully discussed in Chapter 4. Again, in Ranson the court followed and relied upon the dicta of Moses LJ in Helmet. Mr Ranson was employed by Customer Systems in what was essentially a sales function with wider responsibilities. He was directly or indirectly responsible for 59% of the group’s total revenue. He was not a director. Towards the end of his notice period he took an order from a potential customer of Customer Systems (Diageo) as part of preparation for establishing a competing business. The work was to be carried out after the termination of his employment. It was not part of Mr Ranson’s contractual responsibilities to seek work from Diageo as it was not on his ‘patch’. Nor had he initiated the contact with Diageo. Giving the only substantive judgment, Lewison LJ doubted that there was any breach of duty in responding to the overture from Diageo and taking the order, but he held that in any event there was no obligation to report the overture to Customer Systems. Nor was there found to be any breach in having met up in his own time for dinner with a customer of Customer Systems for the purposes of paving the way for future work or failing to disclose having done so, in circumstances where this had not involved any specific solicitation of work. In reaching those conclusions the court focussed on how the duty of fidelity was to be construed in the context of the limits of the express contractual obligations, including any relevant posttermination restrictions on competition and having regard to the dicta in Helmet that the freedom to compete carries a freedom to prepare for future activities. 3.32  These three Court of Appeal decisions can be compared with two earlier first instance decisions in British Midland Tool v Midland International Tooling Limited [2003] 2  BCLC  523 and Shepherds Investments Limited v Walters [2007] IRLR 1. In both cases (which were referred to in Helmet) the defendants were found to be in breach of the duty of fidelity as well as of fiduciary duty. 3.33 In British Midland Tool, four defendants who were directors of British Midland Tool, the claimant, conceived and developed a plan to leave their employment with the claimant and set up a rival company as manufacturers and suppliers of cutting tools to the motor industry. Following the retirement of one of the directors as managing director of the claimant, an advertisement was placed seeking employees for a specialist cutting tool manufacturer, being the venture which the defendants proposed to set up. This resulted in employees of the claimant leaving to join the rival company. The court held that to the knowledge of the three remaining directors there was a determined attempt by the director who had left to poach the claimant’s workforce. The three defendant directors then resigned from their directorships and the new business was then set up next to the claimant’s own premises. Having concluded that the three defendants had breached their fiduciary duties, Hart  J  considered (obiter) whether implementation of the plans also necessarily involved any of them in breaches of their service contracts. He said (at paragraph 94): ‘As to that, I do not think that exactly the same analysis applies. The employee’s duty of fidelity to his employer, although in some respects similar in content to 58

Preparations during employment to compete after employment has ended 3.36

the director’s fiduciary duty to the company and although it is itself sometimes described as a fiduciary … is by no means identical. Importantly it does not include, in the usual case, any prohibition as such on being in a position where his duty as employee and his self-interest may conflict. Moreover, so far as public policy considerations of restraint of trade are concerned, a situation which has to be catered for is the case where the employee has given notice of termination of his employment and wishes during the period of his notice to take preparatory steps (in his own time) with a view to undertaking a competing business when he is free to do so (the situation in Balston’s case). [Leading Counsel] also reminded me of the statement by Cumming-Bruce LJ in G D Searle & Co Ltd v Celltech Ltd [1982] FSR 92 at 101–102 that: “The law has always looked with favour upon the efforts of employees to advance themselves, provided they do not steal or use the secrets of their former employer. In the absence of restrictive covenants, there is nothing in the general law to prevent a number of employees in concert deciding to leave their employer and set themselves up in competition with him.” While not disagreeing with that last quotation as a general statement, in relation to the central point which I have considered (ie the behaviour of the remaining three senior management employees during the period when to their knowledge [the director who had first resigned] was conducting the poaching exercise) I think it impossible to hold that their conduct was consistent with their duty of fidelity to their employer.’

3.34 Accordingly, while finding that the employees had breached their duties of fidelity, Hart J did recognise that there were countervailing public policy considerations to be put in the balance, ie those relating to freedom of employees to prepare for competition. However, as to fiduciary duties, in both British Midland and Shepherds Investments (the facts of Shepherds Investments are set out at 4.68 and 4.188) the proposition that rules of public policy as to restraint of trade could be a basis for weakening fiduciary duties was rejected. In Shepherds Investments Etherton J stated (at paragraph 107): ‘It is difficult to see any legitimate basis for the “trumping” of those duties by “rules of public policy as to restraint of trade” as suggested by Falconer J in Balston at page 412.’

3.35  In this regard, these two cases appear themselves (arguably) to have been qualified by the subsequent Court of Appeal decisions in Helmet and Foster Bryant and a line of following cases: see discussion at 4.177–4.179; 4.193–4.206. It follows (all the more) that where only the (lesser) duty of fidelity is concerned (as recognised in British Midland Tool itself), that proper weight has to be given to the employee’s freedom to prepare for future competition. 3.36  It should be noted that the conduct in question in Shepherds Investments and British Midland Tool in any event went beyond normally permissible preparatory acts. In British Midland Tool the three directors were complicit in a concerted attempt to poach the staff of their employer. In Shepherds Investments there was active promotion of the competing business which was waiting in the wings, including going after an investment, which was itself a maturing business 59

3.37  The implied duty of fidelity

opportunity under consideration by the claimant company. The direct conflict involved was recognised in the evidence of one of the defendants when he said that he found it difficult to promote the claimant’s product at the same time as developing his own (at paragraph 127). Both British Midland Tool and Shepherds Investments had the common feature of directors during employment planning together to set up a competitor. We suggest that this was the key factor in deciding whether the defendants had exceeded the limits of permissible preparatory conduct, rather than that their freedom to prepare for competition was ‘trumped’ by their fiduciary duties. Further, in so far as these cases might be taken as suggesting that there is a prima facie obligation on the part of an employee who has fiduciary duties to resign once an irrevocable decision to compete has been formed, it is suggested that this is unlikely to be the case where that employee is acting alone – and not as a ‘recruitment sergeant’ for or in secret collaboration with other employees. Further, in our view even in the case of a ‘team move’, it is not so much the existence of an intention which creates a conflict between interest and duty, but the acts of team members in planning the team move. 3.37  In this regard, see also UBS Wealth Management (UK) Ltd v Vestra Wealth LLP [2008] IRLR 965, which concerned a very large team move from UBS to Vestra. Openshaw J was persuaded (at the interim injunctive stage) that there was a formidable case of an unlawful plan to poach both staff and clients from UBS, that this plan was formulated and actively managed by a former senior employee of UBS, and that it was at every stage assisted and encouraged by senior staff, including each of the defendants. While the judge accepted what he described as the convention in the City, that employees who are considering taking up alternative employment were under no obligation to their existing employers to disclose ongoing negotiations unless and until a clear agreement had been made with the prospective employer (usually by the signing of a new contract of employment), he could not accept that employees, in particular senior managers, could keep silent when they knew of planned poaching raids upon the company’s existing staff or client base and when these were encouraged and facilitated from within the company itself. This was all the more so when they were themselves party to these plots and plans. That would be an obvious breach of their duties of loyalty and fidelity to UBS. (It should be added that it is not clear what evidence there was of the convention in the City referred to by the judge. It is also not the case that in all circumstances an employee (not part of a ‘team move’) has an implied duty immediately to inform the employer of having signed a contract of employment with another employer. Any argument in favour of such a duty may be particularly difficult to sustain if the employment is only to commence once the employee is free of all obligations to the current employer – which may commonly be a substantial time into the future depending on the length of post-termination covenants.) 3.38  The mere fact that activities can be described as ‘preparatory’ does not of itself mean that they do not amount to a breach of the duty of fidelity. In Crowson Fabrics Limited v Rider [2008] IRLR 288 (ChD) two employees who set up a rival company whilst still employed, were held to have exceeded the bounds of legitimate preparatory steps. Peter Smith J stated (at paragraphs 90–91): 60

Preparations during employment to compete after employment has ended 3.41

‘It is often said that the test is whether or not the actions done were preparatory for the future activity or went beyond that. This is an over-simplification as the Helmet case underlines (paragraphs 28–32): “The battle between employer and former employee, who has entered into competition with his former employer, is often concerned with where the line is to be drawn between legitimate preparation for future competition and competitive activity undertaken before the employee has left. This case has proved no exception. But in deciding on which side of the line Mr Tunnard’s activities fall, it is important not to be beguiled into thinking that the mere fact that activities are preparatory to future competition will conclude the issue in a former employee’s favour. The authorities establish that no such clear line can be drawn between that which is legitimate and that which breaches an employee’s obligations”.’

3.39 In Crowson it was held that the defendants were in breach of their duty of fidelity. (The first defendant was also in breach of his fiduciary duty (see 4.28)). They had set about creating a rival business, in breach of those duties. They had retained or copied or transferred to the third defendant documents belonging to the claimant with a view to using them as an illegitimate springboard to compete with the claimant. They had solicited the business of agents and some customers and had diverted some business opportunities to themselves. 3.40 Further, it is necessary to have regard to the totality of the conduct in question and to consider whether, cumulatively, it falls on the wrong side of the line. This was emphasised in Reuse Collections Ltd v Sendall [2015] IRLR 226. Here the defendant, Sendall, had ceased to be a director of Reuse on sale of the family glass recycling business, but had continued in employment as manager of a depot. Whilst still employed by Reuse, he began preparations to set up a competing business as a joint venture with his two sons who were also employed by Reuse. It was planned that the business would start whilst he was still employed by Reuse and, as such, concealment of his interest in the business was a necessary ingredient in his plans. He arranged for the new business to be incorporated, initially became a director and majority shareholder of it before resigning and transferring his shares to conceal his interest, and provided finance for the business including through obtaining a mortgage. Also whilst still employed he made contact with Reuse’s customers and suppliers with a view to soliciting their business, including conducting active negotiations with them, and obtained necessary equipment for the business. He also made contact with a sub-contractor and insurance broker. Much of this was done in working time. The court distinguished this from a case of limited preliminary steps to compete where the real arrangements are not made until after the employment has terminated. Viewed as a whole it was clearly on the wrong side of the line. 3.41  The court also concluded (at paragraph 155) that in the circumstances providing financing for the prospective business would itself have amounted to a breach of the duty of fidelity despite the absence of post-termination covenants. That was because given the defendant employee’s position and responsibilities as depot manager, and given that the new business was intended to be directly 61

3.42  The implied duty of fidelity

competitive, operating in the same area of the country, and competing for the same relatively narrow pool of suppliers and customers, it would have been impossible for him to have had a major financial interest in the success of the new business without giving rise to a conflict of interest. 3.42  It is impossible to provide an exhaustive list of the preparatory steps prohibited by the duty of fidelity. The ambit of the duty varies depending on the facts of each case and, as noted above, it is necessary to have regard to the cumulative picture. With the above reservations, the following is a summary of the kinds of preparatory steps that have been considered by the courts. The first category is those which have been prohibited by the courts, the second, those which have been permitted. This is further summarised in the table in the Appendix to this chapter. Where the employee is a director, or otherwise owes relevant fiduciary obligations, in certain circumstances the limitations on permissible preparatory steps may (at least arguably) be more stringent. Indeed the very factors which militate in favour of a non-director employee owing relevant fiduciary obligations may also point in favour of more stringent restrictions being imposed by the duty of fidelity.

2(a)  Prohibited activities 2(a)(i)  Preparatory steps in the employer’s time 3.43  Employees are not entitled to make preparations for their future during the hours they are contracted to work for their employer. To do so would be a clear breach of the term of the contract as to hours. It may also be a breach of the implied duty of fidelity: see Thomas Marshall (Exports) Ltd v Guinle [1979] Ch 227. But see Gamatronic, considered at 3.20.

2(a)(ii)  Soliciting the employer’s customers (or suppliers) 3.44  An employee may not solicit the custom of the employer’s customers. It is irrelevant that the solicitation takes place only very shortly before the employment ends and that the employee is only seeking custom from a time after the employment has ended. In Wessex Dairies Ltd v Smith [1935] 2 KB 80, on the last day of his employment the defendant, Smith, informed the customers to whom he delivered milk that he would cease to be employed by Wessex on that day, that he was setting up his own business and that in future he would be able to supply their milk. A number of customers placed orders with Smith. Greer LJ stated (at page 84) that Smith was: ‘… under the ordinary implied obligation existing between master and servant – namely, that during the continuance of his employment he will act in his employers’ interests and not use the time for which he is paid by the employers in furthering his own interests.’ 62

Preparations during employment to compete after employment has ended 3.47

3.45  The Court of Appeal held that Smith was in clear breach of his duty of fidelity and upheld Wessex’s claim for damages. Although the solicitation took place during Smith’s working time, the case was discussed by the Court of Appeal in Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] 1 Ch 169, where the court concluded that the solicitation would have been a breach of Smith’s duty of fidelity even if it had been done in his spare time. 3.46  The line was also crossed by the employee in Adamson v B&L Cleaning Services Ltd [1995] IRLR 193, where the EAT upheld as fair a decision by an employer to dismiss an employee (of a contract cleaning company) who refused to undertake not to tender for future work being currently undertaken by his employer when those contracts came up for renewal. His actions were held by the EAT to be more than ‘testing the market’, and amounted to actual competition during employment. Likewise, in Hanco ATM Systems Limited v Cashbox ATM Systems Limited [2007] EWHC 1599 (Ch), a senior employee whilst still employed by the claimant, set in train the incorporation of a rival business, including agreeing the employment of a key contact of a client of the claimant, and in competition with the claimant he submitted a rival bid for a contract with that client. The employee was held to have acted in breach of fiduciary duty: see 4.27. However, his actions were also regarded (at paragraph  56) as being in breach of the duty of fidelity. Again in Decorus Limited v Penfold and Procure Store Limited [2016] EWHC 1421, an employee (an account manager for an IT reseller business) was found to have crossed the line by virtue of the arrangements made with a customer prior to the termination of his employment for him to compete with the employer after the employment ended. He had contacted customers to tell them he was leaving his employer and accessed purchase logs which contained information that would enable him to compete effectively with his employer. The judge concluded that the communications between the employee and customer which followed his departure evidenced a pre-existing agreement that he would compete and that this customer would help him to do so by sharing the quote it received from his employer with him (which they did after his employment ended). See also Marshall v Industrial Systems & Control Ltd [1992] IRLR 294 (referred to at 3.59). 3.47  The meaning of ‘solicitation’, and what the departing employee can lawfully tell clients about future intentions, is considered at 11.118–11.129. In Ranson (discussed at 3.31) a distinction was drawn between solicitation of customers and simply being attentive to them. Mr Ranson was found not to have breached the duty of fidelity in entertaining a customer out of working time where the aim was to win business for his own competitive business after the termination of employment but nothing specifically was discussed as to this, and the customer already knew that the employee was leaving. In so concluding, the Court of Appeal followed the dictum of Maugham LJ in Wessex Dairies that: ‘… the servant may, while in the employment of the master, be as agreeable, attentive and skilful as it is in his power to be to others with the ultimate view of obtaining the benefit of the customers’ friendly feelings when he calls upon them if and when he sets up business for himself. That is, of course, where there is no valid restrictive clause preventing him doing so.’ 63

3.48  The implied duty of fidelity

3.48  This distinction between solicitation of customers and simply being attentive was applied in Threlfall v ECD Insight Limited [2013] IRLR 185 (discussed in more detail at 4.315). Lang J  concluded that the departing employee, Mr Threlfall, had crossed the line into impermissible conduct by making overt requests for future work from an entity which had recently been a customer of the employer. It was no answer that at the time Mr Threlfall’s employment was to end imminently or that the employer would then not be able to carry out the work and that the customer would not have been willing to use the employer once Mr Threlfall had left. 3.49  Where an employee during employment places an order with the employer’s supplier for goods to be supplied to the employee’s intended business after termination of employment, this would probably only amount to a breach of fidelity where the suppliers only supply to a limited number of customers or supplies are limited: cf Laughton and Hawley v BAPP Industrial Supplies Ltd [1986] IRLR 245 (discussed at 3.66). 2(a)(iii)  Entertaining offers from customers 3.50 In Sanders v Parry [1967] 1 WLR 753 an assistant solicitor, Parry, received a proposal from a client for whom he did work that if he set up his own practice the client would transfer his instructions to him. Havers J held that, whilst employed, Parry was not in a position to consider or discuss the offer. Instead his duty was to seek to retain the client for his employer, Sanders. The fact that the offer was unsolicited was irrelevant. Likewise, in Lancashire Fires Ltd v Lyons & Co [1997] IRLR 113 (CA) the employee was held to be ‘well on the wrong side of the line’ when during his employment (in addition to renting and equipping premises) he entered into a finance agreement with a potential customer (albeit one whose needs the employer was not at the time able to service) under which he agreed to become its sole supplier. He pursued this project during his spare time, taking advantage of the finance provided. His duties to his employer (as project manager) included participating actively in the development of new projects, and his activities for his new concern were directed to the same end with a view to competition with the employer. To arrange finance with a bank will not usually amount to impermissible preparatory activity. However, here the financing was not with a disinterested party, and the combination of the finance agreement and spare time working on a rival production process put the employee in clear breach of the duty of fidelity. 3.51  Those decisions may be contrasted with the conclusion reached in Ranson (discussed at 3.31 and 3.47). There the implied duty of fidelity was held not to extend to preventing an employee salesman entertaining an overture from a potential customer of the employer, and accepting an order for work to be carried out by a competitor after the termination of employment. Crucially this was in circumstances where: (a) it was not part of the employee’s contractual duties to seek to obtain business from that customer, being outside his ‘patch’ (though he was aware that his employer was seeking to obtain business from the customer 64

Preparations during employment to compete after employment has ended 3.56

and had attended a lunch which was part of the attempts to do so), and (b) the employee was not a director and did not owe relevant fiduciary duties. 2(a)(iv)  Deploying the employer’s resources/staff for the employee’s preparatory activities 3.52  Clearly it is a breach of the duty of fidelity to make use of the employer’s staff, to assist during their working time in preparatory activities, or indeed to make use of the employer’s other resources for that purpose without permission. See eg Coleman Taymar Ltd v Oakes [2001] 2 BCLC 749 (considered at 4.181). 2(a)(v)  Offering work to other employees/leaving in concert 3.53  The topic of ‘team moves’ is considered in detail in Chapter 4 since most team moves involve senior employees, at least some of whom have fiduciary duties. At 4.173–4.206 we consider fiduciary duty and preparations to compete and at 4.226–4.262 we consider duties of disclosure which may arise. 3.54 In summarising certain core elements of the duty of fidelity in QBE Management Services (UK) Limited v Dymoke [2012] IRLR 458, HaddonCave J noted (at paragraph 169(6)) that it is a breach of the duty of fidelity for an employee to recruit another employee to act in competition, and that attempts by senior employees to solicit more junior employees constitutes particularly serious misconduct. This was specifically approved and followed in Thomson Ecology Limited v Apem Limited [2014] IRLR 184 at paragraph 16. 3.55 In Tithebarn Ltd v Hubbard (Lexis 7  November 1991/IRLIB  449, unreported), the EAT held that it was not necessarily a breach of the employment contract for an employee to discuss his future with other employees and to invite them to join him in a new business which he was likely to set up. Hubbard, a senior sales trainer, invited a successful and important salesman in the company to join him in a venture which Hubbard was thinking of setting up, apparently in competition with Tithebarn. The Employment Tribunal (by a majority) decided that this did not amount to a breach of the terms of the contract of employment, since there was no attempt to induce the fellow employee to breach his contract of employment. The EAT held that, although one view of the evidence was that Hubbard was seeking to undermine the loyalty of, or entice away, his fellow employee, nonetheless the Employment Tribunal was entitled to form the view that this was a mere discussion for the future, an intention by Hubbard to set up in business and an invitation that in due course his colleague might care to join him. 3.56  The decision in Tithebarn was cited with approval in Lonmar Global Risks Limited v West [2011] IRLR 138 (Hickinbottom J). However, this line of authority was disapproved in QBE Management v Dymoke [2012] IRLR 458. To the extent that Tithebarn suggested it was permissible for an employee to invite a colleague to join him or her in the future it is unlikely to be followed. It may be, however, that the decision can be explained on the basis that there was a 65

3.57  The implied duty of fidelity

mere general discussion about the future rather than anything specific and that, whilst many would take a different view, it was for the Employment Tribunal to assess the facts, with limited scope for the EAT to interfere. See also MPT Group Limited v Peel and others Unreported, 16 May 2017, noting on an interim relief application (at paragraphs 88– 89) that discussions between senior employees as to concerted competitive activity would rarely be acceptable and that the synchronised departures of two senior employees, and discussions that had plainly taken place between them, established a serious issue to be tried as to whether one must have solicited the other in breach of their duty of fidelity. As to the point at which such a general discussion, short of solicitation, would cross into being a breach of duty of fidelity, the position may be affected by a consideration of the seniority and responsibilities of the employee. Thus, there will be less scope for such discussions by an employee with responsibility for preserving or developing the part of the business concerned. The position is illustrated by the approach in First Subsea Limited v Balltex Limited [2014] EWHC 866 (discussed further at 4.212–4.213). Albeit in relation to a former employee who was still a director but had been excluded from management, there was found to be no breach of duty by virtue only of having ascertained whether, if a competing business was to be established, the company’s employees would work in it. Had the defendant still been an employee and the other staff employed in a part of the business for which he had a responsibility, such an enquiry would be likely to be regarded as impermissible. 3.57  Whilst there may need to be a fact-specific consideration of whether the discussions between employees amount to solicitation or encouragement to leave, notwithstanding the decision in Tithebarn an invitation to another employee to join the departing employee will generally fall on the wrong side of the line. Depending on the context and the employee’s role and responsibilities, steps short of this may be permissible. Thus in Thomson Ecology the court noted in the context of a summary judgment application that it was not necessarily a breach of the duty of fidelity for the departing employee to inform other staff that he was leaving before informing the employer or to tell them that he was planning to work for a competitor. Whether such conduct would in fact amount to a breach of duty was dependent on the context. This was notwithstanding that the departing employee was the most senior employee at the company’s premises where he was located and in overall charge of its operations and business. 3.58  It may be a breach of the duty of fidelity for an employee to offer employment to fellow employees, even though that employment is to commence upon due termination of their contracts of employment and even though the employee was in any event planning to leave. In Sanders v Parry [1967] 1 WLR 753, Parry was told by one of his employer’s secretaries that she was dissatisfied in her employment, that she wished to leave and had been offered another job. At the time Parry was making preparations to leave to set up his own practice and, instead of reporting the matter to Sanders, Parry offered the secretary employment, which she accepted. Havers J held that Parry was in clear breach of his duty of fidelity. This may be seen as a ‘high watermark’ case, placing a high burden on the employee including a disclosure obligation. There is surprisingly 66

Preparations during employment to compete after employment has ended 3.61

little authority on this quite common problem of an employee leaving with a PA or secretary. In any event, the decision cannot be taken as authority for the proposition that an employee is bound to report approaches from employees for whom they do not have supervisory responsibility. Most of the recent cases in this area have been in the context of ‘team moves’ by senior employees. These cases are discussed in detail at 4.226–4.262. 3.59 In Marshall v Industrial Systems & Control Ltd [1992] IRLR 294 Marshall, the managing director, together with a manager, intended to start a new company to replace Industrial Systems as distributors to Industrial Systems’ best client. They had drawn up a business plan. Pursuant to that plan the two had already: •

approached the client; and

•

tried to induce another key employee to join the new company.

The EAT (Scotland) upheld the decision of the Employment Tribunal that Marshall had breached his duty of fidelity and had been fairly dismissed. It was one thing, as in the case of the employee in Laughton and Hawley v BAPP (see 3.66), to form an intention to set up in competition, and another (as accepted by the Employment Tribunal in this case) to form a plan with another important manager to try and persuade another to join them in order to deprive the company (of which Marshall was the managing director) of their best client. Further, it was not merely a plan. Concrete arrangements had been made to obtain business from the client. 3.60  Further, without directly soliciting other employees to leave, an employee would act in breach of the duty of fidelity if the employee assisted that other employer to recruit a colleague by providing information for that purpose to another employer. Thus in Thomson Ecology, even in the context of a summary judgment application, the court was able to determine (on the basis of admissions) that there was a breach of the duty of fidelity by virtue of the departing employee discussing with the prospective new employer how they might go about recruiting interested staff from the current employer, the staff and grades of the current employer, and by providing details of the salaries of staff to expedite the making of offers to them. See to similar effect, Tullett Prebon Plc v BGC Brokers LP [2011] IRLR 648 at paragraph 69, stressing the obligation of a broker desk head (with management responsibility for the brokers on the desk), not to do anything to assist the recruitment of his desk, whether or not the information supplied was confidential. 3.61 In G  D  Searle & Co Ltd v Celltech Ltd [1982]  FSR  92 (CA) Cumming Bruce LJ commented (obiter) that there was nothing in the general law to prevent a number of employees in concert deciding to leave their employer and set themselves up in competition with the employer. In QBE Management Services (UK) Limited v Dymoke [2012] IRLR 458 Haddon-Cave J noted (at paragraph 177) that the force of this comment had ‘atrophied’ over the 30 years since Celltech was decided and that (approving a passage in the previous edition of this work) it was now of doubtful value and would not often reflect the true position because 67

3.62  The implied duty of fidelity

of the way that team moves are generally planned and effected. Indeed, the area of ‘team moves’ can be a minefield for departing employees, particularly ones who have fiduciary or relevant reporting duties. In theory it is possible for discussions between colleagues to lead to the decision to work together in future without either soliciting the other to leave. However: •

Senior employees will often have reporting duties in relation to the affairs of the business and, in particular, the activities of junior employees of their team.

•

The longer the preparatory period, the more likely that the senior employees will be in breach of reporting obligations. This can arise by omission (failing to report the planned team move or the future competition) or through rendering reports or projections which are falsified by the plans to compete.

•

Employees who ‘leave in concert’ may act unlawfully by making their preparations to compete during their employer’s working time or using the employer’s equipment for this purpose or soliciting other employees or customers. The line may also be crossed by employees, especially senior employees, recruiting (in particular, more junior) members of the team or engaging in a secret collaborative effort to divert all or part of the employer’s business in the future, as in eg British Midland Tool Ltd v Midland International Tooling Ltd [2003] 2 BCLC 523 (discussed at 3.33) and Tullett Prebon Plc v BGC Brokers LP [2011] IRLR 648.

Accordingly, while the point made by Cummings Bruce LJ in Searle remains theoretically correct, each case has to be examined on its own facts. See further the discussion of team moves in Chapter 19. 2(a)(vi)  Copying or memorising trade secrets or confidential information 3.62  Copying or memorising of customer information for use after employment has ended to solicit business is prohibited (in addition, of course, to the distinct breach in the event of then misusing or disclosing the confidential information): Robb v Green [1895] 2 QB 315. In that case the copying by the employee was by transcribing the information from the claimant’s order book. However, photocopying or transmitting the information by email is equally offensive. See also Louis v Smellie (1895) 73 LT 226 (CA). The principle covers information which is not sufficiently confidential to be subject to an implied confidentiality obligation after the termination of employment; there can be an injunction to remove the headstart from the breach during employment: Roger Bullivant Ltd v Ellis [1987] ICR 464 (CA); cf Coral Index v Regent Index Ltd [1970] RPC 147 (no evidence of conscious memorising of customers and their addresses). A useful summary of what is permitted and what is forbidden appears in the judgment of Sir Donald Nicholls V-C  in Universal Thermosensors Ltd v Hibben [1992] 1 WLR 840 at page 850: ‘[the defendant ex-employees] were entitled [in the absence of express covenant to the contrary in the employment contract] to approach the [claimant’s] 68

Preparations during employment to compete after employment has ended 3.65

customers, and seek and accept orders from them. Still further, they were entitled to use for their own purposes any information they carried in their heads regarding the identity of the [claimant’s] customers, or customer contacts, or the nature of the customers’ product requirements, or the [claimant’s] pricing ­policies, provided they had acquired the information honestly in the course of their employment and had not, for instance, deliberately sought to memorise lists of names for the purposes of their own business. What the defendants were not entitled to do was to steal documents belonging to the [claimant], or to use for their own purposes information, which can sensibly be regarded as confidential information, contained in such documents regarding the [claimant’s] customers or customer contacts or customer requirements or prices charged. Nor were they entitled to copy such information onto scraps of paper and take these away and then use the information in their own business.’

3.63  While it seems right that ex-employees should be able to use their recollection of customers and the customers’ contact details (since they would otherwise be subject in effect to a non-competition covenant to which they had not agreed), it cannot be safely assumed that the ex-employer’s pricing policies and customers’ product requirements will in all cases be treated as information which ex-employees can use from their recollection: see eg SBJ Stephenson Limited v Mandy [2000] IRLR 233. 3.64 Indeed, any steps taken by the employee deliberately to access the employer’s confidential information for the purposes of assisting in establishing a competitor business is liable to amount to a breach of the duty of fidelity. That principle was expressly applied (at paragraph 34) in Decorus Limited v Penfold and Procure Store Limited [2016]  EWHC  1421. The defendant, Penfold, an account manager for the claimant IT reselling business, accessed the claimant’s confidential purchase logs to which he was afforded password protected access in the course of his employment. His evidence was that he did so only for the purposes of figuring out how long it would take him to achieve a profit in the business he was planning to set up in competition with the claimant. On that basis, even if (as he claimed) he did not take away any of the information, and even if (which was not the case) the new business did not enter into competition until after his employment ended, there was still a breach of the duty of fidelity in making use of the claimant’s confidential information other than in the execution of his duties on the claimant’s behalf, and doing so to assist him in establishing a business to compete with the claimant. See also eg Coleman Taymar Ltd v Oakes [2001] 2 BCLC 749, discussed at 4.181, where the employee (who was also a director) clearly went beyond permissible preparatory steps in making use of the employer’s confidential information in approaching the employer’s landlords in order to obtain new leases for himself or his new company.

2(b)  Permitted activities 2(b)(i)  Seeking work with a competitor 3.65 An employee is free to seek work with a rival organisation and the fact of doing so is not of itself a fair reason for dismissal: Harris & Russell Ltd v 69

3.66  The implied duty of fidelity

Slingsby [1973] IRLR 221. A fair reason would not exist unless there are (per Sir Hugh Griffiths at page 222): ‘reasonably solid grounds for supposing that he is doing so in order to abuse his confidential position.’

2(b)(ii)  Indicating an intention to compete in the future 3.66 A  mere indication of an intention to compete in the future is not on its own objectionable. In Laughton and Hawley v BAPP  Industrial Supplies Ltd [1986] IRLR 245, Messrs Laughton and Hawley were employed as warehouse manager and deputy warehouse manager respectively. BAPP was a company engaged in the supply of nuts and bolts. The two employees decided to leave to set up a competing business in the same area. As part of their preparations, before their employment ended they wrote to a number of BAPP’s suppliers saying that they intended to start a competing business and asking for details of the suppliers, products and the best terms the suppliers could offer them. BAPP obtained a copy of the letter and summarily dismissed the two employees. In their Notice of Appearance in the Employment Tribunal proceedings they gave as the reason for dismissal ‘gross misconduct/breach of trust’. The EAT, overruling the Employment Tribunal, found the dismissals unfair. The EAT noted that there was no finding that the employer regarded the employees as having misused confidential information, and concluded that merely indicating an intention to set up in competition with the employer in the future, which they found was the central issue in the case (per Gibson J at paragraph 11) was in itself not a breach of the duty of fidelity. If, however, the employer reasonably believed that in addition the employee had committed, or was about to commit, a wrongful act, then the two things together would be sufficient to justify dismissal. In our view, what is permissible under the principle in Laughton is fairly limited. For example, the indication of an intention to compete made to a customer may easily be construed as an attempt to solicit custom and therefore be a breach of the implied duty. Significantly in Laughton the approach was to suppliers rather than customers. 3.67  Laughton was cited with approval in Balston Ltd v Headline Filters Ltd [1990]  FSR  385. It was also applied in Tithebarn Ltd v Hubbard (Lexis 7 November 1991/IRLIB 449, unreported), but as discussed above (at 3.55–3.57) to the extent that decision suggested it was permissible to invite a colleague to join the employee in a new business, it has been subject to subsequent criticism and is unlikely to be followed. Laughton was also relied upon by the EAT in Khan and Hemming v Landsker Child Care Limited UKEAT/0036/12/DM, 24  May 2012. The claimants were managers in care homes operated by the respondent. They were dismissed for gross misconduct after the respondent discovered a business plan they had formulated to establish their own, competing, residential care homes. The Employment Tribunal concluded that the claimants had been fairly dismissed for gross misconduct consisting of planning to set up in competition with the respondent and using company resources to assist in doing so. However, there were no findings as to what was meant by company resources. It appeared to refer to the information used in the business plan, but there was no finding as to whether this constituted confidential information or was simply a 70

Preparations during employment to compete after employment has ended 3.70

reflection of the claimant’s accumulated knowledge and expertise from their long experience in the industry. In those circumstances, the EAT remitted the matter to the Employment Tribunal to consider, in the light of the guidance in Laughton, whether the preparations to compete in future were capable in the circumstances, including the nature of the information used, of constituting gross misconduct. 3.68  Laughton and Tithebarn should be contrasted with Marshall (see 3.59) in which the employee’s acts went beyond a mere intention to compete. Further, although both Laughton and Khan and Hemming involved more than one employee planning to leave in concert, in neither case was the issue addressed as to whether the employees involved had encouraged or solicited each other to leave. There was no indication in Laughton that either employee had any supervisory responsibility for the other. Similarly in Khan and Hemming, although both employees held managerial positions, they were managers of separate care homes rather than having any managerial responsibility for the other or for the part of the business in which the other worked. 3.69  In that sense the position in Laughton and Khan and Hemming may be contrasted with the line of cases where senior employees or directors, with responsibility for preserving and developing the business, acted in breach of duties of fidelity and fiduciary duties by virtue of the steps taken in preparation to compete and the closely related question of at what stage an intention to compete in the future should be disclosed to the employer (which is discussed in more detail at 3.117–3.138). In British Midland Tool Limited v Midland International Tooling Limited [2003] 2 BCLC 523, Hart J held (at paragraph 89) that once an employee with fiduciary duties formed an irrevocable intention to compete in the future with the employer to whom those duties were owed, the employee should resign. In Shepherds Investments Limited v Walters [2007]  IRLR  1 (Etherton J), it was again found that non-disclosure of a competitive threat after forming an irrevocable intention to compete amounted to a breach of fiduciary duty and fidelity. However, it was also accepted (at paragraph 108) that it was too prescriptive to say that an irrevocable intention to compete was always the touchstone to measure when a duty of disclosure arose and that a fact-sensitive approach is needed. These cases are discussed in more detail at 4.185–4.190. In our view, while the result in those cases was probably correct, that was because directors or senior employees with fiduciary duties committed various clear breaches of duty to their employers. In particular, for this class of employee to recruit others is likely to amount to a breach of fiduciary duty and the duty of fidelity. Indeed at some point even agreeing in concert to leave their employment is liable to lead to a breach of duty because of their recruitment or co-ordination activities and because the intended future departure to compete with their employer is likely to breach disclosure obligations commonly attaching to senior posts and/or falsify reporting actually made by them to their employer. 2(b)(iii)  Other preparations 3.70  The employee who wishes to set up his or her own business may carry out preparatory acts such as acquiring premises, ordering stationery and 71

3.71  The implied duty of fidelity

purchasing an off-the-shelf company. See eg Pennwell Publishing (UK) Limited v Ornstien [2007] IRLR 700 (QBD) (referred to further at 3.109) where the court (Tugendhat J) accepted (at paragraph 53) that permissible preparatory activity included identifying business partners, setting up a company and locating suitable premises and equipment, including where necessary acquiring them before the date of departure. The obtaining of a licence necessary for the (rival) business may also be only (permissible) preparatory conduct (Starcomm Ltd v Knapman [2005] EWHC 3344 (Ch)), although in Starcomm (in an application for summary judgment under CPR, Part 24) some of the other acts of the defendant were found by the court to be more than merely preparatory. In particular, the court found the defendant had been in breach of fiduciary and contractual obligations in relation to the diversion of particular business. See also Saatchi & Saatchi Company plc v Saatchi (13 February 1995, unreported) (Jonathan Parker J), (no breach in agreeing to acquire shares in a competing venture where it was expressly agreed that the agreement to do so would not come into full force until the parties were free from existing restrictions). 3.71 In Robb v Green [1895] 2  QB  1 at page 15 Hawkins  J, in a celebrated (although in some respects unhelpful) passage, said: ‘In what I have said I do not mean to convey that while the contract of service exists a person intending to enter into business for himself may not do anything by way of preparation, provided only that he does not, when serving his master, fraudulently undermine him by breaking the confidence reposed in him. For instance, he may legitimately canvass, issue his circulars, have his place of business in readiness, hire his servants etc. Each case must depend on its own circumstances.’

The passage is too broadly stated. Maugham LJ in Wessex Dairies Ltd v Smith [1935] 2 KB 80 (CA), at page 87, said that he did not know what Hawkins J meant by ‘legitimately canvas’. This seems to have been a reference to canvassing persons other than the employer’s customers: Balston Ltd v Headline Filters Ltd [1990] FSR 385 at page 414 per Falconer J. Likewise, it would seem that Hawkins J was not intending to sanction the sending during employment of circulars to customers of the employer. 3.72 In Ward Evans Financial Services Ltd v Fox [2002]  IRLR  120 (CA) the Court of Appeal held that the deputy High Court judge had erred in holding that a clause in a trust and confidence agreement prohibiting the defendants, during employment, from holding a material interest in a company which might impair their ability to act at all times in the employers’ best interests, did not cover the formation, during employment, of a company which was dormant until after employment ended. The judge had erred in holding, therefore, that the defendants were not in breach of that clause because, although they had formed their company during the period of their employment, the company did not start trading until after their employment had ceased. It did not follow from the fact that the company did not trade until the employee’s contract was terminated, that the employee’s ability to serve the employers was unimpaired by his interest in that company while the contract persisted. In that case, following formation of their 72

Preparatory activity during garden leave 3.76

company, the employees had failed to act in the best interests of the employers whilst still employed by them. Their interest in the company, which they hoped to exploit upon termination of their contracts, was a strong factor in their failure to do so. Although this was a case concerning an express term rather than the implied duty of fidelity, it is not hard to see that the formation of a rival company, even if it is not yet trading, may, in certain circumstances (eg where it diverts the attention or loyalty of the employees concerned), be regarded as impairing the relevant employees’ ability to act at all times in the employers’ best interests and therefore (particularly in conjunction with neglect of the employer’s business or preparation for the new business) amount to a breach of the duty of fidelity. 3.73  See to similar effect Reuse Collections Ltd v Sendall [2015]  IRLR  226, considered at 3.40–3.41, where it was found that for a senior employee to provide finance to a new business, which was directly competitive with and operating in the same area (competing for a narrow pool of suppliers and customers), would give rise to a conflict of interest and amount to a breach of the duty of fidelity. 3.74  An interesting conundrum sometimes arises where a departing employee wishes to use clients as referees. This may be genuine or it may be a disguised attempt by the employee to inform clients of the employee’s departure and thereby solicit their future custom. Whether the seeking of references is genuine or amounts to impermissible solicitation of clients would have to be judged in all the circumstances, including the number of clients involved and their ability in fact to provide a reference.

3. PREPARATORY ACTIVITY DURING GARDEN LEAVE 3.75  The concept of garden leave is considered at 5.125–5.126 and garden leave injunctions are dealt with at 15.3–15.73. As noted above (at 3.2), in Ranson v Customer Systems Plc [2012] IRLR 769 the Court of Appeal emphasised that the duty of fidelity is no more than an obligation loyally to carry out the job which the employee agreed to do. The content of the duty is to be determined having regard to the other contractual terms including the job description. It is against that context that the issue arises as to whether and to what extent the requirements of the duty of fidelity may be affected by the fact the employee is placed on garden leave and therefore no longer required to carry out the positive elements of the job. 3.76  The issue was addressed in Imam-Sadeque v Bluebay Asset Management (Services) Limited [2013]  IRLR  345. Popplewell J  referred to the view expressed (obiter) by Maurice Kay LJ in Tullett Prebon Plc v BGC  Brokers LP [2011] IRLR 421 (CA), at paragraph 41, that the duty of fidelity may be attenuated during the garden leave period depending on the factual circumstances. Popplewell J  accepted that this was correct in the sense that the employee on garden leave is relieved of the obligation to carry out work activities, whether loyally or otherwise. However, he added (at paragraph 144) that: 73

3.77  The implied duty of fidelity

‘… the same cannot be said of the obligations which are imposed by the duty of fidelity and are of relevance in this case, which are obligations to refrain from acting in a particular way. Such negative obligations remain part of his duties for so long as he is employed. During garden leave the employee has the benefit of being paid in full without having to carry out any positive work obligations. The employer is paying for the continued right to insist upon the employee performing his negative obligations.’

3.77 Popplewell J  therefore distinguished between positive work activities which fell away and the negative restrictions on competing which continued to apply. He added (at paragraph 145) that: ‘… one of the common purposes of putting an employee on garden leave is to secure his loyalty to the current employer during the notice period, and to delay the transfer of his loyalty to a new employer until after its expiry. An employer may thereby legitimately seek to restrict the impact of any competitive activity by the employee, and protect the integrity of the employer’s workforce. There is no reason in principle, or authority, why the aspects of the duty of loyalty which touch upon competitive activity, or the enticing away of employees, should be attenuated so as to interfere with these legitimate purposes of garden leave.’

3.78  Applying those principles, on the facts in Imam-Sadeque Popplewell J concluded that the restrictions on the scope to compete or prepare for competition were not changed in any relevant respect when the employee, Mr Imam-Sadeque, went on garden leave. Mr Imam-Sadeque was employed as head of sales with the defendant, Bluebay. His contract contained an obligation not without the consent of his employer, Bluebay, to be in any way directly or indirectly engaged or concerned in any other business where this was likely to be in conflict with Bluebay’s interests. Popplewell J concluded that he acted in repudiatory breach of contract whilst serving a period of garden leave by virtue of assisting in setting up a competing venture and the preparation for its launch, assisting in recruitment of a Bluebay employee, Mr Nixon, for that venture and in telling untruths about his involvement in the recruitment of Mr Nixon when asked about this. Such conduct was both a breach of the express contractual restriction and the duty of fidelity. 3.79  More controversially, Popplewell J concluded that Mr Imam-Sadeque was under an obligation to report the competitive threat posed by the new venture he was helping to launch, and that this obligation was not affected by being placed on garden leave. In concluding that he owed such a duty, Popplewell J took into account the express restrictions on competition during employment, the fact the new venture was to be a direct competitor, Mr Imam-Sadeque’s seniority and that he was highly remunerated and the importance of his role to the profitability of Bluebay and the new employer. The Judge noted that these factors were of almost equal importance during the period of garden leave. In our view this aspect of the reasoning is less convincing. As emphasised in Ranson, employees do not in general have a duty to report unless this can be spelled out from the particular contractual terms and the job description and responsibilities. Where the employee does not have any positive work activities to carry out, it is not easy 74

Preparatory activity during garden leave 3.82

to see that loyally carrying out the requirements of the job can then be said to give rise to a positive reporting obligation. 3.80 The issue was revisited in Thomson Ecology Limited v Apem Limited [2014] IRLR 184 (John Martin QC). As discussed at 3.122–3.123, the departing employee, Mr Hall, was in overall charge of his employer’s operations and business at the premises where he was based. He had an express contractual obligation to report to the operations team on a fortnightly basis, and obligations to oversee senior staff in the maintenance of client relationships and to represent the company in a positive light to the staff. He resigned and was put on garden leave. He acted in breach of contract during the notice period in actively assisting a competitor in identifying and recruiting his employer’s staff and also in failing to inform his employer of the threat from the competitor to its business and staff. The Court approved and followed the reasoning in Imam-Sadeque. John Martin QC acknowledged that one of the consequences of the employee having been placed on garden leave was that the express obligation upon Mr Hall to report fortnightly and to supervise staff fell away. He left open whether, in the light of that, there might have been no obligation simply to report competitive activity if this had first been discovered during the notice period. However, he concluded that there was an obligation to report that he had positively assisted the competitor to recruit. Again, we suggest the reasoning in support of that conclusion is unconvincing. It was understandable that the negative restrictions on competition should continue to apply during garden leave. However, the imposition of a positive duty to report wrongdoing imposed on an employee who did not owe fiduciary obligations and was no longer under an obligation to carry out the work activities of the role, was not satisfactorily explained. 3.81 The approach in Imam-Sadeque and in Thomson Ecology may be contrasted with that in Balston Limited v Headline Filters Limited [1990] FSR 385. Falconer J concluded that the departing employee, Mr Head, had acted in breach of his duty of fidelity to his employer, Balston, during garden leave. In particular he had tendered for business from a competitor, and approached and offered employment to one of Balston’s employees. However, Falconer J concluded (at page 416) that there was no breach of duty in not having informed Balston of the approach from a prospective customer, since the consequence of Mr Head having been placed on garden leave was that his positive functions as an employee had ceased. As such he was not under any duty to take steps to further or advance Balston’s business. Thus there was no positive reporting obligation, notwithstanding that the competitive activity was within the negative restriction on such activity. 3.82  We suggest that the approach in Balston is more consistent with the emphasis in Ranson that the content of the duty of fidelity is properly to be identified in each case in the first instance by focussing on the particular role and contractual obligations of the employee. It may be that in many cases the garden leave provisions of the contract of employment will leave certain positive aspects of the duty of fidelity intact, such as by requiring the employee during garden leave to assist in handover tasks. The express provisions may require the employee (usually 75

3.83  The implied duty of fidelity

at the request of the employer) to attend the office or to remain contactable by mobile telephone throughout garden leave, eg to answer questions relating to the business as Mr Imam-Sadeque was required to do. However, in the absence of such continuing obligations during the garden leave period, there is unlikely to be a strong basis for regarding the duty of fidelity as containing positive reporting obligations during the garden leave period. In this context it may also be relevant to consider the employer’s instructions to the employee in relation to garden leave. While such instructions need to comply with the garden leave provisions of the contract of employment, in some instances the terms of the letter putting the employee on garden leave will make it clear that there is no question of the employee providing further services to the employer during the garden leave period, thereby tending to further negative the continuation of any positive obligations on the part of the employee during the garden leave period. 3.83 In Symbian Ltd v Christensen [2001]  IRLR  77 (CA), Scott V-C  (at first instance) went a step further, and suggested that during a period of garden leave the employee no longer had a duty of fidelity, capable of enforcement by injunction. Since it heard no argument on the point, the Court of Appeal did not deal with this surprising proposition, except that Morritt  LJ noted that counsel for the employee confessed to some difficulty in seeking to justify that part of the Vice-Chancellor’s judgment in his favour. In our view the proposition that there is no duty of fidelity during garden leave is wrong, running contrary to the whole concept of garden leave, which is to enable the employer to protect its business by relying on the duty of fidelity. It is also contrary to the approach adopted in Balston, Imam-Sadeque and Thompson Ecology. At a minimum the negative duty not to compete remains intact during garden leave. 3.84 In Hutchings v Coinseed [1998] IRLR 190, unusually, the Court of Appeal held that it was not a repudiatory breach for a member of the ‘sales support telephone staff’ (who gave one month’s notice, as was required under her contract of employment) to assume during the garden leave period a position with a rival of her employer, Coinseed. The case seems to have turned very much on its own facts. A letter by the employer was held to have varied her contract of employment – and the contract so varied was held not to contain any express or implied prohibition on the employee working for anyone else during the period of garden leave. Further, there was no allegation of breach of confidence against Miss Hutchings. Accordingly, she was entitled to maintain her claim for salary against Coinseed for the month in question.

4. DUTY OF DISCLOSURE TO THE EMPLOYER 3.85  During employment an employee will be the recipient of a whole variety of information which is relevant to the employer. In the majority of instances the employee will pass on the information to the employer without hesitation and therefore the question of whether or not there is a duty to do so will be irrelevant. Inevitably, however, there are times when information is not passed on, as a result of which the employer suffers a detriment of some sort and one of the 76

Duty of disclosure to the employer 3.88

issues in the ensuing litigation is whether or not a duty to disclose existed. It is now fairly standard to include express reporting obligations (see 5.37–5.42), but we consider here the position under the (default) duty of fidelity. 3.86  The issue has tended to arise in the context of the employer contending that a competitive threat could have been more effectively addressed if there had been early disclosure or that some benefit would not have been conferred on an employee if wrongdoing had been disclosed. So far as concerns fiduciary obligations, the issue was given fresh impetus by the Court of Appeal’s decision in Item Software (UK) Limited v Fassihi [2004] IRLR 928 (CA). In that case, which is considered in more detail in Chapter 4, the Court of Appeal emphasised that a directors’ duty to act in good faith in the best interests of the company (or now the equivalent duty under section 172 Companies Act 2006) may entail a positive obligation to disclose information. 3.87  That has in turn encouraged fresh consideration in the authorities of the scope of the duties of disclosure of non-director employees. Therefore before turning to discrete categories of information, we consider first the general principles that have developed. Leaving aside the position of an employee who is also a director, the leading authority is now the Court of Appeal’s decision in Ranson v Customer Systems Plc [2012]  IRLR  769. Giving the only substantive judgment, Lewison LJ emphasised that employees do not in general owe duties of disclosure to the employer. In order to ascertain what if any such duties arise it is necessary to analyse the employee’s contractual obligations, including the nature of the role undertaken by the employee. That is not to say that the default duty of fidelity is not relevant in this context. However, an analysis of the employee’s other contractual terms, including the job description/role, is ‘an essential foundation for determining the scope of the obligation of fidelity’ (at paragraph 33). That follows from the fact that (as noted above at 3.2) the duty is, as Lewison LJ put it (at paragraph 43) ‘no more than an obligation loyally to carry out the job that the employee agreed to do’. 3.88 In Lonmar Global Risks Limited v West [2011] IRLR 138, Hickinbottom J suggested that, in the absence of an express reporting obligation, such an obligation upon an employee (who is not a director) would arise only where a fiduciary obligation to act exclusively in the best interest of the employer could be identified on the basis of the particular functions and contractual duties of the employee. Again in Helmet Integrated Systems Limited v Tunnard [2007] IRLR 126 (CA), in considering whether there was a duty on an employee to report his own competitive activity, Moses LJ focussed on whether a fiduciary obligation could be identified. However, as explained by Lewison LJ in Ranson (at paragraph 35), in the case of an employee who is not a director, an analysis of the contractual obligations and role of the employee is an essential foundation not only for the content of the contractual duty of fidelity, but also for the existence and content of any fiduciary duties upon an employee. As is discussed further in Chapter 4 that follows because any duty of exclusive loyalty in an employment relationship (where the employee is not a director) would need to be spelled out of the employee’s role and contractual duties, and must be consistent with those duties. 77

3.89  The implied duty of fidelity

This in turn suggests that, for a non-director employee, the impact in terms of duties of disclosure of establishing that there are relevant fiduciary obligations (as opposed to available remedies) should not be over-emphasised. The very factors which may lead to the identification of relevant fiduciary obligations including duties of disclosure, are also liable to influence the content of the duty of fidelity and in turn therefore to lead to a contractual obligation of disclosure. 3.89 The authorities have tended to concern three categories of information, which we consider further below: •

Information concerning an employee’s own misconduct or preparatory acts to compete or that on the part of fellow employees in which the employee may or may not be implicated.

•

Information relevant to the employer which the employee uses to the employee’s own advantage. This type of information is sometimes in the form of business opportunities which the employee seeks to divert to himself: diversion of business opportunities is discussed at 4.158–4.172.

•

Inventions and discoveries made in the course of employment.

4(a) Wrongdoing 4(a)(i)  Duty to report own wrongdoing? 3.90  Consistently with the principles set out in Ranson, employees are not under a general default obligation to report either their own wrongdoing or that of other employees. Whether such an obligation arises in a particular case turns upon an analysis of the particular role of the employee and his or her contractual obligations: Sybron Corporation v Rochem Ltd [1983] 3 WLR 713 (CA). 3.91  A controversial issue is whether employees may be subject to an implied contractual duty to disclose their own wrongdoing. It is clear that if there is a duty to report the wrongdoing of others it is no answer to contend that it would also entail revealing the employee’s own wrongdoing (Sybron; Swain v West (Butchers) Limited [1936] 3 All ER 261; QBE Management Services (UK) Limited v Dymoke [2012] IRLR 458). However, until recently the decision of the House of Lords in Bell v Lever Bros Ltd [1932] AC 161 was regarded as being authority against an implied duty on employees to reveal their own wrongdoing. 3.92  That view has, however, been doubted by the Court of Appeal, which has questioned whether it is necessarily correct to say that an employee is not under a duty to disclose the employee’s own misconduct: see Item Software (UK) Limited v Fassihi [2004]  IRLR  928, discussed at 3.96–3.98 and Ranson v Customer Systems Plc [2012] IRLR 769 at paragraph 55. In our view, it is likely that the courts will in future not apply a strict rule that employees are never obliged to disclose their own wrongdoing but, consistently with the approach in Ranson, will rather approach the matter on a fact-sensitive basis. So, for example, in the case of senior employees who fraudulently conceal their wrongdoing in order 78

Duty of disclosure to the employer 3.94

to extract a large severance sum, the court is unlikely to apply the ‘rule’ in their favour. (This kind of case will often be covered by express warranties in the severance agreement that no acts of serious misconduct have occurred.) In relation to more junior employees or less serious misconduct, however, the court is not likely to insist on self-incrimination unless this arises from an express obligation or can be tied to a specific area of responsibility in relation to which the employee can reasonably be expected to report. 3.93 In Nottingham University v Fishel [2000]  IRLR  471, where a university employee was in breach of an express term requiring him to obtain consent before undertaking paid work at clinics abroad, he was held not to be in breach of the duty of fidelity by failing to inform his employer of his breach of contract, since there was no such duty to disclose his own misconduct. The university’s argument was that, had the university been aware of the opportunity to do outside work, it would have sought to do it itself. Elias J stated (at paragraph 74): ‘In my view the premise is wrong. I  do not think that as a general principle an employee is bound to inform his employer if and when he is doing outside work in breach of his contract. Mr Dutton relies upon the case of Neary v Dean of Westminster [1999]  IRLR  288 in which Lord Jauncey, sitting as special commissioner appointed to hear the case on behalf of Her Majesty the Queen as Visitor, held that in the circumstances of that case the employee in question was in breach of the duty of trust and confidence in failing to inform the Abbey authorities of certain activities he was conducting on his own behalf. However, in that case Lord Jauncey clearly considered that the employee had taken advantage of his position as organist at the Abbey for his own benefit. In other words, the duty to inform the Abbey authorities arose because Dr Neary had used his position to earn secret profits; he ought to have accounted for these to his employers in the absence of full disclosure and consent. It is similarly contended in this case that Dr Fishel was a fiduciary who abused his position for his own benefit. I consider that issue later in this judgment. If that is right, then it may be said that by acting in secret Dr Fishel has both acted in breach of his fiduciary duty and in breach of contract. But the contractual claim then adds nothing to the fiduciary claim. Absent the fiduciary obligation, the employee is not obliged to disclose the fact that he has earned sums from third parties. Indeed, were he to be so obliged, this would circumvent the well-established rule in Bell v Lever Brothers Ltd [1932] AC 161 that employees are not obliged to disclose their own past misconduct or breaches of contract.’

Nottingham University v Fishel is considered more fully in Chapter 4 relating to fiduciary duties at 4.8–4.19. 3.94  To similar effect is the decision in Tesco Stores Ltd v Pook [2004] IRLR 618 (at paragraph 63) where Peter Smith J stated: ‘I accept that there is no duty on an employee to disclose breaches of contract, which do not involve a fiduciary element. However, if an employee receives a profit in breach of his duty, he is liable to account. If he receives a bribe he is liable to account for the bribe. It seems to me that this fiduciary obligation to account is different from the authorities in relation to breaches of contract of employment with no such fiduciary element.’ 79

3.95  The implied duty of fidelity

3.95  Pook was employed by Tesco in a senior management position. Part of his duties involved the approval of invoices. In April 2002 the employers discovered that Pook had concocted false invoices on behalf of a company owned and controlled by him and approved them for payment. He was summarily dismissed. The day before his employment was terminated, Pook had applied to exercise options which he held under an executive share option scheme for employees. The employers refused to allow the options to be exercised. They then began proceedings to recover the sums paid out under the false invoices and a further sum which they alleged had been paid to Pook as a bribe by a company which did business with them. Pook consented to a judgment in respect of the sums paid out under the false invoices but denied any liability in respect of the further sum. Pook brought a counterclaim arising out of his entitlement to exercise options granted to him under the employee share option scheme. The court held that Pook owed a fiduciary duty to the employer to disclose the bribes that he had taken. If he had disclosed his own breach, the employers would have dismissed him summarily and his contract of employment would have been terminated immediately. The question of his exercising his share options would not then have arisen since it was a term of the share option scheme that a ‘participant’s rights to exercise an option shall terminate on his ceasing to be employed within the group for whatever reason’. 3.96 However, in Item Software (UK) Limited v Fassihi [2004] IRLR 928 (CA), whilst primarily focussing on the duties of a director, Arden LJ concluded (at paragraph 60) that Bell v Lever Bros was not authority that there were no circumstances in which an employee could have an implied contractual (rather than only a fiduciary) duty to disclose wrongdoing. In Bell v Lever Brothers Ltd [1931] All ER  1 (HL), Bell and Snelling were employees of Lever Bros and directors of its subsidiary, Niger Company. They each made secret profits by speculating in Niger’s business. Before becoming aware of this, Lever Bros terminated their employment and entered into severance agreements with them pursuant to which substantial payments were made. Lever Bros then sought to recover those payments by arguing that Bell and Snelling had been under a duty to disclose their misconduct. The House of Lords rejected that argument, concluding that Lever Bros was bound by the compromise in the absence of fraudulent concealment. As noted in Fassihi, since Bell and Snelling were not directors of Lever Bros, the issue of any duty of disclosure of directors did not arise on the facts of the case. In relation to the duties of disclosure of an employee, Lord Atkin said (at page 227) that: ‘I  see nothing to differentiate this agreement from the ordinary contract of service; and I  am aware of no authority which places contracts of service within the limited category I have mentioned … Nor can I find anything in the relationship of master and servant, when established, that places agreements between them within the protected category … The servant owes a duty not to steal, but, having stolen, is there superadded a duty to confess that he has stolen? I am satisfied that to imply such a duty would be a departure from the well-established duties of mankind and would be to create obligations entirely outside the normal contemplation of the parties.’ 80

Duty of disclosure to the employer 3.98

Whilst these comments were, on their face, of general application, in Fassihi Arden LJ emphasised (at paragraph 55) that all that the majority needed to decide was that the defendant employees owed no duty to disclose their misdeeds to the employer before entering into the compensation agreement with it, and did not decide that an employee could never have a duty of disclosure. 3.97  In the light of this, Arden LJ raised, without deciding, two possible bases upon which employees might be found to be obliged to disclose their own wrongdoing. •

One possibility suggested was to rely upon the developing jurisprudence in relation to trust and confidence. This was considered and rejected in Ranson. Lewison LJ explained that since the term of trust and confidence is a default contractual obligation which is an incident of all employment contracts, it cannot be the foundation for establishing fiduciary obligations which might in turn entail disclosure obligations. Lewison LJ did, however, proceed to note (at paragraph 55) that not only could the particular role and contractual terms of an employee give rise to relevant duties of disclosure, which are not limited to wrongdoing, but that this might also entail an obligation on employees to disclose their own wrongdoing amongst other matters. Similarly in Malik v Bank of Credit and Commerce International SA [1998] AC 20 (HL) Lord Steyn noted (at page 46C) that the implied term as to trust and confidence ‘adds little to the employee’s implied obligations to serve his employer loyally and not to act contrary to his employer’s interests’.

•

The other possibility raised by Arden LJ in Fassihi was to proceed on the basis that no logical distinction can be drawn between an employee disclosing his or her own wrongdoing, and disclosing that of others, especially as the latter course might involve disclosing the employee’s own wrongdoing. Although this was not explored further specifically in relation to contractual duties, it may be regarded as being the logical corollary of the reasoning that Bell v Lever Bros did not determine that in no case may an employee owe a duty to report his or her own wrongdoing. In the light of that conclusion, there is no strong reason to depart from the approach explained in Ranson of focussing on the particular role and contractual obligations of the employee as the necessary starting point to determine if duties of disclosure arise. Having analysed the employees’ contractual duties, other circumstances of the case may also bear on whether in the circumstances a duty of disclosure arises as part of the duty loyally to carry out the employee’s job. Thus, one important factor may be whether the wrongdoing is ongoing and requires to be addressed. Indeed in Sybron Corp v Rochem Fox LJ noted that Bell v Lever Brothers was also distinguishable on the basis that it related to past rather than ongoing wrongdoing.

3.98 At first instance in Fassihi ([2003]  BCC  858), Nicholas Strauss QC concluded that there was a duty of disclosure as a matter of contractual obligation on the facts of that case, arising out of the employee’s particular duties. Mr Fassihi was the sales and marketing director of Item. Its business included 81

3.99  The implied duty of fidelity

the distribution of software products for Isograph. Whilst Item was seeking to negotiate more favourable terms with Isograph, Mr Fassihi secretly approached Isograph with his own proposals to take over the contract for his own company (RAMS). Item’s negotiations with Isograph failed because its managing director, having been encouraged by Mr Fassihi to do so, pressed for more favourable terms which Isograph were unwilling to accept. Clearly there had been an obvious undisclosed conflict of interest on the part of Mr Fassihi and he was summarily dismissed when this was discovered. The deputy Judge concluded that since Mr Fassihi was involved in the negotiations between Item and Isograph, his duty of fidelity required him to disclose important information known to him which was relevant to those negotiations. That applied just as much where the information concerned Mr Fassihi’s wrongdoing as if a third-party rival distributor had been trying to sabotage the negotiations with Isograph. Notwithstanding that the Court of Appeal in Fassihi focussed on fiduciary obligations in order to uphold the decision, the first instance analysis of Nicholas Straus QC fits closely with the reasoning in Ranson and provides a good illustration of circumstances in which such a duty of disclosure may arise. 3.99  Subsequently, in Halcyon House Limited v Baines [2014]  EWHC  2216, HHJ Seymour QC (at paragraph 236) regarded Bell v Lever Bros as still being ‘positive authority’ against an obligation on employees to disclose their own wrongdoing in the form of planning unlawful competition, at least where fiduciary obligations were not engaged. However, that view was reached without addressing the reasoning in either Fassihi or Ranson. See also Milanese v Leyton Orient Football Club Limited [2016] IRLR 601, referred to at 4.14, where (at paragraph  139) the court declined to treat a vague obligation on a director of football to seek approval for decisions as giving rise to an obligation to report his own wrongdoing. The decisions in Halcyon House and Milanese suggest a continuing reticence in some cases to impose a duty to report wrongdoing. By contrast in Thomson Ecology Limited v APEM  Limited [2014]  IRLR  184 the court concluded that even if there was no duty to report a threat of competition during a garden leave period as a result of express reporting obligations no longer applying, the employee’s duty of fidelity in that case required that he report his own wrongdoing in assisting a competitor to recruit (see further the discussion at 3.122–3.125). 3.100  The better view, we suggest, consistently with the reasoning in Ranson, is that whether the disclosure relates solely to the employee’s wrongdoing, or concerns alleged misconduct or other activities of others, a fact-sensitive assessment is required as to whether disclosure is required focussing on the role and contractual obligations and other relevant circumstances. 4(a)(ii)  In what circumstances does a duty to report wrongdoing (generally) arise? 3.101  In determining whether a duty to report arises by reason of the implied duty of fidelity, an important starting point will be consideration of the nature of the employee’s role and any relevant express obligations. The nature and seriousness 82

Duty of disclosure to the employer 3.104

of the wrongdoing will also be relevant. As it was put by Leggatt J in Marathon Asset Management LLP and another v Seddon and others [2017] IRLR 503 at paragraph 138: ‘Whether a duty to report misconduct is to be implied as an aspect of the duty of fidelity and good faith depends on the circumstances, including the nature and terms of the employment, the nature of the misconduct, and how the employee has become aware of it.’

3.102  The position is likely to be relatively straightforward where a manager with responsibility for a relevant part of the business has reporting obligations in relation to that business and is therefore required to disclose misconduct relevant to that part of the business. That was the situation in Sybron Corporation v Rochem Ltd [1983] 3 WLR  713 (CA), where the information was as to the establishment and operation by a number of employees of Sybron of rival businesses in competition with the company. The employee found to be under a duty to disclose was the European zone controller who was in de facto control of the European operation of Sybron and had a duty to report on the state of his zone every month. Factors of significance were: the position of the employee in question in the hierarchy, the recognised reporting procedure, and that there was a continuing fraud on the employer. 3.103  A focus on the employee’s role and contractual responsibilities may entail that reporting obligations are not confined to the conduct of subordinates. In Swain v West (Butchers) Limited [1936] 3 All ER 261 Swain, who was the general manager, was found to be under an obligation to disclose unlawful orders given to him by the managing director. Swain owed an express contractual obligation ‘to promote, develop and extend the interests of the company’. Greer LJ said that this imposed on Swain an obligation to report to the Board ‘any acts not in the interest of the company’, and in Ranson (at paragraph 55) Lewison LJ explained the decision on this basis. See also the discussion of QBE Management Services (UK) Limited v Dymoke at 3.124–3.125. 3.104  Nevertheless, we suggest that it cannot be assumed that wording of this general nature would in all circumstances give rise to a duty to report matters adverse to the employer’s interests. In Swain the obligations applied to a general manager, who as such had a responsibility for the business. This may be contrasted with the situation in Lonmar Global Risks Limited v West [2011]  IRLR  2878. The defendant employees (Messrs Mee and West) were salesman employed by a Lloyd’s insurance and reinsurance broker. Their role was to obtain and retain business from international brokers. Once they obtained work they required a backup team of brokers and insurance technicians to service it, but the team did not report to them. They were recruited by a direct competitor, Tyser, but were found not to have acted in concert. Both were found to have crossed the line into impermissible competitive activity during employment by conducting business for a competitor and, in Mr West’s case, soliciting clients. However, neither was found to owe duties to disclose such conduct. They were under an express contractual obligation to use ‘best endeavours to promote the general interests 83

3.105  The implied duty of fidelity

and welfare of the company’. However, Hickinbottom J  commented that this was a general clause which, without more, could not require the law to impose wide-ranging duties to report wrongdoing and conduct that might be contrary to the interests of the employer. Significantly, neither was part of senior management. They had no management responsibilities or staff reporting to them. The contractual obligation to promote the interests of the employer was properly to be regarded in that light. 3.105  The contractual terms need to be considered in the light both of the actuality of the employee’s role and other circumstances of the case. An illustration of that approach is provided by the decision in Imam-Sadeque v Bluebay Asset Management (Services) Limited [2013]  IRLR  344, where the employee was under a duty to act at all times in the best interests of the employer. As discussed more fully at 3.129 to 3.132, this was taken into account as one consideration pointing in favour of a reporting obligation which the court concluded applied, but was not treated by itself as being determinative. 3.106  Public policy considerations in relation to restraint of trade may militate against an over broad interpretation of general wording to impose reporting obligations where that would interfere with otherwise lawful preparation to compete after termination of employment. Thus in Helmet Integrated Systems Limited v Tunnard [2007] IRLR 127, Mr Tunnard was held not to be under an obligation to disclose his own preparations to compete by developing an idea for a competitive product notwithstanding a contractual obligation ‘to act at all times with the best interests of the company in mind’ and ‘to advise on competitive activity’. As noted at 3.27, the court held that in construing those obligations, clear words would be needed to restrict the ordinary freedom of an employee to preparing to set up in competition. 3.107  Further, where it is intended to impose an obligation to disclose wrongdoing in circumstances that might otherwise be surprising, whether because of the breadth of what should be reported or because the obligation is imposed in relation to those for whom the employee has no managerial responsibility, clear wording may be required, or if contained in standard documents, clear steps needed to draw attention to the obligation. To that end in The Distillers Company (Bottling Services) Limited v Gardner [1982] IRLR 48, where an employee was disciplined for failing to report theft of a case of whisky, the EAT noted that if that was a matter of particular importance to the employer it could reasonably be expected to set this out clearly since: ‘It is asking a lot of an employee to require him to report the misdemeanours of his colleagues, but if this is to be the rule it should … be very clearly spelled out.’

3.108  This was followed by the EAT in Ladbroke Racing Limited v King, Daily Telegraph, 21 April 1989 where Wood J, in a majority judgment, commented that for there to be an express duty to report any breach of company rules, this would need to be written clearly, if necessary in capital letters in the staff handbook. 84

Duty of disclosure to the employer 3.111

3.109  Consistently with the approach in Ranson, close consideration is required of the nature and scope of an employee’s role and areas of responsibility, in order to ascertain whether a duty of disclosure is properly implicit in the duty loyally to carry out the job an employee is employed to do. In Pennwell Publishing (UK) Limited v Ornstien [2007] IRLR 700 (QBD) three employees established a rival company during their employment and engaged in conduct going beyond the boundaries of permissible acts in preparation for competition, including the use of Pennwell’s confidential information to establish the rival business. It was contended that one of the employees, Mr Isles, who was not directly involved in the impermissible activity, should have reported the conduct of his colleagues. The submission was accepted in relation to conduct at a conference chaired by Mr Isles (the day before his employment ended), since this clearly fell within his responsibility. However, Justin Fenwick QC (sitting as a deputy judge) concluded that there was no obligation of disclosure in relation to the earlier conduct of one of his colleagues, Mr Ornstien. He took into account in particular that although Mr Isles held a senior role, Mr Ornstien held the more senior position, being the most senior UK member of staff. 3.110  In the absence of clear express provision, the courts are unlikely readily to impose on junior employees a duty to disclose the wrongdoing of their colleagues or superiors. A good illustration of this is the case of Cantor Fitzgerald International v Tradition (UK) Ltd (12 June 1998). Faced with a claim for copyright infringement of the computer code of the claimant (Cantor Fitzgerald), the defendants had defended the claim on the basis of what later turned out to be apparently false assurances from their programmers (former employees of the claimant) that they had not copied any of the claimant’s code. Tradition sought permission to serve third party proceedings out of the jurisdiction against one Mr Gresham. It was submitted on behalf of Mr Gresham that he was a junior member of the team, he worked on one part of the system only and, moreover, that he was working under the directions of a director of his employer, which was, on the admissions already made, principally responsible for such infringements as might be shown to have taken place. Pumfrey J stated that he did not regard the contention that in these circumstances Mr Gresham was under a clear duty to Tradition to disclose the activities of his fellow programmers, so far as he was aware of them, to be at all a strong one. Pumfrey J could not see what distinguished Mr Gresham from the ordinary run of comparatively junior employees. He was not in the position of having independent managerial responsibility for the activities of any group. He was an employee employed to write code. In these circumstances it was concluded that it was unlikely that the defendants would succeed in showing that Mr Gresham was subject to an independent duty to reveal the activities of his fellow employees to his employer. 3.111  In addition to the nature of the role and express contractual obligations, the nature of any wrongdoing and its likely consequences for the business may also be significant in assessing whether an employee could, consistent with the duty of good faith, fail to make any disclosure. The relevance of the wrongdoing in question was highlighted in RBG Resources plc (in litigation) v Rastogi [2002]  EWHC  2782 (in a summary judgment application). The first three 85

3.112  The implied duty of fidelity

defendants were all directors of RBG, a metal trader. The fourth defendant, Mr Patel, was RBG’s financial controller, latterly holding the role of ‘Senior Vice President – Structured Finance’. RBG’s case was that its entire edifice had been built upon a raft of almost wholly fictitious transactions, and that funding which had been made available to it in respect of those transactions had been ‘siphoned off’ by the directors. RBG commenced proceedings and obtained freezing orders against all four defendants. In relation to the fourth defendant, RBG alleged that, in the alternative to his having been a party to the frauds perpetrated by the directors, he had at the very least acted in breach of duty by failing to monitor, prevent and report upon their wrongdoing. Laddie J dismissed the fourth defendant’s summary judgment application, holding that a senior employee such as the fourth defendant might, in circumstances such as those in the case before him, owe a duty to ‘whistleblow’. He rejected the contention that any duty to report must be limited to transgressions by those over whom the employee held supervisory responsibility. There was no obligation of confidence which would override that duty. Further, there was sufficient evidence to establish an arguable case that the circumstances were such that the fourth defendant ought to have investigated whether the directors were guilty of wrongdoing. In relation to the duty to whistleblow, consistently with the approach subsequently applied in Ranson, he held that: ‘Whether or not Mr Patel was under a duty to report wrongdoing by his codefendants is a matter of fact which is dependent upon a multitude of factors, including the terms of his contract of employment, his duties and his seniority in the company. One of the relevant factors will be the nature of the wrongdoing and its potential adverse effect on the company. Where, as here, the alleged wrongdoing went to the very survival of the company, it is more likely that the court would imply a duty to report.’

3.112  The multi-factorial approach, and the inter-relation between the contractual duties and the nature and extent of wrongdoing, was further illustrated by the reasoning in Marathon Asset Management LLP and another v Seddon and others [2017] IRLR 503. Here the context was that one of the founder members of an investment management LLP, Mr Hosking, had given notice of his departure from the LLP. He headed up a part of the LLP’s business that was run as a separate division. News of Mr Hosking’s impending departure caused a negative reaction from clients, leading to a large proportion of the assets under management on his side of the business being redeemed. It also called into question whether the members of the team employed in that division (known as the Global team) would remain with the LLP. The defendants, Mr Bridgeman and Mr Seddon, were both members of the Global team. Mr Seddon was employed as a fund manager. Mr Bridgeman was employed principally as an analyst. Neither Mr Seddon nor Mr Bridgeman was a director or partner and it was accepted (at paragraph 170) that neither owed relevant fiduciary duties. Mr Bridgeman regarded his position as particularly vulnerable in the light of Mr Hosking’s pending departure. In that context, in breach of his duties of fidelity and confidentiality, Mr Bridgeman copied a substantial volume of documents from the claimant’s server onto a portable USB drive, with a view in part to these documents being of use if he was able to realise his aspiration of starting up a new business with Mr Hosking and/or other 86

Duty of disclosure to the employer 3.113

members of the Global team. Mr Seddon also acted in breach of those duties in providing Mr Bridgeman with 33 files with a view to being able to use them after leaving the claimant, and in particular with a view to the possibility of starting a new business with the other members of the Global team and Mr Hosking. In the course of doing so he was informed by Mr Bridgeman that he had already saved other documents that he was planning to retain. Mr Seddon was aware that Mr Bridgeman had copied the files with the intention of taking them with him when he left the claimant, but did not know which files or how many Mr Bridgeman had copied. It was contended that Mr Seddon acted in breach of duty in failing to report what he knew of Mr Bridgeman’s conduct. In rejecting that submission Leggatt J  emphasised (at paragraph  139) that Mr Seddon and Mr Bridgeman were colleagues of equal standing. Mr Seddon did not occupy an executive or managerial position with the claimant and nor did he have responsibility for supervising Mr Bridgeman, or anyone else at the claimant. Nor were there any express contractual terms from which a duty to report could be inferred such as the obligation, as in Swain, to protect or promote the firm’s interest. Leggatt J acknowledged it was possible to conceive of circumstances where the duty to report could still arise on the basis that any reasonable employee in Mr Seddon’s position would have been bound to do so and could not in good faith have stayed quiet, such as if he had discovered that Mr Bridgeman was embezzling large sums of money from the claimant (at paragraph 140). However, here, it was not suggested that the conduct of which Mr Seddon became aware involved any criminal offence. Further Leggatt J considered that Mr Seddon did not have evidence that Mr Bridgeman had done or was about to do anything which had caused or was about to cause financial loss to the claimant. Although Mr Bridgeman had knowledge of conduct amounting to a breach of contract by Mr Bridgeman, but not the details of what had been copied, Leggatt J concluded that this was insufficient to give rise to a duty to report. 3.113  The decision in Marathon Asset Management serves to illustrate that wide ranging positive reporting duties are not readily to be drawn out of the duty of fidelity in circumstances where reporting obligations cannot be shown to be entailed by the nature of the role or other contractual obligations. The information came to Mr Seddon’s attention at a time when it was clearly in the claimant’s best interests to be made aware of the information. It was at a time where there was still the opportunity to prevent the abuse of the claimant’s confidential information, and prevent any further information being removed. Further, to the extent that this reasoning relied on the conclusion that Mr Seddon was not aware of conduct likely to cause loss to the claimant, it appears unconvincing. In the context of planned departures from the business and the aspiration of setting up a competing business, the inference might readily have been drawn that there was a significant risk that removal of potentially sensitive documents could cause substantial loss. In any event, if viewed from the perspective of protecting the company’s best interests, it could hardly be a persuasive response to say that Mr Seddon was not aware of the extent or detail of the documents copied for removal by Mr Bridgeman. On the contrary, if acting in good faith in the best interests of the company, that would indicate a need for the issue to be investigated to identify the extent of the problem and safeguard the company’s confidential 87

3.114  The implied duty of fidelity

information. As such, the decision may well have been otherwise if Mr Seddon had been a director or partner (owing consequent fiduciary duties) or if there had been contractual obligations pointing in favour of a wider duty to safeguard the claimant’s business. 3.114  Drawing together the threads, in conducting the fact sensitive investigation militated by the approach approved in Ranson, the court is concerned with whether a positive obligation to disclose wrongdoing is either required by an express term or is required in the circumstances as part of the obligation to carry out the requirements of the job loyally. Relevant considerations are likely to include: •

The express terms of the contract, including any relevant express reporting obligations but also any broader terms which may bear on the scope of any positive disclosure obligation (Ranson at paragraph 53; Swain).

•

The seniority of the employee and the responsibilities of the role. Seniority by itself is relevant but not necessarily determinative. There was a duty to disclose wrongdoing of a superior in Swain; also (as above) in RBG Resources a senior employee was held to be arguably under a duty to report the wrongdoing of his even more senior colleagues. Both cases though concerned senior employees with managerial responsibility for the business. Employees in managerial positions with reporting responsibilities and/or responsibilities for discipline are likely to be under a duty to disclose misdeeds of those within the part of the business for which they are responsible, at least if liable to cause significant damage to the interests of the business

•

Whether the wrongdoing is past or ongoing. Disclosure might be more readily required in relation to ongoing wrongdoing (see Sybron Corp per Fox LJ). The distinction is not, however, always determinative. The employer will generally have an interest in identifying a disloyal employee (see eg  Camelot v Centaur Communications Limited [1998]  IRLR  80 (CA)), and the particular managerial and contractual responsibilities of an employee may give rise to an obligation of disclosure in relation to this.

•

The level of seriousness of the wrongdoing or the degree of threat to the employer. Where this is not obvious, the employer may need clearly to set this out and draw to the attention of the workforce the seriousness which attaches to the particular conduct (Distillers v Gardner; Ladbroke Racing v King). Conversely the wrongdoing or likely harm may be sufficiently serious that any reasonable employee would have recognised that they could not in good faith remain silent (Marathon Asset Management v Seddon).

• Other circumstances bearing on the particular importance of the information, or of any conflict affecting the employee, as exemplified by the circumstances in Fassihi. •

88

Whether the employee is under an obligation to account for a secret commission or profit obtained from their position with the employer (eg Tesco v Pook).

Duty of disclosure to the employer 3.116

3.115  Further, other circumstances of the case may require consideration. The decisions considered below (at 3.117–3.138), in relation to whether there is a duty to report competitive activity irrespective of wrongdoing, are also pertinent. As supported by the reasoning in Helmet Integrated Systems Limited v Tunnard [2007]  IRLR  126 (CA), one factor to be taken into account in relation to whether there is an implied duty to report, or whether a clause is to be construed as imposing such an obligation, is the public policy in relation to restraint of trade if otherwise lawful preparation to compete after the employment has ended is impeded. Clearly that concern does not arise, or at least does not do so with the same force, where the disclosure concerns wrongdoing. As such, whilst not of itself necessarily sufficient, the fact that the disclosure concerns wrongdoing is liable to be an important element in the overall consideration. See eg Thomson Ecology Limited v Apem Limited [2014] IRLR 184, discussed at 3.122–3.123. 4(a)(iii) To whom should the report be made? 3.116 Ordinarily where there is an obligation to give disclosure it will be apparent that there is someone or somebody (eg  the Board) on behalf of the employer in a position to deal with the matter to whom the disclosure can be made. A complication arises where those to whom the employee would report are thought to be involved in the wrongdoing. That issue was raised on a summary judgment application in Rastogi (see 3.111). It was contended that Mr Patel was not under a duty to report suspicions of wrongdoing because any such duty would only have required him to report internally to the directors, which in the circumstances would have been futile and would not have saved RBG from the losses which it had actually sustained. The court started from the principle that the disclosure should be to someone with a proper interest to receive the information. Here there were available candidates without the need to report externally. There was at least one member of the employer company’s board to whom the disclosure could be made and who was not believed to be implicated in the wrongdoing, and the report could also be made to the company’s advisory board. However, the court also accepted (at paragraph 44) that if Mr Patel knew of or suspected serious financial wrongdoing which he had a duty to report, that duty was likely to extend to reporting to the company’s auditors. They have a watchdog role and senior executives in particular were under an obligation to help them with their area of responsibility including disclosing matters which excited suspicion. The disclosure to the auditor was still regarded as being to an officer of the company, and on the facts, given the more proximate routes for disclosure, the court considered it was unnecessary to determine whether wider disclosure such as to the external law enforcement agencies was required. However, broadly the tenor of the decision was to recognise that the duty of fidelity might require disclosure beyond the immediate governance organs of the employer where a duty of disclosure arose and wider disclosure was needed to protect the employer. That principle could also apply more widely, as in the case of a team move involving the members of senior management. The duty to disclose might in those circumstances extend to identifying others with a proper 89

3.117  The implied duty of fidelity

interest in receiving the information, such as the Board of a parent company. See also GHLM Trading Ltd v Maroo and others [2012] 2 BCLC 369, considered at 4.257–4.259.

4(b)  Information concerning acts preparatory to competition/ answering questions by the employer 4(b)(i)  In what circumstances does a broader duty to report a competitive threat arise? 3.117 Depending on their particular role and contractual responsibilities, employees may have duties to report competitive threats to an employer irrespective of whether it includes any wrongdoing. As Popplewell J put it in ImamSadeque v Bluebay Asset Management (Services) Limited [2013] IRLR 344 at paragraph 133: ‘The duty of fidelity may also require an employee to report to his employer a competitive threat of which he becomes aware, irrespective of whether he or any fellow employees are involved in that competitive threat. So too may an express term to act in the best interests of the company (cf Swain v West (Butchers) Ltd [1936] 3 All ER 261). Whether it does so is again fact sensitive, and will depend upon the terms of his contract of employment, the nature of his role and responsibilities, the nature of the threat, and the circumstances in which he becomes aware of it. A senior manager who becomes aware of a competitive threat to an aspect of the business for which he is responsible will normally come under such a duty, whereas a junior employee without such responsibility would not. The manager of a branch of a supermarket in the high street would normally be obliged to tell his superiors if he learned that a rival supermarket chain was proposing to open a store next door; whereas a junior employee working in the unloading bay would not.’

3.118  Imam-Sadeque did involve other wrongdoing by the employee. However, where that is not the case, the scope of any such implied obligation may need to take account of countervailing public policy considerations in relation to restraint of trade. Generally, an employee who does not act in concert with others or with knowledge that colleagues are involved as part of a team move, and does not go beyond lawful preparatory acts to compete, is not under an obligation to disclose to the employer legitimate preparatory steps. This is true even in the case of an employee who has fiduciary duties: Framlington Group plc v Anderson [1995] 1 BCLC 475 (Blackburne J) relying on Balston Limited v Headline Filters Limited [1990] FSR 385 (Falconer J) at page 412. Even decisions supporting a wider view of the duties of disclosure have proceeded on the assumption that a distinction is properly to be drawn between an employee acting alone and one where the employee knowingly acts in concert with others: British Midland Tool Limited v Midland International Tooling Limited [2003] 2 BCLC 523 per Hart J at paragraph 89; Kynixa Limited v Hynes [2008] EWHC 1495 at paragraphs 190–192; QBE Management Services (UK) Limited v Dymoke [2012] IRLR 458 at paragraph 189. 90

Duty of disclosure to the employer 3.122

3.119  Where employees intend to leave in concert, difficult questions arise in relation to the duty of disclosure, if any, of employees who intend to leave in concert. In GD Searle & Co Ltd v Celltech Ltd [1982] FSR 92, Cummings Bruce LJ commented: ‘In the absence of restrictive covenants, there is nothing in the general law to prevent a number of employees in concert deciding to leave their employer and set themselves up in competition with him.’

3.120  That comment was obiter, since the court did not have to consider the implied duty of fidelity as the injunction sought was confined to restraining activities after employment had ended, and is now of doubtful value. In QBE Management Services it was held only to be relevant in very narrow circumstances. Certainly in practice (because of the way team moves are generally planned and effected) it will often not reflect the true position. 3.121  In both Midland Tool and Shepherds Investments it was concluded that non-disclosure of a competitive threat after forming an irrevocable intention to compete amounted to a breach of the duty of fidelity as well as a breach of fiduciary duty. In both cases, however, the directors had crossed the line into impermissible preparatory activity. Further the Court of Appeal in Ranson cautioned on the dangers of reasoning by analogy with decisions concerning the duties of directors. More generally, in the context of an application for interim relief, in UBS Wealth Management (UK) Limited and another v Vestra Wealth LLP [2008] IRLR 965, Openshaw J commented (at paragraph 24) that: ‘I cannot accept that employees, in particular senior managers, can keep silent when they know of planned poaching raids upon the company’s existing staff or client base and when these are encouraged and facilitated from within the company itself, the more so when they are themselves party to these plots and plans. It seems to me that that would be an obvious breach of their duties of loyalty and fidelity to UBS.’

3.122 In Thomson Ecology Limited v Apem Limited [2014] IRLR 184 (at paragraph 15) the court (John Martin QC) expressed agreement with this view. In that case, the employee, Mr Hall, was a biologist employed as operations manager of Thomson, the claimant. He was not a director but was the most senior employee at the company’s premises at Letchworth, in overall charge of its operations and business. He had an express contractual obligation to report to the operations team on a fortnightly basis, and obligations to oversee senior staff in the maintenance of client relationships and to represent the company in a positive light to the staff. He resigned on 27 November 2012 and was put on garden leave. He started working for a competitor, APEM, soon after. Another 17 biologists left the claimant and most also joined APEM. Mr Hall made a series of admissions of what the court held to amount to serious breach of his contract prior to its termination, including providing APEM with information to assist in the recruitment of the claimant’s staff and informing the claimant’s staff that APEM was looking to recruit. The court concluded that he had also acted in breach of contract in failing to inform the claimant of the threat from a competitor to the business 91

3.123  The implied duty of fidelity

and staff. The duty arose having regard to his role and contractual obligations. He had overall responsibility for the claimant’s operations and business at the Letchworth premises and an obligation to his superiors to report on a fortnightly basis which implicitly included an expectation to report matters relating to the business that it was relevant for his superiors to know. 3.123  The obligation was not therefore dependent on establishing wrongdoing, though the court did comment that even if there would not have been a duty to report the competitive threat if it had first been discovered during the period of garden leave, there would still have been the duty to report the wrongdoing in assisting APAM to recruit. As such there was a recognition that the arguments for a duty to report the wrongdoing were stronger to the extent that it plainly applied, in the court’s view, even when other positive obligations had fallen away and the employee was on garden leave (albeit that, as discussed at 3.79–3.80, the reasoning in support of the continued application of such a positive reporting duty during garden leave was unconvincing). 3.124  In concluding that there was a duty to report the competitive threat, John Martin QC also relied on the decision of Haddon-Cave J in QBE Management Services (UK) Limited v Dymoke [2012]  IRLR  458. Senior employees in the British Marine part of QBE agreed to set up a business venture together in competition with QBE and staffed by its current employees. They approached numerous such employees and sought their agreement to become involved in the competing business, and required them to keep silent about the new venture. They also approached some of British Marine’s brokers. Haddon-Cave J  suggested that a useful working assumption, not only for directors but also for senior employees, was that they ought to disclose any action at all which if taken by others would lead to competitive activity and any such action of their own as soon as the intention to compete was formed unless they resigned immediately. 3.125  However, this line of authority needs to be applied with some care in the light of the reasoning in Ranson. The focus must be not simply on the seniority of the employees but also on whether a duty to report, whether arising from an express obligation or from the duty of fidelity, can be spelled out of the nature of the role, the contractual obligations and all the circumstances – there having been a strong basis for this on the facts as found in QBE and Thomson Ecology. Thus, for example, following the reasoning in Ranson, it is unlikely that a nondirector employee, even a senior employee, would have a duty to report a competitive threat to a part of the business in relation to which he has no contractual responsibility (unless the extent of the threat was such that it could have a knock on impact on the parts of the business for which he did have responsibility). The decision in QBE was explained by Lewison LJ in Ranson on the basis that Mr Dymoke, who was a senior employee but not a director, was subject to an express contractual obligation to use his best endeavours to promote and protect the interests of his employer and that he should ‘fully and properly disclose to the Board … all of the affairs of the Group of which he was aware’ (per Lewison LJ at paragraph 55). Further, on its facts QBE was not an instance of requiring disclosure of a competitive threat in the absence of other wrongdoing. Mr Dymoke 92

Duty of disclosure to the employer 3.129

owed a duty to disclose his own activities in soliciting fellow employees to defect en masse, his misuse of confidential material and the solicitation of employer’s customers whilst he was still employed. 3.126 A  focus on the responsibilities inherent in the nature of the role also explains the analysis in Tullett Prebon Plc v BGC Brokers LLP [2010] IRLR 648 of the duties of a desk head in a broker firm, Jack J noted, at paragraph 68, that: ‘Where it is sought to recruit a desk as a whole, or the greater part of the desk, it is very likely that the desk head will be approached first with the object of sounding him out as to the desk. He is then in a difficult and sensitive situation. While the desk head may see his obligation to his desk as being to get the best for them, his duty in law as desk head is to act in the interest of his employer and not that of the desk. His employer’s interest is to prevent the recruitment of the desk. He is obliged to inform his employer that the rival company is seeking to recruit the desk. He would be obliged to follow his employer’s instructions to prevent that happening.’

3.127  Consistently with the analysis in Ranson the responsibilities of a desk head were to be identified by a focus on express terms and the responsibilities inherent in the particular role. Since the desk heads had been entrusted with the responsibility for fostering the particular business of a desk, it is unsurprising that, whether analysed as a contractual or fiduciary obligation, there was an implicit obligation to report a threat to that business at least (in the case of a non-director employee) where it did not solely concern the desk-head leaving. 3.128  An early example of (an extremely limited) team move not involving an employee with fiduciary duties is Sanders v Parry [1967] 1 WLR 753. In that case Parry was an assistant solicitor employed in the practice of Sanders. Parry received an unsolicited offer from one of Sanders’ clients, Tully, for whom he worked, to the effect that if he left and set up his own practice, Tully would transfer the bulk of his work to Parry. After Parry had decided to accept Tully’s offer and was making plans for his departure, one of Sanders’ secretaries mentioned to Parry that she was dissatisfied with her job. Parry offered her employment with him, which she accepted. In considering Parry’s conduct Havers  J  ruled that Parry should have disclosed to the claimant the dissatisfaction of the secretary, thereby affording the claimant an opportunity to retain her services. In this respect, the case has often been thought of as the ‘high watermark’ in respect of the duty of disclosure in relation to a very limited team move. However, since Parry had been recruited to take charge of the office where the secretary worked, applying the analysis in Ranson it can be seen why the duty of fidelity required him to report the secretary’s dissatisfaction rather than keeping this information to himself and making use of it to recruit her to his own business. 3.129 The nature of the analysis required is indicated by the decision of Popplewell J in Imam-Sadeque v Bluebay Asset Management (Services) Limited [2013] IRLR 344 in the context of considering the extent of any obligation to report a competitive threat. The defendant employee, Mr Imam-Sadeque, was employed as a head of sales. His contract imposed an obligation to act in the best 93

3.130  The implied duty of fidelity

interests of his employer, Bluebay, at all times. Shortly before entering into a compromise agreement (now a settlement agreement) relating to the termination of his employment, he met a former employee of Bluebay, to discuss him (Mr Imam-Sadeque) joining a new start-up asset management company, Goldbridge, whose business was to be the management of investments similar to those managed by Bluebay. He discussed with Goldbridge specific aspects of the proposed business, in order to assist in setting up the venture and to prepare it for its launch. These discussions were directed to important aspects of the structure and operational implementation of the venture. They included the way in which the venture was to approach the sales side, including client acquisition and retention. He also provided assistance in relation to the announcement of Goldbridge’s launch. Whilst still employed by Bluebay, he also played a substantial role in assisting Goldbridge to recruit a Bluebay employee. Bluebay subsequently claimed Mr Imam-Sadeque had been in repudiatory breach of the terms of the compromise agreement and his employment contract between July and December 2011, as a result of which he was not entitled to be treated as a good leaver and was not entitled to certain benefits under the compromise agreement. 3.130 Applying the fact-sensitive approach demanded in Ranson, in addition to finding that Mr Imam-Sadeque had acted in breach of his duty of fidelity in the assistance provided to Goldbridge, Popplewell J  concluded that he had breached that duty in failing to tell Bluebay that Goldbridge intended to launch a start-up competitive business; that it had the necessary funding, resources, staff and infrastructure in place to do so; and that it intended to launch in the near future. In Popplewell J’s assessment, a number of considerations converged to require disclosure. His contractual terms required him to act in the best interests of Bluebay at all times, whilst other terms left little scope for activities threatening Bluebay’s interests. Various considerations relating to Mr Imam-Sadeque’s role were also seen as indicating a duty of disclosure on the facts of that case. He was a well-remunerated employee and held a senior role which was of very considerable importance to the success and profitability of Bluebay, as it would be to Goldbridge. He had responsibility for targeting and retaining clients, which was an aspect of the investment and asset management business which was important to its success. In addition to his role and contractual obligation to Bluebay, other factors said to point towards an obligation of disclosure were that he was in a position to exert influence on the structure and operational implementation of Goldbridge’s business plans in relation to this important area of activity, and that Goldbridge was to be a direct competitor of Bluebay, targeting similar clients and offering similar investment products. Nor, in Popplewell J’s assessment, was it any answer that Goldbridge would not immediately be in a position to compete as it needed Financial Services Authority (now Financial Conduct Authority) authorisation, since it was a competitive threat from the moment that it became a serious and viable project. As Popplewell J put it at paragraph 137: ‘The supermarket manager who learns of the rival store to be built next door cannot wait until it has been completed, and started trading, before revealing his knowledge of it; he cannot assist in its building and claim no breach of his duty of fidelity because it has not yet started trading when he provides the assistance.’ 94

Duty of disclosure to the employer 3.134

3.131 As to the weight to be placed on the fact that Mr Imam-Sadeque was highly remunerated, Popplewell J commented (at paragraph 138) that: ‘Whilst it would be over simplistic to say that the more senior an employee, the greater the degree of loyalty and diligence required of him, the scope of the duty imposed on someone at high managerial level in a multi-million pound business will involve a heavy burden not to do anything which might result in damage to the interests of that business.’

We suggest that this over-states the position, being inconsistent with the emphasis in Ranson that even senior employees do not generally owe duties of disclosure, and the need to focus on particular responsibilities of the employee. Instead the decision is properly to be regarded as turning on a fact specific assessment based on the express contractual obligations, the particular responsibility for developing and safeguarding the area of business under threat, and the extent of damage liable to be caused to that business and the illicit steps taken during employment to that end. 3.132  Unsurprisingly, Popplewell J held that the fact that the Mr Imam-Sadeque had entered into a non-disclosure agreement with his new employer could have no effect on whether there was a duty of disclosure to the current employer. He accepted that in some cases the circumstances in which an employee learnt of a competitive threat could be relevant to whether a duty of disclosure arises. However, he concluded (at paragraph 148) that if a duty to warn the employer would otherwise arise, an employee could not escape that duty by entering into a contractual duty with the competitor not to fulfil it. Employment contracts are not an exception from the principle that, whilst it is not unusual for parties to undertake mutually inconsistent contractual obligations, the existence of one does not excuse non-performance of the other. 3.133 The decision in Kynixa Limited v Hynes [2008]  EWHC  1495 is more problematic. The first defendant was a director of the claimant, the second a senior employee (equivalent to a Head of Business Development) but not a director and the third a more junior employee. Each was approached separately by and ultimately took up employment with a competitor and they played no part in soliciting each other, but they knew of each other’s intention to join the competitor, Parabis. Both D1 (as a director) and D2 (as a senior employee owing relevant fiduciary obligations) were held to have acted in breach of fiduciary duty in failing to disclose that they had been approached by a competitor after becoming aware of the approach to each other. That aspect of the decision is considered further in Chapter 4 (at 4.244–4.255). However, the court concluded that the failure to report the approaches by the competitor also amounted to a breach of the implied duty of fidelity, including by D3 who had been held not to owe any relevant fiduciary duties. D3 was said to be in breach of the duty of fidelity in failing to report the approaches by the competitor once it was known that D1 and D2 had already been approached. 3.134  Although the reasoning in Kynixa focused primarily on fiduciary duties, it is the application of the duty of disclosure to D3 based only on her duty of 95

3.135  The implied duty of fidelity

fidelity that is perhaps the most controversial aspect of the decision. Given their senior roles, as respectively (effectively) Chief Operating Officer and Head of Business Development, it is understandable that it was regarded as within the scope of the responsibilities and/or management roles of D1 and D2 to report on the determined attempts by a competitor to recruit the two senior members of the management team with the substantial damage that would bring to the claimant’s business. However, that was less clearly the case in relation to D3, who was employed in the role of ‘Relationship Manager’. In considering the scope of her duties, the court took into account that she was a ‘very important employee’ who had access to and knew of all the important information which made the claimant’s business a success. She was trusted to do much of her work at home with minimal supervision. Significantly, the judge (HHJ Wyn Williams) noted (at paragraph 278) that, together with the other defendants, she was regarded by the person who recruited them for a competitor (Parabis), as comprising the senior management team. It was also noted that all three defendants worked closely together. However, it was not identified that she had any specific reporting obligations as part of management of the business which could be said to encompass an obligation to report the approaches by a competitor. Instead, the obligation was put in broad terms, as arising out of the duty of loyalty in the context of her knowledge of the attempt to recruit three senior employees. To this end the judge commented (at paragraph 283) that: ‘A  crucial aspect of the implied duty of fidelity is the concept of loyalty … I simply do not see how one can be acting as a loyal employee when one knows that three senior employees (including oneself) may transfer their allegiance to a group of companies which includes a competitor and yet not only fail to divulge that knowledge but also say things which would have the effect of positively misleading the employer about that possibility.’

3.135  We suggest that this was too sweeping in so far as it suggested that a duty of disclosure arose out of the implied duty of fidelity without consideration of particular duties or management functions giving rise to such a reporting obligation. Consistently with the approach in Sybron Corporation v Rochem Ltd [1983] 3 WLR 713 (CA) (see 3.102) and Ranson it might be expected that closer attention would be needed to her specific contractual duties in order to identify on what basis there was an obligation to report the intentions of her more senior colleagues to leave, at least in the absence of any other wrongdoing on their part. The conclusion as to a breach of loyalty by D3 might, however, be explained by reference to the emphasis on the fact that she was regarded together with the other defendants as comprising the senior management team and that each of the defendants not only failed to disclose the approaches by a competitor, but also misled the claimant about their future intentions. It was not, therefore, a case of mere non-disclosure. Indeed if rightly decided, Kynixa indicates that the duty of disclosure may arise at an even earlier stage than where an irrevocable intention has been formed to compete (see 3.121), namely when an employee is aware that other colleagues (in addition to the employee) have been approached by a competitor. 3.136  In addition to taking account of the terms of employment and job description of the employee alleged to be under a duty of disclosure, the nature and 96

Duty of disclosure to the employer 3.138

credibility of the information is also liable to be a relevant consideration. In Halcyon House Limited v Baines [2014] EWHC 2216, the court commented in relation to an alleged obligation upon an employee to disclose the musings of a director as whether to set up in competition but before the director had made a firm decision, that any disclosure obligation ‘certainly did not extend to “passing on tittle-tattle”’. A similar approach was adopted in Basildon Academies v Amadi UKEAT/0342/14/RN, 27 February 2015. Here the claimant had worked two days a week for his employer and, without informing the respondent employer, three days for a college. He was suspended by the college when a student accused him of sexual assault. Although he was arrested, either there were no charges or they were dropped, and the decision proceeded on the basis that the allegations were not well-founded. After the school found out about the other employment and the allegations he was dismissed on the basis of gross misconduct in deliberately deciding not to inform the respondent employer about these matters. The tribunal held that the dismissal was unfair, but reduced compensation for contributory fault and for the chance of dismissal in any event. The latter finding depended on there having been misconduct in failing to disclose the allegations. The EAT concluded that the claimant was under no such express or implied obligation. Whilst accepting that following Fassihi there was no rule of law that under no circumstances could an employee be under a duty to disclose his own misconduct, Mitting J added (at paragraphs 22–23) that: ‘… in no case of which I am aware (and none has been cited to me) has the proposition ever been advanced, let alone held to be good law, that an employee must disclose to his employer, in the absence of an express contractual term requiring him to do so, an allegation however ill-founded of impropriety against him. … it is clearly not the law that an employee is under such an implied obligation.’

3.137  See to similar effect, but in relation to employee directors, the EAT’s decision in Howard & Palmer Limited v Colebrook and Everett UKEAT/0416/14/ DM, 3 March 2015, considered at 4.253. 3.138  Ultimately whether the duty of fidelity entails a duty to disclose in any particular case requires a fact-sensitive analysis, depending on a number of factors, primarily: •

The various factors identified above (see 3.114) in relation to whether there is a duty to disclose wrongdoing, including in particular the nature of the role and contractual obligations aside from the duty of fidelity. Of particular importance is whether the employee whose conduct is in question has reporting duties in relation to the other employees who are party to the plan. In practice, this will mean that normally only senior staff will be at risk of breaching the duty of fidelity (or express reporting duties), although not necessarily only in relation to their subordinates: in Swain v West (Butchers) Ltd [1936] 3 All ER 261 (CA) a general manager was held to be under a duty to disclose the misdeeds of the managing director: see 3.103.

•

Whether the employees’ plans involve any wrongdoing by any of them (such as removal of confidential information). 97

3.139  The implied duty of fidelity

•

Whether the impact of the departure on the employer is likely to be significant – as, for example, where an entire team is leaving.

•

The degree and certainty of knowledge of what is afoot (Halcyon House; Howard & Palmer) or the veracity or reliability of an allegation (Basildon Academies v Amadi).

•

How the employee became aware of the information (which might also in turn bear upon its reliability).

•

Whether an irrevocable intention has been formed to compete is at least a relevant factor, though it is not necessarily always determinative (Shepherds Investments; Gamatronic) and, depending on the nature and seriousness of the threat and the employee’s other obligations, it may also be that disclosure is required earlier (Kynixa).

4(b)(ii)  Is there a duty to answer questions/ not to mislead? 3.139 As noted above (3.133–3.135), emphasis was placed in Kynixa on the fact that the third defendant, who was not a senior employee and did not owe fiduciary duties, had not only failed to disclose the competitive threat, but had actively misled the employer. Again in Imam-Sadeque, there was a breach of duty by virtue of having misled the employer as to his involvement in assisting a competitor to recruit another employee (the assistance also of itself being a breach of duty). As Popplewell J noted (at paragraph 166), the duty of fidelity includes a duty of honesty, such that Imam-Sadeque was under a duty not to tell untruths as to assistance in the recruitment of the other employee. 3.140  As to the question of what information a departing employee is obliged to give in response to questions by the employer, some assistance may be gained from the decision of Elias J in Football Club v Tigana [2004] EWHC 2585 (QBD) in which he considered the duty of the employee to provide honest answers in relation to information provided in the course of employment. It was common ground in that case (and accepted by Elias J) that if the employee (the manager) was asked for his advice about the value of a particular player, or the terms on which the player should be engaged, then he should give an honest opinion in so far as he felt able to express an opinion. That is perhaps obvious. Elias J (at paragraph 99) defined the essential issue in the case in narrow terms ie whether the employee had deliberately concealed matters which he believed his employer wanted to know. 3.141 However, responses to questions of this nature, focussed on practical issues relating to handing over, are different from imposing on an employee a duty to provide information which the employer wants to know regarding the employee’s intentions as to future activities, after the employment has ceased and not in breach of any post-termination covenants (or regarding legitimate preparatory conduct during employment to compete after ceasing employment). There is in our view no implied duty to provide information in this respect, since it relates to ‘private’ matters outside the scope of employment or matters in respect of which the law recognises a freedom on the part of employees to put their own 98

Duty of disclosure to the employer 3.142

interests first. More difficult issues arise where the employee not only avoids answering but gives an untruthful and misleading answer. In MPT Group Limited v Peel and others Unreported, 16 May 2017, on an interim relief application in the context of the synchronised resignations of two senior employees, the deputy judge, Edward Pepperall QC, considered (at paragraph 86) that employees were entitled to keep their own plans for lawful competition after employment confidential from their current employer and so were under no duty to disclose their true intentions to the employer when asked and nor did they breach their duty of fidelity in giving false or misleading answers denying that they were entering into partnership together. Whilst in broad terms that is an appropriate approach, the issue is fact-sensitive and there may be circumstances in which, even in this ‘free’ area, providing positively misleading information might be regarded as a breach of the duty of fidelity. Ideally if asked questions as to intentions for the future, which the employee does not wish to divulge, the employee should decline to answer, rather than answer falsely. However, in practice employees may feel compelled, in order to protect confidentiality of their plans, to provide a misleading answer since to fail to respond might in any event be seen as evasive and confirm the intention to compete after employment. Whilst, consistently with the approach in MPT, that might not necessarily entail a breach of the duty of fidelity, the issue is fact-sensitive. There would very likely be a breach of duty, if the employee were to give a deliberately false answer with a view to obtaining some other employment advantage such as securing a more favourable bonus payment before departure. Similarly where it ought reasonably to be appreciated that the employer is likely to rely on the misleading information in permitting the employee to continue working in a role with access to clients and confidential information rather than exercising a right to move the employee to alternative duties or place the employee on garden leave, that is liable to be a significant consideration pointing towards a breach of duty. As to the potential springboard relief that might then be available, see by analogy (though in relation to an express obligation to disclose a competitor's offer of employment), the decision in Dyson Technology Ltd v Pellerey [2015] EWHC 3000, considered at 11.227. 3.142  Further, aside from whether there is any positive misrepresentation, steps taken to cover up preparatory steps (whether during employment or in subsequent proceedings), and discussions in relation to this, do sometimes colour the view which the Court may take. The position in that regard is illustrated by the approach in Whitmar Publications Limited v Gamage and others [2013] EWHC 1881 (Ch). In the context of an interim relief application, the judge (Peter Leaver QC) commented (at paragraph 57) that: ‘One of the badges of competition in cases such as this is the secrecy with which those who are competing go about their business.’ We suggest that was going too far, given the fact-sensitive nature of the enquiry as to whether there is a duty of disclosure and that even where only engaged in permissible preparation to compete, employees may for good reason be concerned not to alert their employer to this. However, notwithstanding this, in practice and particularly in the context of a team move, active concealment may be viewed as incriminating. In this case the claimant, Whitmar, was a publisher producing a range of different magazines. The defendants were three senior employees, and it was found that there was a strong case that they had been involved in 99

3.143  The implied duty of fidelity

preparations to compete, crossing into active competition, for over a year prior to their resignation. There were arguable elements of active misleading in that on resignation one of the defendants, Mr Gamage, had told Whitmar’s managing director, that they were going to set up a new company, Earth Island, whereas that company had been set up with a view to entering into competition four months earlier, in August 2012 and Mr Gamage had registered an internet domain for Earth Island’s use some months earlier. There were also allegations that, whilst still employed, they identified premises from which to trade in the same town as Whitmar was based, that they were in discussion as to which employees to take with them and were involved in discussions in preparation for launching competing magazines including exploring titles, design and layout, target audience, marketing strategy and identifying and securing investment and had solicited at least one other employee of Whitmar, and that they had solicited business from a major customer of Whitmar. In concluding that there was a strong case, the Judge placed emphasis on emails highlighting the concern to conceal their conduct including stressing the need not to use their Whitmar email addresses and saying that all traces of an email sent in error to that address had been destroyed, and another email in which they discussed how best to proceed without ‘blowing our cover’. See also in relation to weight attached to concealing conduct in the context of subsequent litigation:  Imam-Sadeque v Bluebay Asset Management (Services) Limited [2013] IRLR 344 at paragraphs 41(3) and 171.

4(c)  Inventions, discoveries and copyright 3.143  Until 1978 it was uncontroversial that an employee was required to disclose to the employer inventions and discoveries which the employee makes in the course of employment. In the absence of agreement to the contrary, these belonged to the employer. In Triplex Safety Glass Co Ltd v Scorah [1938] Ch 211, Farwell J stated that this was the position where the invention or discovery was made in the course of employment by an employee during working hours and using the employer’s materials. 3.144  The decision in British Syphon Co Ltd v Homewood [1956] 2 All ER 897 was on a different basis. In that case Roxburgh J held that it was contrary to the duty of fidelity for an employee who was employed as a technical adviser to advise on all aspects of the business, including the manufacture of soda water syphons, during employment to make an invention (an improved form of soda syphon) and dispose of it as he saw fit. No consideration was given to whether the invention was made during working hours or using the employer’s materials or confidential information. Indeed the ex- employee only sought to exploit the invention after termination of the relevant employment. The reason for the decision was that employees should not put themselves in a position in which they would have personal reasons for not giving to the employer the best possible advice. 3.145  However, the Patents Act 1977 introduced an element of uncertainty into the law. By section 39(1) all pre-existing common law rules are either swept away completely or are to be applied with great caution: Harris’ Patent [1985] RPC 19. 100

Duty of disclosure to the employer 3.148

An ‘invention’ (not defined in the 1977 Act) belongs to the employer only if this results by virtue of two separate two-stage tests respectively applicable to employees who, in brief, are ‘paid to invent’ and employees who, by virtue of their (higher) responsibilities, have a special obligation to further their employer’s undertaking. All other inventions belong to the employee: section 39(2) (see further 3.153–3.157). ‘Invention’ means much more than ‘patentable invention’ (Viziball’s Application [1988] RPC 213) and may indeed in suitable fields such as electronics and software, encompass things also covered by copyright (compare ‘all other purposes’ in section 39(1); and generally see section 39(3) combined with section 43(4)). Finally, by section 42(2) a term in a contract is unenforceable to the extent that it diminishes the employee’s rights in an invention. 3.146  A duty to disclose to the employer inventions which by section 39(2) of the 1977 Act belong to the employee might be seen as a diminution of rights (within the meaning of section 42(2) 1977 Act), given possibly a wide interpretation of ‘rights’. How then can an employer claim rights in an invention if unaware of its existence? One practical solution may be based on the implied term of the employee’s duty of fidelity, which in this context may mean a requirement to disclose for the initially limited purpose of determination of ownership. Reliance might also be placed on the need to give the contract of employment business efficacy. Employers requiring such disclosure should bear in mind the need to maintain the confidentiality of the employee’s submission pending determination of its ownership. In Prout v British Gas [1992]  FSR  478, an employee’s submission made under the employer’s suggestion scheme was held to give rise to a contractually enforceable obligation of confidence, or alternatively there was held to be a fiduciary relationship binding in equity protecting suggestions that were of a potentially patentable nature. There is also the possibility of a claim for unfair constructive dismissal by failure to treat the employee consistently with the implied term of trust and confidence. 4(c)(i) Employee works and intellectual property rights in them: statutorily implied terms 3.147 While the protection of intellectual property rights in the context of employment covenants goes beyond the scope of this book, employers should be aware of the legislation which effectively implies into the employment relationship provisions as to the ownership of intellectual property generated during the employment relationship.1 4(c)(ii)  Copyright works 3.148  Copyright exists in a very wide range of material, from illustrations and computer programs to internal memoranda written for an employer by employees 1 For a detailed account of the law of copyright and associated moral rights under Chapter IV, Part I Copyright, Designs and Patents Act 1988 in the context of employment, readers are referred eg to Copinger and Skone James on Copyright (2016, Sweet & Maxwell).

101

3.149  The implied duty of fidelity

and others. Section 11(1) Copyright, Designs and Patents Act 1988 provides that the author of a work is the first owner of copyright in it. Without more, this would mean that an employee engaged to write software for a software house employer would own copyright in any software written by the employee for the employer (but note that, by section 9(3), for computer-generated works the ‘author’ is taken to be the person who made the arrangements necessary for the creation of the work). 3.149  However, section 11(1) CDPA 1988 is made subject (so far as is relevant to employment) to section 11(2). This provides that where a literary, dramatic, musical or artistic work is made by an employee in the course of his or her employment, the employer is the first owner of copyright in the work, subject to any contrary agreement between them. However, section 11(2) CDPA 1988, applies only to those who are employed under contracts of service or apprenticeship: section 178. The difference between a contract of employment and one for services is dealt with at 2.6–2.59. The employer and freelancer/consultant may, however, expressly agree that the employer shall be the first owner of the copyright. 3.150 Assuming an employer can show that the worker concerned was an employee, another hurdle that the employer must overcome is to show that the work concerned was generated in the course of that employee’s employment. This might seem an obvious point, and one that is easily disposed of by the employer. Unfortunately, this is not always so. In the leading case on this point, Byrne v Statist Co [1914] 1 KB 622, Mr Byrne, the employee, was on the permanent editorial staff of The Financial Times. His regular working hours were 11.00 am to 6.00 pm. He was asked by The Financial Times to translate, for a separate fee, the text of a speech from Portuguese to English. The English version was to be printed in The Financial Times. Mr Byrne prepared the translation in his own time, ie outside his normal working hours. The court decided that he had not produced the translation within his ordinary duties as an employee of The Financial Times. In other words, the work was not produced in the course of his employment and, consequently, Mr Byrne was the owner of the copyright in the translation. 3.151  It follows that employers should, wherever possible, make specific provision in contracts with consultants and other freelancers for ownership of, and dealings with, works created by those consultants and freelancers. It is prudent for employers, too, to make similar provision in their standard contracts of employment. Outline provisions are suggested in Chapter 5 at 5.45–5.53. 4(c)(iii)  Other employee works and intellectual property rights in them Design rights 3.152 Section 213 Copyright, Designs and Patents Act 1988 established a new, unregistered, design right in the original design of an article. Ordinarily, the designer is the first owner of the design right: section 215(1). However, in 102

Duty of disclosure to the employer 3.157

contrast to the position of literary or artistic works enjoying copyright protection, where a design is created in pursuance of a commission, the commissioner is the first owner of any resulting design right: section 215(2). For example, where an employer engages a freelance worker to produce a design, the employer as commissioner will be first owner of the design. Where a design is created by an employee in the course of employment, the employer will be first owner of any resulting design right: section 215(3). (Note that by section 214(2) the ‘designer’ of the, commercially increasingly important, computer-generated work is taken to be the person who made the arrangements necessary for the creation of the design.) The principles determining whether or not a worker is an employee and issues such as whether the design was created in the course of employment will be similar to those applicable to the creation of copyright material by employees in the course of their employment. The ownership of registered designs is dealt with by section 2 Registered Designs Act 1949, as amended by section 267 Copyright, Designs and Patents Act 1988. Ownership of registered designs follows the pattern of ownership of unregistered design rights, as outlined above. Employee inventions 3.153  Section 39 Patents Act 1977 sets out an all-embracing code to determine who, as between employer and employee, owns rights in inventions arising out of their relationship. There are two situations addressed by section 39. 3.154  The first deals with inventions made in the course of the normal duties of the employee or in the course of duties falling outside his or her normal duties, but specifically assigned to the employee, and where, in either case, the circumstances suggest that the invention might reasonably have been expected to result from the carrying out of those duties: section 39(1)(a) PA 1977. In effect, this situation covers junior employees and those in middle-management positions. 3.155 The second situation deals with inventions made in the course of the employee’s duties and where, at the time of making the invention, because of the nature of the employee’s duties and the particular responsibilities arising from the nature of those duties, he has ‘a special obligation to further the interests’ of the employer’s business: section 39(1)(b) PA 1977. Because of the need for the special obligation mentioned in this provision, this situation effectively covers senior employees and directors. 3.156 In each of these situations, any inventions covered will belong to the employer: see, generally, Harris’ Patent [1985]  RPC  19. Also, for the first Court of Appeal decision on the interpretation of section 39(1)  PA  1977, see LIFFE Administration & Management v Pinkava [2007] ICR 1489 (CA). In any other situation, inventions arising out of the employment relationship will belong to the employee: section 39(2). 3.157  Having provided for the ownership of inventions, the Patents Act 1977 goes on to give inventive employees the right in certain circumstances to compensation for the ‘outstanding’ benefit gained by the employer from the 103

3.158  The implied duty of fidelity

patent derived from the invention: section 40(1)  PA  1977; Shanks v Unilever Plc [2014] EWHC 1647. More particularly, compensation will be paid where a patent has been granted for the employee’s invention which, by virtue of section 39(1) PA 1977 always belonged to the employer, and the patent itself is (taking into account such factors as the size and nature of the employer’s business) ‘of outstanding benefit’ to the employer, and it is just that the employee should be awarded compensation. There is also provision for compensation where by section 39(2) the employee (and not the employer) is the first owner of the patented invention, the employee then sells the ownership in the patent or grants an exclusive licence under it to the employer, but the employee’s benefit from the sale or licensing of his or her rights is ‘inadequate’ in comparison to the benefit derived by the employer from the patent: section 40(2). There are detailed provisions for determining the level of compensation payable by the employer. Employers cannot in the employment contract (or, indeed, in any other contract) require employees, before the employees create any invention, to contract out of the benefits provided for by this statutory code in relation to those inventions and the patents for them: section 42(2). This is made even more explicit in section 40(4) in relation to inventions originally belonging to the employee and subsequently covered by section 40(2). However, this rule against contracting out does not derogate from any duty of confidentiality owed by the employee to his or her employer: section 42(3). In other words, while employees may benefit from the inventions they create for their employers, they must still preserve their employers’ trade secrets and other confidential information. 4(c)(iv) Summary 3.158  The above account of the law relating to designs and inventions created by employees is necessarily brief, and readers are advised to consult specialist texts on industrial and other designs and patents. The law of designs and employee inventions is complex and, as in the case of copyright, contains many traps for the unwary. Employers should seek specialist legal advice in this area (as well as in the copyright area). In addition (and having taken such advice) employers should in their standard contracts of employment make specific provision for the ownership and use of registered and unregistered design rights, copyright, patents and all other intellectual property rights that arise out of employment (in the latter case, taking into account the mandatory nature of the Patents Act 1977 as regards employee inventions). An outline of certain basic provisions is suggested at 5.45–5.53.

104

APPENDIX TO CHAPTER 3

Preparatory activity during employment to compete after employment 3.159  The following table sets out the main types of permitted and prohibited activity (where there is no express prohibition). The table should be used with care: sometimes slight variation of the facts can lead to a different result, as can the fact that the preparatory acts are part of a team move and the particular role and responsibilities of the employee. In addition it will be important to have regard to the cumulative impact of various different steps taken by the departing employee. In relation to the cases referred to below it is also advisable to refer back in the text of this chapter to the discussion of the case, which may show caveats to the broad propositions set out below. Permitted (as long as not preparing in employer’s time) Seeking work with a competitor (Harris v Slingsby [1973] IRLR 221)

Indicating an intention to compete in the future (Laughton and Hawley v BAPP Industrial Supplies Ltd [1986] IRLR 245; Balston Ltd v Headline Filters Ltd [1990] FSR 385) but see 3.32–3.41, 3.66–3.69 Negotiating and agreeing terms of employment with competing business (Framlington Group plc v Anderson [1995] 1 BCLC 475) Arranging premises and purchasing off-the-shelf company (Balston Limited v Headline Filters Limited)

Prohibited Competing in employer’s time (Thomas Marshall v Guinle [1979] 1 Ch 227; cf Adamson B&L Cleaning [1995] IRLR 193) Soliciting employer’s customers (Wessex Dairies v Smith [1935] 2 KB 80; Crowson Fabrics Limited v Rider [2008] IRLR 288 (ChD); Balston v Headline Filters Ltd; Threlfall v ECD Insight [2013] IRLR 185) Soliciting employer’s exclusive suppliers (or other suppliers to employer of scarce commodities); cf Laughton and Hawley v BAPP Industrial Supplies Ltd Entertaining offers from customers (Sanders v Parry [1967] 1 WLR 753; Lancashire Fires Ltd v SA Lyons & Co [1997] IRLR 113 (CA); but cf Ranson v Customer Systems Plc [2012] IRLR 769 (CA) re entertaining an approach from customer outside employee’s ‘patch’ to carry out work after employment)

105

3.159  Preparatory activity during employment to compete after employment

Permitted (as long as not preparing in employer’s time) Ordering stationery (Robb v Green [1895] 2 QB 315 (CA))

Discussing leaving with colleagues (Tithebarn v Hubbard (Lexis 7 November 1991/IRLIB 449, unreported); Lonmar Global Risks v West [2011] IRLR 138); leaving in concert (G D Searle & Co Ltd v Celltech Ltd [1982] FSR 92 (CA))

Arranging finance with a disinterested third party (Balston Ltd v Headline Filters Ltd) (but cf Lancashire Fires)

Prohibited Soliciting/recruiting colleagues (Marshall v Industrial Systems & Control Ltd [1992] IRLR 294; British Midland Tool v Midland International Tooling Ltd [2003] EWHC 466 (Ch), [2003] 2 BCLC 523; Balston Ltd v Headline Filters Ltd; QBE Management Services (UK) Limited v Dymoke [2012] IRLR 458) Providing information to assist a competitor to recruit colleagues: Tullett Prebon Plc v BGC Brokers LP [2011] IRLR 648; Imam-Sadeque v Bluebay Asset Management (Services) Limited [2013] IRLR 344; Thomson Ecology Limited v Apem Limited [2014] IRLR 184 Copying or memorising trade secrets or confidential information (Roger Bullivant Ltd v Ellis [1987] ICR 464 (CA); Universal Thermosensors Ltd v Hibben [1992] 1 WLR 840; Crowson Fabrics Ltd v Rider); using confidential information to assist in establishing a competitor: Decorus Ltd v Penfold and Procure Store Limited [2016] EWHC 1421 Using employees in their working time to set up competing business and contracting indirectly to purchase equipment for his own company from the employer company without disclosing his interest (Coleman Taymar Ltd v Oakes [2001] 2 BCLC 749) Obtaining a loan from a customer together with an exclusive supply agreement when competing business became operational (Lancashire Fires Ltd v SA Lyons & Co) Providing finance, and thereby obtaining a major financial interest in, a competing business which was to operate in the same area of the country, and compete for the same relatively narrow pool of suppliers and customers (Reuse Collections v Sendall [2015] IRLR 226)

106

Preparatory activity during employment to compete after employment 3.159

Permitted (as long as not preparing in employer’s time) Entering into heads of agreement to take shares in a competing company when free of restraints (of contract or as a director) (Saatchi & Saatchi Company plc v Saatchi (13 February 1995, unreported) (Jonathan Parker J)) Obtaining a licence necessary for the business to be able to operate (Starcomm Ltd v Knapman [2005] EWHC 3344 (Ch)) Identifying business partners (Pennwell Publishing (UK) Limited v Ornstien [2007] IRLR 700 (QBD) at paragraph 53)

Prohibited

107

CHAPTER 4

Employee fiduciary duties Selwyn Bloch QC and Jeremy Lewis Introduction 

4.1

1. When does an employee who is not a director owe fiduciary duties?  4.5 1(a) The Fishel test for fiduciary obligations  4.5 1(b) Circumstances indicative of a fiduciary relationship  4.20 1(b)(i) Relevance of the nature of the breach: bribes, secret commissions and secret profits  4.21 1(b)(ii) Seniority  4.25 1(b)(iii) Autonomy and vulnerability to abuse  4.30 1(b)(iv) Joint ventures  4.40 1(b)(v) Reading v A-G categories  4.44 1(b)(vi) Express contractual provisions  4.54 1(b)(vii) Conclusion  4.55 1(c) De facto directors  4.56 1(d) Shadow directors  4.72 1(e) Other workers  4.79 1(f) Members of limited liability partnership  4.82 1(g) Fiduciary duties to other group companies  4.86 2. Scope of fiduciary duties  2(a) Overview: the statutory framework for directors and dangers in extrapolating to non-director employees  2(b) Directors’ duties: the Companies Act 2006  2(b)(i) Ratification  2(c) The duty to act within powers/for proper purposes  2(d) Good faith and promotion of company’s interests  2(e) Duty to exercise independent judgment  2(f) Duty to exercise reasonable care, skill and diligence  2(g) The no conflict and no profit rules  2(g)(i) The no conflict rule  2(g)(ii) The no profit rule  2(g)(iii) Sections 175–177, 182 Companies Act 2006  2(g)(iv) Authorisation and informed consent  2(h) Exploitation of business opportunities during the employment relationship/directorship  2(h)(i) Opportunity coming to director/employee in fiduciary capacity  2(h)(ii) Opportunity coming to employee/director’s attention other than in fiduciary capacity  2(h)(iii) Opportunity that employer would not or could not exploit 

4.87 4.87 4.90 4.95 4.99 4.103 4.114 4.115 4.118 4.119 4.129 4.137 4.144 4.158 4.159 4.161 4.162 109

4.1  Employee fiduciary duties

2(i) Fiduciary duty and preparation to compete  2(i)(i) Relevance of restraint of trade principles  2(i)(ii) The Balston line of authority  2(i)(iii) The alternative view: no ‘trumping’ by restraint of trade  2(i)(iv) Re-assertion of restraint of trade considerations  2(i)(v) Conclusions on the two lines of authorities  2(j) Exclusion from management/garden leave  2(j)(i) Impact of fiduciary duties  2(j)(ii) Section 1157(1) Companies Act 2006  2(k) Duty of disclosure  2(k)(i) Basis for the duty of disclosure  2(k)(ii) Disclosure of wrongdoing  2(k)(iii) Disclosure of competitive threats irrespective of wrongdoing  2(k)(iv) To whom should the disclosure be made?  2(k)(v) Summary in relation to duty of disclosure  2(l) Exploitation of business opportunities after ceasing employment/ directorship  2(l)(i) Overview in relation to position after directorship  2(l)(ii) Do fiduciary obligations continue after resignation as a director?  2(l)(iii) What constitutes a maturing business opportunity?  2(l)(iv) Resignation prompted or influenced by seeking to divert the opportunity  2(m) Comparison of the position of employees with and without relevant fiduciary duties  2(m)(i) Preparations to compete  2(m)(ii) Business opportunities  2(m)(iii) Continuing duties after employment  2(m)(iv) The duty of disclosure  2(m)(v) Duty not to make a secret profit/divert opportunities  2(m)(vi) Duty to avoid undisclosed conflicts 

4.173 4.174 4.175 4.185 4.193 4.202 4.207 4.207 4.219 4.226 4.226 4.232 4.238 4.257 4.260 4.263 4.263 4.265 4.285 4.291 4.299 4.300 4.306 4.307 4.308 4.313 4.317

INTRODUCTION 4.1  In this chapter we focus on fiduciary duties which, in some cases, are owed by employees in addition to the implied duty of fidelity. We consider first the circumstances in which an employee may owe fiduciary duties, and in particular: •

The approach for determining whether an employee, who is not a director, owes fiduciary duties. A summary of the relevant considerations appears at 4.55. (In this context we refer to a director as someone formally appointed as a director, rather than an employee with that title but not a member of the Board of Directors.)

•

Employees as de facto or shadow directors.

110

Introduction 4.4

•

Other senior personnel who are not employees (eg consultants).

4.2  We then consider the nature and scope of fiduciary duties that may be owed bearing upon the freedom to be engaged in outside business activities or prepare for competition. In this context we consider: •

The framework of general duties upon company directors in the Companies Act 2006 (‘CA  2006’), and the corresponding position apart from the CA  2006 (4.90–4.157). This includes consideration of the following key fiduciary duties: >

The duty to act in good faith to promote the interests of the company.

>

The duty to avoid undisclosed conflicts of interest.

>

The prohibition on secret profits.

•

Exploitation of business opportunities during employment/directorship (4.158–4.172).

•

The limits of permissible preparation to compete (4.173–4.206).

•

The impact on fiduciary duties of exclusion from management and garden leave (4.207–4.225).

•

Fiduciary duties of disclosure (4.226–4.262).

•

The exploitation of business opportunities after ceasing to be an employee/ director (4.263–4.298).

4.3  Finally, we compare the restrictions upon departing employees arising from the duty of fidelity with those arising from fiduciary duties. The essential difference between the duty of fidelity and fiduciary duties is between merely requiring that the employee take into consideration the interests of the employer (duty of fidelity) and the fiduciary obligation to act ‘solely in the interests of his employer’ (fiduciary duty). However, notwithstanding the emphasis on the distinctive feature of single-minded loyalty as the distinguishing mark of a fiduciary, the position is not so clear-cut in the context of an employee with fiduciary obligations planning to leave and compete in the future. A fiduciary can, for example, act in his own interest in choosing to resign from his position and in taking certain steps preparatory to future competition. Public policy considerations in relation to restraint of trade bear upon the scope of the obligation of single-minded loyalty: Foster Bryant Surveying Limited v Bryant [2007] IRLR 425 (CA) per Rix LJ at paragraph 76. We explore further below, at 4.173–4.225, the extent to which such public policy considerations may limit the scope of fiduciary obligations and the extent to which, where applicable, fiduciary obligations may, in practice, impose a more onerous burden on employees than the duty of fidelity. We consider first, however, the circumstances in which fiduciary obligations may arise in an employment context. 4.4 The issues addressed in this chapter should be considered alongside the discussion of remedies in Chapter 16. Whilst reliance is sometimes placed on 111

4.5  Employee fiduciary duties

fiduciary duties in order to argue for stricter or wider duties (such as in relation to disclosure of an employee’s own wrongdoing), the difference in available remedies is often the most significant reason why, in litigation against (ex-)employees, (ex-)employers will often seek to establish the existence of and breach of fiduciary obligations. In some cases, in order to obtain effective relief, it is essential to establish that the employee owed, and acted in breach of, a fiduciary duty. In particular, a fiduciary duty may be important in order to establish a proprietary remedy, or because due to difficulty in establishing loss, there is a need to be able to elect for an account of profits.

1. WHEN DOES AN EMPLOYEE WHO IS NOT A DIRECTOR OWE FIDUCIARY DUTIES? 1(a) The Fishel test for fiduciary obligations 4.5  The leading analysis of the circumstances in which an employee who is not a director might owe fiduciary duties is that by Elias J in University of Nottingham v Fishel [2000]  ICR  1462 (‘Fishel’). In Helmet Integrated Systems Limited v Tunnard [2007] IRLR 126 (at paragraph 37) Moses LJ approved the following statement of principle from the judgment of Elias J in Fishel at pages 1493E–G: ‘Elias J’s decision is not only of importance in distinguishing between an employee’s implied duty of loyalty and a fiduciary obligation but also in identifying how a fiduciary relationship might be established. I can do no better than recite Elias J’s statement of principle: “…  in determining whether a fiduciary relationship arises in the context of an employment relationship, it is necessary to identify with care the particular duties undertaken by the employee, and to ask whether in all the circumstances he has placed himself in a position where he must act solely in the interest of his employer. It is only once those duties have been identified that it is possible to determine whether any fiduciary duty has been breached”.’

4.6  An analysis is therefore required as to whether in all the circumstances, and by reference to the specific contractual obligations, the employee has undertaken to act solely in the employer’s interests. In Fishel Elias J further explained (pages 1491G–H) that fiduciary duties: ‘… arise not as a result of the mere fact that there is an employment relationship. Rather they result from the fact that within a particular contractual relationship there are specific contractual obligations which the employee has undertaken which have placed him in a situation where equity imposes these rigorous duties in addition to the contractual obligations. Where this occurs, the scope of the fiduciary obligations both arises out of, and is circumscribed by, the contractual terms; it is circumscribed because equity cannot alter the terms of the contract validly undertaken ….’

4.7 The focus on particular contractual obligations serves the dual purpose not only of considering whether there are fiduciary obligations at all, but also 112

When does an employee who is not a director owe fiduciary duties? 4.10

identifying limits to those obligations. To this end, the Court of Appeal in Ranson v Customer Systems Plc [2012] IRLR 769 emphasised that the starting point for determining if the defendant employee owed fiduciary duties, and if so what duties, must be the contract of employment (per Lewison LJ paragraph  25). Lewison LJ noted that this approach followed the classic statement of Mason J  in Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 at page 97: ‘… it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.’

4.8 In Fishel this approach led to the identification of limited aspects of the role of the defendant employee (Dr Fishel) which did give rise to fiduciary obligations. Dr Fishel was employed full time as a clinical embryologist in the claimant university’s infertility clinic. The clinic had no separate legal status, being part of the medical faculty. Dr Fishel’s role was central to the success of the clinic, and he was one of the two most senior officers working full time in the clinic. He was responsible for all aspects of the work of the clinic’s embryologists, including being ultimately responsible for their allocation to particular cases. He had a responsibility for promoting the clinic’s research and development activities. He also had a central role on an executive committee, established below board level, to consider issues affecting the clinic. However, although he had the title of ‘scientific director’ of the clinic, he did not carry out the functions that a company director would typically exercise. He was not ultimately responsible for the operation of the clinic. It was run by a board of management and, although Dr Fishel would usually attend the board’s meetings, he did not do so as a board member. 4.9  In breach of his employment contract, Dr Fishel undertook paid work at overseas private clinics without obtaining consent from the university. He also sent embryologists employed by the university, and under his supervision, to work at the overseas clinics, and was paid directly by those clinics. The university established that he had acted in breach of contract, but was unable to show any loss, and it was also held that it could not obtain restitutionary damages for breach of contract (see Chapter 16 at 16.11–16.21). However, it also argued that Dr Fishel owed fiduciary duties and that, by virtue of a breach of these duties, he was liable to account for profits made from the outside work. 4.10  In applying the law (and in particular the test of whether the employee had placed himself in a position where he must act solely in the interests of the employer), Elias J approached the matter in two stages. He first considered whether the relationship was one which ‘could in principle create fiduciary duties’. The second stage was to consider the specific contractual duties, in order 113

4.11  Employee fiduciary duties

to identify whether fiduciary obligations were ‘engaged’. The focus at the second stage was on considering, having regard to the scope of the contractual obligations, whether there was a breach of characteristic obligations of a fiduciary, in particular as to avoiding actual or potential conflicts of interest and not making a secret profit. 4.11  Elias J therefore first considered the general nature of the employment and whether in principle fiduciary obligations could arise. He considered the following factors relied upon by the university: that it was a publicly funded academic institution, that Dr Fishel was employed in a separate and self-financing unit which was akin to a business, that he played a key role in the unit as its scientific director (albeit that this was akin to the position of a senior employee with the title of director rather than an executive director) and that his salary was fixed in part by reference to bonus related to turnover. Elias J  rejected a contention that Dr Fishel’s position could be equated to that of an executive director of a company, but commented (pages 1494D–G) that: ‘He was more akin to a senior employee with the title of director. Further, in my opinion, when considering the context it is also relevant to bear in mind the fact that Dr Fishel was working in an environment where doing outside consultancy work was encouraged … However, notwithstanding that, I  accept that the matters relied upon by the university would support the contention that the relationship is one which could in principle create fiduciary duties. The question is whether it has done so in the particular circumstances relied on here. If not, whether one says that there is no fiduciary relationship in all the circumstances, or whether one says that there is in principle such a relationship but that it is not engaged in the particular case, is perhaps a matter of no great moment.’

4.12  Having identified that the relationship was one in which fiduciary duties could arise, Elias J concluded that: •

There was no breach of any fiduciary obligation in working abroad or not passing on the opportunity to do such work to the employer, because although it was a breach of contract to do the work without consent, as a matter of construction there was no contractual obligation to secure work abroad for the university and Dr Fishel did not use his position with the university to obtain the work abroad.

•

However, Dr Fishel did act in breach of fiduciary duty in accepting work for embryologists under his supervision from which he directly benefited. Dr Fishel owed a duty to direct the work of embryologists under his supervision, and hence there was a conflict of interest.

•

There could also have been a breach of a fiduciary obligation if (as was not the case) Dr Fishel had worked for a competing clinic.

4.13  Whilst Elias J approached the analysis in two stages, in many cases it may be convenient to consider first the question of whether, even assuming that the relationship could in principle create fiduciary duties, these were engaged in 114

When does an employee who is not a director owe fiduciary duties? 4.15

the particular circumstances of the case. The issue as to whether there was a breach of fiduciary obligation in relation to Dr Fishel working abroad (or not passing on the opportunity to do so) might have been approached in this way. This was the approach adopted in Pennwell Publishing (UK) Limited v Ornstien [2007] IRLR 700 (QBD) (see 3.109). This was a team move case in which three employees of the claimant (Pennwell) established a rival company during their employment and engaged in conduct going beyond the boundaries of permissible acts in preparation for competition. One of the employees, Mr Isles, was not directly involved in that activity. Pennwell sought to establish that he owed fiduciary duties because of the seniority of Mr Isles’ position. Justin Fenwick QC (sitting as a deputy judge) noted that, had he concluded that whilst still employed by Pennwell Mr Isles had been involved in active solicitation for the new business in preference to Pennwell in relation to matters of which he had direct control, it would have been necessary to consider the issue more fully. However, on the findings of fact this did not arise. In the terminology adopted by Elias J in Fishel, because fiduciary duties were not in any event engaged, it was not necessary to consider the issue further. 4.14 The approach in Milanese v Leyton Orient Football Club Limited [2016] IRLR 601 may be understood in similar terms. Here Mr Milanese was employed in the role of director of football, but was not a statutory director. He was responsible for handling player transfers and contract negotiations including finding and making offers for youth players. His claim for wrongful dismissal failed on the basis that he had acted in repudiatory breach of his contract. In its counterclaim, Leyton Orient argued that Mr Milanese owed fiduciary duties because he was trusted to spend the defendant’s money on transfers. However, this was not material in relation to the only breach found, which concerned Mr Milanese’s conduct in relation to pressuring a youth player to enter into an oppressive agency agreement with a third party. In essence, whatever the position if there had been a breach concerning money spent on transfers, no arguable fiduciary duty arising from the particular contractual obligations was engaged by the breach found on the facts. 4.15  The adoption of a two-stage approach in Fishel may in part have reflected the submission made that Dr Fishel’s position was akin to an executive director. Generally, the approach taken following Fishel has not been to approach the issue of whether there are fiduciary duties in two stages, but to regard: (a) the contractual duties, and (b) the circumstances of the employment, as each being aspects bearing on the question of whether fiduciary duties arise and if so in what regard. The position was neatly summarised in Otkritie International Investment Management Limited v Urumov [2014] EWHC 191 (Comm), where Eder J noted (at paragraph 72): ‘In the employment context, the courts typically look to the employee’s contractual obligations and the circumstances of his employment, for example seniority, managerial responsibility, decision-making autonomy, independence and the vulnerability of the employer, which may justify holding the employee bound by a duty of loyalty to the employer ….’ 115

4.16  Employee fiduciary duties

The reference to a ‘duty of loyalty’ of course was not just to the duty of fidelity owed by all employees but to the fiduciary obligation of undivided loyalty. The significance of the circumstances of employment to the overall analysis will vary dependent on the nature of the obligation. In relation to some obligations it may be clear, irrespective of the circumstances of employment generally, that the employee’s obligation is to act solely in the employer’s interest. As Elias J commented, even an errand boy would owe fiduciary obligations to return the change he received. The duty arises not out of the nature of the employment generally, but the particular circumstances of the employee being put in a position where there is an obligation to account for the change received: Fishel (at page 1491A). 4.16 Equally, it may be questioned whether the background factors which led Elias J  to conclude that the relationship could in principle create fiduciary duties (see 4.11) were essential to the conclusion that there were fiduciary obligations in relation to accepting work for embryologists under Dr Fishel’s control. The fiduciary duty arose out of the fact that Dr Fishel was responsible for all aspects of the work of the embryologists, including being responsible for their allocation to particular cases ([2000]  ICR  1462 (page 1469E)). That he was specifically entrusted with the management and deployment of this specific resource strongly indicated that he was obliged to act solely in the interests of the employer in relation to that resource. This responsibility was consistent with being a senior employee in a separate and self-financing unit, but it is doubtful whether seniority was essential to the conclusion that the fiduciary duty was owed in this respect. 4.17  The importance of the initial assessment in Fishel that the relationship could in principle give rise to fiduciary duties might be thought to be clearer in relation to what the position would have been had he worked for a competing clinic. The position of Dr Fishel, akin to that of a senior employee and playing a key senior role in a separate self-financing unit akin to a distinct business, appears to have been regarded as pivotal to this analysis. As explained by Elias J (pages 1496B–C), the conclusion that a fiduciary obligation in this regard could be triggered followed from the combination of the background factors relied upon by the university (see 4.11) and the nature and scope of Dr Fishel’s duties. However, this aspect of the decision may be explained as flowing from the analysis that he had a duty to act solely in the interests of his employer in the management and deployment of the work of the embryologists. Taking up competitive employment was liable to place him in a position of potential conflict in relation to discharge of that duty. 4.18 Further, a requirement for a two-stage approach is not consistent with authority to the effect that the circumstances giving rise to a breach of any fiduciary obligations may themselves be relevant to whether fiduciary obligations arise. We consider this further at 4.21–4.24. 4.19  An alternative formulation sometimes adopted for identifying a fiduciary obligation is to consider whether the relationship was such as objectively, to give 116

When does an employee who is not a director owe fiduciary duties? 4.21

rise (or to give rise in particular respects) to a legitimate expectation that a person will not use his or her position in a way which is adverse to the interests of the principal. This test was adopted by Vos J in Global Energy Horizon Corp v Gray [2012]  EWHC  3703, following the earlier Privy Council decision in Arklow Investments Limited v Maclean [2000] 1 WLR 594. The test would not, however, seem to differ substantively from that adopted in Fishel. The focus is on the particular circumstances and contractual obligations which apply, which may give rise to the legitimate expectation that the alleged fiduciary will act solely in the interests of the employer. We turn to this in the following section.

1(b)  Circumstances indicative of a fiduciary relationship 4.20  Whilst in general terms it can be said that fiduciary obligations arise where there is a duty to act solely in the interests of the employer, and that this turns on the employee’s particular role and contractual obligations, it is possible to identify a number of factors which typically are significant to this question. We consider in turn the following: •

Nature of the breach (4.21).

•

Seniority (4.25).

•

Autonomy and vulnerability to abuse (4.30).

•

Factors highlighted in Reading v A-G [1949] 2 KB 232 (CA), [1951] AC 507 (HL) (4.44): >

Employee entrusted with property by the employer and relied upon to deal with it for the employer’s benefit.

>

Employee entrusted with a role such as negotiating a contract and relied upon to secure best terms for the employer.

>

Employee gains a position of authority from employment which enables him to obtain the sum he receives.

1(b)(i) Relevance of the nature of the breach: bribes, secret commissions and secret profits 4.21  Although establishing a relevant fiduciary obligation is an essential ingredient of a claim to account for a bribe, secret commission or secret profit, in that context the requirement is to be interpreted in a very loose and broad sense: Reading v Attorney-General [1951] AC 507 (HL) per Lord Porter at 516. The position was reviewed in detail by HHJ Havelock-Allen QC in Airbus Operations Ltd v Withey [2014] EWHC 1126. The claimant, Airbus, outsourced the management of part of its computer network to T-Systems, which in turn outsourced to BTL. Mr Withey was employed by Airbus in a junior managerial role, and for part of the relevant period in a more senior role but still below the level of senior management. Unbeknown to Airbus, he entered into an arrangement 117

4.22  Employee fiduciary duties

with an employee of T-Systems (Mr Wells) and the owner of BTL (Mr Bohana), whereby he and Mr Wells (acting through consultancy companies which they set up) provided administrative support to BTL outside their normal working hours. Over a period of six years the consultancy companies set up by Mr Withey and Mr Wells were each paid about £500,000 by BTL before the situation was discovered. Airbus then claimed to recover these payments. The court accepted that there may not have been a conscious intention on the part of Mr Bohana to buy influence for BTL or by Messrs Withey and Wells to exert influence on BTL’s behalf. However, one of the factors which led to the arrangement was the positions held by Messrs Withey and Wells with Airbus and T-Systems, which would help BTL to maximise its chances of winning or holding onto work from Airbus. Whilst the defendants did not believe that they were acting improperly, they were aware that the arrangement might not look right and ought to have been disclosed. 4.22  The court noted (at paragraph 88) that the essential ingredients of bribery or secret commission were: (a) receipt of money or a valuable benefit, (b) by a person who owed a fiduciary duty of loyalty to a principal with whom the donor of the money wished to transact business, (c) which was kept secret from the principal, and (d) which placed the recipient in a position where his interest may potentially conflict with the fiduciary duty owed to the principal. The court also noted that the fiduciary obligation was key because it was this that gave rise to the obligation to account for the bribe, secret commission or secret profit because it was treated as being held on constructive trust by the fiduciary for the principal. Whilst emphasising that in this context a fiduciary duty is viewed in a ‘wide and loose sense’, the court was not willing to go as far as saying that it was to be imputed whenever the other ingredients of bribery or secret commission were made out. As HHJ  Havelock-Allen QC explained (at paragraph 411): ‘The readiness with which the court will impute a fiduciary duty depends on the circumstances. An employee in a lowly position will be held to owe a fiduciary duty with regard to money entrusted to him by his employer. An employee of non-managerial rank who receives a payment in circumstances which plainly involve dishonesty, where all the other ingredients of a case of bribery are present, may well be someone in respect of whom a fiduciary obligation will very readily be implied. Where, however, the dishonesty is not obvious, a determination of whether the employee stood in a fiduciary relation to his employer will depend on a more clinical inquiry into his status and the functions he was required to perform as part of his job.’

4.23  Here, in the context of having received a secret commission, even though Mr Withey was not part of senior management, it was sufficient that he held a post in which he was able to influence, in the sense of materially affect, the course of business between his employer and the donor of the secret payment. Mr Withey had had considerable influence in the procurement process which on occasions he had used to ensure that work was given to BTL where otherwise it might not have been. It was not necessary to show that he was an autonomous decision maker or unsupervised, though on the facts it was also held that he did 118

When does an employee who is not a director owe fiduciary duties? 4.25

have a degree of autonomy and independent decision making which also justified the conclusion that he owed fiduciary obligations to Airbus. Consistent with the analysis in Ranson v Customer Systems Plc [2012] IRLR 769, the particular fiduciary duties owed derived from his contractual obligations and managerial responsibilities. Thus he owed fiduciary duties of undivided loyalty in directing the work of the team under him (similar to the position in Fishel), in administering the relevant budget including approving quotations for work and in respect of any intervention in the procurement process which determined or influenced what work was awarded. The express contractual duty not without approval to be engaged in any capacity in another business which might conflict with the best interests of Airbus, was also to be regarded as a fiduciary duty. Further, the payments gave rise to a potential conflict of interest with those fiduciary duties owed to Airbus. It was no answer to show that he rendered services for the payment or that the contracts might or would have been awarded to BTL anyway or that no loss was suffered by Airbus. Nor was it an answer that BTL, as a sub-contractor, did not deal directly with Airbus; it was sufficient that the party making the payments (BTL) intended to do business with the principal whether directly or indirectly via a sub-contract. 4.24  The fact-specific nature of the analysis was also illustrated by the conclusion in Airbus that, by contrast, no relevant fiduciary duty was owed to Airbus by Mr Wells. In part that was because he was not an employee of Airbus, nor could he be regarded as a sub-agent (ie someone engaged by the agent to perform some of his functions on behalf of the principal). The court noted (at paragraph 439) that this would have sufficed as a basis for the conclusion that no fiduciary duty was owed, relying on Daraydan Holdings Ltd v Solland International Ltd [2005] Ch 115 (per Lawrence Collins J at paragraph 52). However, the court was also not satisfied that if he had been an employee he would have owed relevant fiduciary obligations to his employer, given the lack of evidence as to his decision-making authority or ability to influence procurement decisions and the presence of closer supervisory control.

1(b)(ii) Seniority 4.25 As illustrated by the approach in University of Nottingham v Fishel [2000]  ICR  1462 (‘Fishel’), one important factor to be taken into account in ascertaining whether the relationship could in principle involve fiduciary obligations is whether the employee is a member of senior management, and the nature of the senior management obligations which the employment entails. The significance of seniority was considered in Shepherds Investments Limited v Walters [2007] IRLR 110. On behalf of the claimant, reliance was placed on Canadian Aero Service Ltd v O’Malley (1973) 40 DLR (3d) 371 – a decision of Laskin J in the Supreme Court of Canada which has been cited with approval in a number of English authorities in relation to diverting maturing business opportunities: see eg CMS Dolphin Limited v Simonet [2001] 1 BCLC 704; Foster Bryant Surveying Limited v Bryant [2007]  IRLR  425 (CA) per Rix LJ at paragraphs 55–58. In 119

4.26  Employee fiduciary duties

Canadian Aero Service Laskin J held that the president and the executive vicepresident of a company were in a fiduciary relationship with the company, even though they had not been formally appointed directors. In Shepherds Investments Etherton J noted ([2007] IRLR 110 at paragraphs 74–75) the distinction drawn by Laskin J between ‘mere employees’ and ‘top management’, acting on behalf of the company in a senior management capacity. Laskin J concluded that the president and executive vice-president were in the position of agents rather than mere employees in that: ‘Although they were subject to supervision of the officers of the controlling company, their positions as senior officers of a subsidiary, which was a working organisation, charged them with initiatives and with responsibilities far removed from the obedient role of servants.’

4.26  It was argued in Shepherds Investments that there was no reported English case in which an employee has been held to owe fiduciary duties to his employer company merely because the employee was a member of the senior management, and that it was instead necessary to identify contractual terms imposing a duty to act solely in the interests of the employer. As to the circumstances that could lead to a finding of a fiduciary obligation, Etherton J recorded the following submission ([2007] IRLR 110 at paragraph 76): ‘The test, he submitted, is whether the employee contributes to a process which imposes a responsibility to serve the company to a higher level of faithfulness and loyalty than would otherwise be the case. Indications of such a responsibility and duty would be the participation by the employee in, and the assumption by the employee of a responsibility for, the formulation of policy and strategy for the company, and that in doing so the employee is not merely carrying out instructions or assuming responsibilities for which he is accountable to a line manager or other superior ….’

4.27 This issue was not resolved in Shepherds Investments because it was concluded on the facts that the senior employee was also a de facto director and therefore a fiduciary (see 4.68). However, it is entirely consistent with the approach in Fishel to have particular regard to whether an employee holds a senior management position provided that the status as a member of senior management is not considered in isolation. Seniority of the position provides the context in which to consider the nature of the senior management obligations and other duties owed. This is illustrated by the decision in Hanco ATM  Systems Limited v Cashbox ATM  Systems Limited [2007]  EWHC  1599 (Ch). The claimant, ATM  Systems, distributed and serviced automatic teller machines (ATMs). T was a member of the claimant’s senior management team and had the title ‘Corporate Sales Director’, although he was not appointed as a director. He was head of the claimant’s sales operation, responsible for meeting the corporate sales target in its business plan, and managed the corporate sales team. He attended the claimant’s regular Monday board meetings and had access to sensitive business information relating to the claimant’s customers. Whilst still employed by the claimant, T set in train the incorporation of a rival business (Cashbox), including agreeing the employment of a key contact 120

When does an employee who is not a director owe fiduciary duties? 4.29

of a client of the claimant, and in competition with the claimant he submitted a rival bid for a contract with that client. Peter Smith J  held that the Master (who decided the case at first instance on a summary judgment application) was entitled to conclude that T was ‘sufficiently senior to owe a fiduciary duty’. However, seniority was not viewed in isolation; having regard to the nature of T’s employment and duties, in forming and nurturing relationships with the claimant’s potential clients and seeking new business, T owed fiduciary obligations to act with single-minded loyalty to the claimant, to act in the exclusive interests of the claimant, and not to obtain a secret profit or place himself in a potential conflict situation. 4.28  Seniority was again treated as a key factor by Peter Smith J in Crowson Fabrics Limited v Rider [2008]  IRLR  288 (ChD). The claim concerned two employees who set up a rival company whilst still employed, and who exceeded the bounds of legitimate preparatory steps. In considering whether they owed fiduciary duties, Peter Smith J  (at paragraph  80) applied a test of whether the employee’s role was ‘sufficiently senior for the court to conclude that in addition to his normal duties as an employee he owed fiduciary duties’. On this basis the assessment of whether the role and the tasks entrusted were sufficiently senior to entail fiduciary obligations was a matter of impression. This test was found to be satisfied in relation to one of the employees. Factors taken into account included that he was given the nominal title of director (despite not being a board member), was one of the inner circle, was the accepted number three in the company and part of senior management, was completely trusted and was invited to strategy discussions. The other defendant, despite being the most senior employee on the sales side, did not owe fiduciary obligations. Peter Smith J concluded that whilst he was a senior and experienced salesman, his duties were no more than that. (However, in relation to duties arising by reason of ability to influence placing of business, compare the approach to sales managers in Tunnard (4.32), Normalec (4.48) and Comax (4.50)). See also Kynixa Limited v Hynes [2008] EWHC 1495 (QB) (4.244–4.250), where again seniority was accepted as a sufficient touchstone of whether there was a fiduciary relationship. 4.29 Similar considerations were applied in Reuse Collections Ltd v Sendall [2015] IRLR 226 (discussed in 3.40–3.41) to support a conclusion that no relevant fiduciary obligations were owed. The departing employee was found to have acted in breach of his duty of fidelity in the steps he took in preparation to compete, and indeed in providing finance to a competing business during his employment. He was manager of one of the employer’s depots and was in charge of all operations from that depot. However, in concluding that he did not hold relevant fiduciary obligations, the court emphasised the limits on that seniority. He did not attend or report to board meetings, was not involved in major strategy decisions taken by the employer, did not have control over financial matters without needing to obtain authorisation, did not have the final say in relation to hiring, firing or promoting staff or as to their remuneration and did not have any significant access to confidential information held at or produced by the head office. Nor were there express contractual obligations which pointed to fiduciary duties. 121

4.30  Employee fiduciary duties

1(b)(iii)  Autonomy and vulnerability to abuse 4.30  There is, however, a danger that focussing solely on seniority may lead to fiduciary obligations being improperly grafted onto an employment relationship. In particular, it may risk failing to focus adequately on whether the particular obligations owed are such as to entail an obligation of undivided loyalty. It may also result in uncertainty as to where such obligations are liable to arise. The importance which has been attached to the criterion of seniority may be explained on the basis of the degree of autonomy and discretion which is more usually entrusted in senior employees to further the interests of the employer, and the consequent vulnerability of the employer to the employee misusing his position or responsibilities. This accords with the observation of Elias J in Fishel ([2000]  ICR  1462 (page 1491E)) as to two characteristic features of obviously fiduciary relationships such as that of trustee, company director or liquidator: ‘… typically there are two characteristics of these relationships, apart from duty on the office holder to act in the interests of another. The first is that the powers are conferred by someone other than the beneficiaries in whose interests the fiduciary must act, and the second is that these fiduciaries have considerable autonomy over decision making and are not subject to the control of those beneficiaries.’

4.31  Consistently with that analysis, in Threlfall v ECD  Insight Limited [2013] IRLR 185 Lang J concluded that no relevant fiduciary duties were owed by the defendant notwithstanding his role as the defendant’s Head of Media. Although he was found to be a senior employee, he was not part of the senior management team. Whilst Mr Threlfall owed a contractual duty to keep the employer’s board informed of his conduct of the business of the company, he was under the close management and supervision of the managing director, who was the sole shareholder and director of the employer and exercised absolute control over its activities. 4.32  Vulnerability to abuse has also been emphasised as a basis for finding that fiduciary obligations arose aside from seniority. In Helmet Integrated Systems Limited v Tunnard [2007] IRLR 126 the claimant was a salesman, but he had a specific contractual obligation to report on competitor activity. The Court of Appeal concluded that Tunnard owed no fiduciary obligation in relation to his own development of the preliminary concept for a helmet, notwithstanding that he was employed to sell products with which he would be in competition if the concept came to fruition. However, the court accepted that if the claimant had used information about competitor activity, either for his own benefit or for that of someone other than his employer, this would have been a breach of a fiduciary obligation. Moses LJ explained that: ‘I  am prepared to go thus far because HISL [the employer] would have no control over how Mr Tunnard deployed what he had learned as a salesman, and would be dependent upon him to pass on the information. Were it not so, the employee could pick or choose what he did or did not pass on. Thus HISL 122

When does an employee who is not a director owe fiduciary duties? 4.35

would be vulnerable to any misuse of such information, the dissemination of which was outside the employer’s control. Such vulnerability is what Lord Millett described (op cit 219) as a “defining characteristic” of a fiduciary relationship.’

The degree of autonomy, and consequent vulnerability of the employer, which in this case arose from specific duties and aspects of the claimant’s role as a salesman, were therefore important factors in relation to whether there were fiduciary obligations. 4.33  The approach in Helmet was followed in ODL Securities Ltd v McGrath [2013] EWHC 1865 (Comm). The defendant, Mr McGrath, was employed by the claimant (a foreign exchange broking company) as Head of Risk. Essentially his role was to monitor clients’ trading positions, to guard against the risk to the claimant that they might default. He held a senior position; although he was not a director, he was regarded by most people in the company including some directors as in effect being a director. The other employees were accustomed to following his instructions in relation to payments or transfers from client accounts. On his own case he was essentially running the business. In all this was viewed by the court as giving rise to a situation of vulnerability, as was indicated by the fact that he had been able to make unauthorised loans and procure transfer of funds to his own benefit. Following Helmet, Flaux J considered (at paragraph 15) that this ‘situation of vulnerability is precisely the situation in which fiduciary duties will be imposed’ and he was found to owe the same fiduciary duties as if he was a director. 4.34 The element of vulnerability to abuse was again emphasised in Global Energy Horizon Corp v Gray [2012] EWHC 3703, as being one of three key elements. In particular, Vos J (at paragraph 392) drew on guidance of the Canadian Supreme Court in Lac Minerals Limited v International Corona Limited [1990] FSR 441, where it was noted that: ‘Relationships in which a fiduciary obligation has been imposed seem to possess three general characteristics: (1)

The fiduciary has scope for the exercise of some discretion or power.

(2)

The fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interests.

(3)

The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power.’

4.35 In Global Energy Horizons the claimant was pursuing an acquisition strategy of buying underperforming oil wells and using its ultrasound technology to increase their remaining production. The defendant was an employee of Deutsche Bank and was a shareholder, but not an employee or director, of the claimant company. He was found to be part of the ‘deal team’ established by the claimant in relation to the acquisition strategy. Each element of the threefold test in Lac Minerals was found to be satisfied. He had scope for the exercise of discretionary power in promoting the claimant’s interests with investors, and 123

4.36  Employee fiduciary duties

though he reported back to the main shareholder, the way he conveyed the claimant’s position to the investors was in his own gift. He had the power to affect the claimant’s interests through, in practice, being able to require the claimant to focus on a particular investor. The element of vulnerability was also found to be present because the defendant was seen as having the relevant contacts and was able to, and did, impose his will on the claimant. Taking these elements together, Vos J concluded that the defendant owed the claimant a fiduciary duty of loyalty in relation to the opportunities which came to him as part of his involvement with the claimant company in relation to the acquisition strategy and the ultrasound technology. 4.36 However, in Ranson v Customer Systems Plc [2012]  IRLR  769 (also discussed at 3.31), whilst purporting to adopt the criterion of whether there is vulnerability to abuse, the Court of Appeal adopted a narrow approach to where that might exist. Mr Ranson was employed in a senior sales role in which he was responsible, directly or indirectly, for 59% of the group’s total revenue. He was not a director. There were no relevant post-termination restrictions in his employment contract. Whilst still employed by Customer Systems, he made preparations for setting up a competing business including incorporating a company, registering an internet domain name for it, preparing some business plans and inviting a colleague to join him (though the colleague decided to stay). He also secured work for the prospective business from another company, Diageo, via a contact, Mr Clothier, who had previously been employed by a good customer of Customer Systems. Mr Ranson had worked closely with Mr Clothier in that context and they had become friends. It was Mr Clothier who had introduced Mr Ranson to a contact at Diageo, and the information which Mr Ranson supplied related to his future business rather than Customer Systems. Mr Ranson was aware that Customer Systems was interested in seeking work from Diageo, not least because in anticipation of Mr Clothier’s move, he and a colleague at Customer Systems had met with Mr Clothier over lunch. In addition, two days before the termination of his employment Mr Ranson had taken his contact at one of Customer Systems’ customers out to dinner (Mr Boardman at AstraZeneca). One reason for doing so had been to seek to obtain work from that customer after termination of Mr Ranson’s employment. 4.37 At first instance it was held that Mr Ranson owed fiduciary duties to Customer Systems in his dealings with Mr Clothier and that he was in breach of those duties in failing to inform his employer of the opportunities to conduct business with Diageo. He was also found to be in breach of both contractual and fiduciary duties in canvassing business from another customer via Mr Boardman. Both conclusions were overturned on appeal. Whilst Mr Ranson was responsible on behalf of Customer Systems for looking for new clients, Diageo was not on his ‘patch’ (notwithstanding the lunch meeting with Mr Clothier), and on the facts it was therefore not part of his job for Mr Ranson to pursue the opportunity with Diageo. As regards Mr Boardman, on the judge’s findings of fact although Mr Ranson’s purpose in meeting with him had been in part to pave the way for future work, there had been nothing specific discussed as to this. The court concluded that there was no breach in being attentive to the customer with a 124

When does an employee who is not a director owe fiduciary duties? 4.39

view to paving the way for future business. In any event the court concluded that even if there was a breach of contract in responding to Mr Clothier, there was no breach of contract or fiduciary duty in failing to report the overture made by Mr Clothier and his reaction to it to Customer Systems or in relation to his conduct in respect of Mr Boardman. The analysis focussed principally on the confines of Mr Ranson’s contractual duties, leading to the conclusion that there were no such duties upon which a relevant fiduciary duty could be ‘hung’. However, it was also emphasised that: ‘the potential vulnerability to which Moses LJ referred in Tunnard (ie  the employer’s ignorance of the potential business opportunity) does not arise on the facts.’

4.38  The Court of Appeal therefore concluded that the element of vulnerability to abuse was not present because the employer was aware that there was an opportunity to pursue with Diageo, and presumably was to be taken as being aware of the opportunities with AstraZeneca by virtue of its being an existing customer. At first blush that may appear an artificially narrow view. The employer would not have known of the efforts being made by Mr Ranson to procure that business for himself and it was vulnerable to Mr Ranson using his contacts with those customers to secure their business. The result may be regarded as reflecting a decision to keep the imposition of fiduciary obligations within a narrower confine, though it may also be explained on the basis of the conclusions reached on the facts as to the ambit of Mr Ranson’s contractual duties. 4.39 Further, whilst the element of vulnerability is an important consideration, it is not necessarily sufficient and in any event needs to be considered alongside an analysis of the contractual duties and other circumstances. In Lonmar Global Risks Limited v West & others [2011] IRLR 2878 the defendants were salesmen (producers) whose role was to obtain and retain business from international brokers. Once they obtained work they required a backup team of brokers and insurance technicians to service it, but the team did not report to them. One of the defendants was found to have acted in breach of contract by introducing a customer to a direct competitor, Tyser, and facilitating an arrangement to ‘house’ the customer in Lonmar (as a temporary measure). The other defendant was found to have acted in repudiatory breach of his employment contract by soliciting clients and conducting business for a competitor during his employment with the claimant. However, in neither case were they found to owe fiduciary duties so as to impose an obligation to disclose wrongdoing or persuade other employees to stay. It was not sufficient that as salesmen they were exposed to the claimant’s clients largely unsupervised. They had no management responsibilities or duties and there were no staff who reported to them. The provision requiring the use of best endeavours to promote the general interest and welfare of Lonmar was treated as being a general clause which, without more, could not require the law to impose wide ranging duties to report wrongdoing and conduct that might be contrary to the interests of Lonmar or to persuade clients or employees to stay (but as to this see 3.103–3.106). 125

4.40  Employee fiduciary duties

1(b)(iv)  Joint ventures 4.40  The significance of the twin factors of autonomy and vulnerability to abuse is further illustrated by the emphasis given to these factors in relation to whether a fiduciary obligation arises in the context of a joint venture. The approach was summarised by Carr J in Baturina v Chistyakov [2017] EWHC 1049 as follows (at paragraphs 180–181): ‘180.  At paragraph 56, the Court of Appeal [in Ross River Limited and another v Waveley Commercial Limited and others [2014] 1 BCLC 545 (CA)] approved the following passage from the judgment of Briggs J (as he then was) in Ross River Ltd v Cambridge City Football Club Ltd [2007] EWHC 2115 (Ch): “In relationships falling short of partnership, but having in them elements of joint enterprise or joint venture, there is no hard and fast rule as to the existence or otherwise either of a duty of good faith, a fiduciary duty or a duty of disclosure. Each case will turn on its own facts, but if the relationship is regulated by a contract, then the terms of that contract will be of primary importance, and wider duties will not lightly be implied, in particular in commercial contracts negotiated at arms’ length between parties with comparable bargaining power, and all the more so where the contract in question sets out in detail the extent, for example, of a party’s disclosure obligations.” 181. In Crossco No 4 Unlimited v Jolan Ltd [2011] EWCA Civ 1619, Etherton LJ said at paragraph 88: “In the absence of agency or partnership, it would require particular and special features for such fiduciary duties to arise between commercial coventurers. It is clear, however, that in special circumstances they can arise: Snell’s Equity (32nd ed) at 7–006; Murad v Al-Saraj [2004] EWHC 1235 (Ch) at [325]-[341], [2005] EWCA Civ 959.”’

4.41  Applying this guidance, no fiduciary duties arose in Baturina, where Ms Baturina sought recovery of sums, paid by way of loans, which had been placed under the control of the defendant, Mr Chistyakov, in relation to an agreement between them for property development in Morocco. Ms Baturina was an experienced businesswoman with access to all necessary advice and was experienced in the construction industry, much more so than Mr Chistyakov. There was also a raft of security put in place for her investments and her employees were proactive in management of the projects. As such she was found not to be vulnerable vis a vis Mr Chistyakov in any sense and was not significantly dependent on his advice. The venture was an arm’s length commercial arrangement between parties with at least comparable bargaining power. 4.42  Similarly in Cullen Investments Limited and others v Brown and others [2017] EWHC 1586 (discussed further at 4.110), no fiduciary duties arose from a joint venture agreement to exploit property development opportunities in the UK and Europe. The joint venture was entered into between two business partners, Mr Brown and Mr Watson and/or a company controlled by Mr Watson (Cullen). Brown and Cullen were equal shareholders of the joint venture company (KIL), 126

When does an employee who is not a director owe fiduciary duties? 4.44

and Brown and Watson were both directors. Pursuant to the Heads of Agreement, Brown was the CEO of KIL. His duties were to include implementing existing projects, sourcing and implementing new deals and running the day to day operation. Brown was found to have acted in breach of fiduciary duty in his capacity as director of KIL in relation to his involvement in another Germanbased venture. However, there was found to be no separate fiduciary obligation owed arising from the relationship between Brown and Watson/Cullen as joint venture partners. Notwithstanding that the joint venture originated in a personal friendship it was commercial in nature, with formal commercial and arm’s length agreements governing the relationship. There were no special features to justify super-imposing fiduciary obligations (in addition to those arising from the capacity as director); it was not a case of either party being wholly dependent on the other for advice or recommendations or negotiations. See also Miller v Stonier [2015] EWHC 2796 (Ch), where the absence of special features of vulnerability led to the conclusion that no fiduciary obligations arose from a joint venture (between Miller and Stonier) to set up business as a supplier of gas and electric fires. 4.43  In each of these cases, the position was distinguished from that in Murad and Murad v Al-Saraj and Westwood Business Inc [2005] EWCA Civ 959 (CA) concerning a joint venture between the Murad sisters and Mr Al-Saraj to acquire a hotel, with the joint venture operating through a jointly owned company. Mr Al-Saraj was found to owe fiduciary duties since, as he was well aware, the Murad sisters were wholly dependent on him for his advice and recommendation in relation to the hotel, for the negotiations and the instruction of professionals on their behalf including the structure of the transaction and the documentation. The elements of particular vulnerability provided the special features justifying the imposition of fiduciary duties. Similarly the elements of vulnerability may arise from one party having control over key assets or autonomy in management functions. That was the case in Ross River Limited and another v Waveley Commercial Limited and others [2014] 1 BCLC 545 (CA), where the fact that one of the joint venturers owned all the relevant assets and was in control of their exploitation (for the benefit of the joint venture) were key factors giving rise to that party owing relevant fiduciary obligations. 1(b)(v)  Reading v A-G categories 4.44 In Reading v A-G [1949] 2 KB 232 (CA), [1951] AC 507 (HL) three scenarios likely to give rise to a fiduciary obligation were identified: (1) the employer entrusts the employee with property, and relies on the employee to deal with the property for the benefit of the employer or for purposes authorised by it and not otherwise (per Asquith LJ (CA) at page 236); and (2) the employer entrusts to the employee a job to be performed, such as the negotiation of a contract on its behalf or for its benefit, and relies on the employee to procure for the employer the best terms available (per Asquith LJ (CA) at page 236); 127

4.45  Employee fiduciary duties

(3) the employee gains from his employment a position of authority which enables him to obtain the sum which he receives (per Lord Porter (HL) at page 516). 4.45  This was in the context of a soldier who had improperly made use of his uniform to obtain payments. As such it engaged the broader approach to identifying fiduciary obligations in the context of a bribe, secret commission or secret profit (see 4.21–4.24) and it was noted that the term fiduciary relationship was used in a ‘wide and loose sense’ (per Lord Porter at page 516, per Asquith LJ (CA) at page 236). However, in the light of the analysis in Fishel, the categories identified in Reading v A-G  might also be regarded as instances illustrative of where a court is likely to be satisfied that there is a duty to act solely in the employer’s interests, and where the vulnerability referred to in Helmet Integrated Systems is likely to arise. That is subject to two important caveats. First, as is clear from Fishel, the nature of the fiduciary obligations that may arise need to be focussed on the particular responsibilities which give rise to that duty, such as (in relation to the first category) duties related to dealing with the property entrusted in the employee. Secondly, and most clearly in relation to the second category (given its width if taken at face value), consideration is still required of whether in all the circumstances there are the elements, such as autonomy and vulnerability to abuse, which require the imposition of fiduciary obligations. 4.46 As to the first category (entrusting the employee with property), there is little difficulty in identifying an obligation of undivided loyalty in relation to the use of the employer’s property. Thus in Agip (Africa) Limited v Jackson [1990] Ch 265 the claimant’s chief accountant misapplied company funds, to which he had access by virtue of being entrusted with signed payment orders to have them taken to the bank and implemented. Although Millett J  referred to his ‘senior and responsible’ position, the fact he was entrusted with control of company property which he misapplied would no doubt have been sufficient. To similar effect, in Ultraframe (UK) Limited v Fielding [2005] EWHC 1638 (Ch D) Lewison J (at paragraphs 1290–1291) referred to the fiduciary obligations that, arising out of other specific obligations, could be owed by a relatively junior employee, such as a book-keeper being the signatory on the company’s bank account, or a security guard owing fiduciary duties not to divulge confidential information (as in Brink’s Limited v Abu-Saleh (No 3) [1996] CLC 133 (page 148), per Rimer J). 4.47 In relation to the second category in Reading v A-G (entrusting the employee with a job entailing reliance on procuring best terms), an example is the decision of Burton J in PMC Holdings Limited v Smith (23 April 2002, unreported) QBD. Mr Smith held a senior position with the claimant with the title Operations Director, but there was a dispute as to when he became a board director. Irrespective of whether he was a board director, he was held to owe fiduciary obligations in relation to his responsibility for placing, negotiating and approving sales and purchases and prices in respect of material transactions, and causing the company of which he was 50% owner to be paid substantial consultancy fees. 128

When does an employee who is not a director owe fiduciary duties? 4.51

4.48 The pre-Fishel decision in Normalec Limited v Britton [1983]  FSR  318 (Ch) might also be regarded as falling within the second category identified in Reading v A-G (see 4.44). Mr Britton was engaged to sell electrical goods for the claimant in Yorkshire. Whilst still employed, and under a duty to maximise sales for his employer, he set up a rival business, making use of the knowledge acquired in his employment of the identity, whereabouts and requirements of the claimant’s customers. Walton J held that in so doing he acted in breach of his fiduciary duties to the claimant. In post-Fishel terms, that decision is explicable on the basis that, in relation to Mr Britton’s obligations relating to selling the claimant’s goods, and having regard to vulnerability to abuse and the obligation to maximise sales, there was a duty to act exclusively in the claimant’s interests in relation to the sales function. 4.49 Similar considerations applied in TCP  Europe Limited v Perry [2012]  EWHC  1940. TCP sold customised commemoratives – or lucites – to mark the conclusion of a significant financial transaction. Three of its employees formed another company which also sold lucites. One of the defendant employees was a director. The other two were the head of sales and a salesman. In each case they were found to owe both an implied contractual duty (arising from the duty of fidelity) and a fiduciary obligation not during their employment to seek to divert away from TCP opportunities to sell which they should have sought to secure for the benefit of their employer. They owed a duty to act solely in the interest of the employer in carrying out their sales duties. 4.50  As noted above (4.21–4.24), in the context of the broader approach in a secret commission case, the ability to influence negotiations may be a sufficient basis for attaching fiduciary obligations even where the employee is not part of senior management and has not been entrusted with autonomy in negotiations. That was the approach approved in Airbus Operations Ltd v Withey [2014] EWHC 1126. Similarly, in Comax Secure Business Services Limited v Wilson (21 June 2001, unreported), again a secret commission case, Judge Richard Seymour QC, after considering Fishel, concluded that: ‘I am satisfied that an employee, who is in a position to influence the placing of orders for goods or services by his employer, owes a fiduciary duty to the employer not to prefer his own financial interests or those of his associates to the interests of his employer in deciding whether to exercise the influence which he possesses and, if so, how.’

4.51  The third category in Reading v A-G (employee put in a position of autonomy to make a profit) closely overlaps with the second category. An instance of duties falling within the third category is provided by the decision of the Birmingham Mercantile Court in Lewis & Lewis Property Consultants v Chase Midland Plc (18 November 2004, unreported) (HH Judge Alton). The issue arose in relation to a counterclaim against the claimant firm, on behalf of whom a Mr Lewis had provided independent consultancy services. He came to assume a broad responsibility over acquisitions, marketing and sales in relation to the defendants’ residential development business in the West Midlands. Although he was self-employed, his position was found to equate to that of the most senior 129

4.52  Employee fiduciary duties

non-board level management employee and he was privy to significant confidential information. It was alleged that he had derived secret commissions or profits from his position. The court (at paragraphs 55 and 62) applied the principle that an employee or agent who is in a position to influence the placing of contracts, owes a fiduciary duty to the principal not to further his own financial interests by accepting a payment from a third-party made to him by reason of his holding of that position of influence. Amongst other duties, Mr Lewis was held to owe a fiduciary obligation not to use his position within the defendant company to advance his own interests or make secret profits or secret commissions paid either explicitly or implicitly in the hope or expectation that such payment might influence the defendant’s business, since any such influence would give rise to a conflict of interest. 4.52 Similar considerations were applied in Cobbetts LLP  v Hodge [2010] 1 BCLC 30 where a salaried partner (ie a senior employee, rather than a partner in the sense of being a business owner) made a secret profit in carrying out his responsibilities for his employer. In the course of his employment he acted for a company and its two principal shareholders in raising funds by way of a private placement of shares. In addition to his legal work, at the company’s request, he also found investors for the company. After his resignation, but whilst still employed by the claimants, he negotiated that he be allocated a 5% shareholding in the client company at par. Floyd J  concluded that the defendant had been employed to generate new business. The work in assisting in finding new investors was both within the scope of the retainer and carried out in the course of his employment. Those duties were to be carried out in the interests of the employer firm. As such he owed fiduciary obligations not to place himself in a position of conflict of duty and interest in respect of carrying out those duties, and in particular not to make a secret profit from them. He was therefore obliged to account for the shares, subject to an allowance for the cost of acquiring the shares, though not for his work and skill in enhancing their value (as to which see 16.88). 4.53  Again in AAH Pharmaceuticals Limited v Birdi [2011] EWHC 1625 fiduciary obligations were imposed in relation to an employee who made a secret profit from his position. The defendant employee, Mr Birdi, was the claimant’s commercial development manager. He was responsible for the contractual arrangements between the claimant and one of its suppliers of pharmaceutical products, Quantum. He abused his authority in that respect by procuring the payment of a secret commission from Quantum. In granting summary judgment, Coulson J  held that a fiduciary duty would arise where an employee retains a secret profit in breach of contractual duty. He added that even if that was not the case, applying the Fishel analysis of looking at the defendant’s role and duties, fiduciary obligations plainly arose at least in relation to the arrangements with Quantum. An important factor in support of this was the fact that Mr Birdi was responsible for those arrangements. Other considerations were that Mr Birdi was a senior employee and part of his employer’s management group, and that he was privy to substantial confidential information. Coulson J  noted that being privy to confidential information is an important 130

When does an employee who is not a director owe fiduciary duties? 4.55

consideration in relation to whether fiduciary duties are owed, albeit that confidentiality obligations are not of themselves sufficient: see Arklow Investments Limited v Maclean [2000] 1 WLR 594 (PC). 1(b)(vi)  Express contractual provisions 4.54  As noted above (4.7), close consideration of the contractual terms is required both in order to identify whether an employee is subject to fiduciary obligations and as to the scope of those obligations. In some cases the practice has arisen of stipulating expressly in the contract that a non-director employee acknowledges that fiduciary obligations are owed. Whilst this may have the effect of reinforcing the seniority of the employee’s position, in our view it would not avoid the need to consider whether the nature of the obligations and the role in fact gave rise to fiduciary obligations and in what respects. An employee in a role subject to close supervision would not become subject to non-contractual fiduciary obligations merely by the inclusion of such a provision. Further, a general statement to the effect that there was an acknowledgment of fiduciary obligations would itself beg the question of the scope of those obligations. It would be open to the parties to agree to contractual obligations which mirrored fiduciary obligations but these would need to be set out with greater specificity. See also by analogy the discussion in 3.103–3.106 in relation to the approach adopted by the courts in relation to the more common general contractual wording imposing obligations to promote, or to use best endeavours to promote, the interests of the employer. 1(b)(vii) Conclusion 4.55  Drawing these strands together, we suggest that the following considerations are likely to be material in relation to whether the relationship and contractual duties and responsibilities give rise to fiduciary obligations: •

The seniority of the employee, and the extent of responsibility for, and autonomy in relation to, management of the employer’s business or a part of that business.

•

The degree of autonomy afforded the employee, or conversely control exercised by the employer, in relation to specific obligations or relationships relevant to the case (as in the case of a salesperson responsible for passing back information as to business opportunities).

•

Whether the employee is entrusted with or assumes control over relevant tangible or intangible property (including in particular confidential information) and is relied upon to deal with it for the benefit of the employer and/or only for authorised purposes.

• Whether the employee is entrusted with relevant initiatives and responsibilities, such as negotiation of a contract, in which he is required to act solely in the interests of the employer to procure the best terms for the employer. 131

4.56  Employee fiduciary duties

•

Whether the nature of the employee’s role or responsibilities (whether by virtue of the contract or assumed in practice), such as his influence over the placing of relevant orders, is such as to leave the employer vulnerable to abuse unless the employee acts solely in the best interests of the employer.

•

The nature of the breach. A fiduciary obligation will more readily be found in the case of a bribe or secret commission.

1(c)  De facto directors 4.56  In some cases involving senior employees, an alternative approach will be to assess whether the employees are also de facto directors, despite not having been appointed to the office of director. An employee who is a de facto director will owe the same duties as if they had formally been appointed as a director: Ultraframe (UK) Limited v Fielding [2005]  EWHC  1638 at paragraph  1257. The same position applies under the Companies Act 2006: McKillen v Misland (Cyprus) Investments Limited [2012] EWHC 521 at paragraph 19. This follows on the basis that section 250 CA 2006 (in force since 1 October 2007) provides that a director includes ‘any person occupying the position of director, by whatever name called’. The position of a de facto director is to be distinguished from that of a shadow director, who holds that position by reason of influence over others as explained below at 4.72–4.78. 4.57  Guidance as to the approach to be applied in determining whether a person is a de facto director was provided by Arden LJ, giving the only substantive judgment of the Court of Appeal in Smithton Limited (formerly Hobart Capital Management Limited) v Naggar [2015] 1 WLR 189, and in turn explaining the earlier Supreme Court decision in HMRC v Holland [2010] 1 WLR 2793. Arden LJ noted (at paragraphs 33 and 35) that: ‘The question is whether he was part of the corporate governance system of the company and whether he has assumed the status and function of a director so as to make himself responsible as if he were a director. … The question is whether he has assumed responsibility to act as a director.’

4.58  As Arden LJ noted (and as set out by Lord Collins in Holland), the original basis of liability as a de facto director was that a person had been appointed a director by an invalid process, and therefore had assumed responsibility as a director. However, that is not the only basis on which an individual (or currently an entity) can become a de facto director; there could objectively be an assumption of responsibility to act as a director in other circumstances. As to this, Arden LJ noted that one factor which is liable to arise is whether the acts relied upon as rendering a person a de facto director had the quality of being directorial acts. As Millett J had put it in Re Hydrodan (Corby) Ltd [1994] 2 BCLC 161 (at page 163): ‘To establish that a person was a de facto director of a company it is necessary to plead and prove that he undertook functions in relation to the company which could properly be discharged only by a director. It is not sufficient to show that 132

When does an employee who is not a director owe fiduciary duties? 4.61

he was concerned in the management of the company’s affairs or undertook tasks in relation to its business which can properly be performed by a manager below board level.’

4.59  As Arden LJ explained in Smithton, in addressing this issue as to whether the alleged director’s acts were directorial in nature, the Court will in general have to determine the corporate governance structure of a company. She added (at paragraph 31) in relation to the question of what makes a person a director, that: ‘The Companies Act definition does not elucidate that matter. Provisionally it seems to me that that term is to be tested against the usual split of powers between shareholders and directors under Table A  i.e. on the basis that the powers of management of the company’s business are delegated to the directors and the shareholders cannot intervene except by special resolution. On that basis it means a person who either alone or with others has ultimate control of the management of any part of the company’s business. In the usual case, in my judgment, it would not include a purely negative role of giving or receiving permission for some business activity.’

4.60 In Ultraframe [2005]  EWHC  1638 (at paragraphs 1255–1256), Lewison J  endorsed the following relevant passage in Secretary of State for Trade and Industry v Elms (16 January 1997, unreported): ‘At the forefront of the test I think I have to go on to consider by way of further analysis both what Millett J  meant by “functions properly discharged only by a director”, and Mr Lloyd QC (in Re Richborough Furniture Ltd [1996] 1 BCLC 507) meant by “on an equal footing”. As to one it seems to me clear that this cannot be limited simply to statutory functions and to my mind it would mean and include any one or more of the following: directing others, putting it very compendiously, committing the company to major obligations, and thirdly (really I think what we are concerned with here) taking part in an equally based collective decision process at board level, ie at the level of a director in effect with a foot in the board room. As to Mr Lloyd’s test, I think it is very much on the lines of that third test to which I have just referred. It is not, I think, in any way a question of equality of power but equality of ability to participate in the notional board room. Is he somebody who is simply advising and, as it were, withdrawing having advised, or somebody who joins the other directors, de facto or de jure, in decisions which affect the future of the company?’

4.61 As emphasised in Smithton the issue of whether the acts had the quality of being directorial is not necessarily determinative. The court may have to determine in what capacity the alleged director was acting. In relation to this, Arden LJ discerned a subtle difference between the leading speeches in HMRC v Holland. The ratio was contained in the speech of Lord Collins. The appropriate approach was to consider on the evidence whether the claimant had discharged the burden of showing that the acts of the alleged director were in that capacity rather than in some alternative capacity. There is no irrebuttable attribution of acts as being carried out in any particular capacity. Having regard to the burden on the claimant of establishing the alleged de facto director acted in that capacity, in practice therefore if the alleged director’s acts can be attributed to some other capacity there may be difficulty in showing that he had in fact been acting 133

4.62  Employee fiduciary duties

as director rather than in the alternative capacity. Consistently with this, prior to the Court of Appeal’s decision in Smithton, it has been said that if the act complained of could be referable to acting as a director or some other capacity, the person in question must be entitled to the benefit of the doubt: Re UKLI Limited [2015]  BCC  755 per Hildyard J  at paragraph  38. That is illustrated by the conclusion in HMRC v Holland where the issue was whether a director of the corporate director of the claimant was a de facto director of the claimant. It was found that he was not. His conduct was explicable by his capacity as director of the corporate director. 4.62 Again, the issue as to the capacity in which acts were carried out was determinative in Smithton. The claimant, Hobart (a joint venture brokerage company), sought to recoup losses incurred on transactions with clients introduced to it by Mr Naggar who was a director of its holding company, by contending that he was a de facto or shadow director of Hobart. Mr Naggar never attended Hobart board meetings and was not held out as a director but it was argued that he exercised control over Hobart’s day to day business. It was argued that Hobart’s business had been run informally and that major corporate decisions were taken by Mr Naggar and one other of Hobart’s directors, and that they acted like partners in Hobart’s business. The Court of Appeal (Arden LJ giving the only judgment) accepted that whether Mr Naggar was part of the corporate governance system was an important step in deciding whether he had assumed the responsibility of a director. However, that was not in issue here since Mr Naggar had not disputed at trial that he performed directorial acts. Instead his defence was focussed on what was referred to as ‘hat identification’ ie that he had multiple roles and had acted at all times in a different capacity from that of a Hobart director. The judge had been entitled to uphold that defence. She was entitled to take into account that in the light of the joint venture agreement and the need for directors of Hobart to be authorised by the FSA it was unlikely that Mr Naggar would have been permitted to act as a de facto director. In that context, and considering Mr Naggar’s conduct objectively against the conduct to be expected of him in his role as a major client and the chairman of the majority shareholder, the judge had been entitled to find that he had acted consistently with such conduct and had in fact acted in the capacity of client. That was a matter of fact and degree for the judge to assess. 4.63  Arden LJ in Smithton proceeded to distil a number of further considerations by way of practical guidance: •

The court must look at what the alleged director actually did rather than any job title.

•

It is not possible to avoid being regarded as a de facto director merely because the alleged director shows that he, in good faith, did not believe that he was acting as a director.

•

The court must look at the cumulative effect of the activities relied on, and all the circumstances, in the round and in context.

•

In an exceptional case, a single act might lead to liability.

134

When does an employee who is not a director owe fiduciary duties? 4.64

•

Relevant circumstances could include whether the company considered the alleged director to be such and held him out as a director, and whether third parties considered that he was a director.

•

The fact that a person is consulted about directorial decisions or his approval is sought does not in general make him a director because he is not making the decision.

•

Acts outside the period when he is alleged to be a de facto director may throw light on whether he was a de facto director in the relevant period.

•

The role of de facto (or shadow) director need not extend over the whole range of a companies’ activities.

4.64  Further guidance as to relevant considerations to be taken into account was provided by Hildyard J  in Re UKLI  Limited [2015]  BCC  755. He set out (at paragraph 41) the following factors as all being relevant, albeit that he recognised there is some overlap between them and that not all need necessarily be established: ‘(1) A de facto director must presume to act as if he were a director. (2)

He must be or have been in point of fact part of the corporate governing structure and participated in directing the affairs of the company in relation to the acts or conduct complained of.

(3)

He must be either the sole person directing the affairs of the company or a substantial or predominant influence and force in so doing as regards the matters of which complaint is made. Influence is not otherwise likely to be sufficient.

(4)

I am not myself persuaded that an “equality of footing” test is required: I prefer the looser fact-based approach advocated by Jacob J (in Secretary of State for Trade and Industry v Tjolle [1998] BCC 282 at page 290), and consider the indicia to be whether the person concerned has undertaken acts or functions such as to suggest that his remit to act in relation to the management of the company is the same as if he were a de jure director.

(5)

The functions he performs and the acts of which complaint is made must be such as could only be undertaken by a director, not ones which could properly be performed by a manager or other employee below board level.

(6)

It is relevant whether the person was held out as a director or claimed or purported to act as such: but that, and/or use of the title, is not a necessary requirement, and even that may not always be sufficient.

(7)

His role may relate to part of the affairs of the company only, so long as that part is the part of which complaint is made.

(8)

Lack of accountability to others may be an indicator; so also may the fact of involvement in major decisions.

(9)

The power to intervene to prevent some act on behalf of the company may suffice.

(10) The person concerned must be someone who was more than a mere agent, employee or advisor.’ 135

4.65  Employee fiduciary duties

4.65  Applying those criteria, one of the defendants in Re UKLI was held to be a de facto director at least in relation to financial decisions such as loans and dividends, even though he was not held out as such, because of his direct involvement in those decisions. It was held to be no answer that he owned all the shares of the company and as such was able to exert influence as shareholder. It was the exercise of the power usually reserved for a director (or in relation to acting as a shadow director (see 4.72–4.78), the influence or control of those acting as directors). 4.66 Whilst the decision preceded Smithton, the guidance remains pertinent (see eg Re Sports Management Group Ltd [2016] BPIR 1224, where Registrar Derrett followed this guidance). The same applies in relation to the decision of Judge Pelling QC in Energenics Holding Pte Limited v Neuftec Limited [2014]  EWHC  1845, which was decided around a month prior to Smithton. Having reiterated that the court should take into account all the relevant factors in deciding whether the person had ‘assumed to act as a director or exercised the powers and discharged the functions of a director’, he offered (at paragraph 88) the following summary of considerations that are likely to be relevant: ‘i)

Whether the person concerned was concerned with the management of the company’s affairs;

ii)

Whether the tasks that he undertook were tasks that could properly be performed by a manager below board level;

iii)

Whether the person concerned was at least equally with others directing the affairs of the company;

iv)

Whether the company held the person out as being in substance a director;

v)

Whether the individual concerned held him or herself out as being in substance a director;

vi)

Whether the individual had access to proper information on which to base decisions – access to accounts is likely to be particularly relevant where it is alleged that the person concerned is authorising the use of company funds;

vii) Whether the individual took major decisions in the name of the company; viii) Whether the individual was part of the corporate governing structure or exercised real influence on the corporate governance of the structure; and ix)

Whether the individual assumed a role sufficient to justify imposing on him a fiduciary duty and make him responsible for the misuse of assets.’

See also Secretary of State for Business, Innovation and Skills v Chohan [2013] EWHC 680 (at paragraph 41). 4.67  Consistently with the reasoning in Smithton, Judge Pelling QC emphasised that it was inadequate to plead in broad terms that a person was a de facto director without identifying the particular factors which supported that contention, and that whether a person was a de facto director is a matter of substance rather than form. As such it was not sufficient that the person had held himself out as a 136

When does an employee who is not a director owe fiduciary duties? 4.68

director. However, as illustrated by the decision in Michael and others v Phillips and others [2017] EWHC 614 (QB), the fact of being held out as a director is likely to be an important factor pointing towards being a de facto director. In that case the claim arose out of the proposed sale of a mini cab business (HRC) owned by Mr and Mrs Michael to the first defendant (Mr Phillips) and his business (A1). In anticipation of the purchase the parties entered into a management agreement for A1 to provide services to HRC, including day to day control management of HRC, co-ordination of drivers and managing office staff. The intention was that Mr Phillips would be appointed as a director, but that was not done. The deal fell through, but it was held that Mr Phillips had been a de facto director and in breach of duty had diverted and merged HRC’s business with A1’s business. Applying the test in Smithton, the court noted (at paragraph 39) that whilst there was no single definitive test, and the question is one of fact and degree, it was necessary to look at what the person did, whether they were ‘part of [the] corporate governance system’ and assumed the status and function of a director and that it was relevant to consider whether the person was held out by the company as a director and whether third parties considered them to be a director. Here Mr Phillips had held himself out to the staff as their employer and to the world at large, including his solicitors and HRC’s accountant, as the new owner. He assumed authority to hire and dismiss staff, had control of the cash receipts of the business, had rebranded the business and made changes to the office. Some of the steps taken went beyond the terms of the management agreement, and indicated an assumption of full authority and control over HRC’s business. It was also significant that there was a commitment in the management agreement that he would be appointed as a director, indicating that this was the basis of his engagement. Other than the operation of the bank account, there was nothing that he did not control. He acted in breach of fiduciary duty to promote the success of HRC and avoid conflicts of interest in diverting bookings and business to A1 from HRC and failing to put sufficient accounting controls in place to enable the businesses and income of each company to be distinguished. He had followed a business strategy of acquiring and merging the operations of the two businesses including by a central exchange for bookings and operating the companies as a single business, for which he did not have consent and which was not permissible prior to completing the share purchase. 4.68  The importance of being held out as a director was again highlighted in Shepherds Investments Limited v Walters [2007] IRLR 110, where the issue of whether a senior employee was a de facto director arose in the context of a team move. S was a former senior employee of Shepherds Investments Limited but not formally appointed as a director. Pursuant to a written management agreement, Shepherds Investments acted as the manager of Shepherds Select Fund plc (‘SSF’), which was an open-ended investment company. S became one of only a limited number of senior managers who were responsible for SSF’s US traded life policies investment business. S was appointed as the sales manager, but subsequently was referred to as Sales Director. He described himself as such on his business cards and in letters. It was also regarded as significant that in a business plan drawn up with colleagues in preparation to compete with his employer, he described himself as ‘Sales Director of Shepherds’, and that he referred to 137

4.69  Employee fiduciary duties

himself as one of the people who had been on the board of the Shepherds Group. The business plan was intended to be used as promotional material in order, among other things, to attract investment by venture capitalists. 4.69  Taking these matters together, Etherton J concluded that S was a de facto director. This conclusion was reached despite the evidence that S remained subject to instructions from a managing director (or a de facto MD) and despite the absence of evidence that he attended board meetings or participated in policy or strategy meetings for Investments. If correctly decided, the decision suggests that, notwithstanding the emphasis in subsequent decisions (eg Holland at paragraph 32, Smithton at paragraph 38) that the focus is not on what the person alleged to be a de facto director called himself, but on what he did, considerable weight may be attached to the fact that an employee holds himself out as being a director. We suggest, however, that this part of the decision needs to be treated with caution. In any case in which it is asserted that a senior employee was a de facto director, it will remain essential, following the approach and guidance in Smithton, to identify carefully the functions undertaken in order to assess whether, taken as a whole, they show the employee to be part of the corporate governance system of the company and as having assumed responsibility to act as a director. 4.70  As Arden LJ explained in Smithton ultimately the assessment is one of fact and degree for the judge. It is necessary to have regard to the context in which the decision is made. Indeed in HMRC v Holland Lord Collins suggested that it was not necessary for a de facto director to have the same meaning in all of the different contexts in which a “director” may be liable. The importance of having regard to the context echoed the observations of Jacob J  in Secretary of State for Trade and Industry v Tjolle [1998] 1 BCLC 333 (at page 343) (cited with approval by Lord Hope in Holland at paragraph 31), who commented that: ‘… I think what is involved is very much a question of degree. The court takes into account all the relevant factors. Those factors include at least whether or not there was a holding out by the company of the individual as a director, whether the individual used the title, whether the individual had proper information (eg management accounts) on which to base decisions, and whether the individual had to make major decisions and so on. Taking all these factors into account, one asks “was this individual part of the corporate governing structure”, answering it as a kind of jury question. In deciding this, one bears very much in mind why one is asking the question. That is why I  think the passage I quoted from Millett J is important. There would be no justification for the law making a person liable to misfeasance or disqualification proceedings unless they were truly in a position to exercise the powers and discharge the functions of a director. Otherwise they would be made liable for events over which they had no real control, either in fact or law.’

In Tjolle the alleged director was given the courtesy title of deputy management director but did not perform any function which could only be properly discharged by a director, and as such did not form any part of the real corporate governance of the company. 138

When does an employee who is not a director owe fiduciary duties? 4.73

4.71  As explained by Arden LJ in Smithton, having taken into account all relevant circumstances it remains important to stand back and look at the cumulative effect. That approach is illustrated by the decision in Ultraframe in the context of a dispute between competitors in the market for the manufacture and supply of conservatory roofs. One of the competitors, Ultraframe, acquired two companies (Northstar and Seaquest) with business in the field of conservatory roof design and manufacture. Ultraframe claimed that F, who was alleged to be a de facto director of Northstar and Seaquest, had stolen their business and assets. Lewison J emphasised the need not only to consider each of the matters relied upon individually as demonstrating that F  was a de facto director, but also to stand back and to consider their cumulative effect. Having regard to F’s involvement in important decisions of the business, he concluded that he did become a de facto director in that he had at least an equal voice with the de jure directors in important business decisions and became part of the corporate governance.

1(d)  Shadow directors 4.72 The position of de facto directors is to be distinguished from that of a shadow director, albeit the same sorts of evidential indicia are relevant and a person may act as both: Re UKLI Ltd [2015] BCC 755 at paragraph 46. Whereas a de facto director directly assumes the status and functions of a director, a shadow director has that status by virtue of influence over others. Section 251 Companies Act 2006 (in force from 1 October 2007) sets out the following definition of a shadow director: ‘(1) In the Companies Acts “shadow director”, in relation to a company, means a person in accordance with whose directions or instructions the directors of the company are accustomed to act. (2)

A person is not to be regarded as a shadow director by reason only that the directors act on advice given by him in a professional capacity.

(3)

A body corporate is not to be regarded as a shadow director of any of its subsidiary companies for the purposes of— •

Chapter 2 (general duties of directors),

•

Chapter 4 (transactions requiring members’ approval), or

•

Chapter 6 (contract with sole member who is also a director),

•

by reason only that the directors of the subsidiary are accustomed to act in accordance with its directions or instructions.’

4.73  Guidance was provided by the Court of Appeal in Secretary of State for Trade and Industry v Deverell [2001] Ch 340. Morritt LJ (with whom the other members of the Court agreed), considering the equivalent definition in the Company Directors Disqualification Act 1986, noted (at paragraph 35) that the purpose of the legislation relating to shadow directors is to identify those with real influence in the corporate affairs of the company. It is not necessary that such influence should be exercised over the whole field of its corporate activities. Nor is it necessary to show that the board were mere puppets. Whilst it would be 139

4.74  Employee fiduciary duties

sufficient to show that the properly appointed directors or some of them took on a subservient role or surrendered their discretions, that is not a necessary element. It is sufficient if the board are ‘accustomed to act’ in accordance with such directions or instructions. This is to be judged objectively and does not depend on showing a particular understanding or expectation on the part of either the person who gives or receives the instructions, though evidence of such an understanding or expectation would be relevant. The label, if any, given to the relevant parties is only one factor in considering whether there were relevant instructions or directions. Further, although the legislation refers to ‘directions’ or ‘instructions’, this does not exclude non-professional advice. 4.74  It is not necessary that the whole board is accustomed to act in accordance with the directions or instructions of the shadow director. It is sufficient if a governing majority of the directors were accustomed to act in that way: Ultraframe at paragraph 1272. 4.75 Whereas a de facto director owes the same fiduciary duties as someone formally appointed as a director, this is not necessarily the case with a shadow director. Section170(5) Companies Act 2006 provides that: ‘The general duties apply to shadow directors where, and to the extent that, the corresponding common law rules or equitable principles so apply.’

The pre-Act position in relation to whether shadow directors owe fiduciary duties is therefore preserved (subject to specific statutory duties on shadow directors, eg in relation to declaration of interest in transactions or arrangements entered into by the company (section 187 Companies Act 2006), and provisions relating to directors’ service contracts (section 230)). 4.76 There is a conflict of authority at first instance as to whether and to what extent a shadow director owes fiduciary duties. In Ultraframe, Lewison J ([2005] EWHC 1638 at paragraphs 1279–1291) concluded that in the paradigm case of a shadow director exercising indirect influence over a company, but who does not deal directly with the company’s assets, fiduciary duties will not usually be owed. However, fiduciary obligations may arise where, on the facts of a particular case, the activities of a shadow director go beyond merely exercising indirect influence. This accords with the analysis in University of Nottingham v Fishel [2000] ICR 1462 in focusing on specific duties and responsibilities and whether these give rise to fiduciary obligations. Thus, Lewison J noted that a person who becomes a signatory on a bank account would owe fiduciary obligations not to apply the money for their own benefit, and such obligations would arise whether the person was a shadow director or a book-keeper, though it would not follow that they would owe the full range of fiduciary duties to the company. 4.77  However, in Vivendi SA v Richards [2013] BCC 771 Newey J concluded that Ultraframe understated the fiduciary duties owed by shadow directors. He concluded (at paragraph  143) that shadow directors will typically owe such duties at least in relation to the directions or instructions that they give to the 140

When does an employee who is not a director owe fiduciary duties? 4.79

de jure directors (formally appointed and registered with the registrar of companies), and in particular will normally owe the duty to act in good faith in the interests of the company when giving such directions or instructions. Newey J reasoned that this conclusion was supported by public policy considerations. Otherwise there would be a ready route for those seeking to evade fiduciary obligations by appointing others to the formal role of director who would be accustomed to acting on their instructions. He noted that in Ultraframe Lewison J’s reasoning proceeded on the basis that fiduciary duties flowed from an assumption of responsibility. Newey J observed that this could only be reconciled with the case law if: (a) whether there was an assumption of responsibility was determined objectively, and (b) the taking on of a role or position was capable of implying an undertaking/assumption of responsibility. On that basis he observed that a person who gives directions or instructions to the de jure directors in the belief that they will be acted upon can fairly be described as assuming responsibility for the company’s affairs. In support of his conclusion Newey J  noted that a shadow director’s role can be every bit as important as de facto directors. Further, other statutory provisions, such as the fact a shadow director can be liable for wrongful trading and can be subject to director’s disqualification proceedings, reflect a perception that a shadow director can bear responsibility for a company’s affairs. 4.78 Notwithstanding Newey J’s extensive consideration of Ultraframe, in Sukhoruchkin v Van Bejestein [2014] EWCA Civ 399, in the context of an appeal against refusal to continue a freezing injunction, Sir Terence Etherton noted that the law as to the circumstances in which a shadow director owes fiduciary duties was not entirely settled in the light of the differing approaches in Ultraframe and Vivendi. One complication, not expressly addressed in Vivendi, is that section 1157 of the Companies Act 2006 provides for relief from sanctions only in relation to an officer of a company. If shadow directors are to be subjected to the wider range of fiduciary duties contemplated in Vivendi, it may be thought anomalous that they should not have the same entitlement to relief from sanctions. Yet that is not available at least without adopting a strained definition of ‘officer’. That might in turn provide some support for the narrower approach adopted in Ultraframe.

1(e)  Other workers 4.79 In addition to the position in relation to employees, the issue as to whether fiduciary duties are owed may arise in relation to others who provide their services to an employer. The issue may, for example, arise in relation to a non-employee consultant. The analysis in Fishel as to whether fiduciary obligations are owed having regard to particular duties and responsibilities is equally capable of being applied in such a case. This was the approach adopted in Lewis & Lewis Property Consultants v Chase Midland Plc (18  November 2004, unreported) (HHJ Alton) (see 4.51), where the position of an independent consultant was expressly equated to that of a senior non-board level management employee. 141

4.80  Employee fiduciary duties

4.80  Equally, the principles as to identification of a de facto director (see 4.56– 4.71) are applicable. In Primlake Limited (In Liquidation) v Matthews Associates [2007] 1 BCLC 666 a consultant was held to be a de facto director (and in breach of fiduciary duty in procuring payments to himself). This was on the basis that he was allowed by the company’s managing director to perform all the company’s management functions apart from signing cheques or giving instructions to banks, and that he took all effective decisions. Lawrence Collins J referred to the crucial issue of whether the individual had assumed the status and functions of a company director so as to make himself responsible as if he were a de jure director. 4.81 In City of London Group Plc v Lothbury Financial Services Limited [2012]  EWHC  3148, Proudman J  accepted (at paragraph  64) that it would be novel to fix a consultant with fiduciary duties ‘since it is the very absence of exclusivity which characterises the consultancy relationship’. However, that does not take into account sufficiently the differing circumstances in which a consultant may operate. Even if it was the case that the consultant’s services were not provided on an exclusive basis, that is not necessarily inconsistent with fiduciary duties arising in respect of particular obligations: see eg Global Energy Horizons Corp v Grey [2012]  EWHC  370. See also Vivendi SA  v Richards [2013] BCC 771 (discussed at 4.77), where Newey J considered that his conclusion that the shadow director owed fiduciary duties was buttressed by the fact that he was also a consultant, and that pursuant to the consultancy agreement he owed express obligations of loyalty to the company. As such there was no question of him being able to pursue his own rather than the company’s interests, in the instructions or directions that he gave.

1(f)  Members of limited liability partnership 4.82 An increasingly common feature in some sectors, such as hedge funds, is to operate through a model where those working for the business are linked by being members of a limited liability partnership rather than as employees. Whilst not employees, it has been recognised that, as such, LLP members may be workers for the purposes of statutory protection afforded to workers: see Bates van Winkelhof v Clyde and Co LLP [2014] ICR 730 (SC). In F & C Alternative Investment (Holdings) Limited v Barthelemy [2012] Ch 613 Sales J considered the extent of any fiduciary duties owed by members of a limited liability partnership. The court emphasised that the very fact of the separate legal personality of the LLP marked a fundamental difference from the traditional partnership where individual partners owe fiduciary duties to each other in relation to the management of the affairs of the partnership. As to this: •

142

The legislative regime for LLPs (principally, the Limited Liability Partnership Act 2000 (‘LLPA’) and the Limited Liability Partnership Regulations 2001 (SI 2001/1090) (‘the LLP Regs’)) provides considerable flexibility for there to be a range of different forms of governance regimes.

When does an employee who is not a director owe fiduciary duties? 4.83

•

Unlike the position of partners of a firm, who owe each other a fiduciary duty of good faith, there is no general rule that members of an LLP owe fiduciary obligations to each other. It is necessary to consider the particular roles and responsibilities of the members, or of particular members, to determine whether any such obligations arise. Thus fiduciary obligations may arise where a person assumes responsibility for the management of another’s property or affairs. In F & C Alternative Investment, an argument that the corporate member owed fiduciary duties to the other members failed since under the LLP agreement it did not undertake responsibility to act as agent for the other members and nor did it undertake responsibility to manage the affairs of the LLP, let alone the affairs of the individual members.

•

Section 6(1)  LLPA provides that every member of an LLP is the agent of the LLP. As such members owe the usual fiduciary obligations to the LLP in relation to transactions which a member enters into on the LLP’s behalf.

•

Regulation 7 of the LLP  Regs sets out certain default provisions which apply if there is no contrary agreement. These include regulations 7(9) and 7(10) which are in the following terms: ‘(9) If a member, without the consent of the limited liability partnership, carries on any business of the same nature as and competing with the limited liability partnership, he must account for and pay over to the limited liability partnership all profits made by him in that business. (10) Every member must account to the limited liability partnership for any benefit derived by him without the consent of the limited liability partnership from any transaction concerning the limited liability partnership, or from any use by him of the property of the limited liability partnership, name or business connection.’

However, as explained in F & C Alternative Investment (at paragraph 220), this does not imply that any more general fiduciary duty of good faith is owed by members to the LLP, and nor can any such general duty be implied. •

As to what fiduciary obligations are owed to the LLP by the members of its governing bodies (in this case the LLP board and its management and compensation committees), the touchstone is to ask what obligations of a fiduciary character may reasonably be expected to apply in the particular context. The contract between the parties (principally the LLP agreement) will usually provide the major part of the contextual framework in which that question arises since any fiduciary obligations must not distort the bargain made by the parties. The emphasis on reasonable expectations of the parties, and the focus on the contractual duties, accords with the approach adopted in Ranson v Customer Systems Plc [2012] IRLR 769 in relation to identifying what if any fiduciary duties may be owed by employees and also echoes the legitimate expectation test referred to at 4.19.

4.83  The application of these principles in F & C Alternative Investment required careful consideration of the circumstances and the contractual obligations when discerning the fiduciary obligations owed to the LLP by members of the LLP 143

4.84  Employee fiduciary duties

board, and the relevant governing committees. Sales J approached the issue by considering in turn fiduciary duties owed in usual circumstances and how they were impacted by the context. In determining the content of these duties it was necessary in particular to take into account that the governing bodies were to include representatives of the corporate member (F&C) and it was implicit in the contractual arrangements that the parties expected the F&C representatives to wear both an ‘F&C hat’ and an ‘LLP hat’ when participating in business decisions for the LLP, and not thereby to be disqualified from participating in such decisions. On that basis: (1) Whilst there was a fiduciary obligation on the members of the LLP board and governing members not to put themselves in a position where there was a conflict of interest without informed consent, here there had been informed consent to the F&C representatives having in mind the interest of F&C when participating in business decisions. (2) There was a duty not to make a profit from their position without informed consent, but that did not prevent the members and the F&C representatives aiming to make profits for F&C  from the operations of the LLP, to be distributed in accordance with the contractual arrangements, since there was informed consent to this. (3) There was an obligation owed to the LLP board and members of the LLP committees to act in good faith in what was regarded as the best interests of the LLP but, again, the content of that duty had to be assessed taking into account what could reasonably be expected in circumstances where the F&C representatives were entitled to take into account, and needed to reconcile in a practical way, the interests of the LLP and F&C. (4) There was a duty to act in good faith, which Sales J regarded as a compendious expression of duty, encompassing each of the above duties. It could also be taken to add a general obligation of openness and fair dealing as between fiduciary and beneficiary. However, again the precise content would vary depending on the particular circumstances and what was reasonably to be expected of the person acting in those circumstances ([227(iv)]). 4.84  It was in relation to the duty to act in good faith in the best interests of the LLP that Sales J noted (at paragraph 227(iii)) that the greater difficulty arose in ‘the practical working through of the accommodation to be achieved’ between the different perspectives of the members and F&C  representatives (given the informed consent for the conflicts inherent in those roles). Sales J  rejected a contention that the F&C  representatives had a broad obligation to inform the LLP about information derived from their positions within the F&C group which might have an impact on the business of the LLP. He concluded that this would amount to distorting the bargain contained in the contractual arrangements in a way which was not sufficiently justified by reference to the role which the F&C  representatives were expected to fulfil within the LLP. He did, however, accept that there was a narrower disclosure obligation in relation to certain information, going to the heart of the marketing approach which the LLP could expect 144

Scope of fiduciary duties 4.87

to be applied by F&C, which was of potentially profound significance to the LLP’s business. 4.85  The approach adopted by Sales J provided a practical solution given the need to avoid distortion of the contractual arrangement and given the extent to which there was informed consent to a conflict of interest.

1(g)  Fiduciary duties to other group companies 4.86  Where an employee or director provides services for another group company the issue may arise as to whether, despite the absence of any direct contractual relationship with that company, fiduciary duties may be owed to it. This issue arose in Bank of Ireland v Jaffery and another [2012] EWHC 1377, in the context of allegations of a bank senior executive, Mr Jaffery, having taken bribes and been in a position of conflict of interest by having secret interests in projects financed by the bank’s lending. The bank which employed Mr Jaffery transferred its business to Bank of Ireland (UK) Plc, but the claimant continued to work for the business, in his capacity as Head of Business Banking. Mr Jaffery accepted that he owed fiduciary duties to his employer, but he disputed that such duties were owed to Bank of Ireland, with whom he had no contractual relationship. Vos J concluded (at paragraph 299) that: ‘… if the employee of a parent is required … by that parent to work for one of its subsidiaries as a banker handling loans and dealing with its financial affairs, the employee must owe fiduciary duties as much to the subsidiary in connection with the financial affairs that the employee is required to handle, as he would to the parent employer in connection with its own financial affairs.’

On that basis, fiduciary duties were indeed owed to the parent company. This approach was followed in Otkritie Investnational Investment [2014] EWHC 191 (Comm), again to establish that an employee owing fiduciary duties to one group company could be held to owe such duties to other companies in the same group. In each case though, consideration is required of whether the circumstances of the role, and the nature of the services provided to the group company or responsibilities undertaken, are such as to entail the duty to act solely in the interests of the group company or a legitimate expectation to do so (see Global Energy Horizon Corp v Gray [2012] EWHC 3703 (see 4.19).

2. SCOPE OF FIDUCIARY DUTIES 2(a) Overview: the statutory framework for directors and dangers in extrapolating to non-director employees 4.87  We turn to consider the nature and scope of fiduciary duties. In relation to company directors the applicable duties are now set out in the Companies Act 2006 (‘CA 2006’). The relevant provisions of the CA 2006 apply only to those 145

4.88  Employee fiduciary duties

in the position of a director (including a de facto director). They do not apply to other employees. Nor do they apply to partners, or to members of a limited partnership (as to which see 4.82–4.85). Certain provisions of the CA  2006, but not the relevant provisions in relation to directors’ duties set out in Part 10, Chapter 2, are applied to LLPs by the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009. 4.88  The statutory provisions are expressly stated to be based on common law rules and equitable principles, which they replace in relation to company directors (section 170(3) CA 2006). A statutory framework developed specifically in relation to company directors may not, however, be applicable in all respects to non-director employees found to owe fiduciary duties. Notably, section 171 in relation to acting within powers is not readily applied to non-directors. Indeed in Ranson v Customer Systems Plc [2012]  IRLR  769 (CA), Lewison LJ (at paragraph  24) warned that it was dangerous to reason by analogy from cases about company directors to cases about employees when determining the scope of the fiduciary obligations that may be owed in particular circumstances by nondirector employees. 4.89  Allowing for this, the statutory duties do, however, provide a convenient framework to consider the obligations of employees owing fiduciary obligations, whether as directors or otherwise. Whilst noting potential differences from the position apart from the Act, we therefore consider first the statutory framework of general duties. These include the core fiduciary obligations of good faith, avoidance of conflict of interest and the prohibition on secret profits. We then focus on the application of these principles in relation to particular issues material to employee competition and outside business interests, including exploitation of corporate opportunities, the scope of permissible preparation for competition after ceasing to be a fiduciary and the developing law in relation to fiduciaries’ duties of disclosure.

2(b)  Directors’ duties: the Companies Act 2006 4.90  Part 10, Chapter 2 CA 2006 sets out general duties owed by company directors to the company. The duties are expressed as being in place of the corresponding common law and equitable principles (section 170(3)). 4.91  In summary, CA 2006 sets out the following general duties: (1) To act within powers: ie to act in accordance with the company’s constitution and only to exercise powers for the purposes for which they were conferred: section 171. (2) To act in good faith to promote the success of the company: section 172. (3) To exercise independent judgment: section 173. (4) To exercise reasonable care, skill and judgment: section 174. 146

Scope of fiduciary duties 4.95

(5) To avoid conflicts of interest other than in relation to transactions or arrangements with the company: section 175. (6) Not to accept benefits from a third party unless there is no conflict of interest: section 176. (7) To declare interest in proposed transactions or arrangements with the company: section 177. 4.92  Most of the general duties cease to apply when a person ceases to be a director. This is, however, subject to an exception in relation to: (a) the duty in section 175 in relation to conflicts of interests regarding the exploitation of any property, information or opportunity of which the director became aware whilst a director; and (b) the duty in section 176 relating to secret profits as regards things done or omitted to be done before ceasing to be a director (section 170(2) CA 2006). 4.93  Section 170(4) CA 2006 provides that: ‘The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties.’

4.94  The pre-existing case law in relation to directors’ fiduciary duties, together with continuing case law developments (such as in relation to fiduciary obligations of trustees, agents or, in some cases, senior employees), therefore remain relevant in relation to the construction of the statutory duties. Equally, as Mummery LJ put it in Towers v Premier Waste Management Limited [2012] IRLR 73 (CA) at paragraph 3: ‘Although the pre-2006 Act common law rules and equitable principles continue to apply to a pre-2006 Act case, it is unrealistic to ignore the terms in which the general statutory duties have been framed for post-2006 Act cases. They extract and express the essence of the rules and principles which they have replaced.’

2(b)(i) Ratification 4.95  Ratification involves the validation of an unauthorised act by subsequent approval (and see 4.144–4.157 in relation to authorisation in advance). Preexisting case law in relation to ratification remains relevant by virtue of section 180(4)(a) CA 2006. This provides that the general duties have effect subject to any rule of law enabling the company to give authority for anything done or omitted to be done by the directors that would otherwise be a breach of duty. This is subject to section 239, which sets out minimum requirements for effective ratification of conduct by a director amounting to ‘negligence, default, breach of duty or breach of trust in relation to the company’. Ratification of such conduct must be either by resolution of the members of the company (ie  an ordinary resolution passed by a simple majority, unless the company’s articles provide otherwise) or by unanimous consent of the members (sections 239(2) and (6); 147

4.96  Employee fiduciary duties

sections 281 and 282). Section 239(6)(a) provides that nothing in section 239 (which requires ratification by resolution of the members) affects the validity of a decision taken by unanimous consent of the members of the company. As such it preserves the principle established in Re Duomatic Ltd [1969] 2 Ch 365 that it is sufficient if it can be shown that all shareholders with the right to attend and vote at a general meeting assented to the matter provided that: (a) they have full knowledge of the relevant facts, (b) they agree to (or acquiesce in) the conduct (rather than merely have knowledge of it) and (c) the approval is unanimous: see Bhullar v Bhullar [2017] EWHC 407 (Ch). 4.96  If the director is also a member, neither his votes, nor those of any connected person (as defined in section 252) can be taken into account for the purposes of ratifying the director’s conduct consisting of negligence, default, breach of duty or breach of trust (sections 239(3), (4) and (6)). This represents a change as compared to the previous law: see Goldtrail Travel Limited v Aydin [2015] 1 BCLC 89 at paragraph 116. The effect is that a sole shareholder is not able to ratify his own wrongdoing in general meeting: Goldtrail at paragraphs 117–119. 4.97  Generally, following full disclosure (as to which see 4.151–4.155), there may be ratification by way of an ordinary resolution in the case of obtaining a secret profit, provided there is no misappropriation or misapplication of company property and the ratification does not depend on the votes of the wrongdoer. However, ratification will not be effective if these conditions are not satisfied unless (where the wrongdoer is not the sole shareholder) there is unanimous ratification by all shareholders or, possibly, by special resolution (see eg Regal (Hastings) Limited v Gulliver [1967] 2 AC 134n (HL) and Cook v Deeks [1916] 1 AC 554 (PC)). Further, this principle does not relieve directors of liability in respect of transactions which are ultra vires since such acts could not be approved in general meeting: Madoff Securities International Limited (in Liquidation) v Raven [2013] EWHC 3147 (Comm) at paragraph 269. 4.98  Further, different considerations apply if the company becomes insolvent or of doubtful solvency or on the verge of insolvency. In such circumstances the interests of creditors are said to ‘intrude’. This is on the basis that in practical terms it is the creditors’ assets that are under management rather than the shareholders’, and as such their interests need to be properly considered: see Bilta (UK) Ltd v Nazir (No2) [2016] AC 1 (SC) per Lord Toulson and Lord Hodge at paragraphs 123–126, and 4.107–4.108. Unanimous consent of the shareholders is therefore not sufficient: see Madoff Securities at paragraphs 272–273; Goldtrail [2015] 1 BCLC 89 at paragraph 114; section 172(3) CA 2006. This is so even if the directors honestly and reasonably believe the company to be solvent: Madoff Securities per Rose J at paragraph 273.

2(c) The duty to act within powers/for proper purposes 4.99  Section 171 CA 2006 provides that directors must: (a) act in accordance with ‘the company’s constitution’; and (b) only exercise powers for the purposes 148

Scope of fiduciary duties 4.101

for which they were conferred. References to the company’s constitution include its articles, decisions taken in accordance with the company’s articles and any decisions taken by members (or a class of them) which is treated by any enactment or rule of law as being equivalent to a decision of the company (such as decisions with unanimous informal consent of all members) (section 257). 4.100  The provision was considered by the Supreme Court in Eclairs Group Ltd and another v JKX Oil and Gas plc [2016] 3 All ER 642. Here the directors had exercised a power under the company’s constitution to restrict the voting rights of shareholders who it was believed were planning a takeover of the company and it was believed had failed to provide accurate information in response to disclosure notices served on them (under section 793 CA 2006 and the companies constitution). It was determined that the proper purpose of the power to impose these restrictions was to enforce compliance with the disclosure notice, whereas in fact the principal purpose for which they had been imposed was with a view to procuring that certain resolutions tabled by the board which required shareholder approval were able to be passed. As such, although the board had power to issue the restrictions, the power to do so had not been validly exercised and they were not valid. As explained by Lord Sumption (at paragraphs 14–16) the rule substantially corresponds to the equitable rule restricting the exercise of discretionary powers by trustees, and which applied to directors prior to the CA 2006. The provision in section 171(b) CA 2006 is not concerned with excess of power by doing something which is beyond the scope of the company’s constitution, but with abuse of power by doing acts which are within its scope but done for an improper reason. As such the test is necessarily subjective. However, it is distinct from the requirement under section 172 to act in the manner which the director considers in good faith would be most likely to promote the success of the company. There can therefore be a breach of the duty, notwithstanding that a director has acted in what he in good faith considers to be in the best interests of the company, if the director has acted for an improper purpose: Re HLC Environmental Limited [2014] BCC 337 at paragraphs 97–98. Thus in Eclairs Group it was no answer if the directors held the belief in good faith that passing the resolutions, and blocking a suspected takeover, was in the best interests of the company. 4.101  Prior to the decision in Eclairs Group a four stage test was required, which involved identifying: (1) the power whose exercise is in question, (2) the proper purpose for which such power was conferred, (3) the substantial purpose for which the power was exercised, and (4) whether that purpose was proper: Madoff Securities International Limited (in Liquidation) v Raven [2013] EWHC 3147 (Comm) at paragraph 196. As Lord Wilberforce explained in Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 (PC) page 834: ‘Having ascertained, on a fair view, the nature of this power, and having defined as can best be done in the light of modern conditions the, or some, limits within which it may be exercised, it is then necessary for the court, if a particular exercise of it is challenged, to examine the substantial purpose for which it was exercised, and to reach a conclusion whether that purpose was proper or not. In doing so it will necessarily give credit to the bona fide opinion of the directors, if such is found to exist, and will respect their judgment as to matters 149

4.102  Employee fiduciary duties

of management; having done this, the ultimate conclusion has to be as to the side of a fairly broad line on which the case falls.’

4.102  However, the speeches in Eclairs Group called into question the test, in cases of mixed motive, of the substantial or principal purpose. Lord Sumption (with whose speech Lord Hodge concurred) considered that the appropriate approach is instead to apply a test of whether the improper purpose was causative in the sense that but for that purpose the decision would not have been made. Lord Sumption reasoned (at paragraph 21) that if without the improper purpose the decision impugned would never have been made it would be irrational to allow it to stand simply because there were other proper purposes. Conversely if there were proper reasons and the power would have been exercised in any event, it was difficult to see why justice required it to be set aside. The majority in Eclairs Group declined to endorse this change from the principal or substantial purpose test on the basis that there had not been full argument on it. However, they expressed sympathy for Lord Sumption’s view as to the correct test (per Lord Mance, with whom Lord Neuberger agreed, at paragraph 53). As such it may be that a but for test will now be applied (but see Watchstone Group Plc v Quob Park Estate Ltd and others [2017] EWHC 2621 where, at paragraph 78, the Court (Elizabeth Jones QC) proceeded on the basis of the parties’ submission that, given the lack of agreement in Eclairs, a predominant purpose test was to be applied).

2(d)  Good faith and promotion of company’s interests 4.103  Section 172 CA 2006 provides: ‘172  Duty to promote the success of the company (1)

A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to— (a) the likely consequences of any decision in the long term, (b) the interests of the company’s employees, (c) the need to foster the company’s business relationships with suppliers, customers and others, (d) the impact of the company’s operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company.

(2) Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes. 150

Scope of fiduciary duties 4.106

(3)

The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.’

4.104  This is a reformulation of the primary or core fiduciary duty of directors to act bona fide in what they consider to be in the interests of the company, or as it is sometimes put, to ‘do his best to promote its business and to act with complete good faith towards it’ (Scottish Co-operative Wholesale Limited v Meyer [1959] AC 324 at page 366 per Lord Denning, followed eg in British Midland Tool Limited v Midland International Tooling Limited [2003] 2  BCLC  523 at paragraph 81; Re Southern Counties Fresh Foods Limited [2008] EWHC 810 at paragraph 52). 4.105  The general rule is that the decision as to what will promote the success of the company, and what constitutes such success, is for the director’s good faith judgment. As explained in Regentcrest plc (in liquidation) v Cohen [2001] 2 BCLC 80 at paragraph 120: ‘The duty imposed on directors to act bona fide in the interests of the company is a subjective one (see Palmer’s Company Law paragraph 8.2603. The question is not whether, viewed objectively by the court, the particular act or omission which is challenged was in fact in the interests of the company; still less is the question whether the court, had it been in the position of the director at the relevant time, might have acted differently. Rather, the question is whether the director honestly believed that his act or omission was in the interests of the company. The issue is as to the director’s state of mind. No doubt, where it is clear that the act or omission under challenge resulted in substantial detriment to the company, the director will have a harder task persuading the Court that he honestly believed it to be in the company’s interest; but that does not detract from the subjective nature of the test.’

4.106  However, this focus on the subjective assessment of the director is subject to two important qualifications. First, the subjective test only applies where there is evidence of actual consideration of the best interests of the company. Where the director has not given consideration to whether the relevant act or failure to act is in the company’s interests, the court should ask whether an intelligent and honest person in the position of a director of the company involved would, in all the circumstances, have reasonably believed that the act in question was for the benefit of the company: see Madoff Securities International Limited (in Liquidation) v Limited Raven [2013]  EWHC  3147 (Comm) at paragraph  194; Re HLC Environment Projects Limited [2014] BCC 337 at paragraph 92(b). The test in such a case where the director has failed to consider the matter has sometimes been framed as being that there is a breach if the director would have concluded that his actions or failure to act (in that case by making disclosure) were not in the company’s interest had he been acting in good faith (GHLM Trading Limited v Maroo [2012] 2  BCLC  369 at paragraph  194, followed in Odyssey Entertainment (In Liquidation) v Kamp [2012] EWHC 2316 at paragraph 213) or had he thought about the matter in good faith (IT  Human Resources Plc v Land [2016] FSR 10 at paragraph 124) or ‘fairly and in good faith’ (Gamatronic 151

4.107  Employee fiduciary duties

(UK) Limited and others v Hamilton and Mansfield [2017]  BCC  670 at paragraph 229). 4.107  Secondly, this objective test must also be applied where a very material interest has been overlooked: see eg  Re HLC  Environment Projects Limited [2014] BCC 337 at paragraph 92(c); Ball (Liquidator of PV Solar Solutions Ltd) v Hughes [2017] EWHC 3228 (Ch) at paragraph 78. One instance of this concerns the principle, reflected in the saving provision in section 172(3) CA 2006, as to the need to take into account the interests of creditors when the company is insolvent (see section 214 Insolvency Act 1986) or on the verge of insolvency or of doubtful solvency (see eg Re MDA Investment Management Ltd (No 1) [2004] 1  BCLC  217; Ultraframe [2005]  EWHC  1638 at paragraph  1304; Singularis Holdings Ltd v Dalwa Capital Markets Europe Ltd [2017] 1 Lloyd’s Rep 226 at paragraph 130). In Re HLC Environment Projects (at paragraph 8), John Randall QC summarised the various different formulations for the test of when creditors’ interests needed to be considered. He concluded (at paragraph 89) that the underlying principle is that directors are not free to take action which puts at ‘real (as opposed to remote) risk’ the creditors’ prospects of being paid, without first considering their interests. However in BTI  2014  LLC  v Sequana [2017] 1 BCLC 453, at paragraphs 477 and 478, Rose J emphasised that the situation in which a duty to consider and act in the interests of creditors should not be pitched too low (followed in Secretary of State for Business, Innovation and Skills v Akbar [2017]  EWHC  2856 (Ch) at paragraph  85). It is not sufficient merely that there is something more than a remote risk of insolvency, and Rose J noted that there has been no case where, on the facts, the company could not also accurately be described in much more pessimistic terms, as actually insolvent or ‘on the verge of insolvency’, ‘precarious’ or ‘in a parlous financial state etc’. The essence for the test is that the directors ought to be anticipating the insolvency. 4.108  The duty then requires the director to have regard to the interests of creditors as a class. It is therefore a breach of duty to advance the interests of a particular creditor if this was not believed to be in the interests of creditors as a class: GHLM Trading Limited v Maroo [2012] 2 BCLC 369. Further, where the interest of creditors need to be taken into account, their interest must be considered as paramount: Re HLC  Environment Projects at paragraphs 92(a) and 92(w); Oakdene Homes Plc (in Liquidation) v Turpin Unreported, 1 November 2016 at paragraph 107. As explained in Oakdene Homes, where there is no evidence of the rationale for a decision (in that case to award a bonus to a director), or where a very material interest was without objective justification overlooked (in that case the interest of creditors despite doubtful solvency), the test is the objective one of whether an honest and intelligent person in the position of the directors could in the circumstances have reasonably believed that the award of the bonus was in the interests of the company. 4.109  Aside from the need to have regard to interests of creditors in a case of doubtful insolvency, it is also implicit in the list of specific matters to which the director must have regard which are listed in section 172, that a decision made in 152

Scope of fiduciary duties 4.110

good faith may be challenged if there has been a failure to have regard to these matters, at least where there are important considerations arising in relation to them. Notably, the listed matters include a specific obligation to have regard to the need to foster the company’s relationships with suppliers, customers and others. Whilst it would seem unlikely that this differs substantially from the position prior to the CA 2006, it may be deployed to seek to bolster contentions of a breach of the obligation of good faith. Duties of disclosure (which are considered in more detail at 4.226–4.262) provide an illustration of how this might be deployed. In Item Software (UK) Limited v Fassihi [2004] IRLR 928 (CA) Arden LJ observed (at paragraph 41) that the very general terms in which the principle of good faith is expressed is one of its strengths, since it ‘is dynamic and capable of application in cases where it has not previously been applied but the principle or rationale of the rule applies’. The principle was applied in Fassihi to require disclosure by a director of his own misconduct in entering into negotiations in competition with the company of which he was a director. It may be that the analysis of whether a failure to make disclosure was consistent with the obligation of good faith might now be informed by specific consideration of whether the director had regard to the need to foster the company’s business relationships, and how the failure to make disclosure was reconciled with that obligation. 4.110  The obligation is limited to the need to ‘have regard to’ these interests, rather than stipulating that these interests must in all cases be determinative. However, in some cases it will be plain that either there has been a failure to have regard to one or more of the listed matters, or if they were considered, the director could not genuinely have concluded that the conduct promoted the interests of the company. That was the case in Cullen Investments Ltd and others v Brown and others [2017] EWHC 1586. As discussed at 4.42, here the dispute arose out of a joint venture between two business partners, Mr Watson and Mr Brown, to exploit property development opportunities in the UK and Europe. The joint venture operated through a corporate vehicle, KIL. Mr Brown and a company controlled by Mr Watson, Cullen, were equal shareholders in KIL and Brown and Watson were both directors. Subsequently, Mr Brown pursued an opportunity with a German-based property management company. KIL was offered first refusal in relation to this. It did not take it up but nor did it decline to participate altogether. Indeed it provided services to the German venture without Mr Brown having disclosed his interest. There was found to be an obvious conflict of interest arising from Mr Brown’s involvement, not least as the size of his personal interest in the German opportunity could be adversely affected by higher charges by KIL. In analysing the position under section 172 CA 2006, the court emphasised that Mr Brown could not have considered that concealing his interest amounted to ‘acting fairly as between’ himself and Cullen, who were the only two shareholders. KIL was entitled to know that its CEO had a personal stake in a separate project for which the company was providing services and other benefits and which was at least to some extent in competition with KIL. He had either subjectively concluded that it was in KIL’s best interests to be informed of his personal interest, or would have formed that view if he had considered the issue in good faith. 153

4.111  Employee fiduciary duties

4.111 Further, there is some authority to the effect that, even where directors act in good faith for a proper purpose, the court has a residual right to interfere on grounds of irrationality: see Ultraframe (UK) Limited v Fielding [2005] EWHC 1638 at paragraph 1294; and Hunter v Senate Support Services Limited and others [2004] EWHC 1095 (Ch) (at paragraphs 165-169) and Power Adhesives v Sweeney [2017]  EWHC  676 (Ch). See also Cobden Investments Limited v RWM Langport Ltd [2008] EWHC 2810 where the court proceeded on the basis (at paragraph 53) that there would be a breach of section 172 if it was established that the relevant exercise of the power is one which could not be considered by any reasonable director to be in the interests of the company. However, this is not easily reconcilable with the wording of section 172, which was not expressly considered in these decisions and which expressly adopts a good faith test. 4.112  Some further support for an objective element to section 172  CA  2006 might be found in the reasoning in Gamatronic (UK) Ltd and another v Hamilton and Mansfield [2017] BCC 670. In the context of considering whether there was a breach of fiduciary duty and the duty of fidelity in steps taken to compete during employment, and non-disclosure of such steps, Akhlaq Choudhury QC (sitting as a deputy judge) referring to the business (Vox) through which the defendant directors intended to operate, commented (at paragraph 151) that: ‘I find it difficult to accept the notion that liability for breach could only arise if there was subjective intention to compete as that could potentially give rise to abuse where a deliberately blinkered approach is taken by individuals. It seems to me that the question of whether there is competition is one to be determined objectively, and that would appear to be consistent with the analysis of the Court of Appeal in Morris-Garner [referring to One Step (Support) Ltd v MorrisGarner and another [2016] 3 W.L.R. 1281 (CA)]. I acknowledge that it is not always easy to determine whether there is actual competition (as was the case here). Insofar as that uncertainty over competition causes directors to take pause and perhaps adopt a more cautious approach before acting then it does not impose on them any undue burden or one that is inconsistent with their obligations as fiduciaries.’

4.113  Clearly an employee who takes a ‘deliberately blinkered’ approach to what is in the best interests of the employer has not considered the issue in good faith. That does not provide a satisfactory basis for concluding that for the purposes of section 172 CA 2006, or the duty to consider in good faith what is in the interests of the employer, the issue of what is competitive is to be assessed objectively. Nor does the decision in One Step (Support) Ltd v Morris-Garner and another [2016] 3 WLR 1281 (CA), which was relied upon in Gamatronic and concerned the effect of a non-competition covenant, support that conclusion. However, even aside from whether there is a residual rationality threshold, the subjective test is significantly qualified by the need to have given actual consideration to the best interests of the company, and not overlook material considerations at least relating to the listed matters and, in cases of insolvency or being on the verge of insolvency, to prioritise the interests of creditors. In practice if a decision is irrational this would no doubt provide strong evidence that it was not made in 154

Scope of fiduciary duties 4.116

good faith and/or that there was a failure to have regard to the factors enumerated in section 172. Further, the subjective nature of the good faith test is balanced by the obligation to act for a proper purpose, to exercise independent judgment (section 173 CA 2006) and to exercise reasonable care, skill and diligence (section 174 CA 2006).

2(e)  Duty to exercise independent judgment 4.114  Section 173 CA 2006 sets out the principle that a director must exercise independent judgment. Again, this codifies pre-existing principles. The rule is not infringed by the director acting in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors or otherwise acting in a way authorised by the company’s constitution (section 173(3)). The provision therefore does not exclude delegation by the directors, providing this is in accordance with the company’s constitution and the directors comply with their duty to supervise the delegated function. However, it is a breach of duty for a director to allow himself to be dominated, bamboozled or manipulated by a dominant fellow director where this involves a total abrogation of responsibility: transactions which are entered into as a result are ultra vires since such acts could not be approved in general meeting: Madoff Securities International Limited (in Liquidation) v Raven [2013] EWHC 3147 (Comm) at paragraph 191. As to the principles applicable in relation to delegation, see Ultraframe (UK) Limited v Fielding [2005] EWHC 1638 at paragraphs 1296–1299 and Re Barings plc (No 5) [1999] 1 BCLC 433 at page 489.

2(f)  Duty to exercise reasonable care, skill and diligence 4.115  Section 174 CA 2006 sets out the director’s obligation to the company to exercise reasonable care, skill and diligence. The standard of care is defined as: (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company; and (b) with the general knowledge, skill and experience that the director has. This is not treated as a fiduciary duty (section 178(2) CA 2006). This reflects the common law position that breach of a fiduciary obligation connotes disloyalty rather than only lack of competence: see Extrasure Travel Insurances Ltd v Scattergood [2003] 1 BCLC 598; Bristol & West Building Society v Mothew [1998] Ch 1 at page 18. 4.116  One aspect of the duty is that whilst (subject to the articles of association) the directors are entitled to delegate functions to others in the management chain, this does not absolve them of the duty to supervise the discharge of the delegated functions. The extent of the duty, and whether it has been discharged, depends on all the circumstances including the director’s role in the management of the company: Re Barings plc (No.5) [1999] 1 BCLC 433 at page 489. Directors who are not otherwise involved in wrongdoing, may therefore incur liability as a result of failing to exercise reasonable care and skill so as to prevent the wrongdoing of 155

4.117  Employee fiduciary duties

others: see eg Weathering Capital (UK) Ltd v Peterson [2015] BCC 741 (CA). The obligation might be of significance for example in the context of a director who discovers indications of a team being poached, or indeed that an individual valuable employee is planning to leave. Depending on the damage that might be caused to the company, the obligation of reasonable care might be said to require reasonable steps to seek to prevent the harm or to bring the risk to the attention of the board. Whilst a duty might arise under section 172 CA 2006, the tests are different. Under section 172 CA 2006, subject to the exceptions considered at 4.106–4.113 above, the test is subjective. The test under section 174 is objective, having regard to the general knowledge not only of the particular director but also the skill and experience of someone carrying out the director’s function. 4.117 This may require disclosure to the other directors, or in some cases if the other directors cannot be trusted to deal with the matter, to the company’s auditor or shareholders. That was the case in Lexi Holdings Plc v Luqman [2009] 2  BCLC  1 (CA). The managing director of the company misappropriated in excess of £53 million from the company. Another director, who was his sister, knew of the managing director’s previous conviction for a dishonesty offence and should have identified that his loan account with the company was fictitious, and so should have sought advice and informed the company’s auditor. Indeed it was noted at first instance ([2008] 2 BCLC 725 at paragraph 39) that a director who resigns after discovering that another director may be committing breaches of duty, may still incur liability if the director fails either to deal with the issue before resigning or to alert other members of the board to the issue or, exceptionally, if not satisfied that other directors will deal with it, to alert the company’s shareholders.

2(g) The no conflict and no profit rules 4.118 Sections 175–177  CA  2006 address two fiduciary obligations of fundamental importance: (a) that a fiduciary must not place himself in a position where his duty and his interest may conflict (‘the no conflict rule’); and (b) that a fiduciary may not retain a secret profit from the fiduciary position (‘the no profit rule’). It has been argued that these are the central fiduciary duties, proscribing self-interested conduct and thereby serving the role of protecting against breach of other, primary, obligations (such as obligations owed under a contract of employment): see eg Conaglen, ‘The Nature and Function of Fiduciary Loyalty’ (2005)  LQR  452. In the following sections we consider first how these rules had been developed prior to the CA 2006. We then turn to the specific statutory provisions and the extent to which they reflect or may be regarded as departing from the position apart from the CA 2006. 2(g)(i) The no conflict rule 4.119 The no conflict rule is the general principle that no fiduciary ‘shall be allowed to enter into engagements in which he has, or can have, a personal 156

Scope of fiduciary duties 4.122

interest (or an interest in another fiduciary capacity owed to another company) conflicting, or which may possibly conflict, with the interests of those whom he is bound to protect’ (per Lord Cransworth LC in Aberdeen Railway Co Blaikie (1854) 1 Macq 461 at page 471). After citing this principle, Lord Upjohn in Boardman v Phipps [1967] 2 AC 46 (at page 124) explained that: ‘The phrase “possibly may conflict” requires consideration. In my view it means that the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict; not that you could imagine some situation arising which might, in some conceivable possibility in events not contemplated as real sensible possibilities by any reasonable person, result in conflict.’

4.120  The no conflict rule therefore encompasses both an actual and a potential conflict of interest. In Airbus Operations Ltd v Withey [2014] EWHC 1126 it was argued that in relation to employees who owe fiduciary duties, but who are not directors, the duty is restricted to avoidance of an actual conflict of interest since there is no provision akin to section 1157 CA 2006 (see 4.219–4.225) excusing a breach of duty. The argument was rejected (at paragraphs 129–131). 4.121  The applicable principles were summarised in Quarter Master UK Limited v Pyke [2004] EWHC 1815 (Ch D, Paul Morgan QC) at paragraph 55 as follows: ‘A director, as a fiduciary, must not without the authority of the company, place himself in a position where his personal interests (or indeed his interest in another fiduciary capacity owed to another company) conflict or possibly may conflict with his fiduciary duty to protect the company. If he is in a position where his interests conflict with those of the company, he is obliged to prefer the interests of the company. There must be a real, sensible possibility of conflict. If, in breach of this duty, he enters into a transaction or other engagement on his own account, thereby preferring his own interest to that of the company, he is not permitted to retain the profit, to the extent that it is made within the scope and ambit of the duty which conflicts or may conflict with his personal interests (or his interests in another fiduciary capacity). It is not because he has made a profit from trust property or a profit from his fiduciary position that the director is liable under the conflict rule. Rather, it is because, being in a fiduciary position, he has entered into a transaction, inconsistent with his fiduciary duty of loyalty to the company, which has yielded the profit and he has thereby misused his position. The opportunity to make the profit may not arise from the director’s fiduciary position; he might just as well have had the opportunity if he had not been in that position but even so, his liability in respect of the profit arises because of the conflict of interest. In many cases, where the conflict rule applies, the director will also have taken advantage of the property of the company or of his fiduciary position but this will not always be so.’

4.122  Where the test of a ‘real sensible possibility of conflict’ is satisfied, it is no defence that the fiduciary acted honestly or in good faith in what was believed to be the best interests of the principal or that the fiduciary did not himself make a profit, or that the dealings giving rise to the conflict were on fair terms or that the principal could not itself have taken advantage of the opportunities seized by the third party: see eg Breitenfeld UK Ltd v Harrison [2015] 2 BCLC 275 at 157

4.123  Employee fiduciary duties

paragraphs 69–73; Richmond Pharmacology Ltd v Chester Overseas Ltd [2014] Bus LR 1110 at paragraphs 71–72. The rule applies even where the fiduciary’s breach is calculated to benefit and does benefit the person to whom the duty is owed: Phipps v Boardman [1967] 2 AC 46; Richmond Pharmacology Ltd v Chester Overseas Ltd [2014] Bus LR 1110 at paragraph 71. 4.123  In order to obtain the authority of the principal, it is necessary to show not only that the principal has consented, but also that consent was given on a fully informed basis: see Hurstanger Limited v Wilson [2007] 1 WLR  2351 (CA) per Tuckey LJ at paragraph 35; Rosetti Marketing Limited v Diamond Sofa Co. Limited [2013] Bus LR 543 (CA) per Lord Neuberger MR at paragraph 22. A breach is not avoided merely by giving information sufficient to put the principal on enquiry. Nor is it a defence that consent would have been given if full disclosure had been made if that did not in fact occur. The requirements for fully informed consent are considered further at 4.151–4.155. See also the discussion of F& C Alternative Investment (Holdings) Ltd v Barthelemy, at 4.82–4.85, where in considering the fiduciary duties owed by members of the governing bodies of an LLP, the court took into account that they included representatives of the corporate member, who would have in mind the interests of the corporate member when participating in business decisions, and that as such there was implicitly informed consent to this conflict of interest. 4.124  One area of some controversy has concerned whether it is permissible for a director to take up a directorship of a competing company. The decision in London and Mashonaland Exploration Co. Ltd v New Mashonaland Exploration Co Ltd [1891] WN 165 has been treated as authority that there is no rigid rule that a director may not be involved in the business of a company of which he was a director: see In Plus Group Ltd v Pyke [2002] 2 BCLC 201 (CA) per Brooke LJ [72]–[75], per Sedley LJ at paragraph 79. In Mashonaland, Chitty J refused an injunction to prevent Lord Mayo, who was a director and chairman of the claimant company, serving as a director of a competing company (because he had been excluded from its management), and Chitty J emphasised that there was no evidence of any misuse of information. The decision was cited with approval by Lord Blanesburgh in Bell v Lever Bros [1932] AC 161 at 193–196, but other members of the House of Lords, agreeing in the result, did not endorse the reasoning in Mashonaland. 4.125  The decision in Mashonaland is difficult to reconcile with the constraint on a director having a conflicting interest or duty. It is more likely that it will be confined to its facts, or limited to circumstances in which the director has been excluded from or ceased in practice to carry out duties of a director for one of the companies, so that the purpose served by the restriction on a conflict of interest or duty has ceased to apply: see the discussion in 4.207–4.218. In In Plus Group Limited v Pyke [2002] 2 BCLC 201 (CA), the majority of the Court considered it was not necessary to express a view on whether Marshonaland was rightly decided because on the facts of In Plus Group no conflict arose because the defendant had been excluded from his directorial role. However, Sedley LJ noted the substantial academic criticism of the decision. He expressed the view 158

Scope of fiduciary duties 4.128

(at paragraph 84) that ‘the Marshonaland principle is a very limited one since ordinarily taking up such a role with a competing company will entail a conflict of interest or duty’. Sedley LJ proceeded to emphasise, at paragraph 88, that the decision in Mashonaland should not be treated as a ‘licence for directors or other fiduciaries to put themselves or stay put in situations where their duties and/or interests can come into conflict’. 4.126 In Commonwealth Oil & Gas Co Ltd v Baxter [2009]  CSIH) 75 (CS), Lord Hamilton noted (at paragraph 5) that at least as a matter of Scottish law, the decision in Mashonaland was not binding, and in any event concluded that he would not regard it as other than a decision on its own facts and therefore of limited value on any matter of principle. Lord Nimmo Smith (at paragraphs 75–79), in reasoning that was not specific to Scottish law, also treated the decision as a very narrow one, since the key question in each case would be whether there was (objectively) a real sensible possibility of conflict. As he noted, that was illustrated by the approach in Meyer v Scottish Co-Operative Wholesale Society Ltd [1959] AC 324 (HL), where Lord Denning (at pages 366–367) considered that directors of a textile company who were nominees (and directors) of the co-operative society, were in breach of duty by continuing their association with the co-operative society when it set up its own rayon department. 4.127  We suggest that the approach advanced by Lord Nimmo-Smith is correct. This is to consider whether taking up a directorship with a competitor (whether viewed by itself or together with other steps taken by the director) could objectively give rise to a real sensible conflict of interest or duty. Viewed in that light the decision in Mashonaland is best regarded as one on its particular (and not very fully reported) facts. Indeed that is reinforced by the wording of section 175 CA 2006 (4.137), even allowing for the fact that by virtue of section 170(4) (4.93) it is to be construed and applied in accordance with the common law and equitable principles. Hart J  suggested in British Midland Tool Ltd v Midland International Tooling and others [2003] EWHC 466 (at paragraph 82) that the decision stands for the ‘limited proposition’ that ‘there is nothing inherently objectionable in the position of a company director who, in the absence of contractual restraints or disclosing confidential information, becomes engaged either personally as a director of another company in a competing business’. However, whether or not that is right in principle, in practice it will rarely be the case that taking up such a directorship of a competing company will be possible without leading to a conflict of interest, other than on the basis of fully informed consent or where the director has been excluded from a directorial role with one of the companies. 4.128  By way of exception to the usual position that it will ordinarily be a breach of duty for a director or agent to act for a competitor unless fully informed consent has been obtained, this does not apply where the principal must have appreciated that the nature of the agent’s business is to act for other competing principals. This applies to estate agents, but in Rosetti Marketing Limited v Diamond Sofa Co Limited [2013] Bus LR 543 (CA) the Court of Appeal stated that the exception should not be extended to other cases of agency in the absence of clear evidence 159

4.129  Employee fiduciary duties

to support such an extension: per Lord Neuberger MR at paragraph 27, giving the only substantive judgment. In Rosetti the court rejected an argument that the estate agency exception should be extended to cover an agency for promoting, placing and selling of furniture in Great Britain, since there was no evidential basis made out that the agency could not operate if the ordinary conflict rules applied. See also Northampton Regional Livestock Centre Co Limited v Cowling [2014]  EWHC  30 where it was noted (at paragraph  187) that ‘any argument promoting the extension of the inapplicability of the normal fiduciary obligations would need to be very cogently justified with strong evidence’. 2(g)(ii) The no profit rule 4.129  The no profit rule prohibits a fiduciary from retaining a benefit resulting from the fiduciary position where consent has not been obtained, following full disclosure, from the person or (in the case of a director) company to whom the duty is owed. This applies whether the profit is made directly or indirectly from the use of the property of the company, or is made in the course of the fiduciary relationship and by reason of the fiduciary position. 4.130  The principle applies irrespective of whether or not the fiduciary acted in good or bad faith. To this end, in Regal (Hastings) Limited v Gulliver [1967] AC 134 (HL) at page 144G Lord Russell of Killowen referred to: ‘The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides … The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account.’

4.131 In Murad and Murad v Al-Saraj and Westwood Business Inc [2005]  EWCA  Civ 959 (CA), Arden LJ (at paragraph  83) commented that it may be appropriate for a higher court to revisit the inflexible rule on accounting for secret profits so as to make it ‘proportionate to the justice of the case’. In Wrexham Association Football Club Limited v Crucialmove (2007) BCC 139 (CA), Peter Gibson LJ (at paragraph 51) commented that he could not see how the rule could be tempered by any court below the House of Lords. However, without detracting from the fact that the secret profit is unlawful, it may be that considerations of proportionality could lead to refusing the remedy of an account of profits, rather than damages: see 16.48; Ultraframe (UK) Limited v Fielding [2005] EWHC 1638 per Lewison J (at paragraphs 1579–1580); Satnam Investments Limited v Dunlop Heywood [1999] 3 All ER 652 (CA). 4.132 The principle applies irrespective of whether the making of the profit entailed skill and risk on the part of the fiduciary (eg Regal (Hastings) Limited v Gulliver [1967] AC 134 (HL)). 4.133  It is no answer that the profit would or could not have been obtained by the principal (Regal (Hastings) Limited v Gulliver [1967] AC 134 (HL); Industrial Development Consultants Limited v Cooley [1972] 1  WLR  443; Wrexham 160

Scope of fiduciary duties 4.137

Association Football Club Limited v Crucialmove Limited (2007) BCC 139 (CA) at paragraph 40 per Sir Peter Gibson). However, as discussed further below (at 4.162–4.172) in relation to corporate opportunities, this is subject, (particularly in relation to opportunities which come to the fiduciary in a private capacity) to whether there could be a realistic sensible conflict or potential conflict of interest. 4.134 The principle also applies irrespective of whether the principal suffers any loss or is otherwise prejudiced or might even have benefited from the transaction: Regal (Hastings) Limited v Gulliver [1967] AC 134 (HL); Gwembe Valley Development v Koshy (No 3) [2004] 1 BCLC 131 at paragraphs 44–45). Nor is it any defence that if full disclosure had been made, the principal would have consented to the transaction: Murad and Murad v Al-Saraj and Westwood Business Inc [2005] EWCA Civ 959 (CA) at paragraph 71 per Arden LJ and at paragraph 130 per Clarke LJ. 4.135  In the absence of full disclosure, the secret profit belongs in equity to the company: Gwembe Valley Development v Koshy (No 3) [2004] 1 BCLC 131 at paragraph  44; FHR  European Ventures LLP  v Cedar Capital Partners LLP [2015] AC 250 (SC). 4.136  See generally in relation to these principles Keech v Sandford (1726) Cas temp King 61; Regal (Hastings) Limited v Gulliver [1967] 2 AC 134n; Boardman v Phipps [1967] 2 AC 46; CMS Dolphin Limited v Simonet [2001] 2 BCLC 704; Bhullar v Bhullar [2003] 2  BCLC  241; Quarter Master UK  Limited v Pyke [2005] 1 BCLC 245 at paragraphs 54 and 56; Ultraframe (UK) Limited v Fielding [2005]  EWHC  1638 at paragraphs 1318–1325 per Lewison J; FHR  European Ventures LLP v Cedar Capital Partners LLP [2015] AC 250 (SC).

2(g)(iii)  Sections 175–177, 182 Companies Act 2006 4.137  Section 175 CA 2006 provides: ‘175  Duty to avoid conflicts of interest (1)

A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.

(2)

This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity).

(3)

This duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company.

(4)

This duty is not infringed— (a) if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest; or (b) if the matter has been authorised by the directors. 161

4.138  Employee fiduciary duties

(5)

Authorisation may be given by the directors— (a) where the company is a private company and nothing in the company’s constitution invalidates such authorisation, by the matter being proposed to and authorised by the directors; or (b) where the company is a public company and its constitution includes provision enabling the directors to authorise the matter, by the matter being proposed to and authorised by them in accordance with the constitution.

(6)

The authorisation is effective only if— (a) any requirement as to the quorum at the meeting at which the matter is considered is met without counting the director in question or any other interested director, and (b) the matter was agreed to without their voting or would have been agreed to if their votes had not been counted.

(7)

Any reference in this section to a conflict of interest includes a conflict of interest and duty and a conflict of duties.’

4.138  Section 175 CA 2006 deals with conflicts other than those arising in relation to dealings with the company. Conflicts of interest in relation to dealing with the company are addressed in sections 177 and 182. Section 177 sets out an obligation to declare both the nature and extent of any interest of a director in a proposed transaction or arrangement with the company (provided that the director is aware of the interest and the proposed transaction), and to make a further declaration if what was previously declared becomes inaccurate or incomplete. (Section 182 sets out an equivalent obligation in relation to an existing arrangement or transaction.) The declaration in relation to a proposed transaction must be made in advance of the company entering into the transaction, and in relation to an existing transaction must be made as soon as reasonably practicable. The director need not declare an interest if it cannot reasonably be regarded as giving rise to a conflict of interest or to the extent that the other directors are already aware of it (which includes anything of which they ought reasonably to be aware) or, in relation to terms of a service contract that has been considered by a meeting of directors or a committee of directors appointed for that purpose under the company’s constitution (sections 177(6), 182(6) CA 2006). Nor need there be a declaration under section182, if it has already been made under section 177 unless the declaration has become inaccurate or incomplete (section 182(1), (2) CA 2006). 4.139  Section 176 concerns the obligation not to accept benefits from third parties. It provides as follows: ‘176  Duty not to accept benefits from third parties (1) A  director of a company must not accept a benefit from a third party conferred by reason of— (a) his being a director, or (b) his doing (or not doing) anything as director. 162

Scope of fiduciary duties 4.140

(2)

A  “third party” means a person other than the company, an associated body corporate or a person acting on behalf of the company or an associated body corporate.

(3)

Benefits received by a director from a person by whom his services (as a director or otherwise) are provided to the company are not regarded as conferred by a third party.

(4)

This duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

(5)

Any reference in this section to a conflict of interest includes a conflict of interest and duty and a conflict of duties.’

4.140  Sections 175 and 176 encompass broadly three types of conflict that may arise: (1) A conflict of duty and duty (ie conflict between the director’s duty to the company and the director’s duty to someone else: sections 175(7), 176(5)). (2) A conflict of duty and interest (ie conflict between the director’s duty to the company and another interest of the director: sections 175(7), 176(5)). (3) A conflict of interest of the director and interest of the company: section 175(1). The first and second categories are uncontroversial and familiar. The fiduciary duty may be regarded as ‘prophylactic’ in the sense that it serves to help secure performance of other fiduciary or non-fiduciary duties by insulating the fiduciary from influences that may distract from proper performance. The third category is more problematic. Where there is no (real or sensible) conflict with any duty of the director, fiduciary duties cease to have any prophylactic role. In the paradigm case of a current director, that is unlikely to be important since directors are to be regarded as in a position akin to a ‘general trusteeship’ and have a responsibility for the business of the company as a whole: see O’Donnell v Shanahan [2009] BCC 822 (CA), per Rimer LJ at paragraph 69 (see further 4.164) and First Subsea Ltd v Balltec [2017] 3 WLR 896 (CA)). (For criticism of this approach, see eg  Lim, ‘Directors’ Fiduciary Duties: A  New Analytical Framework’ (2013) 129 LQR 242.) The application of the constraint of a conflict of interest and interest becomes potentially more problematic in cases where a director is in practice excluded in whole or in part from carrying out directorial duties, whether before the directorship ends or (to the extent that the conflict duty continues, as provided for in section 170(2) CA 2006) after the relationship has ended (4.263–4.298). The approach prior to the CA 2006 coming into force was premised on the constraint on conflicts applying only to a conflict of duty and interest or duty and duty. As such where a director was excluded from carrying out his or her duty, no conflict arose: In Plus Group Ltd v Pyke [2002] 2  BCLC  201 (CA). The issue then arises as to whether the CA  2006 is to be taken as effecting a substantive change in the law, or whether, notwithstanding the reference to a conflict of interest and interest (in section 175(1) CA 2006), by virtue of section 170(4), the restrictions are to be construed consistently with the pre-existing law. We address that issue at 4.207–4.218. 163

4.141  Employee fiduciary duties

4.141  Consistently with the pre-Act position (see eg Bhullar v Bhullar [2003] 2 BCLC 241 (CA)), section 175 covers both actual and potential conflicts, unless the situation cannot reasonably be regarded as likely to give rise to a conflict of interest or has been authorised by the directors. However, the approach taken is to treat the no profit rule as an aspect of the no conflict rule. The restriction in section 175(2) on exploitation of property or information or opportunities received from third parties, is treated as an aspect of the conflict of interest provisions in section 175. This differs from the position taken in some decisions, prior to the CA 2006 coming into force, where instead it has been emphasised that the no profit and no conflict rules overlap but are distinct. To this end in Don King Productions Inc v Warren [2000] Ch 291 (CA) Morritt LJ approved the following statement of Deane J in Chan v Zacharia (1984) 154 CLR 178: ‘Notwithstanding authoritative statements to the effect that the “use of fiduciary position” doctrine is but an illustration or part of a wider “conflict of interest and duty” doctrine (see eg, Phipps v Boardman [1967] 2 AC 46, 123; NZ Netherlands Society “Oranje” Inc v Kuys [1973] 1 WLR 1126, 1129), the two themes, while overlapping, are distinct. Neither theme fully comprehends the other and a formulation of the principle by reference to one only of them will be incomplete. Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it. Any such benefit or gain is held by the fiduciary as constructive trustee …’

4.142  As reflected in this passage, the position prior to the CA 2006 was therefore that, without the need for further consideration as to whether there was also a conflict of interests, the no profit rule could be triggered where a profit was obtained by reason of the fiduciary position. It would therefore be no answer that the employer company would or could not in practice have taken up the opportunity, even where it is clear that it could not have afforded to do so. In Regal (Hastings) v Gulliver [1967] 2 AC  134 (HL), the employing company, Regal, sought to acquire the lease of two cinemas. A  subsidiary company (Amalgamated) was formed for that purpose. Regal could not afford the full price for the purchase of the leases, so the balance was contributed by directors of Regal, who therefore became shareholders in Amalgamated pro rata to their contribution to the purchase price. They were found to be liable for the profits made on the shares, having come across the opportunity to obtain the shares in Amalgamated by virtue of their directorship. This was notwithstanding that the employing company could not otherwise have proceeded with the transaction, owing to lack of funds. 4.143  Having regard to the terms of sections 175(4)(a) and 176(4)  CA  2006, the issue arises as to the circumstances in which it might be said that the situation (section 175(4)(a)), or receipt of the benefit (for section 176(4)), could 164

Scope of fiduciary duties 4.145

not reasonably be regarded as giving rise to a conflict of interest. The same issue is liable to arise for non-director employees, since it is most unlikely that non-director employees would be held to a higher standard than directors. We consider this further in relation to the following sub-category of cases: (1) Exploitation of business opportunities (or receipt of benefits) during the employment relationship/directorship (other than cases of exclusion from management) (4.158–4.172). (2) Preparation for competition (4.173–4.206). (3) Exclusion from management/garden leave (4.207–4.218). (4) Duties of disclosure (being an obligation which, if it arises, applies prior to termination of the relationship under section 172 CA 2006 or its common law/equitable equivalent) (4.226–4.262). (5) Post-termination exploitation of property, information or opportunities (4.263–4.298). The risk of a breach arising from an actual or potential conflict of interest may be avoided by securing authorisation, and it is therefore relevant to turn to that issue first. 2(g)(iv)  Authorisation and informed consent 4.144  If there is a conflict of interest, in relation to a public company the matter may be authorised either: (1) by the directors, pursuant to section 175(4), (5) CA 2006, but only if this is given in advance (though this does not cover acceptance of benefits from a third party within section 176 CA 2006); or (2) in relation to an interest in a transaction or proposed transaction with the company, by a declaration of the nature and extent of the interest under section 177 or section 182 CA 2006; or (3) by authorisation or consent by the shareholders in a general meeting or informal unanimous consent of the shareholders, whether before or after the event (section 239(6) CA 2006); (4) by ratification, as to which see 4.95–4.98. 4.145  Where the section 175 CA 2006 duty is complied with by authorisation of directors, or in relation to section 177 (concerning the director’s dealings with the company) where the requisite declaration of interest is made, the transaction or arrangement in question is not liable to be set aside by any common law or equitable principles requiring consent or approval of shareholders (section 180(1)). However, this does not detract from the requirement for shareholder approval which applies to certain transactions, specified in Chapter 4 of Part 10 CA 2006 (sections 180(3); 188–226)). 165

4.146  Employee fiduciary duties

4.146  Section 175 CA 2006 provides that there is no infringement of the duty to avoid a conflict under that provision if the matter has been authorised in advance by the directors. In relation to a public company, authorisation can be given by the directors if this is provided for in the company’s constitution: sections 175 and 180(1)  CA  2006. In relation to a private company the default position is that authorisation may be given by the directors (section 175(5)(a) CA 2006). This is a change from the position prior to the CA 2006, although in many cases the articles would provide for disclosure to the board: see eg  Gwembe Valley Development Co Limited v Koshy [2004] 1  BCLC  131 (CA) at paragraph  65; Re LCM Wealth Management Limited [2013] EWHC 3957 at paragraph 192(1). 4.147 Section 175(6) sets out the minimum requirements for authorisation. Thus, authorisation is effective only if the quorum is met without counting any interested directors and is either agreed to without their votes or would have been agreed to if their votes had not counted. This mechanism therefore cannot apply where there is a sole director: see eg  Goldtrail Travel Limited v Aydin [2015] 1 BCLC 89. Further, as Hildyard J explained in Re LCM Wealth Management Limited [2013] EWHC 3957 (at paragraph 192(4)), section 175 does not contemplate a general declaration of interest, but only authorisation of an identified situation. As such the opportunity giving rise to the actual or potential conflict must be particularised. 4.148  Authorisation can only be given under section 175 if it has been given in advance of exploitation of the property, information or opportunity. Subsequent ratification requires fully informed consent of the shareholders: Re LCM Wealth Management at paragraph 192(2). There can also be pre-authorisation by shareholders for a director exploiting opportunities for personal gain if the shareholders, with knowledge of the relevant facts, consented to the director doing so. 4.149 Shareholder consent may be given by way of acquiescence. However, consent cannot be inferred from silence unless: (a) the shareholders knew that consent was required, or (b) the circumstances are such that it would be unconscionable for the shareholders to remain silent at the time but object later: Sharma v Sharma [2014] BCC 73 (CA). 4.150 As noted at 4.95, as an alternative to approval by resolution in a general meeting, shareholder approval can be provided if all shareholders with the right to attend and vote at a general meeting assented to the matter provided that they: (a) have full knowledge of the relevant facts, (b) agree to (or acquiesce in) the conduct (rather than merely have knowledge of it), and (c) that the approval is unanimous. Equally if the matter can be authorised by the directors then it is sufficient if it can be shown that all directors unanimously assented to the conduct (and the same conditions apply): see Bhullar v Bhullar [2017] EWHC 407 (Ch) at paragraph 98. 4.151  To be effective, consent must therefore be fully informed. So far as concerns section 175 this is not expressly stated, but it follows from the requirement under section 170(4) to interpret and apply the duties consistently with common law and equitable principles: see eg Killen v Horseworld Ltd [2012] EWHC 363 166

Scope of fiduciary duties 4.154

at paragraph 77. Information must be disclosed if it may have affected the principal’s consent: Global Energy Horizons Corp v Gray [2012] EWHC 3703 at paragraphs 393–395. However, it is not necessary for the shareholders to be aware of the legal incidents which follow from the relevant facts, such as that the proposed transaction would involve a breach of fiduciary duty: Sharma at paragraph 52. Whilst authorisation after partial disclosure is not effective to negate a fiduciary duty, it may be effective to avoid the special remedies for bribes by negating the secrecy in the payment or benefit: Hurstanger Ltd v Wilson [2007] 1 WLR 2351 (CA) at paragraph 38. 4.152  Disclosure is required of the nature of the interest, not merely its existence. This was starkly illustrated in Global Energy Horizons Corp v Gray [2012]  EWHC  3703. The defendant, Mr Gray, was subject to fiduciary duties to the claimant arising from his role in working for it to pursue an interest in a business utilising technology to increase the production of under-performing oil wells. He subsequently also acted for an investor who also sought an interest in the business, and whose interest competed with that of the claimant. Mr Gray disclosed that he was advising that investor. He did not until later disclose that the investor’s interests would be opposed to those of the claimant, and when this was finally made clear there was no consent to this. Accordingly there was no fully informed consent to the conflict of interest. 4.153 Again in Pennyfeathers Limited v Pennyfeathers Property Co Limited [2013] EWHC 3530, there was a failure to meet the rigours needed for informed consent. The defendants were directors of a company that was a vehicle for purchasing a farm for development. In advance of an anticipated buy-out of the company, they set up their own company and took steps to purchase the land for it. There was therefore an obvious conflict of interest. It was disclosed to the other directors that they were in discussions with the owners of the land but not that they were in the process of seeking to acquire the opportunity for themselves. There was no agreement or acquiescence to them doing so. 4.154  The requirements for fully informed consent were further illustrated by the decision in Northampton Regional Livestock Centre Co Limited v Cowling [2016] 1 BCLC 431. One of the defendants, Mr Lawrence, was a partner in a firm (MCL) which had been engaged to market the claimant’s property. His partner in MCL, Mr Cowling, was also a director and shareholder in the claimant company. The property was ultimately sold to E  Limited, and a few months later there was a further sale by E Limited at a very substantial profit. At the same time as MCL was acting for the claimant, Mr Lawrence had agreed to act for E Limited on terms that included payment of a third of any profit made on the sale. Mr Lawrence owed the claimant fiduciary duties as a partner in the firm acting as the claimant’s agents. There was an obvious conflict of interest on Mr Lawrence’s part in acting for the claimant company whilst also acting for a prospective purchaser (E Limited). He made what was found to be only partial disclosure in relation to this. He disclosed that he was acting for E Limited. He did not, however, disclose the terms of his retainer, including the very valuable provision to be paid a share of the profit on sale. Mr Cowling did not ask about this, but this 167

4.155  Employee fiduciary duties

provided no defence as the obligation was on Mr Lawrence to disclose, rather than on Mr Cowling to enquire. It is not always necessary to disclose the level of remuneration, which may be assumed to be on normal or standard commercial terms (see at paragraph 188 and also Global Energy Horizons at paragraphs 394 and 509). However, that plainly had no application to the large fee to be paid for an onward sale. 4.155  At first instance it was found that there was also a failure to provide full information in that there was no disclosure that Mr Lawrence had provided to E Limited confidential commercial information of the claimant which he had in his possession through acting as agent for the claimant. On appeal, the Court of Appeal accepted that there was no sufficient basis for finding a breach of duty to the claimant in respect of the information imparted to E Limited, as it was information which was bound to be communicated to intended purchasers in any event. However, this did not affect the conclusion as to failure to make adequate disclosure of the conflict of interest. 4.156  In relation to the duty not to accept benefits from third parties under section 176 CA 2006, there is no provision for authorisation by the board of directors. However, a company’s articles may still make provision for authorisation by the board (section 232(4)), or consent may be given by the shareholders (sections 180(4) and 239). 4.157  In the following sections we consider further specific aspects of the application of the principles set out at 4.103–4.113 and 4.118–4.143 which are material to employee competition and outside business interests.

2(h) Exploitation of business opportunities during the employment relationship/directorship 4.158 The duty of a director not to divert a corporate opportunity unless authorised following full disclosure arises both from the no profit rule and from the no conflict rule, and may breach both sections 175 and 176 CA 2006 (see also Ultraframe (UK) Limited v Fielding [2005]  EWHC  1638 at paragraphs 1332–1356 where Lewison J analysed whether various decisions in relation to corporate opportunity had focused on the no conflicts or no profits rule). The issues may conveniently be considered under the following headings: (1) opportunities coming to the director/employee in his/her fiduciary capacity; (2) opportunities which come to the director/employee in a private capacity; (3) opportunities coming to the director/employer in either capacity but which the director/employee would not or could not exploit. Different considerations may arise where the director/employee has been excluded from management or post-termination of the directorship or of employment, which we consider separately at 4.207–4.218. 168

Scope of fiduciary duties 4.160

2(h)(i)  Opportunity coming to director/employee in fiduciary capacity 4.159  Ordinarily there is little difficulty in identifying a conflict of interest where an opportunity comes to a director (or employee owing relevant fiduciary obligations) by virtue of their position which he then exploits, without authorisation by the employer. The conflict of interest arises from the fact of profiting from their own position. Indeed, in some of the speeches in Regal (Hastings) v Gulliver [1967] 2 AC 134 (pages 137G and 139G per Viscount Sankey and page 154G per Lord Wright) emphasis was placed on the conflict of interest which arose by reason of the directors framing resolutions from which they benefited personally, notwithstanding that the company also benefited and could not otherwise have done so. The approach now set out in the CA 2006 in effect adopts the view of the no profit rule as arising out of the no conflict rule as explained by Mummery LJ in Gwembe Valley Development Co Limited v Koshy [2004] 1 BCLC 131 (CA), at paragraph 44 (adopting dicta of Court of Australia in Furs Ltd v Tomkies (1936) 54 CLR 583 at page 592): ‘An undisclosed profit which a director so derives from the execution of his fiduciary duties belongs in equity to the company. It is no answer to the application of the rule that the profit is of a kind which the company itself could not have obtained, or that no loss is caused to the company by the gain of the director. It is a principle resting upon the impossibility of allowing the conflict of duty and interest which is involved in the pursuit of private advantage in the course of dealing in a fiduciary capacity with the affairs of the company. If, when it is his duty to safeguard and further the interests of the company, he uses the occasion as a means of profit to himself, he raises an opposition between the duty he has undertaken and his own self-interest, beyond which it is neither wise nor practicable for the law to look for a criterion of liability. The consequences of such a conflict are not discoverable. Both justice and policy are against their investigation.’

4.160  The strict nature of the rule where fiduciaries profit from their position was reiterated by the Court of Appeal in Towers v Premier Waste Management Limited [2012] IRLR 73. Although the breach of fiduciary duty took place prior to the CA 2006 coming into force, the Court proceeded on the basis that it was relevant to consider the terms in which the general statutory duties were framed. Mr Towers was managing director of the claimant company. At the suggestion of the company’s Operations Director, a customer of the company loaned Mr Trowers a truck and digger, which Mr Trowers used in the renovation of a farm house which he owned with his wife. He made no disclosure of this to the company. He only used the equipment for a period of six months, but did not return it, on the understanding that the customer did not require him to do so. After he had left the company on bad terms, the company was invoiced by the customer for the use of the machines. The company then successfully claimed against Mr Trowers for his breach of fiduciary duty in taking a free loan of the equipment and he was ordered to pay £5,200 plus interest. It was argued on his behalf that the value of the loan was negligible, that it had been arranged by another employee rather than Mr Trowers, that the equipment was in poor condition and could not have been loaned out elsewhere and that there was no evidence that Mr Trowers 169

4.161  Employee fiduciary duties

would have loaned other equipment if he had not been provided with the equipment by the customer. As explained in the Court of Appeal by Mummery LJ (at paragraphs 48 and 51), these arguments missed the point that there had been a breach of the no conflict duty, encompassing the duty not to make a secret profit. These duties applied without needing any evidence that the company would have taken the opportunity or whether it had suffered any loss or whether the director or customer had any corrupt motive and irrespective of the value of the benefit. The very fact of depriving the employer of the opportunity to raise an objection to the director taking personal advantage of the opportunity offered by one of its customers gave rise to a conflict and breach of fiduciary duty. 2(h)(ii) Opportunity coming to employee/director’s attention other than in fiduciary capacity 4.161  By reason of the no conflict rule, an obligation may arise not to exploit an opportunity without authority, even where information as to the opportunity comes to the attention of the director (or other fiduciary) other than in the course of acting on behalf of the company, and where there is no question of using the position as a director or any company information or of there being an opportunity belonging to the company. This was the situation in Bhullar v Bhullar [2003] 2 BCLC 241 (CA). The issue arose in the context of an unfair prejudice petition relating to a company owned by two families. The objects of the company included the acquisition of property for investment. The relationship between the families broke down and it was made clear by one side that they did not wish any further properties to be acquired. Two of the directors then discovered by chance that a property, situated next to an existing investment property of the company, was on the market. They arranged for a private purchase of the property. The property was not acquired in the course of their management of the business and could not be regarded as an emerging business opportunity of the company, in that the family company had not at any time been negotiating for its purchase. Nevertheless, given that it was admitted that it would have been worthwhile for the family company to have the property, and it was adjacent to the company’s existing property, there was a potential conflict of interest. The test to be applied was whether the reasonable man, looking at the relevant facts and circumstances, would think there was a ‘real sensible possibility of conflict’. In substance this equates with the test under section 175(4) (a) and section 176(4) of whether the situation, or the acceptance of a benefit, cannot reasonably be regarded as likely to give rise to a conflict of interest. That is to be distinguished from situations which might result in a conflict only in some conceivable possibility not contemplated as a sensible possibility by any reasonable person: Boardman v Phipps [1967] 2  AC  46 per Lord Upjohn at paragraph 124. 2(h)(iii)  Opportunity that employer would not or could not exploit 4.162  Generally, it is no answer that the company/employer could not in practice have taken up the opportunity. However, in relation to the obligation of a 170

Scope of fiduciary duties 4.164

partner it is relevant to have regard to the scope of the employer’s business: Aas v Benham [1891] 2 Ch  244 (CA). Again, in relation to the scope of fiduciary duties owed by an employee who is not a director it is relevant to have regard to this and the scope of the employee’s duties: University of Nottingham v Fishel [2000] ICR 1462; Ranson v Customer Systems Plc [2012] IRLR 769. In relation to the position prior to the CA 2006, in O’Donnell v Shanahan [2009] BCC 822, the Court of Appeal concluded that the position is different in relation to a director, at least where the director learns of the opportunity in the course of being a director of the company. Consistently with this, section 175(2) CA 2006 provides that it is immaterial whether the company could have taken advantage of the opportunity (or property or information). We address these differing situations further below. Partners 4.163 In Aas v Benham [1891] 2 Ch 244 (CA), the defendant was a partner in a ship-broking firm. He was approached for advice by a ship-building company. As a result of information he received whilst acting on behalf of the ship-broking firm, he realised that it would be advantageous for the ship-building company to become a builder of warships and to acquire for this purpose a yard which he discovered was available in Bilbao. He wrote a prospectus in relation to this for the ship-building company and made profits out of the project. The Court of Appeal determined that since it was no part of the business of the ship-broking firm to advise on corporate reconstructions or to build ships, the partner had no fiduciary duty to his partners which prevented him making use of the information as he did, even though he had learnt it whilst on the firm’s business. Directors 4.164 In O’Donnell the Court of Appeal distinguished Aas on the basis that it concerned fiduciary duties owed by a partner whose duties were circumscribed by the contract of partnership. The nature of the partnership business was expressly limited by the terms of the partnership agreement. Rimer LJ, giving the only substantive judgment, emphasised (at paragraph 68) that the duties of a director are not similarly circumscribed by the terms of a contract. In particular, on the facts in that case the scope of the company’s business was in no relevant manner restricted by its constitution. The defendants had pursued an opportunity in relation to property investment which had come to their attention in their capacity as directors of the company. At first instance it had been found that this was permissible as the company’s business was essentially the provision of financial and business advice and assistance and there was found to be no realistic prospect that the company would have diversified into property investment. However, as the Court of Appeal noted in allowing the appeal, it was fully open to the directors to pursue property investment if they so chose. Indeed the opportunity came to their attention in the course of the company acting in an estate agency capacity which was itself a diversification of its business. If the defendants wished to pursue the private venture, they needed to obtain the company’s informed consent. As Rimer LJ explained (at paragraph 70): 171

4.165  Employee fiduciary duties

‘The statements of principle in the authorities about directors’ fiduciary duties make it clear that any inquiry as to whether the company could, would or might have taken up the opportunity itself is irrelevant; so also, therefore, must be a “scope of business” inquiry. The point is that the existence of the opportunity is one that it is relevant for the company to know and of which the director has a duty to inform it. It is not for the director to make his own decision that the company will not be interested and to proceed, without more, to appropriate the opportunity for himself. His duty is one of undivided loyalty and this is one manifestation of how that duty is required to be discharged.’

4.165  The decision in O’Donnell was followed in a post-CA  2006 context in Invideous Limited v Thorogood [2013] EWHC 3015. The claimant company’s business, broadly, concerned monetising video content on the internet. Whilst he was still a director of Invideous, the defendant set up another company with an employee of a wholly owned subsidiary of Invideous and worked on a project to provide a product for a media company, Technicolour. Unsurprisingly, Rose J concluded that this was a breach both of his duty of fidelity and his fiduciary duties. Rose J rejected on the facts the contention that the type of business pursued was outside the scope of the claimant’s business. However, in any event, following O’Donnell, she concluded that a director is precluded from taking advantage of an opportunity for himself if he learns about that opportunity in the course of his duties as a director regardless of whether the opportunity falls within the scope of the company’s business and regardless of whether the company could have taken advantage of the opportunity. Similarly in Cullen Investments Limited and others v Brown and others [2017] EWHC 1586 (see 4.42, 4.110) the court rejected an argument that O’Donnell should be distinguished on the basis that it was argued that the defendant director had higher level obligations under the joint venture agreement as well as arising from his role as director of the joint venture company. The boundary between the roles were not hermetically sealed and in any event the opportunity which gave rise to the secret profits was plainly an opportunity for the joint venture company. 4.166  In the context of the Companies Act 2006 the issue arises as to whether it might be argued that pursuing an opportunity could not reasonably be regarded as likely to give rise to a conflict of interest (section 175(4)(a)). On the facts there was plainly such a conflict in both O’Donnell and Invideous. However, applying the approach in O’Donnell and in Bhullar still leaves open an issue as to: (a) the position where the opportunity falls outside constitutional limits on the company’s business, and (b) the extent to which it is relevant to have regard to the scope of the company’s business where an opportunity comes to the director’s attention other than in the course of the directorship. 4.167  In a pre-CA 2006 decision in the context of an unfair prejudice petition, in Wilkinson v West Coast Capital [2005] EWHC 3009 (Ch D), Warren J considered the position as to whether a conflict of interest is to be regarded as arising where there is a constitutional limit on the company diversifying beyond its existing business, such as a restriction in the articles of association. It was alleged that directors and an alleged de facto director of X Company (which owned The Gadget Shop chain of stores) had acted in breach of fiduciary duty in procuring 172

Scope of fiduciary duties 4.169

the acquisition of the ‘Birthdays’ chain of retail shops for another company (Y). Warren J concluded that the position depends on whether the director can, in a non-fiduciary capacity, prevent shareholder consent being given to the removal or variation of that limit. He considered that: (a) The mere fact that shareholder consent is required for a particular acquisition does not free the director from any duty to bring the opportunity of the acquisition to the attention of the board and the shareholders. (b) The director might not, however, be subject to a conflict of interest if the director in his capacity as a shareholder, or director/shareholders acting together, could prevent the requisite shareholder consent being given. If the opportunity was one which did not fall within the company’s existing business and was not competitive with it, and was either generally known or came to the attention of the director other than in his capacity as a director, there would be nothing to prevent the director exploiting the opportunity for himself. This would be so even if the board of the company believed it would be a good thing to make the acquisition for the company. (c) If the opportunity instead came to the notice of the director in circumstances where it was being offered for the benefit of the company, there would then be a maturing business opportunity of the company. This would be the case, for example, where the opportunity was offered to the director in his capacity as a director of the company and information was made available for the company to consider the opportunity. Warren J left open the question as to whether director shareholders could then, having withheld shareholder consent, take the benefit of the opportunity for themselves. (d) Warren J also left open the question of whether a non-shareholder director could take up the opportunity in circumstances where the opportunity had been considered by the company and shareholder consent had been withheld. There would then remain a constitutional bar to the company diversifying its business by pursuing the opportunity, so that it might be said that there was no conflict of interest. 4.168  Applying that approach, there was found to be no breach of the no conflicts rule as the director/shareholders were entitled under a shareholders’ agreement to block the acquisition of Birthdays, so that it did not fall within the scope of X  Company’s business. In relation to the no profit rule, the directors were able to make the acquisition only with the benefit of information provided to the subsidiary of X company and the work done by personnel of X company. However, the opportunity did not come to the notice of the directors by virtue of their directorship of X company, and at least in relation to those directors who had not exploited information about the project which they knew to have been provided in confidence to the subsidiary of X company, there was held to be no breach of the no profit rule. 4.169  The guidance in Wilkinson v West Coast Capital has now to be viewed in the light of the subsequent decision in O’Donnell and the provisions of 173

4.170  Employee fiduciary duties

the CA  2006. The decision in O’Donnell might be distinguished on the basis that it was expressly emphasised in that case that the opportunity was not outside the constitution. However, the emphasis on the constitutional limits of the company’s business would appear to sit uneasily with the express provision in section 175(2) that it is immaterial whether the company could not have pursued the opportunity. We suggest that, in the light of that provision, where the opportunity comes to the director’s attention through his position with the company, as indicated by the approach in Towers v Premier Waste Management Limited [2012]  IRLR  73 (CA), there is likely to be a breach of duty in pursuing the opportunity without authority even though the company could not have pursued it (whether due to a constitutional limit or otherwise). Where the opportunity came to the attention of the director other than through his or her position with the company, then the fact that it was an opportunity that was not competitive with the company’s existing business and outside its constitutional limits would be relevant to the question of fact as to whether it could objectively be regarded as one likely to give rise to a conflict of interest, leaving out of account the fact that the company could not pursue it even if it wanted to do so. 4.170 In Wilkinson (at paragraph  302), Warren J  recognised that it is a very difficult question whether, if a company decided on a fully informed basis not to pursue an opportunity for commercial reasons, it would then be open to a director to pursue the opportunity. In the Canadian Supreme Court case of Peso Silver Mines v Cropper [1966]  SCR  673 it was held that a managing director did not act in breach of fiduciary duty by exploiting an opportunity after the full board had rejected the opportunity on a fully informed basis. The opportunity was rejected by the company because it was financially strained and had enough projects at hand to manage. Six weeks after the rejection by the company, without obtaining the company’s consent, the director took up the opportunity after it was offered to him in his private capacity. The decision has not as yet been followed in the UK, and it is doubtful that it can be materially distinguished from cases where, as in Regal Hastings, an opportunity was not pursued by the company because it was unable to do so. In Murad and Murad v Khalil Al-Saraj and Werstwood Business Inc [2005] EWCA Civ 959 (CA) Arden LJ noted, by reference to the decision in Peso Silver, that Canadian courts have ‘modified the effect of equity’s inflexible rule’ in relation to conflicts of interest. However, she said that whether there should be any relaxation in this interest should be left to another court. See further, Lim (2013) 129 LQR 242, where the argument is made that Peso Silver should be followed and that no conflict arises if the opportunity has been rejected by the employer on a fully informed basis. We suggest that the better view is that the fully informed rejection by a company does not necessarily remove the potential conflict which may arise from a director profiting from his own position. The conflict might arise from the director diverting focus away from the company’s business. Further if the director was free to take up such opportunities, that might risk clouding the director’s judgment when weighing up the merits of such opportunities for the company, and as such detract from the prophylactic purpose of fiduciary duties. 174

Scope of fiduciary duties 4.173

Employees 4.171 When considering fiduciary duties arising from an employment relationship where there is no directorship, it remains essential to consider not only the scope of the employer’s business, but also in relation to a business opportunity which the employee wishes to pursue, whether it falls within the scope of the business or interests which it is alleged the employee owed an obligation to promote or protect. Thus in University of Nottingham v Fishel [2000] ICR 1462 (see 4.8–4.12), Elias J emphasised (at pages 1496G–H) that employees do not in general promise to give their employer the benefit of every opportunity falling within the scope of its business. Dr Fishel was under no contractual obligation to seek to secure overseas work for his employer, and as such was under no obligation to disclose the opportunities to do so or to pass on those opportunities to his employer notwithstanding that this may have been in the interests of the employer. In contending that Dr Fishel did owe such an obligation, the University sought to rely on Industrial Development Consultants Limited v Cooley [1972] 1 WLR 443 in which Mr Cooley resigned from his position as managing director of the claimant company in order to take the benefit of opportunities which came to his attention by reason of his employment (see further 4.269). Elias J  (at pages 1495E–F) explained the decision on the basis that, in contrast with Dr Fishel’s contractual position, Mr Cooley had a specific duty to secure contracts of the type which he secured for himself (see to similar effect CMS  Dolphin Limited v Simonet [2001] 2 BCLC 704 at paragraph 90). 4.172  Similarly, in Ranson v Customer Systems Plc [2012] IRLR 769, the Court of Appeal emphasised that it is dangerous when considering the position of employees to reason by reference to cases concerning directors and that, in the case of a non-director employee, the contract of employment is the necessary starting point for determining not only whether an employee owed any fiduciary duties but also the scope of any such duties. The fiduciary relationship must accommodate itself to the contractual obligations, and it is therefore essential to ascertain the scope of the obligations and whether undivided loyalty is required in the relevant respect. On the facts there was no breach of a duty by Ranson in pursuing an opportunity with a particular client because it was not part of his job to chase business from that client.

2(i)  Fiduciary duty and preparation to compete 4.173  We consider in this section the limits on preparation during employment to compete after employment. This is to be seen in the context of the limits of legitimate preparatory activity by employees aside from fiduciary duties, which are considered in further detail in Chapter 3 (3.26–3.84). The extent to which there must be disclosure to the employer of an intention to compete, or of preparatory steps to do so, is considered separately at 4.226–4.262. 175

4.174  Employee fiduciary duties

2(i)(i)  Relevance of restraint of trade principles 4.174  In approaching the issue as to the limits of permissible activity prior to termination of the fiduciary relationship, the starting point where a fiduciary duty is engaged is necessarily the fiduciary duty to act in good faith in the best interests of the employer (or the director’s duty to promote the success of the company) and to avoid an undisclosed conflict of interest (see eg Shepherds Investments Limited v Walters [2007] IRLR 110 at paragraph 106). A potentially important issue arises, however, as to the extent to which public policy in relation to restraint of trade should be taken into account. Two lines of authority have emerged. The first, following the decision in Balston Limited v Headline Filters Limited [1990] FSR 385, places emphasis on construing fiduciary duties in accordance with public policy on restraint of trade. The second line of authority, which emphasises the stricter duties upon fiduciaries than where the employee does not owe fiduciary obligations, is to the effect that it is neither necessary nor appropriate to regard restraint of trade principles as ‘trumping’ fiduciary duties. For the reasons expanded on in this section, we suggest that whilst it may be inappropriate to regard restraint of trade principles as ‘trumping’ fiduciary duties, public policy in relation to restraint of trade does have an important role in identifying the limits of permissible activity and of the obligations imposed by fiduciary duties in this context. Indeed that has been recognised in more recent decisions, which have in turn recognised that a ‘merits-based’ assessment is required of whether the preparatory steps fall on the right side of the line between permissible steps and disloyalty: Foster Bryant Surveying Limited v Bryant [2007]  IRLR  425 (CA). This cannot be answered simply by posing the question of whether the director if acting in good faith would consider the actions to have been in the best interests of the company. Further, it remains important to keep in mind the warning given by the Court of Appeal in Ranson v Customer Systems Plc [2012]  IRLR  769 as to the dangers of extrapolating from cases involving directors to other cases involving employees alleged to owe fiduciary duties. Clearly, as emphasised in Ranson, where an employee is not a director, there is a prior issue as to whether any relevant fiduciary obligations arise, and as to their scope, having regard to the nature of the employee’s role and the contractual provisions. 2(i)(ii) The Balston line of authority 4.175  As to the first of these lines of authority, in Balston Limited v Headline Filters Limited [1990]  FSR  385 Falconer J  highlighted the potential conflict between: (a) the fiduciary duties to act in good faith in the employer’s best interests and arising from the no conflict rule; and (b) public policy in relation to restraint of trade. On that basis he concluded (at page 412) that: ‘… an intention by a director of a company to set up business in competition with the company after his directorship has ceased is not to be regarded as a conflict in interest within the context of the principle, having regard to the rules of public policy as to restraint of trade, nor is the taking of any preliminary steps to investigate or forward that intention so long as there is no actual competitive activity, such as, for instance, competitive tendering or actual trading, while he remains a director.’ 176

Scope of fiduciary duties 4.178

4.176  The approach in Balston was in effect to shape what should be regarded as a conflict of interest having regard to public policy as to restraint of trade. That still begs a question as to how the approach fits with the obligation to act in good faith in the way considered most likely to promote the success of the company. In effect that duty was qualified by reference to public policy as to restraint of trade. Just as a director’s power to resign is not a fiduciary power (and is not qualified by the section 172 CA 2006 duty), so on the Balston approach a director’s power to investigate employment opportunities after termination of employment, and to prepare to compete after employment, is in effect regarded as not being a fiduciary power, provided it does not extend beyond permissible preliminary preparatory steps or otherwise involve abusing the employee’s position (such as by soliciting other employees or failing to discharge management functions). 4.177  The effect of this approach is to bring the position in relation to directors, and other employees owing fiduciary duties, more closely into line with other employees, where the distinction is drawn between competitive activity and mere preparatory steps. (As to the danger, however, of assuming that the mere fact activities can be described as ‘preparatory’ of itself means they do not amount to breaches of fidelity, see Crowson Fabrics Limited v Rider [2008] IRLR 288 (ChD) referred to at 3.38–3.39.) Indeed the approach in Balston essentially reflects the view expressed by the Court of Appeal in Helmet Integrated Systems Limited v Tunnard [2007] IRLR 126 (CA), in the context of a senior employee who was found not to owe fiduciary obligations, that (at paragraph 27): ‘… freedom to compete, once an employee has left, unrestrained by any enforceable covenant, carries with it a freedom to prepare for future activities, which the employee plans to undertake, once he has left.’

4.178  The decision in Helmet is discussed at 3.27–3.30 and 4.32. Notwithstanding that the employee owed an express obligation to advise on ‘competitor activity’, the Court of Appeal concluded that this did not encompass disclosing his own development of a potentially competitive product. The Court of Appeal emphasised that clear words would be required if the contract was to be construed as removing the employee’s pre-existing right to prepare for competition after employment and to make an informed assessment as to whether it was viable. The express obligation to report competitor activity was therefore not construed as being wide enough to cover his own actions, even though they would have covered the same activities carried out by a third party. This interpretation of the contractual obligations in turn influenced the court’s findings as to the extent to which there were relevant fiduciary obligations. The Court of Appeal did accept that if Mr Tunnard had received information that a third party proposed to develop a helmet in competition with the claimant’s helmet, he would owe a fiduciary obligation to deploy that information solely in the interests of his employer. This was because the employer would have no control over how Mr Tunnard deployed the information he learned as a salesman and would be dependent on his passing on the information. However, having regard also to the findings as to the scope of the contractual obligations, and the fact that Mr Tunnard was employed as a salesman rather than a designer, he did not owe a fiduciary obligation to disclose 177

4.179  Employee fiduciary duties

his own activities in his own time in relation to his development of a preliminary concept for a new helmet. 4.179  The decision did not decide the issue as to whether, if Mr Tunnard had owed fiduciary duties as a director, the position would have been different. Indeed, some dicta suggest that the result might have been different in the case of a director. Moses LJ emphasised (at paragraph 33) that: ‘Since the essence of the obligation of an employee as fiduciary is that the employee must act solely or exclusively in the interest of his employer, it will be easier for an employer to establish that activities in preparation for competition were themselves in breach of a fiduciary obligation …’

4.180  Notwithstanding this view, the approach in Balston suggests that even in the case of a director, similar public policy considerations remain relevant, in relation to where the line is drawn between permissible and impermissible conduct. It acknowledges that the public policy in the freedom to compete after termination of employment, even for an employee director, entails a degree of freedom to prepare for competition, even though this would not be considered to be in the best interests of the employer. As such, the interest in freedom to compete is a relevant consideration when considering the grey area as to whether preparatory steps involve a breach of fiduciary duty and the duty of fidelity. The effect of taking into account public policy as to restraint of trade is therefore that, rather than simply posing the question of whether the director acted in what was considered in good faith to promote the interests of the company, a broader merits based assessment is required in relation to whether, having regard both to the fiduciary obligations owed and the public policy considerations relating to restraint of trade, the director crossed the line beyond permissible preparatory conduct. 4.181 The decision in Balston has been followed in Framlington Group plc v Anderson [1995] 1  BCLC  475 (Blackburne J); Saatchi & Saatchi Company plc v Saatchi (13 February 1995, unreported) (Jonathan Parker J) and Coleman Taymar Ltd v Oakes [2001] 2  BCLC  749 (Robert Reid QC, sitting as a High Court judge). In Saatchi & Saatchi there was no breach when a director entered into ‘heads of agreement’ to acquire shares in a competing venture which would only come into full force when the director ‘was free to do so’, ie free from all restrictions arising from the employment contract or directorship. On the other side of the line, in Coleman Taymar the defendant director went beyond merely preparatory steps. Using confidential information that the company was terminating its leases, he (without the knowledge of the company) approached the company’s landlords in order to obtain new leases for himself or his new company. He contracted indirectly to purchase equipment for his own company from the employer company without disclosing his interest, and used the employer company’s employees to assist him in preliminary work. Clearly by virtue of using the employer’s confidential information and employees for his own purposes and by virtue of the conflict of interest in purchasing property from the employer company, this was on the wrong side of the line, notwithstanding that 178

Scope of fiduciary duties 4.183

the claimant did not engage in actual competition until after the termination of his employment. There was clear wrongdoing distinct from the mere investigation of potential future competition. 4.182  In applying the merit-based approach – balancing fiduciary obligations with public policy as to restraint of trade – one relevant factor may be to take into account the particular role played by the director in the business. Support for that approach is provided by the decision of Blackburne J  in Framlington Group plc v Anderson [1995] 1 BCLC 475. The defendants were employed as fund managers by Framlington and were also directors. They resigned with a view to taking up employment with a competing company, Rathbone. Under their contracts of employment they were free, if they ceased to be employed by Framlington, to set up or join a competing business and to take with them or to solicit Framlington’s clients. However, with a view to achieving an orderly transfer of the managed funds, Framlington and Rathbone entered into negotiations and ultimately agreed on a sale of managed funds to Rathbone, which would then be managed on behalf of Rathbone by the defendants. Framlington instructed the defendants to take no part in the negotiations and also informed them that it had no interest in the remuneration they agreed with Rathbone. The consideration paid to Framlington by Rathbone included shares in Rathbone. The defendants were also given shares in Rathbone in return for entering into long term service agreements with it. Framlington’s case proceeded on the premise there was a ceiling on what Rathbone would pay for the goodwill. Blackburne J rejected that premise but concluded that even if it was correct there was no breach of duty by the defendants. Framlington contended that there was a conflict of interest and that the defendants had not acted in good faith in the best interests of Framlington in negotiating to receive consideration shares, and/or they had made a secret profit, which reduced the amount paid to Framlington for the goodwill. This was rejected. Following the approach in Balston, Blackburne J commented (at page 498E) that he could see no reason why a director could not, without committing a breach of the duty of good faith, seek to drive as hard a bargain as he could with a future employer over the terms on which he was to be employed, and it was immaterial if, on the facts in Framlington, this had detrimental consequences to the current employer. 4.183 Thus, just as public policy considerations dictated that a director was free to resign in spite of the harm it would cause the employer, equally the director was free to negotiate remuneration terms with the new employer, even if to the detriment of the current employer. The position would no doubt have been different if the defendants had been involved in the negotiations with Rathbone on behalf of Framlington, since then there would clearly have been a direct conflict of interest. However, here they had been excluded from those negotiations. Nor had their negotiations involved obtaining a secret profit from their position. The consideration paid to the defendants was not in respect of any asset of Framlington, but in respect of entering into long term service agreements. That in turn enabled Rathbone to secure the benefit of the client goodwill which attached to the defendants consisting of their relationship which they had built up with the clients (having managed their investment over 179

4.184  Employee fiduciary duties

many years and which was not protected by any post-termination covenants in favour of Framlington). 4.184  Blackburne J emphasised (at page 497D) that the precise content of the duty to act in the best interests of the company is necessarily dependent upon how the company’s business is organised and the part which the director could reasonably have been expected to play. As such, given that they had been excluded from the negotiations, they were not under a duty to take steps to assist Framlington to procure the best price for the sale of the business. That approach was subsequently approved in Foster Bryant Surveying Limited v Bryant [2007] IRLR 425 (CA) (at paragraphs 64 and 65) and, we suggest, is not affected by the approach subsequently taken in O’Donnell v Shanahan [2009] BCC 822 (at paragraph 69) that directors are to be regarded as undertaking a role akin to a ‘general trusteeship’, and as having responsibility for the business of the company as a whole (see 4.140). Rather, in a context where public policy in relation to restraint of trade is also a relevant consideration, the particular role played by the director is likely to play an important role in the merit-based assessment of the limits of lawful preparations to compete and what is required by the fiduciary duty to act in good faith in the best interests of the company. Clearly that consideration applies particularly strongly where the director is specifically excluded from relevant involvement as in Framlington. As such, as it was put in Foster Bryant (at paragraph 77), in all (as in Balston) the resignations could be viewed as not being accompanied by disloyalty. 2(i)(iii) The alternative view: no ‘trumping’ by restraint of trade 4.185  A different approach to that in the line of authorities following Balston was, however, adopted in Shepherds Investments Limited v Walters [2007] IRLR 110 (the facts of which are set out at 4.188). Having identified that the starting point was the fiduciary duties to act in good faith in the best interests of the employer and to avoid an unauthorised conflict of interest, Etherton J commented (at paragraphs 107–108) that: ‘It is difficult to see any legitimate basis for “trumping” of those duties by “rules of public policy as to restraint of trade” as suggested by Falconer J in Balston … … What the cases show, and the parties before me agree, is that the precise point at which preparations for the establishment of a competing business by a director become unlawful will turn on the actual facts of any particular case. In each case, the touchstone for what, on the one hand, is permissible, and what, on the other hand, is impermissible unless consent is obtained from the company or employer after full disclosure, is what, in the case of a director, will be in breach of the fiduciary duties to which I have referred or, in the case of an employee, will be in breach of the obligation of fidelity.’

4.186  On this basis, the focus would be simply on asking whether the director acted in good faith in the best interest of the company and had not placed himself in a position where his interests conflict with those of the employer. As Etherton 180

Scope of fiduciary duties 4.188

J commented, it is clear at the extremes which preparatory activities will give rise to a breach of fiduciary duty. Thus, he noted that merely making a decision to set up a competing business at some point in the future and discussing the idea with friends and family would not give rise to a conflict, and that it may also be consistent with fiduciary duties to consult with lawyers and other professionals. At the other extreme, soliciting customers of the employer or actually carrying on a competing business would give rise to a breach of fiduciary duty and the duty of fidelity. Other clear examples, as in Coleman Taymar, would be the deployment of the company’s employees to assist in relation to preparations in their working time, or the use of the company’s confidential information. However, in between there will be a large grey area where the answer is fact-sensitive. 4.187  In considering the application of these principles Etherton J drew substantially on the analysis of Hart J in British Midland Tool v Midland International Tooling Limited [2003] 2 BCLC 523. In that case four defendants who were directors of the claimant conceived and developed a plan to leave their employment with the claimant and set up a rival company as manufacturers and suppliers of cutting tools to the motor industry. Following the retirement of one of the directors as managing director of the claimant, an advertisement was placed seeking employees for a specialist cutting tool manufacturer, being the venture which the defendants proposed to set up. This resulted in employees of the claimant leaving to join the rival company. The other three defendant directors resigned from their directorships, and the new business was then set up next to the claimant’s own premises. The claim was brought principally on the basis of unlawful means conspiracy. Hart J  concluded that the plan had necessarily involved unlawful means consisting of breach of fiduciary duty by the three directors. This was put on two bases. Given that the directors were aware of a determined attempt being made by a potential competitor to poach the employer’s workforce, there was a duty to take active steps to thwart the process, including alerting fellow directors to what was going on. Hart J also concluded that there was a duty on the directors to make disclosure of their intentions to join a competitor, irrespective of their knowledge of the competitor’s attempts to poach the workforce. This was on the basis that a director’s duty to act so as to promote the best interests of his company prima facie includes a duty to inform the company of any activity, actual or threatened, which damages those interests (see further 4.226–4.262). In forming the view that the failure to make disclosure involved a breach of fiduciary duty, particular emphasis was placed on the fact that the directors had formed an irrevocable intention to compete. As explained by Hart J (at paragraph 89): ‘A director who wishes to engage in a competing business and not disclose his intentions to the company ought, in my judgment, to resign his office as soon as his intention has been irrevocably formed and he has launched himself in the actual taking of preparatory steps.’

4.188 In Shepherds Investments Limited v Walters [2007]  IRLR  110 Etherton J (at paragraph 108) expressed the view that this may have been ‘too prescriptive’. The particular facts of each case must be considered to determine if the conduct is consistent with the director’s obligations to act in good faith in the best interests of the employer and to comply with the no conflict rule. Notwithstanding this, in 181

4.189  Employee fiduciary duties

Shepherds Investments the time by which such an irrevocable intention has been formed was an important part of the reasoning in determining that preparatory steps to compete went beyond permissible limits. As in British Midland Tool, the case concerned the conduct of directors acting in concert. W and H were directors and senior employees of Shepherds (Financial) Limited (‘Financial’). S was a senior employee of Shepherds Investments Limited (‘Investments’), a subsidiary of Financial, and was held to have assumed the obligations of a director (although not formally appointed as a director). Financial in turn acted as the manager of the investment company, Shepherds Select Fund plc (‘SSF’). Financial was retained to advise Investments on investment policy for SSF. One of SSF’s subsidiary companies, TLP Limited, carried on business investing in US traded life policies (TLPs). Until May 2004 the TLPs took the form of a share in each of a number of different life policies held by a US corporation, MBC (known as ‘fractionalised policies’). From 2003 the Shepherds Group (ie Investment, Financial, SSF and its subsidiaries) began to consider the establishment of an investment fund to purchase whole life policies (rather than interests in fractionalised policies). By early May 2003 W, H and S had also begun to discuss between themselves the idea of establishing for their own benefit a new investment fund which would invest in whole life policies. In July 2003 they produced a business plan for this proposed new business in which they stated that they had identified significant improvements that could be made to the Shepherds model, but had been unable to have Shepherds adopt these measures and had formed their own business to take this forward. 4.189  Etherton J concluded that it was only subsequent to this, when Shepherds appeared to reject the idea of switching from fractionalised life policies to whole life policies, that the defendants formed an irrevocable intention to set up their business in relation to whole life policies. Following this, in August 2003, lawyers in the Cayman Islands were instructed in relation to the proposed new business, and meetings were held with banks and auditors. S resigned in September 2003 and H in October 2003. On the same day as H ceased to be a director and employee of Financial, their new investment company (Assured) and its manager (PSL) were formally incorporated. The directors of Assured included S and H. Promotional literature was prepared and the first transactions took place in early 2004. W then resigned in May 2004. The Shepherds Group itself began trading in the whole life policy market in July 2004. 4.190  Etherton J further concluded that in their actions since August 2003 the individual defendants acted in breach of their fiduciary duties. As he explained (at paragraph 127): ‘… not only had the individual defendants formed the irrevocable intention to establish a business which they knew would fairly be regarded by Financial and Investments as a competitor to the business carried on by SSF, but they continued to take steps to bring into existence that rival business, contrary to what they knew were the best interests of Financial and Investments, and without the consent of those companies to do so after full disclosure of all material facts, and so in breach of their respective fiduciary duties and their obligation of fidelity.’ 182

Scope of fiduciary duties 4.193

The breach therefore arose irrespective of any evidence of solicitation of customers or poaching of employees. It arose from continuing to take steps to bring into existence the competitor business after forming the irrevocable intention to compete, and without obtaining consent to do so following full disclosure of the material facts. The decision was, however, subsequently explained in Foster Bryant (at paragraph 75) on the basis that in going after the investment in whole life policies, the defendants had been pursuing for their own benefit a maturing business opportunity under consideration by their employer (see 4.197). Further this involved a direct conflict of interest as reflected by the fact that one of the defendants had accepted in evidence that he found it difficult to promote the claimant’s product at the same time as developing his own. 4.191 In QBE Management Services (UK) Limited v Dymoke [2012] IRLR 458 Haddon-Cave J expressed the view that the approach in Balston was distinguishable in a team move case and in any event the test to be applied was simply whether the director had acted in good faith in the best interests of the company. However, in First Subsea Limited v Balltec Limited [2014] EWHC 866, the court regarded these two lines of authority as setting out a consistent set of principles. To that end Norris J emphasised the fact-sensitive nature of the enquiry as to the precise point at which preparations for the establishment of a competing business by a director becomes unlawful. 4.192 By contrast, the distinction between these two lines of authority was expressly identified, without a preferred approach being decided, in Halcyon House Limited v Baines [2014] EWHC 2216. The issue arose in the context of an allegation of breach of fiduciary duty by the managing director of a family residential lettings company. The relationship started to break down when the managing director, Mrs Baines, went on maternity leave. Ultimately the other directors, her mother and brother, presented her with a non-negotiable settlement agreement, which she accepted and which entailed her removal as a director and employee. In advance of that, with the writing on the wall, she took limited preparatory steps to compete, consisting of incorporating a company, drawing up financial projections for a new residential lettings business and making enquiries as to a property for the new business. She did not solicit customers or staff to leave. HHJ Seymour (at paragraph 225) regarded Balston as propounding a test of whether the steps taken were sufficiently proximate to competing with the employer company as to constitute a breach of fiduciary duty. British Midland Tool was regarded as setting out a test of whether an intention to compete had been ‘irrevocably formed’, though as noted above (at 4.188) in Shepherds Investments that was regarded as possibly too prescriptive. The court found it unnecessary to decide between them on the basis that on neither approach was there a breach of fiduciary duty on the facts. 2(i)(iv)  Re-assertion of restraint of trade considerations 4.193 Whilst Etherton J  in Shepherds Investments Limited v Walters [2007] IRLR 110 at paragraph 107 rejected the suggestion that rules of public 183

4.194  Employee fiduciary duties

policy as to restraint of trade could be a basis for trumping fiduciary duties, it would be going too far if this connotes that restraint of trade principles are not of relevance in determining what is regarded as amounting to a breach of fiduciary duty. On the contrary, restraint of trade considerations continue to be highly relevant in determining the boundaries of what constitutes permissible preparation to compete and where fiduciary obligations are engaged. 4.194  The analysis of Hart J in British Midland Tool v Midland International Tooling Limited [2003] 2 BCLC 523 at paragraph 89 proceeded not on the basis that there was some reason in principle for disregarding restraint of trade principles, but on the basis that the duty to disclose actual or threatened activity which damages the interests of the employing company did not infringe those principles because it is open to a director to resign and bring to an end the fiduciary duties. One difficulty with that analysis is that where the fiduciary duties arise not out of, or only out of, the office of director, but out of the duties and/or senior position of an employee, there may be a substantial period of notice to be served before an employee can lawfully bring the duties to an end (see eg Ministry of Sounds Holdings Limited v Cosgrave (23 February 1999, unreported), Ch D (Neuberger J). 4.195 A  further difficulty is that without having regard to what would be an excessive restraint of trade, it is difficult to explain convincingly the criterion emphasised in Midland Tool of an irrevocable intention to engage in a competing business. In some respects an employer will have a particularly strong interest in being informed that an employee is considering leaving for a competitor before the decision has been made to do so, since at that stage there would be a greater prospect of persuading the employee to stay. Similarly, even taking the extreme situation identified by Etherton J  in Shepherds Investments (see 4.188–4.190), the reason that it could not be regarded as contrary to the employing company’s best interests merely to decide to set up a competitor in future and to discuss this with friends, family and possibly lawyers, is that this would plainly be an unacceptable restraint of trade. In the case of a senior employee with fiduciary duties, the employer may well have a strong interest in being given full details as to what plans the employee has to compete after the end of employment, but in the ordinary case a court may be expected to say that it would be going too far, having regard to public policy on restraint of trade, to require this to be divulged. 4.196 Consistently with this, in Foster Bryant Surveying Limited v Bryant [2007] IRLR 425 (CA), in the context of a director who had been excluded from management (see 4.211), Rix LJ, giving the leading judgment, commented that: ‘… while the principles remain unamended, their application in different circumstances has required care and sensitivity both to the facts and to other principles, such as that of personal freedom to compete, where that does not intrude on the misuse of the company’s property whether in the form of business opportunities or trade secrets. For reasons such as these, there has been some flexibility, both in the reach and extent of the duties imposed and in the findings of liability or non-liability. The jurisprudence also demonstrates, to my mind, that in the present context of retiring directors, where the critical line between 184

Scope of fiduciary duties 4.198

a defendant being or not being a director becomes hard to police, the courts have adopted pragmatic solutions based on a common-sense and merits based approach.’

4.197  The Court of Appeal therefore accepted that restraint of trade principles are relevant. There has been a tendency to explain this as simply applying with sensitivity to the particular facts, the test of whether the fiduciary acted in good faith in the best interests of the employer: see eg First Subsea Limited v Balltec Limited [2014] EWHC 866 (at paragraphs 189 and 206). However, as noted above, that is artificial since it will often be in the best interests of the employer to know of the potential competitive threat as soon as possible and prior to any firm decision having been made to compete. Instead, just as in Helmet Integrated Systems (see 4.177–4.179) restraint of trade principles were relevant to the construction of express and implied contractual obligations, so they may be taken into account in considering whether preparatory steps are to be regarded as engaging fiduciary duties or involving a breach of fiduciary duty. Rather than there being an obligation solely to further the interests of the employer, the public policy in relation to restraint of trade militates in favour of an employee being entitled (within limits) to have regard to his own interest in preparing to compete in the future. To this end, Shepherds Investments was explained in Foster Bryant on the basis that it involved the ‘combination of disloyalty, active promotion of the planned business, and exploitation of business opportunity’ whilst the directors remained in office, whereas Balston and the cases which followed it were explained as cases where the resignations were not accompanied by disloyalty. Whilst this begs the question of what is to be regarded as ‘disloyalty’, on this approach any differences in application in this context between the duties of fidelity of an employee and fiduciary duties are significantly diminished, though there remains a potentially important distinction particularly in relation to duties of disclosure at least in respect of employees who are directors. 4.198  The decision in Attwood Holdings Limited v Woodward [2009] EWHC 1083 provides some further indication of how these principles might be expected to be applied. Mr Woodward was a director of the claimants and operations director of one of them (MEGL), which was a wholly owned subsidiary of Attwood, and responsible for the day to day management of its business. The claimants contended that Mr Woodward, together with another employee, Mr Gwillam (MEGL’s management accountant), had taken impermissible steps prior to the end of their employment and Mr Woodward’s directorship to enter into competition and had failed to make disclosure as to this. The claim against Mr Gwillam was settled shortly before the trial. Having considered the decisions in British Midland Tool, Shepherds and Foster Bryant, the court was not satisfied that discussions about future competition, the investigation of potential funding or the preparation of business plans would necessarily lead to the conclusion that a director had put himself in a position where his interests conflicted with his duties to his company. Given that here the director continued to carry out his functions satisfactorily, the court would not have regarded these matters as involving a breach of duty. In that respect the decision may be contrasted with the conclusion reached in Shepherds Investments (where as noted above there was the additional element of exploiting 185

4.199  Employee fiduciary duties

a maturing business opportunity). Unsurprisingly the director was found to have crossed the line into impermissible conduct by having solicited customers. He was also found to have acted in breach of duty in failing to disclose plans of a senior employee to compete. Applying British Midland Tool and Shepherds Investments he should have disclosed the nascent threat in relation to the plan of a senior employee to compete irrespective of the director’s own involvement. 4.199 Restraint of trade considerations were again important in Gamatronic (UK) Ltd and another v Hamilton and Mansfield [2017] BCC 670. The defendants were the former Managing Directors of Gamatronic UK (C1) and between them held 49% of its shares. The remaining shares in C1 were held by an Israeli company (C2). The claimants supplied uninterruptable power supplies (UPSs). On 29  February 2012, the defendants entered into settlement agreements by which their employment and directorships with C1 ended, and they sold their shares to C2. It was alleged that they had acted in breach of fiduciary and contractual duties by secretly acquiring a beneficial interest in what was to be a competing business (Vox). In relation to whether the defendants had acted in breach of duty, the Court separated out different periods. In the first period (October 2010 to January 2011) there were meetings with the directors of Vox to discuss cooperation between Vox and a US company which later became Vox’s distributor in the Europe. There were discussions about the proposed venture and the proposed nature of the relationship between Vox and the US company. The involvement included discussions about setting up a Founders agreement and establishing a business plan. In finding that this did not entail a breach of duty, Akhlaq Choudhury QC commented (at paragraph 147) that: ‘If all such preparatory steps were prohibited then the directors’ personal freedom to compete after leaving would be seriously curtailed. Insofar as some of these activities involved meetings which may have encroached on working hours at Gamatronic UK, there is little to suggest that the Defendants were neglecting their duties as a result.’

4.200  Essentially this reflected the principle, acknowledged in Helmet (4.177), that the freedom to compete after employment (and in this case after ceasing to be a director) must entail a certain freedom to prepare to do so in advance. The court focussed on identifying whether there were respects in which the conduct crossed the line into impermissible disloyal activity. To that end the act of one of the defendants during this period in reviewing the claimants’ UK price lists on behalf of Vox was, unsurprisingly, found to amount to a clear breach of the fiduciary duty of loyalty, and to avoid a conflict of interest. Indeed the use of confidential information to assist in establishing a competitor business would equally be a clear breach of the duty of fidelity: see Decorus Limited v Penfold and Procure Store Limited [2016] EWHC 1421, discussed in Chapter 3 at 3.64. In relation to the following period there was found to be a breach of duty (fiduciary and the duty of fidelity) when the defendants travelled to Denver to meet with representatives of the US company. Again, the analysis proceeded on the basis of identifying how this went beyond permissible preparations to compete or preparatory commercial discussions, in this instance by taking substantial time off work under false pretences. In essence the trip interfered with the carrying 186

Scope of fiduciary duties 4.204

out of their duties to the employer, and disloyalty was underlined by the element of dishonesty. 4.201  Breaches of duties (again, both of fidelity and fiduciary duty) were found then to have gathered pace. Some emphasis was placed on there being an irrevocable intention to enter into what objectively amounted to competition as indicated by a purchase of shares in the new venture. In relation to this, Akhlaq Choudhury QC noted (at paragraph 88(iii)) that (following Shepherds Investments) there was no prescriptive rule that such an intention always gave rise to a duty of disclosure, and much would depend on the particular facts. Here, the irrevocable intention was accompanied by clear breaches of duty by virtue of approaching third party customers on behalf of Vox, engaging or continuing to engage Vox’s services for D1’s business, holding themselves out as directors of Vox, and being actively involved, even to a limited extent, in operational matters concerning Vox. 2(i)(v)  Conclusions on the two lines of authority 4.202  As noted above (4.193–4.201), in the context of delineating the boundaries of legitimate preparations to compete, the content of fiduciary obligations are shaped in part by the need to have regard to the public policy in protecting freedom to compete after the directorship/employment has ended, and the associated need for a degree of freedom to prepare for this. As such, the approach in Balston Limited v Headline Filters Limited [1990] FSR 385 is to be preferred in recognising that an intention to compete after employment is not of itself to be regarded as a conflicting interest. Equally, without more, preliminary preparation to compete after employment by a director or senior employee acting alone is not to be regarded as engaging or infringing fiduciary duties. 4.203  Whilst it is clearly important, as Etherton J emphasised, to focus on the particular facts, and on the cumulative picture, we suggest it remains the case that helpful guidance is provided by previous decisions indicating where the boundaries of permissible preparatory conduct have been located (see the discussion in Chapter 3 at 3.43–3.74 and the Appendix, and 4.263–4.298 in relation to the limits on exploitation of business opportunities after ceasing employment/directorship). Indeed, it is notable that in both British Midland Tool and Shepherds Investments the matters leading to a finding of breach of fiduciary duty also constituted a breach of the duty of fidelity. Further, as noted in Chapter 3, so far as concerns senior employees who are not directors, as made clear in Ranson v Customer Systems Plc [2012] IRLR 769, the very factors which are central to determining whether fiduciary obligations are owed (principally the contractual terms) are also central to determining the content of the duty of fidelity. 4.204  Subjective intention is not a satisfactory touchstone as to whether breaches of fiduciary duty (or fidelity) have occurred and is likely to be difficult to apply with certainty. The adoption of the criterion of whether there was an irrevocable intention to leave and enter into competition may be explained at least in part as being the product of seeking to balance the full rigour of the fiduciary obligation 187

4.205  Employee fiduciary duties

to act in good faith in the best interests of the principal, and competing public policy considerations as reflected in Balston. To that end, it at least affords the employee/director some space to explore alternatives before the duty of disclosure arises. However, as noted below, in some cases the obligation to disclose may arise earlier (see eg Odyssey Entertainment considered at 4.243), whereas in other cases such as where the director is simply acting alone in deciding to move to a competitor, there may be no such obligation of disclosure even upon forming the decision to leave (Balston). As such it may best be regarded as one factor to be taken into account as part of the overall merit-based assessment of where to draw the line between permissible and impermissible activity. Further, whether an irrevocable intention to leave has been formed may in certain instances cast light on the true nature of preparatory steps which are otherwise ambiguous. For example, a discussion with colleagues or clients which is alleged by the (ex-) employee to be entirely innocent, may in some cases be viewed in a more sinister light, against a background of an irrevocable intention to compete. 4.205  Equally, as with an employee’s duty of fidelity, the issue of whether duties are engaged or infringed in relation to preparatory activities requires consideration of the particular responsibilities of the employee/fiduciary (as illustrated by Framlington Group plc v Anderson [1995] 1  BCLC  475). Thus, an employee with management responsibility for a business may be able to make preparations to compete after employment, but it does not follow that he can turn a blind eye to the fact that colleagues are planning to leave and fail to take steps to secure the business or to report the matter so that others can do so. 4.206 Significantly, the decisions in British Midland Tool and Shepherds Investments both involved directors planning together to set up a competitor. Hart J expressly distinguished Balston on this basis in British Midland Tool (at paragraph 89), and that view was supported by Haddon-Cave J in QBE Management Services (UK) Limited v Dymoke [2012] IRLR 458 (at paragraph 188). We suggest that this central feature was the key factor in considering whether the defendants had exceeded the limits of permissible preparatory conduct. The cases cannot be taken as indicating that in the case of a director acting alone, rather than in the context of a team move, there is any prima facie obligation to resign once an irrevocable decision to compete has been formed. The significance of having acted in concert has been particularly emphasised in considering the scope of the duty of disclosure, as considered more fully at 4.226–4.262.

2(j)  Exclusion from management/garden leave 2(j)(i)  Impact of fiduciary duties The position aside from the Companies Act 2006 4.207 As set out at 4.196, in Foster Bryant Surveying Limited v Bryant [2007] IRLR 425 the Court of Appeal emphasised the need to consider the particular circumstances of each case in assessing whether there has been a breach 188

Scope of fiduciary duties 4.209

of fiduciary duty. In particular, the issue may arise as to the impact on a director’s fiduciary duties of being effectively excluded from a management role. One particular instance of exclusion from an employee director’s management role is where the employee is placed on garden leave but continues as a director. In practice that situation will be rare (though it does sometimes occur). That is in part because it is good practice for a garden leave clause, or other provision, to include an option for the employer to require the employer to resign as a director, supported by the ability of the company, via a power of attorney, to effect a resignation (see the precedent at 5.144). It may be for that reason the authorities on this issue have tended to be in relation to exclusion from management other than specifically in the context of employee directors placed on garden leave. 4.208  The issue of exclusion from management was considered by the Court of Appeal in In Plus Group Limited v Pyke [2002] 2 BCLC 201. Mr Pyke was a director of the claimant company, In Plus. He fell out with his co-director and was effectively excluded from the management of the company. In those circumstances, while still a director, he set up his own company, which entered into contracts on its own behalf with a major customer of In Plus whom he had brought with him to In Plus. Relations had broken down between that customer and In Plus and it had refused to place any further work with In Plus. The Court of Appeal held that, on the particular facts of the case, there was no breach of duty. The particular facts identified by Brooke LJ were that: (a) Mr Pyke had effectively been expelled from the business more than six months before any of the acts alleged to amount to a breach of duty; (b) he had invested a large amount of money in In Plus and not been permitted to withdraw any sums; (c) he was not receiving any remuneration from In Plus; and (d) in contracting with the customer he used no property belonging to In Plus and made use of no confidential information which had come to him as a director. 4.209  As explained by Sedley LJ (at paragraphs 89–90), the finding of fact that Mr Pyke had been effectively excluded from the company was crucial because ‘it eliminates the duality of interest or duty which the law seeks to guard against’. As noted at 4.140, in that respect the reasoning was implicitly founded on the premise that the no conflict rule applies only to a conflict of interest and duty (to the company) or duty and duty (rather than a conflict only of the director’s interests and the company’s interests). The reasoning based on whether there is a duality of interest does not by itself readily explain why there is an amelioration of the duty to act in good faith in the best interests of the company, or the equivalent duty under section 172 CA 2006 to act in a way which the director considers in good faith would be most likely to promote the success of the company. The explanation no doubt lies in a view of the role of the no conflict rule, and fiduciary duties more generally, in preventing a fiduciary being swayed by personal considerations or competing interests, with the consequence that the rule ceases to apply where the fiduciary no longer has any powers or duties to exercise (see eg Wilkinson v West Coast Capital [2005] EWHC 3009 (Ch D) at paragraph 251 and Conaglen, ‘The Nature and Function of Fiduciary Loyalty’ (2005) LQR 452). 189

4.210  Employee fiduciary duties

4.210 As such, whilst the decision in In Plus was described as ‘exceptional’, it indicates a broader application to circumstances where a director is excluded from all decision-making and participation in a company’s affairs. Nor did it make any difference, in the view of Sedley LJ (at paragraph  90), whether the exclusion was ‘explicable and even justifiable’. Jonathan Parker LJ, whilst also emphasising the unusual circumstances of the case, endorsed the comment of Sedley LJ that, for all the influence Mr Pyke had, he might as well have resigned as a director. These comments might equally be applied to many instances of a director employee excluded from management during a period serving out garden leave. 4.211 These issues were revisited by the Court of Appeal in Foster Bryant Surveying Limited v Bryant [2007] IRLR 425 (CA). The claim made by the claimant company related to conduct of the defendant director, Mr Bryant, after he had given notice of resignation but before the resignation took effect, and during a period when it was found he had in practice been excluded from discharging his role as a director and acted as an employee only. During that period Mr Bryant accepted an offer to work for a key customer of the claimant company following the termination of his employment with the claimant. Given that his resignation had not been planned with an ulterior motive, and there was no diversion of any maturing business opportunity, this was not considered sufficient to give rise to a breach of fiduciary duty. Having regard to the fact that he had already tendered his resignation irrevocably, the court rejected the contention that Mr Bryant should have rejected the offer of future work and pressed the customer to maintain its business with the claimant company. The court was instead willing to compare the conduct to legitimate preparation to compete, and watered down accordingly the obligation to act in good faith in the best interests of the company. Further, whilst not deciding the case on this basis, Rix LJ observed (at paragraph 93) that it was ‘very arguable’ that, having been excluded from management after giving notice of resignation, Mr Bryant’s duties extended no further than to require that he remained honest and neither exploited nor took any property of the company. This approach emphasises the importance of focussing on the particular duties and responsibilities of the employee/director in ascertaining whether, in context, fiduciary obligations are engaged or infringed. 4.212  The issue arose again (at first instance) in First Subsea Limited v Balltec Limited [2014] EWHC 866. The defendant, Mr Emmett, was a director of a company (BBSW) which designed underwater machinery. He sold his shareholding in the company in order to obtain further investment, but remained a director and employee. He became dissatisfied with the management situation and sought to buy back control of the claimant company but his offer was rejected. He was then substantially excluded from management of the company. He was suspended, refused access to the premises, and ultimately dismissed as an employee on 6  March 2004. However, he remained a director until he finally resigned on 19  July 2004. In the meantime he set up a competing business together with the former managing director of the claimant who had been dismissed (over Mr Emmett’s head) by the claimant in March 2004, and was held by an employment tribunal to have been unfairly dismissed. Several of the claimant’s employees 190

Scope of fiduciary duties 4.214

joined them in that business. The issue then arose as whether and to what extent Mr Emmett had acted in breach of fiduciary duty given that he remained a director. Norris LJ placed emphasis on the fact that Mr Emmett had chosen to remain a director for as long as it suited his purpose to avoid a buyout and a compulsory transfer of his shares. He concluded that the consequence was that his fiduciary duties had not been reduced to vanishing point, but the duties upon him were tailored to his position. Therefore the only positive duties (ie  duties requiring action) were in relation to what the claimant company was, to Mr Emmett’s knowledge, requiring him to do. Negative duties (ie those requiring him not to act in a particular way) were limited to what the claimant company was, according to what Mr Emmett knew or must be taken to have known, doing or intending to do. As such: ‘If Mr Emmett was to do something for BSW then he had to do it in a loyal and faithful way: if BSW was doing something, then Mr Emmett had to conduct himself in a loyal and faithful way as regards his own actions in the light of what BSW was doing.’

4.213  Applying this approach, taking into account Mr Emmett was not performing any duties for the defendant company and that until just three days prior to his resignation as a director, no firm decision had been made to compete and Mr Emmett’s preference was to buy back shares, Norris LJ concluded that generally the steps taken by Mr Emmett to establish a competing business did not involve a breach of fiduciary duty. Mr Emmett was though found to have acted in breach of fiduciary duty in: (a) acting disloyally in indicating to an engineering subcontractor (Mr Halstead) that BSW was insolvent and casting doubt as to its continued existence in order to assist in achieving Mr Halstead’s support, and (b) putting in a competing bid for a project when he knew the defendant company would be bidding for it and asking a supplier of BSW to prepare drawings for the competing bid. However, there was no breach in seeking to encourage a third party to enter into a joint venture in relation to the prospective competing business or taking legal advice as to this. Nor was there found to be a breach of duty in ascertaining from employees of BSW that if a competing business were to be established they would work in it since, it was found, this fell short of encouraging them to leave BSW and to join his new venture. In effect, against the context of Mr Emmet’s exclusion from management, the approach was to allow a broad scope for permissible preparatory steps whilst drawing the line at direct competition or active disloyalty. 4.214  Each of the above cases concerned directors. As noted above (at 4.88), in Ranson the Court of Appeal emphasised the dangers of applying such decisions to the case of non-director employees found to owe fiduciary obligations. We suggest that is particularly apposite when considering the effect of exclusion from management. In the case of non-director employees, the fiduciary obligations arise not by reason of the office held but only by reason of the contractual obligations and role. Once those obligations come to an end, the factors which lead to fiduciary obligations being imposed in addition to the ordinary express or implied contractual obligations of employees also come to an end. As such, we 191

4.215  Employee fiduciary duties

suggest the focus is on the requirements of the duty of fidelity, as to which see 3.75–3.84. The position under the Companies Act 2006 4.215  In each of the above cases the material facts pre-dated the statutory duties under the CA  2006 coming into force. Some difficulties arise in applying the reasoning underlying the above decisions to the statutory regime applicable to directors. (1) As noted above (at 4.209), the reasoning in In Plus was implicitly premised on the no conflict rule applying only where there was a conflict between the director’s duty to the company and the director’s other duties or interests. The effect was that if the director had no duties or powers to exercise, the duty to avoid a conflict fell away. However, the CA 2006 also applies the no conflict rule to a conflict of the interest of the director and of the company (section 175(1) CA 2006). As such the reasoning based on the absence of any conflict is not readily applicable. Indeed preparation to compete with the company may be no less damaging to the interest of the company by virtue of it having excluded the director from management. (2) Section 170(2) makes clear that in the respects specified, the no conflict duty (encompassing the no profit duty) continues to apply after the termination of the directorship. Clearly the continuing duties of a director excluded from management cannot be any lower than in relation to a former director. On the contrary, in contrast to a former director, a continuing director remains subject to the obligation to act in the way considered most likely to promote the success of the company (section 172  CA  2006). The issue therefore arises as to how exclusion or amelioration of duties is to be reconciled with that duty. 4.216  Balanced against those considerations is the requirement under section 170(4)  CA  2006 to interpret the general duties in the same way as common law rules or equitable principles. In the light of that requirement, and subject to the duties applicable to a former director providing an irreducible minimum floor as to the extent to which duties might be ameliorated, it may be expected that, notwithstanding some difficulties of analysis, the previous approach will continue to be applied. 4.217  The issue arose in a post CA 2006 context in Halcyon House Limited v Baines [2014]  EWHC  2216. Here modest preparatory steps to compete were taken at a stage when the other directors had resolved to impose their views upon the management of the company and to ignore the position of the defendant director, Mrs Baines, who was also on maternity leave. HHJ Seymour indicated that, following In Plus Group, he was inclined to the view that any fiduciary duty owed by Mrs Baines to the employer company had therefore come to an end notwithstanding that her directorship had not terminated. However, he preferred to found his decision on the conclusion that there was no breach of duty in any 192

Scope of fiduciary duties 4.220

event if fiduciary duties continued. There was no consideration as to how the termination of fiduciary duties was to be reconciled with the statutory duties under CA 2006. As noted above, the suggestion that all fiduciary duties had come to an end was inconsistent with the approach to former directors set out in section 170(2) CA 2006. 4.218  Again, as discussed further below (4.282–4.284), in Allfiled UK Ltd v Eltis [2016]  FSR  11, at paragraph  102, Hildyard J  considered that the approach in Foster Bryant continued to apply. The issue arose in the context of continuing duties after resignation, and as such it was not necessary to consider the impact of the continuing duty of loyalty in section 172 CA 2006. However, applying the interpretative obligation under section 170(4) CA 2006, we suggest that the continuing obligation is likely to be construed as allowing for an assessment of what loyalty, and avoidance of a conflict of interests, requires in all the circumstances including the fact of having been excluded from duties. 2(j)(ii)  Section 1157(1) Companies Act 2006 4.219  In the case of a director excluded from management, a similar result might be reached, without the need to ameliorate the duties which on their face arise under sections 172 and 175  CA  2006, by virtue of section 1157(1)  CA  2006 (brought into force on 1 October 2008). This provides that: ‘If in proceedings for negligence, default, breach of duty or breach of trust against— (a)

an officer of a company, …

… it appears to the court hearing the case that the officer … is or may be liable but that he acted honestly and reasonably, and that having regard to all the circumstances of the case (including those connected with this appointment) he ought fairly to be excused, the court may relieve him, either wholly or in part, from his liability on such terms as it thinks fit.’

4.220  The predecessor of this provision, section 727(1) Companies Act 1985, which was in similar terms to section 1157(1)  CA  2006, was considered in Coleman Taymar Limited v Oakes [2001] 2 BCLC 749. Part of the claim against Mr Oakes related to the period after he had ceased to be an employee and no longer had any connection with the business other than that he had not resigned as a director. This was regarded as a technicality, in that he was neither paid nor given any information about the company, nor asked to do anything in relation to it, and was treated as if he had resigned. In those circumstances he was relieved from liability for having entered into competition with the company after his employment ended (although he was liable for steps which led to a conflict of interest prior to termination of his employment). His Honour Judge Reid QC observed that it was a pre-requisite for relief under section 727 that the director had acted both honestly and reasonably. If those conditions are satisfied, the court must still consider whether, in all the circumstances, the director ought fairly to 193

4.221  Employee fiduciary duties

be excused and, if so, may (not must) relieve him either absolutely or on such terms as the court thinks fit. The burden of proof on each of the issues is on the director: Re Stuart [1897] 2 Ch 583. The judge also rejected a submission that the relief is not available in response to a claim for an account of profits. However, relief is not available in response to a claim for recovery of the company’s property held by the director as constructive trustee: Guinness plc v Saunders [1990] 2 AC 663 (HL) at page 702C per Lord Goff. 4.221  Section 1157 may ordinarily be less likely to apply in relation to a breach of section 172  CA  2006 since (at least where there has been some consideration of the issue of whether the conduct was in the interests of the company) it involves want of good faith. It is though possible to conceive of exceptions. One possibility may be where a director’s good faith belief is that reporting certain information would be most likely to promote the success of the company but reasonably forms the view that there is no obligation to do so as a result of exclusion from management of the company. If the Court, notwithstanding the approach in Foster Bryant, concluded that the failure to report was a breach of section 172, then section 1157 might provide a fall-back. The provision may also be relevant in relation to a breach of the no profit or no conflict duty if not accompanied by bad faith: see Odyssey Entertainment Limited (in Liquidation) v Kamp [2012] EWHC 2316 per Simon Barker QC at paragraph 224. 4.222  In any event for relief to be granted there will need to be significant mitigating considerations or evidence of hardship or injustice. In Trowers v Premier Waste Management Limited [2012] IRLR 78 the defendant director was found to have acted in breach of the duty in accepting a loan of equipment from a customer without making disclosure of this to the company. There was a breach of the no conflict duty and the duty not to make a secret profit. At first instance relief was refused on the grounds that the defendant had not acted reasonably. In upholding the decision, the Court of Appeal noted that there was little more to add in the absence of any mitigating factor for the breach of duty, or evidence of hardship or injustice that might be relevant to the granting of relief. The court noted a number of arguments advanced which did not justify granting relief: the absence of any finding of bad faith or of any actual conflict, the fact the defendant had relied on another employee to sort matters out and had not had direct contact with the customer, the absence of quantifiable loss by the company and the negligible profit for the defendant. 4.223 Relief was, however, granted in Patel v Ferdinand (2016) Unreported, Birmingham District Registry, 11 July 2016 in the context of an unfair prejudice petition. Here the directors, Ms Patel and Ms Ferdinand, were each 50% shareholders in the company through which they carried on their solicitors’ practice. The company was a successor to their partnership. Their relationship broke down irretrievably and they could no longer work together. They each wanted to buy out the other, but no agreement was reached. Discussions about dividing up the business were complicated by a legal aid contract. Ms Ferdinand acquired a firm (Fosse) with an existing legal aid contract and started working under that name instead of for the company. Other than remaining as a director, she severed her 194

Scope of fiduciary duties 4.225

connection with the company and took the staff who worked for her and the clients she then had to the new firm. Purle J noted that relief under section 1157 was not lightly to be granted to a defaulting director, but concluded that, exceptionally, it was appropriate here. The only practical course was for the two directors to set up separately in business with their own respective clients. That would inevitably have been the outcome of any negotiated agreement as to the way forward. The appropriate course would have been to wind up the company on just and equitable grounds for them to go their separate ways. However, the same result had followed in practice, with both directors ending up with their own clients, and no diversion of each other’s clients. Whilst Ms Ferdinand’s conduct in setting up in competition and taking her clients was a breach of fiduciary duty, she was found to have acted honestly. She had continued to work for the company until she had started out on her own. She had taken legal advice and honestly believed she could properly act as she did. Setting up separately was the only sensible way forward once continuation of the quasi-partnership was not practical, albeit that it should have been reached via an application to wind up. As such she was found to have acted honestly and reasonably in all the circumstances. 4.224  However, reliance on professional advice will not necessarily be sufficient to show that the director acted reasonably. An argument based on reliance on advice failed in Richard Hunt Investments Limited v Hunt [2017]  EWHC  988 (Ch). Here the defendant director, Mr Hunt, had caused payments to be made to himself which were said to be for the purposes of sustaining the underlying business when it was transferred to two new companies as part of a pre-pack administration. There was a breach of fiduciary duty as a result of focussing on the underlying business as whole rather than the interest of the claimant as a separate corporate entity. The section 1157 defence failed on the basis that although Hunt acted honestly he had not acted reasonably. It was accepted that in some circumstances the fact of acting on professional advice could found grounds for being excused. However, here the argument that Hunt had relied on the advice of the claimant’s liquidator failed since: (a) the liquidator had not given unequivocal advice or approval of the payments; he had not known of the amounts of the first payments and had no knowledge of later payments until after they were made; (b) Hunt was an experienced (though not sophisticated) director, having been a director of many companies, and (c) the amount of the payments could not be objectively justified as it had not been shown they had been fully spent in the way claimed. See also (by analogy) Power Adhesives v Sweeney [2017] EWHC 676 (Ch) where, in deciding that a resolution to issue shares to one of the company’s directors should be set aside due to failure to take into account all relevant considerations, the court concluded that it was no answer that professional advisers (auditors) were involved as the directors had not used all proper care and diligence in the way that they were involved. 4.225  Despite the requirement of acting reasonably as well as honestly, relief is potentially available for a director found to have acted in breach of the duty to exercise reasonable care and skill: Re D’Jan of London Limited [1993] BCC 646; Northampton Regional Livestock Centre Co Limited v Cowling [2014] EWHC 30. In Re D’Jan a factor pointing in favour of relief was that the defaulting director 195

4.226  Employee fiduciary duties

was a 99% shareholder and the company was solvent so that at the time he was putting his own interests at risk by the lack of care (in not reading certain forms before signing). It is also relevant to take into account whether there was gross negligence or, at the other extreme, if it is a marginal decision, and whether there was board authority for the acts alleged to be negligent. Northampton Regional Livestock Centre Co Limited v Cowling [2014] EWHC 30 concerned an alleged sale of land at an undervalue. One of the defendants, Mr Cowling, was alleged to have acted in breach of his statutory duty to exercise reasonable care as a director of the vendor company, and of his duty as a fiduciary by virtue of being a partner in the firm acting as agents responsible for marketing the property. The court (Green J) concluded that Mr Cowling had not acted negligently. However, in the alternative it was found that even if he had acted in breach of his duty to use reasonable care and skill, relief would have been granted under section 1157 on the basis that he had acted honestly and in good faith at all material times, had obtained board approval for the acts now alleged to be negligent, and that if he had been found to be negligent it would have been a marginal finding.

2(k)  Duty of disclosure 2(k)(i)  Basis for the duty of disclosure 4.226 As explained by Arden LJ in Item Software (UK) Limited v Fassihi [2004] IRLR 928 (CA), at paragraph 41, directors and other fiduciaries do not owe a separate and independent duty to disclose to the principal either their own misconduct or, more generally, information of relevance or concern to it. Arden LJ reasoned that to impose a separate duty would lead to a proliferation of duties and arguments about their breadth. Instead, in assessing whether failure to make disclosure amounts to a breach of fiduciary duty, it is necessary to focus on the fiduciary obligation to act in what the fiduciary in good faith considers to be the best interests of his principal (or now, in relation to directors, the equivalent duty under section 172 CA 2006). 4.227  Aside from express disclosure obligations (as to which see 5.37–5.42), a duty of disclosure might also be identified through other routes: •

As noted at 4.116, a disclosure duty might also arise from the duty under section 174 CA 2006 to exercise reasonable care and skill. This provides for an objective assessment rather than the subjective test under section 172 of what is considered in good faith to be most likely to promote the success of the company. In practice that is unlikely to be a significant distinction in the light of the objective test that applies under section 172 CA 2006 where there has been no actual consideration of what is in the best interests of the company.

•

The obligation under section 177 CA 2006 where a director is directly or indirectly interested in a proposed transaction to declare both the nature and extent of the interest to the other directors. (There is also an obligation under section 182  CA  2006 to declare to the other directors the nature

196

Scope of fiduciary duties 4.228

and extent of any direct or indirect interest in any transaction previously entered into by the company.) That might be relevant for example where the employer seeks to recover sums paid under a termination agreement. In Gamatronic (UK) Ltd v Hamilton [2017]  BCC  670 (4.199–4.201) the court held that, subject to restitution being given for benefits received, there had been a right to rescind a Share Purchase Agreement on the basis of (amongst other grounds) failure to give full information, including as to the directors’ wrongdoing, before entering into the agreement with the principal. That aspect of the reasoning is unpersuasive, in that it relied on a common law/equitable principle of fair dealing with the principal, whereas the duty under section 177 CA 2006 is framed in narrower terms as to the nature and extent of the interest in the contract. Nor was it necessary to rely on this route, as the duty of disclosure in any event arose under section 172 CA 2006 (at paragraph 209(ii)). •

Disclosure in order to obtain authorisation by informed consent so as not to infringe the duty under section 175 CA 2006 to avoid a conflict of interest. However, here the duty is to avoid the conflict of interest, rather than a duty of disclosure.

•

One of the grounds relied upon at first instance in Fassihi (at paragraph 54) as the basis for the duty of disclosure was that a director who was making a profit by appropriating the company’s contract for his own benefit would need to make disclosure as part of his obligation to account for the profit (and indeed the profits would be subject to a constructive trust in favour of the principal: FHR European Ventures LLP v Cedar Capital Partners LLP [2015] AC 250 (SC)).

4.228  In most cases, however, the focus falls naturally on the section 172 duty (or its common law/equitable equivalent for non-directors). As discussed in Chapter 3, and as emphasised in Ranson v Customer Systems Plc [2012]  IRLR  769, a different analysis is required when considering whether a director has a duty of disclosure as compared to other employees. The extent to which a non-director employee may owe duties of disclosure will depend on whether such an obligation can be spelled out of the contractual terms and what is implicit in the nature of the role, bearing in mind that the duty of loyalty entails a duty to carry out the particular job which the employee agreed to do (Ranson at paragraph 43). By contrast in the case of a director, the starting point is to apply the statutory duties including under section 172  CA  2006 (4.103). Where the employee is aware of a competitive threat to the employer, in the case of a non-director employee consideration is required as to whether, by way of exception to the general position, the employee’s role and contractual duties, and the circumstances, are such that a duty should be imposed. By contrast, a straightforward application of the wording of the test under section 172 CA 2006 would ordinarily indicate that if considering the matter in good faith the director would regard it as being in the interests of the company for it to be made aware of the competitive threat at the earliest opportunity. As such there is less to be done to establish such a duty. Instead, there needs to be explained why the duty should not apply, taking into account public policy considerations as to restraint of trade as suggested in 197

4.229  Employee fiduciary duties

Balston Limited v Headline Filters Limited [1990] FSR 385 and supported by dicta in Foster Bryant Surveying Limited v Bryant [2007] IRLR 425. A consequence is that a duty of disclosure may more readily be established on the part of a director compared with other employees. 4.229  The potential difference between the scope of a director’s fiduciary obligation, and the duties of a non-director employee is illustrated by the decision in Pennwell Publishing (UK) Limited v Ornstien [2007] IRLR 700 (QBD). As also discussed at 3.109 and 4.13, the claim concerned three employees who established a rival company during their employment and engaged in conduct going beyond the boundaries of permissible acts in preparation for competition, including the use of Pennwell’s confidential information, to establish the rival business. It was contended that one of the employees, Mr Isles, who was not directly involved in that activity, should have reported the conduct of his colleagues. The submission was accepted in relation to conduct at a conference chaired by Mr Isles, since this clearly fell within his contractual responsibility. However, Justin Fenwick QC (sitting as a deputy judge) concluded that there was no (contractual) obligation of disclosure in relation to the earlier conduct of one of his colleagues, Mr Ornstien. He took into account in particular that, although Mr Isles held a senior role, Mr Ornstien held the more senior position, being the most senior UK member of staff. In those circumstances, the judge was not satisfied that a duty to report the conduct arose. There was no need to consider whether there would have been a different result as a consequence of fiduciary obligations, because a submission that Mr Isles owed such obligations was rejected. Applying the test in Item Software (UK) Limited v Fassihi [2004] IRLR 928 (CA), if Mr Isles had been a director it might more readily have been concluded that he could not have been acting in good faith, and with regard to the duty to promote Pennwell’s business relationships, in failing to disclose the misconduct of his colleagues. The assessment would have focussed on whether Mr Isles had given any consideration to whether disclosure was required in the company’s interests, and if not, whether if acting in good faith he would have concluded that such disclosure was required, as to which relevant factors would have included the extent of Mr Isles’ knowledge of his colleague’s wrongdoing, and whether he was aware that it exceeded the limits of permissible preparatory activities. 4.230  Whilst it is apparent that the fiduciary duties upon a director may lead to obligations of disclosure that may not apply to a non-director employee, it is questionable whether for employees who are not directors, any fiduciary obligations that may be found to apply are liable to lead to a duty of disclosure that would not otherwise arise by way of contractual obligation. As discussed in Chapter 3, the Court of Appeal’s analysis in Ranson was to the effect that an analysis of the employee’s role and contractual terms shape both the content of the duty of fidelity and the existence and extent of any implied fiduciary duties. That may in turn indicate that, whilst the distinction may still be important in relation to remedies, the very analysis that might lead to a fiduciary obligation including to make disclosure, would equally point to a contractual obligation of disclosure in the same circumstances either pursuant to express terms or the implied duty of fidelity. In Ranson, giving the only substantive judgment, Lewison LJ (at paragraph  57), 198

Scope of fiduciary duties 4.232

expressed scepticism as to whether, in the event that the implicit requirements of the role and contractual duties entailed an obligation to disclose information, it was necessary to add a fiduciary obligation to buttress what would in any event be a breach of a contractual obligation. 4.231  The imposition of a positive duty of disclosure as an aspect of the duty to act in good faith in the way that best promotes the interests of the company is controversial. As Newey J noted in GHLM Trading Limited v Maroo [2012] 2 BCLC 369 (at paragraph 193), whilst the decision in Fassihi might be regarded as now supported by section 172 CA 2006, ‘it breaks new ground in treating a fiduciary duty as prescriptive rather than merely proscriptive’. As explained by the Court of Appeal in Attorney-General v Blake [1998] Ch 439 (CA) at pages 455D–E, the traditional view is that ‘equity is proscriptive, not prescriptive … It tells the fiduciary what he must not do. It does not tell him what he ought to do’. This was followed in Forsta AP-Fonden v Bank of New York Mellon SA/ NV [2013] EWHC 3127 (Comm) where, in a banking context, Blair J, at paragraph 184 (having cited Blake) regarded the duty to act in the client’s interests as connoting a duty to avoid conflicts and not to make secret profits, and considered that positive obligations arose only as remedies, rather than standalone duties when the negative obligation was breached – such as the duty to make disclosure of a conflict of interest and seek consent from the principal. This was on the basis that fiduciary duties properly so called are proscriptive. Fassihi has not been followed in Australia, where it has been emphasised that fiduciary duties are ‘limited to imposing constraints on conduct which the fiduciary has in fact embarked upon and not by imposing a positive obligation of disclosure of the kind assumed by a duty to disclose’: P & V Industries Pty Limited v Porto [2006] VSC 131, Supreme Court of Victoria at paragraph 43 and Westpac Banking Corp in Hoh v Frosthollow Pty Ltd [2014] VSC 77. (A contrary view was expressed in the Western Australian Court of Appeal in Westpac Banking Corporation v Bell Group Ltd (No 3) [2012] WASCA 157, but that view has not subsequently been followed. See further Low, ‘Fiduciary duties: the case for prescription’ (2016) Trust Law International 3.) Other commentators, whilst taking issue with the position adopted in P&V Industries v Porto that fiduciary duties are solely proscriptive, have acknowledged the uncertainty liable to arise from the reasoning in Fassihi (see Ho and Lee, ‘A director’s duty to confess: a matter of good faith?’ CLJ 2007, 66(2), pages 348–364). In Porto the approach in Fassihi was criticised (at paragraph 32) for, in effect, creating a separate duty of disclosure ‘without adequately describing the true scope of the obligation, other than by vague reference to the interests of the company’. However, as a matter of English law the approach in Fassihi is now well-established. 2(k)(ii)  Disclosure of wrongdoing 4.232  Arguably one area of distinction between an employee’s duties of disclosure arising from the implied duty of fidelity, and that which may arise where fiduciary duties are engaged, concerns whether there is a contractual duty upon employees to disclose their own wrongdoing. If there is a contractual duty to report on the wrongdoing of others it is no answer that this may inevitably lead to 199

4.233  Employee fiduciary duties

disclosure of the employee’s own wrongdoing: Sybron Corporation v Rochem Ltd [1983] 3 WLR 713 (CA); British Midland Tool (see 4.187). However, traditionally, Bell v Lever Brothers [1932] AC 161 (HL) has been taken as authority for the proposition that there is no obligation for an employee to disclose his or her own wrongdoing. Thus, in Nottingham University v Fishel [2000]  ICR  1462, Elias J (at page 1486C) rejected a submission that Dr Fishel was obliged to disclose the fact that he had earned sums from third parties, on the basis that if there was such an obligation it would ‘circumvent the well-established rule … that employees are not obliged to disclose their own past misconduct or breaches of contract’. As discussed in Chapter 3 (at 3.91–3.100), the better view is that there may be circumstances where the duty of fidelity does require employees to disclose their own wrongdoing. However, that is not yet well established, and there remain first instance decisions which continue to regard Bell v Lever Bros as authority to the contrary: see Halcyon House Limited v Baines [2014] EWHC 2216 per HHJ Seymour QC at paragraph 236. 4.233  It is, however, well-established that, applying the test in Item Software (UK) Limited v Fassihi [2004] IRLR 928 (CA), fiduciary duties may give rise to an obligation to disclose the fiduciary’s own wrongdoing irrespective of whether wrongdoing of any other person is involved. That was the position in Fassihi. The directors of Item included Mr Dehghani, the managing director, and the defendant, Mr Fassihi, who was the sales and marketing director. Item decided to negotiate more favourable terms with a customer, Isograph, for whom it distributed software products. Mr Fassihi secretly approached Isograph with his own proposals which involved establishing his own company, RAMS, to take over the contract. At the same time Mr Fassihi encouraged Mr Dehghani to press Isograph for terms more favourable to Item. Agreement was nearly reached by Mr Dehghani with Isograph, but the negotiations failed because Mr Dehghani insisted on terms that Isograph was not prepared to accept. Isograph then terminated the contract by giving 12 months’ notice, expiring on 11 May 2000. Item then discovered Mr Fassihi’s misconduct, and he was summarily dismissed. Item brought proceedings against Mr Fassihi alleging, amongst other things, that Mr Fassihi was in breach of fiduciary duty in failing to disclose to Item his own wrongdoing in negotiating behind Item’s back, and that this had resulted in loss of profit due to the termination of the agreement with Isograph. That claim was upheld. Arden LJ (giving the leading judgment), concluded that Mr Fassihi could not reasonably have come to the conclusion that it was not in the interests of Item to know of his breach of duty and he could not fulfil his duty of loyalty except by telling Item about his setting up of RAMS, and his plan to acquire the Isograph contract for himself. Although referring to what Mr Fassihi could reasonably have concluded, given the nature of the test under section 172 (see 4.103–4.113), in essence this may be better viewed as reflecting a finding that either Mr Fassihi must have concluded that disclosure was in Item’s best interest if he had considered the matter, or in any event would have done so if he had considered the issue in good faith. 4.234  Prior to the Court of Appeal’s decision in Fassihi, in Tesco Stores Limited v Pook [2004] IRLR 618, Peter Smith J accepted that there was no duty on an 200

Scope of fiduciary duties 4.236

employee to disclose breaches of contract which did not involve a fiduciary element, but held that there was a positive duty to disclose breaches of fiduciary duty (see 3.94–3.95). Peter Smith J expressed a similar view in Hanco v ATM Systems Limited v Cashbox ATM  Systems Limited [2007]  EWHC  1599, in Hemsley v Graham [2013] EWHC 2232 (Ch) at paragraphs 409–411 and again in Haysport Properties Limited v Ackerman [2016] BCC 676 (considered at 16.112). To the extent this indicated that there is a free-standing duty to disclose wrongdoing, rather than one that may arise from the duty under section 172 CA 2006 or its common law equivalent, that was contrary to the approach in Fassihi: see Stupples v Stupples & Co (High Wycombe) Limited [2013] 1 BCLC 729 at paragraph 59; Wey Education Plc v Atkins [2016] EWHC 1663 (Ch) at paragraph 146. It also follows from the fact-specific nature of the section 172 duty that it is not necessarily always the case that every breach of duty (by the director or by others within the director’s knowledge) has to be disclosed. Thus, in Wey HHJ David Cooke contrasted a breach by a director in establishing a competing business in secret (where a duty to disclose would plainly arise applying the section 172 duty), with the case of a director making an exaggerated expenses claim (where it was questionable whether such a duty will arise). However, in practice, and subject to the extent of the director’s knowledge, at least where there is serious wrongdoing (which tends to negate concerns as to the public policy as to restraint of trade), the application of that duty is liable to require disclosure by a director where there is a current or future threat to the commercial interests of the company. Consistently with this, referring to the approach adopted in Hanco, in Bank of Ireland v Jaffery [2012] EWHC 1377, Vos J noted that Peter Smith J had held that: ‘it was clear law that an employee who owes fiduciary duties (whether a director or not) owes a duty, as part of those fiduciary duties, to disclose his own wrongdoing to his employer. The scope and extent of this duty could depend on the precise circumstances, but in the case of a clear commercial conflict of interests, it seems to me to be right to say that such a conflict must be disclosed.’

4.235 Applying that approach Mr Jaffery, a senior executive of the claimant bank, was found to have acted in breach of admitted fiduciary duties in not disclosing his own wrongdoing. Although not a director he held a closely analogous position. He acted in breach of his duty to act in good faith in the interests of the claimant in granting loans to certain customers without loan documentation or adequate security and without proper authorisation notwithstanding that the claimant was not in the business of making commercial loans. Once it became apparent that a substantial proportion of the loans had not been repaid within the time required, he acted in breach of fiduciary duty in not informing the other directors that there was a substantial amount still outstanding. It was in the employer’s best interest to know of the situation so that it could take steps to ensure that the defendant could not make such loans again. 4.236  Typically in cases of serious wrongdoing, including crossing the line into impermissible activity in relation to competition or preparation to compete, it will be obvious that disclosure is in the employer’s interests, if only so as to be able to address the consequences of the wrongdoing, prevent a repeat and/ or to remove an untrustworthy director. That was the case in ODL  Securities 201

4.237  Employee fiduciary duties

Ltd v McGrath [2013]  EWHC  1865 (Comm) (see 4.33). The defendant Mr McGrath, was employed by the claimant broking company as Head of Risk, and found to owe the same fiduciary duties as if he had been a director. Although his role entailed minimising risk, in breach of his fiduciary duty he granted risky commercial loans which it was found that he knew he did not have authority to do. It was apparent shortly after the first loan of US$1.5 million that it had not been repaid within the time agreed, and despite continuing promises remained outstanding. There was a breach of fiduciary duty in failing to disclose his misconduct in making the unauthorised loans and that there remained a substantial amount outstanding. It was plainly in the claimant’s interests to be informed of this so that they could have taken steps to ensure that Mr McGrath was not in a position to make any such disadvantageous loans in the future. In relation to a further loan there was a stark conflict of interest in that it was made at a time when the borrower was on the verge of insolvency, and the loan was made and a bribe accepted as a last throw of the dice to have the first loan repaid, knowing that Mr McGrath faced personal liability in relation to it. Again (as must have been obvious if the issue had been considered in good faith) it was plainly in the interests of the claimant to be made aware at least of the conflict of interest. 4.237  Similarly in IT Human Resources Plc v Land [2014] EWHC 3812, considered at 16.130–16.131, applying the approach in Fassihi of focussing on the duty to act in good faith in the best interests of the principal resulted in a duty on the defendant, who was a director of the claimant, to disclose having acted in breach of fiduciary duty in supplying the claimant’s copyright material to a third party. Again in Wey Education Plc v Atkins [2016] EWHC 1663 (Ch), the fiduciary duty of loyalty resulted in a disclosure duty. The defendant, Dr Atkins, had procured the appointment of additional directors to a company (TMET) which was to be the vehicle to implement a plan to pursue opportunities in the education sector. She was a director of the claimant companies and obliged to use her powers as director of the sole shareholder in TMET in the interests of the claimant companies. In fact the appointment of the additional directors was part of a plan to take control of TMET and with it the benefit of grant money and the potential to develop future opportunities, and was a breach of the fiduciary duty of loyalty. She had then made partial disclosures designed so as not to arouse suspicion, and to present the changes as having been made at the insistence of the Department of Education when that was not the case. The court concluded that in the circumstances her duty of loyalty required her to disclose what she had done, which would have brought forward the date of her dismissal. Damages were awarded reflecting the salary paid in the interim. See also eg Dorma UK Limited v Bateman [2016] IRLR 616. At the interim relief stage, springboard relief was granted where the court proceeded on the basis that the defendant branch manager owed fiduciary duties and there was a strong inference that he had acted in breach of them by conniving in the recruitment by a competitor of a complete team and failing to report this. 2(k)(iii)  Disclosure of competitive threats irrespective of wrongdoing 4.238 Necessarily implicit in the approach adopted in Item Software (UK) Limited v Fassihi [2004] IRLR 928 (CA), is that the obligation of a fiduciary to 202

Scope of fiduciary duties 4.240

make disclosure is not limited to disclosure of wrongdoing. As Newey J noted in GHLM Trading Limited v Maroo [2012] 2 BCLC 369 (at paragraph 195): ‘… it can be incumbent on a fiduciary to disclose matters other than wrongdoing. The “single and overriding touchstone” being the duty of a director to act in what he considers in good faith to be in the best interests of the company (to quote from Etherton J  in Shepherds Investments Ltd v Walters [2006]  EWHC  836 (Ch), [2007] 2 BCLC 202, at paragraph132), there is no reason to restrict the disclosure that can be necessary to misconduct. Were a director subjectively to consider that it was in the company’s interests for something other than misconduct to be disclosed, he would, it appears, commit a breach of his duty of good faith if he failed to do so.’

4.239  However, when applied in the context of whether a duty arises to disclose a competitive threat a straightforward application of the test of what is believed in good faith to be in the best interests of the employer becomes problematic. It is likely to be in the employer’s interest to know at the very earliest stage that a senior employee is considering alternative employment options, but having regard to public policy concerning restraint of trade it is plainly not the case that the employee, certainly where acting alone, is under a duty to disclose this. Further, the approach of the court in Fassihi was to emphasise the flexibility of the concept of fiduciary loyalty. Arden LJ emphasised (at paragraph 63) that there was no difficulty in applying this in Fassihi, which was a case involving disclosure of wrongdoing in circumstances such as to make the remedy for an existing liability of a director to account for secret profits and for diversion of corporate opportunities more effective. In the light of the serious wrongdoing, there was no scope for arguments by reference to public policy relating to restraint of trade. However, as discussed above (4.173–4.206) in the context of preparations for competition, the scope and application of the duty under section 172 CA 2006 (or its common law/equitable equivalent) is affected by public policy considerations relating to restraint of trade. A key issue is the extent to which such considerations may have the effect that there is no requirement for disclosure despite it being in the employer’s interest to be informed of the employee’s planned activities not involving wrongdoing, such as preparation to compete lawfully after employment. As Arden LJ noted in Fassihi (at paragraph 63): ‘If the approach of the law were overly intrusive, legitimate entrepreneurial activity would be discouraged and this would not be a beneficial outcome.’

4.240 In Balston Limited v Headline Filters Limited [1990]  FSR  385 at page 512, Falconer J  held that it followed from his conclusion that the intention to enter into competition after ceasing to be a director and the taking of preparatory steps was not a breach of fiduciary duty, nor was it a breach of fiduciary duty to fail to disclose this. In British Midland Tool Limited v Midland International Tooling Limited [2003] 2 BCLC 523 Hart J distinguished Balston on the basis that it concerned disclosure about the director’s own conduct. By contrast British Midland Tool was concerned with a plan by four directors to compete, and which necessarily involved maintaining secrecy over the plan after forming an irrevocable intention to compete. However, Hart J’s reasoning also made clear that the duty of disclosure was capable of arising without any other wrongdoing on the 203

4.241  Employee fiduciary duties

part of the director or any other employee. It was capable of giving rise to a duty to inform the company of any activity, actual or threatened, which damaged the employer’s interests. To that end, Hart J concluded (at paragraph 89) that: ‘A director’s duty to act so as to promote the best interests of his company prima facie includes a duty to inform the company of any activity, actual or threatened, which damages those interests. The fact that the activity is contemplated by himself is, on the authority of Balston, a circumstance which may excuse him from the latter aspect of the duty. But where the activity involves both himself and others, there is nothing in the authorities which excuses him from it. This applies, in my judgment, whether or not the activity in itself would constitute a breach by anyone of any relevant duty owed to the company.’

4.241  Applying and expressly agreeing with this approach, in Attwood Holdings v Woodward [2009] EWHC 1083 (the facts of which are set out at 4.198) the deputy judge (John Martin QC) commented (at paragraph 24) that: ‘It seems to me clear that, if a director learns that an employee is proposing to set up in competition, he is under an obligation to warn the company of that fact; and that obligation cannot be any weaker merely because he is himself involved in the proposal.’

On this basis, there was found to have been a breach of fiduciary duty by the defendant director in failing to alert the company to the impending competitive threat arising from the steps being taken by another employee to set up in competition, irrespective of whether those steps involved any breach of that other employee’s duty of fidelity and irrespective of the defendant director’s own involvement with those steps. 4.242  Similarly in Shepherds Investments (see 4.188–4.190), Etherton J  concluded that, at the latest from the point when the departing directors formed an irrevocable intention to compete, each of them was obliged to disclose at least the actual or threatened activity of the other defendants in setting up a competing business, whether or not in so doing the other defendants were acting in breach of a duty. However, it does not necessarily follow that an irrevocable intention to resign will give rise to a duty of disclosure: Gamatronic (UK) Ltd and another v Hamilton and Mansfield [2017] BCC 670 at paragraph 88(iii) and see 4.185–4.206. The issue is fact-specific, taking into account amongst other things whether there is a team move. 4.243 Equally, particular responsibilities undertaken may demand disclosure at a stage before there is an irrevocable intention to compete. In Odyssey Entertainment Limited (in Liquidation) v Kamp [2012] EWHC 2316 the claimant company traded in film distribution rights. The defendant director, Mr Kamp, was the Chief Executive Officer. He reported to the board that financial prospects for the company were poor. Ultimately the board made the decision to wind down the business. Meanwhile Kamp had set up another film rights company and worked to acquire rights for himself and the company. Judge Simon Barker QC concluded that Kamp had acted in breach of fiduciary duty as he had misled the board about his intentions and kept secret the work undertaken on his own 204

Scope of fiduciary duties 4.245

account. Had the board not been misled it would probably not have taken the decision to wind down the business which had enabled Kamp to secure rights to films that would otherwise probably have been acquired or retained by the claimant. The particular situation of the company and the advice being given by Kamp made early disclosure of his contemplated plans particularly important. As Judge Simon Barker QC put it (at paragraph 214): ‘… where a director has decided or is even seriously contemplating carrying on a business similar to that carried on by the company and is recommending the closure of the company’s business, the legal obligation of good faith under s.172 will not be met by remaining silent about that fact or serious possibility.’

4.244  More controversial is the application of British Midland Tool by the decision of Wyn Williams J  in Kynixa Limited v Hynes [2008]  EWHC  1495. The claimant employer was a specialist provider of rehabilitation and case management services for individuals who suffered injury. The first defendant, Mr Hynes (D1), was a director, senior employee (equivalent to chief operating officer) and a shareholder of the claimant. The second defendant, Ms Preston (D2) and third defendant (D3) were employees but not directors. However, the court concluded that D2, who was also a minor shareholder, owed fiduciary duties on the basis that she held a senior position as Head of Business Development, was responsible for or party to many important business decisions and privy to all aspects of the claimant’s business. Each of the defendants was approached separately by and ultimately took up employment with a competitor within the Parabis group of companies. It was not suggested that any of the defendants played a role in encouraging the others to leave or in identifying them as appropriate employees to approach. Rather, Parabis (through a Mr Roberts) had set out to recruit all three defendants. Further, even before the approach from Mr Roberts, D1 had indicated his dissatisfaction in his employment with the claimant and made clear that he wished to leave at the end of March 2007, though he did not resign as a director. 4.245  In considering the duties of disclosure which arose in these circumstances, the court emphasised (at paragraphs 190–192) that it was not considering what the position would have been if the defendants had acted without the knowledge of the intention of any other of the defendants also to join the competitor. The issue as to the extent to which a director may in those circumstances have to disclose his or her own intentions to leave and then compete did not arise. However, applying the analysis of Hart J in British Midland Tool, the court found that both D1 and D2 acted in breach of their fiduciary duties (and also their duty of fidelity) from early January 2007 when they became aware, through discussion with each other, that they had both been approached by Mr Roberts, but failed to disclose this to their employer. At that stage they were obliged to disclose the fact of their own discussions with Mr Roberts and all that they knew of the approach to the other. Further, following Hart J in British Midland Tool, the obligation to report did not rest on there having been any wrongdoing by the defendants in entering into discussions with Mr Roberts. In taking up employment with a competitor, both D1 and D2 were in breach of a covenant in the shareholders’ agreement not to be engaged or interested in a competing business for a period of 12 months 205

4.246  Employee fiduciary duties

from ceasing to be connected with the claimant. However, the reasoning that there was a breach of fiduciary duty in failing to report the approaches by Mr Roberts did not rest on this. Indeed, in relation to D2 the court rejected all claims that she had acted in breach of her contractual duties prior to the termination of employment, other than by virtue of the failure to report. The duty to report seems to have been triggered simply by knowledge of an approach to D1 and herself. 4.246  As discussed in 3.133–3.135, D3 was found also to have acted in breach of her duty of fidelity but that conclusion may have been driven by the aspect of having misled the employer, together with her being part of the employer’s senior management. However, at least in relation to D1 and D2, the decision in Kynixa did not rest on the fact of having positively misled the employer. In the case of D2 it was found ([2008] EWHC 1495 at paragraphs 272–273) that, at the time that D2 initially came under the duty to report, she had not yet misled the claimant about her future intentions. Nor did the decision rest on any preparatory steps to compete, or whether the employees had irrevocably formed an intention to engage in a competing business. The court considered whether it might be said that D2’s duty to report did not arise notwithstanding her knowledge of the approach to D1, at a stage when D2 had not yet made up her mind whether to accept the offer. This was rejected on the basis of the finding that there was at least a ‘serious possibility’ that she would accept the offer. 4.247 The implications of this approach in the context of a team move are potentially far-reaching. The decision indicates a broad duty to disclose where employees, though not acting in concert or otherwise acting unlawfully, are aware that colleagues are also being recruited – at least in circumstances where (as in Kynixa) this involves the most senior management of the employer being recruited by a competitor. If correctly decided, it therefore indicates that it is not necessarily an answer to a claim of breach of fiduciary duty that a senior employee has done nothing other than be head-hunted by a competitor and knows that at least one other important employee has been approached, subject to it being the case that loss of these employees to a competitor could properly be regarded as a threat to the employer’s interests. It is not an answer that the employee played no role in soliciting the other employee to leave and was not engaged in any other wrongdoing. Nor does it make a difference that the employee owed fiduciary duties by virtue of the senior position held and could not therefore, without first serving out notice, take the course suggested by Hart J in British Midland Tool in relation to directors of resigning immediately from the fiduciary position if she did not want to disclose her intentions. Potentially this significantly limits the freedom to manoeuvre of an employee intending to move to a competitor, at least where other employees are approached at the same time. Thus, where an employee opts not to resign until after payment of a bonus, the employer may be able to argue that the bonus payment was made only by virtue of the breach of fiduciary duty in failing, before payment was made, to disclose the intention to move. 4.248  The court in Kynixa did not consider whether taking into account restraint of trade considerations would lead to a different conclusion as to whether 206

Scope of fiduciary duties 4.249

fiduciary duties were engaged or infringed. Leaving aside such considerations the duty of disclosure followed naturally from the duty to act in good faith in the best interests of the company. If taking public policy as to restraint of trade into account it can be argued that the decision did go too far in so far as it indicated that senior employees have an obligation to report the competitor’s approach from the point at which it is known that another senior employee has also been approached, and in the absence of any other unlawful conduct. This places a substantial fetter on an employee’s ability to explore employment options, and places an employee who may still be undecided as to his or her future in an invidious position in having to report the approach to the employer. Indeed, whilst the line of cases following British Midland Tool points to a broad approach to the duty of disclosure of a competitive threat at least on the part of those who are directors, as explained in Foster Bryant and First Subsea (at paragraph 206), the precise point at which preparations to compete are to be regarded as impermissible, and indeed when there is a duty to make disclosure, is fact-sensitive and the decisions following British Midland Tool may be regarded as taking into account public policy considerations of restraint of trade in drawing the line as to where the disclosure duty arises. 4.249  Such considerations are implicit even in the broad approach adopted in Kynixa. Although the reasoning proceeded on the basis of a distinction between a case where the director only had his own conduct to report and where he/she was aware of the conduct of others, that distinction is not easily reconcilable with simply applying a test of whether disclosure is required so as to act in good faith to promote the employer’s business. The departure of a single employee might also be a serious threat to the interests of the employer. The explanation we suggest lies in the role of public policy in relation to restraint of trade in fashioning the scope of the fiduciary duty or whether it is engaged, so that an employee, acting without knowledge of approaches made to other employees, is not to be regarded as having failed to act in breach of fiduciary duty by failing to disclose an approach, or even a settled intention, to join a competitor. The decision of Falconer J  in Balston to the effect that a director does not act in breach of fiduciary duty in planning to set up in competition after employment and failing to report this intention has not been specifically overruled, and indeed may be regarded as receiving support from subsequent decisions including in Foster Bryant and Gamatronic (see 4.199–4.201). Just as the scope of what is required by fiduciary duties has been adapted to take into account the context of an employee excluded from a business, so those duties are capable of taking into account the consideration that they should not impose obligations which amount to an excessive restraint of trade. This is consistent with the recognition in Fassihi that the approach of the law should not be overly intrusive. It is also consistent with the recognition in Foster Bryant of the potential role for restraint of trade considerations (see 4.196). There may be a good reason for an employee to be legitimately concerned not to disclose the approach by a competitor until after all terms have been finalised. The employee might, for example, be concerned not to sour the relationship with the current employer. The fact that it may be in the employer’s interest to be informed that the employee is considering leaving is not, we suggest, a sufficient basis to impose an obligation of disclosure. 207

4.250  Employee fiduciary duties

4.250  It does not, however, follow that taking into account such public policy considerations should have led to a different conclusion on the facts in Kynixa. D1 and D2 had senior responsibility for managing and developing the business as a whole and associated fiduciary obligations. In the light of those responsibilities it was part of their duties to strive to preserve the claimant’s business. D1, as a director, was in the position of a trustee of the company’s property and in relation to D2, who was not a director, the responsibilities of the role could readily be seen as giving rise to a disclosure obligation in order to protect the business. As key members of the senior management team, they were entrusted with protecting the company’s business. Even if public policy militates that a director should not be required to disclose his own formative departure plans, it does not follow that he should be able to withhold information about approaches to others which the company would need to know about so as to be able to seek to protect its position, or that the director should be permitted to refrain from making disclosure until the point when the horse has bolted because an irrevocable decision has already been made to leave. Put another way, if the director was not himself planning to leave but became aware of the approaches to other key employees, there would not be a convincing reason to qualify the section 172 duty in its requirement of disclosure. It would be strange if the fact that the director was also himself planning to leave should lead to a different conclusion. 4.251 A  further complication arises where, although the recruiting employer initially only seeks to recruit one key employee, this is with the intention that after having left employment he will then, lawfully, lead the drive to recruit other members of his former team. A variation is where the key employee is recruited as a talisman on the basis that there will be no need for him to be involved in recruitment. The mere fact of his leaving to join the competitor will lead others in the former team to follow. In both cases the recruitment would be part of an attempt to poach the team as a whole. Indeed, this may well be reflected in lucrative terms offered to the initially recruited employee. However, in these cases at the time of recruitment of the initial employee there might be no other steps being taken to recruit other members of the team. Applying the reasoning in Balston, it might be said that there is no intention to compete until after employment and that there is no information as to any other employee intending to leave. By reference to restraint of trade considerations, it might be said that it would be overly intrusive to require an employee to make disclosure of the approach where there has not yet been any approach to any other employee and where the employer will have the opportunity to protect itself before the employee’s notice expires. 4.252  Once the relevance of restraint of trade considerations are acknowledged, we suggest it follows that considerations applicable to whether a duty of disclosure is liable to arise under the duty of fidelity in the absence of other wrongdoing are also liable to be material in relation to where the line is drawn for employees owing fiduciary duties, as to which see 3.114. That is necessarily the case for employees whose fiduciary obligations arise not from being a director but out of their role and duties as employer, since the fiduciary duties are shaped by the contractual duties and role (Ranson). As emphasised in Ranson, care is needed in applying the line of authorities concerning directors or de facto directors to 208

Scope of fiduciary duties 4.253

the case of non-director employees where the prior issue needs to be addressed as to whether fiduciary duties are owed. A  duty to report may as a result be more difficult to establish, though it may still arise on the basis of considering the employee’s role and contractual responsibilities. The difference is illustrated by the decision in Helmet Integrated Systems Inc v Tunnard [2007] IRLR 126 (CA) (see 3.27–3.30 and 4.178). An analysis of the contractual obligations led to the conclusion that Mr Tunnard owed no contractual or fiduciary duty to disclose the idea he had hit upon during his employment for a new type of safety helmet which would be in competition with the claimant’s products, and the steps taken to advance that idea including by applying for funding and arranging for product designers to prepare concept drawings. As a matter of construction, bearing in mind the need for clear wording to restrict preparation for competition, Mr Tunnard’s contractual obligations did not extend to disclosing his own preparations to compete and as such he was found to owe no relevant fiduciary obligation to disclose his own activities. Had he been a director, the prior issue of whether he owed relevant fiduciary obligations would not have arisen. Indeed there was a recognition in Helmet (at paragraph  50) that it might be easier to establish a breach of duty due to non-disclosure if fiduciary obligations were owed. Further, on its face it was plainly in the company’s interest to be informed of the competitive threat liable to be posed by the idea he was developing. 4.253  However, restraint of trade considerations are also material even in the case of a director. As such the factors summarised at 3.138 are likely to remain relevant, albeit that (subject to the specific considerations arising in cases of exclusion from management) the director’s responsibility for the business as a whole and role as trustee of its assets will tend to push the boundary more towards a duty of disclosure of a competitive threat, particularly when not simply arising from the director’s own preparations or intention to leave. One fact relevant both to the duty of fidelity and fiduciary duties is likely to be the degree of certainty and knowledge of what is afoot or what is planned and the reliability of the information received as to this. The focus on whether there is an irrevocable intention to compete may be regarded as one aspect of this, but it is capable of applying more widely. The decisions in Halcyon House Limited v Baines [2014] EWHC 2216 and Basildon Academies v Amadi UKEAT/0342/14/ RN, 27 February 2015 provide an illustration of this in the context of the scope of the duty of fidelity (see 3.136). A similar approach was apparent in the context of director’s fiduciary duties in Howard & Palmer Limited v Colebrook and Everett UKEAT/0416/14/DM, 3 March 2015 (Langstaff J). Here the respondent employer was a company specialising in the niche market of unlicensed medicines. The claimant employees had been directors of the respondent, who had been approached by a mutual contact, Mr Kent, who planned to set up his own pharmaceutical company, which they were invited to join. With a view to doing so, they tendered their resignations. They were then unfairly dismissed. In relation to contributory fault it was argued, relying on British Midland Tool, that they were in breach of the duty they owed as directors, by virtue of the duty to act in the best interests of the company, to inform the company of any activity, actual or threatened, which could damage the company’s interests. The EAT concluded that the Employment Tribunal had been entitled to conclude that there had been 209

4.254  Employee fiduciary duties

no breach, since the claimants did not know that Mr Kent’s company would be a direct competitor until after they had resigned as directors. Further, the judge commented that the extent of the director’s duty to inform of actual or threatened activity which might damage the employer must depend on the particular circumstances and could not be taken so far as, for instance, to oblige a director who might read of some gossip in newspapers as to a potential competitor’s plans, to tell the board of this. Here even if they did not know of all the details, the two directors were involved in plans to set up a business which could possibly come into a position of conflict with the employer’s business. However, they did not know that this would be the case. The case was therefore distinguishable from one of directors conspiring together to leave their employment and to set up in competition, and the Employment Tribunal was entitled to conclude that there was no breach of duty in failure to make disclosure of what was afoot. 4.254  However, where the approach by the new employer is known to be part of a broader plan to attract key members of the current employer’s workforce, the approach in British Midland Tool and Kynixa would suggest, especially in the context of a senior employee or director with responsibility for the business, that fiduciaries’ obligations to protect the business would be engaged and this would entail an obligation to provide early warning of the threat. If the employee continues to have fiduciary obligations, either because of not resigning as a director or arising out of the obligations as an employee even after giving notice of termination of employment, a duty to disclose the known threat may arise. An employee with responsibilities for the business (on the approach in British Midland Tool and Kynixa) could not, consistently with those continuing obligations, keep from the employer knowledge of a particular competitive threat where it would plainly be in the interest of the employer to be forewarned. 4.255  The decision in Kynixa (if correctly decided in the relevant respects) has implications as to how a recruiting employer can safely operate in the context of seeking to poach a team of employees. Clearly the targeted employees should not be involved in the recruitment prior to leaving employment. That is not, however, sufficient – at least where the targeted employees include members of the senior management. Further steps are required so as to seek to avoid the disclosure consequences that are likely to arise in a team move case. If possible (though in practice this may be difficult) a prudent course would be to avoid discussing recruitment of other employees with the targeted employee prior to leaving employment. In addition, it would be sensible to ask, at least until the employer has been notified of the intended departure to the new employer, that the targeted employee should not discuss with other employees either the fact of the approach by a competitor or that consideration is being given to moving to work for the competitor. Equally, the practice of all targeted employees attending together to finalise their contracts is to be avoided. This may, of course, be a substantial obstacle where, in order to persuade the employee to move, the recruiting employer needs to persuade the employee that a viable team will be recruited. However, applying the approach in Kynixa, the consequence of communicating that the employee is being recruited as part of a wider attempt to target key employees of the current employer is likely to be, at least in relation to 210

Scope of fiduciary duties 4.257

directors and employees in senior management with responsibility for promoting and preserving the business, that a duty of disclosure will be triggered both as a fiduciary obligation and pursuant to the implied duty of fidelity. 4.256 Depending on the circumstances, difficulties may still arise despite seeking to ensure that the targeted employee does not discuss the matter with colleagues. It may be obvious in the circumstances that the approach by the competitor employer is part of a wider drive to recruit from the current employer. That inference may be particularly strong where the targeted employee could not realistically operate except as part of a wider team. A court may infer that it would be unrealistic for there not to have been discussions with the employee as to how that team would be put together. It might be argued that, even if not stated expressly, other members of the current team were bound to be targeted and that the employee must have appreciated that would be the case. Indeed, there might be scope to argue, depending on the senior management responsibilities held, that in circumstances giving rise to suspicion of a strategy to poach key employees, there would be a duty to investigate and make enquiries as to whether this is the case, so as to take appropriate steps to protect the business. That contention may be supported by the analysis in RBG  Resources plc v Rastogi [2002] EWHC 2782, where it was held that the duty of fidelity arguably gave rise to an obligation to investigate whether there was wrongdoing (see the discussion in Chapter 3 at 3.111). Given the flexibility emphasised in Fassihi afforded by the requirement to act in good faith to promote the business of the employer, there is scope for further development to encompass such an obligation, though it may be countered that it would go too far, having regard to restraint of trade considerations. 2(k)(iv) To whom should the disclosure be made? 4.257  As discussed in 3.116, in RBG Resources plc v Rastogi [2002] EWHC 2782 the court recognised the duty of disclosure arising under the duty of fidelity may in some circumstances, where disclosure to the employer’s governing organs would be ineffective, extend to disclosure to others where that is necessary to protect the interests of the company. As the court acknowledged in GHLM Trading Limited v Maroo [2012] 2 BCLC 369, the same may apply by virtue of the test under section 172  CA  2006 or its common law/equitable equivalent. GHLM was a Spanish clothing business. Mr and Mrs Maroo transferred their shares in GHLM to a company beneficially owned by Mr Binani in return for him agreeing to invest £1m in the business. The Maroos continued to run the business and were GHLM’s only directors. GHLM’s business was not successful and in May 2007 Mr Binani decided that it should be closed down. He tried to remove the Maroos as directors but Mr Maroo refused to resign unless paid sums he claimed he was owed by the business and arranged for almost £100,000 of stock to be transferred to a company controlled by the Maroos, allegedly in relation to settlement of a loan to GHLM by Mrs Maroo. This entailed a breach of fiduciary duty in preferring a particular creditor over the class of creditors given that the company was on the verge of insolvency. However, as a means of seeking to resist payment 211

4.258  Employee fiduciary duties

of outstanding remuneration to the Maroos, it was also argued that they should have disclosed their own wrongdoing, and that because the Maroos were the only directors, the disclosure should have been to the shareholder. The court accepted (at paragraph 198) that in principle such disclosure might be required. As Newey J explained at paragraphs 198–199: ‘198 … If a director subjectively concluded that it was in the company’s interests for a matter to be disclosed to a person who was not a member of the board (or if he would have so concluded had he been acting in good faith), it would, it appears, be incumbent on him to ensure that such disclosure was made. 199. On the other hand, a director’s duty of good faith is owed to his company, not to shareholders. The question is therefore as to what the director thought (or would have thought) was in the company’s interests. That disclosure might have been in a shareholder’s interests will not matter as such.’

4.258  Newey J did not accept that it inevitably followed that wider disclosure was required where both directors were involved in the wrongdoing. The issue is fact-specific. It was possible that a director could conclude in good faith that what was required was a change of heart by the board, and that disclosure to the shareholders was not in the interest of the company. Here the argument that wider disclosure was required failed on the facts because, rather than focussing on the breach of fiduciary duty found, no doubt with a view to establishing an earlier duty of disclosure it relied on other matters that were not pleaded or clearly put in cross-examination as required given the allegation of want of good faith. As such it was not established in relation to the matters relied upon that the Maroos considered that disclosure of such matters (which were not limited to alleged wrongdoing) would be in the best interests of the company or would have so concluded if considering the matter in good faith. Nor was it established that disclosure to the shareholder of the matters alleged would have made any difference. 4.259  The broad approach, however, illustrates that where a duty of disclosure would otherwise arise so as to protect the interests of the employer, it is not necessarily an answer that the directors of the company are all believed to be subject to suspicion. If for example a team move is planned involving the immediate supervisors, or even the board as a whole, the duty to act in the best interests of the employer may require reporting to others able to protect the interests of the employer such as the parent company. 2(k)(v)  Summary in relation to duty of disclosure 4.260  The issue of whether a fiduciary is under an obligation to give disclosure relating to preparations for competition causes difficulty for several reasons. There is liable to be a tension between a straightforward answer to the question whether disclosure would promote the success of the company (or principal/ employer), and public policy relating to restraint of trade, or as Arden LJ put it in Fassihi (see 4.239) protecting legitimate entrepreneurial activity. In practice, it will often be important for the employee to be able to consider and explore options and undertake preparations without revealing this to the employer, whilst 212

Scope of fiduciary duties 4.262

conversely it is in the employer’s interest to be informed as soon as possible so as to be able either to seek to dissuade the employee/director from following that course or to plan for the future or take other steps to protect its position. Further, even where disclosure is given, far from drawing a line under matters that may prompt further questions from the employer as to the departing employee’s plans, including matters which are properly to be regarded as the employee/director’s own private information (see 3.141). 4.261  In the context of preparation for competition (or steps going beyond mere preparation), in broad terms, the relevant issues in relation to an employee who is also a director, are: •

Whether the director considered that the success of the company was most likely to be promoted by disclosure or, where there was no consideration of that issue, would that have been the conclusion if the issue had been considered in good faith?

•

If so, whether nevertheless, taking into account the public policy in relation to restraint of trade (including allowing freedom to compete after the termination of the directorship/employment, and an associated degree of freedom to prepare for competition), no duty of disclosure arises, or does not arise until a later stage (eg upon forming a settled intention to compete)?

Whilst the same issues might arise in relation to a non-director employee who owes relevant fiduciary obligations, there is a prior issue as to whether relevant fiduciary obligations arise at all. The considerations relevant to the determination of that issue (focussing on the contractual obligations and nature of the role) may well also effectively determine whether a duty of disclosure arises. 4.262  In approaching the issue as to whether the section 172 duty (or its common law/equitable equivalent) gives rise to a disclosure duty, the following considerations are likely to be relevant: •

Whether the conduct has involved wrongdoing (whether by the director/ fiduciary or by others involved in the preparatory steps, or going beyond mere preparatory steps) aside from by virtue of non-disclosure by the director/fiduciary. The significance of this is likely to be two-fold. First, it tends to negate any concerns as to public policy in relation to restraint of trade. Second it is likely to be clear that disclosure of the wrongdoing and related conduct will be in the interests of the employer (see 4.236).

•

Whether the director/fiduciary is acting alone or other employees are involved. Ordinarily, aside from any specific contractual obligations, a director/fiduciary acting alone is not under an obligation to report the fact of having been approached by a competitor or to report plans to set up in competition in future (Balston Limited v Headline Filters Limited [1990]  FSR  385). That may be affected by the specific circumstances or responsibilities of a director, for example where there is a conflict of interest in relation to negotiations for which the director is responsible. Conversely 213

4.263  Employee fiduciary duties

where the director is aware of a threat to the employer’s business resulting from other employees being targeted or planning to leave, and a consequent need for the employer to take steps to protect its business, a duty of disclosure is likely to arise (British Midland International Tooling v Midland International Tooling Limited [2003] 2 BCLC 52; Shepherds Investments Limited v Walters [2007] IRLR 110; Attwood Holdings Limited v Woodward [2009] EWHC 1083; Kynixa Limited v Hynes [2008] EWHC 1495 (QB)). •

The nature of the role of the fiduciary/director, including any specific reporting responsibilities and any conflict of interests that arise in carrying out the particular role entrusted to the director/fiduciary (eg Framlington Group plc v Anderson [1995] 1  BCLC  475; Odyssey Entertainment (In Liquidation) v Kamp [2012] EWHC 2316). The director is a trustee of the assets of the company as a whole, but given the need to balance public policy as to restraint of trade, even in relation to a director the particular functions undertaken may be significant, as may be the fact of being excluded from aspects of the management role.

•

The nature of the preparatory steps – for example whether they are liable to interfere with carrying out the employee’s’ duties (see eg Gamatronic (UK) Ltd and another v Hamilton and Mansfield [2017]  BCC 670 – considered at 4.199) or to give rise to a conflict of interest in carrying out those duties.

•

The nature and extent of the competitive threat, and whether it is past or ongoing.

•

On the authorities, it is relevant whether the director has formed a settled intention to enter into competition (Shepherds Investments), and indeed at that point a director must resign from office unless informed consent is obtained. However, the fact of forming such an intention is not necessarily determinative (Gamatronic) and a duty may also arise at an earlier stage as a result of the specific role and responsibilities of the director/fiduciary (Odyssey Entertainment) or the nature of the competitive threat (Kynixa). Where for example there is known to be a plan by another employer to attract key members of the current employer’s workforce, the fiduciaries’ obligation to protect the business is likely to entail an obligation to provide an early warning of the threat.

•

The degree of certainty and knowledge of what is afoot or what is planned and the reliability of the information received as to this (see 4.253).

2(l) Exploitation of business opportunities after ceasing employment/directorship 2(l)(i)  Overview in relation to position after directorship 4.263 In Hunter Kane Limited v Watkins [2003]  EWHC  186 (Ch D) Bernard Livesey QC (sitting as a deputy judge) set out (at paragraph 25) the following 214

Scope of fiduciary duties 4.263

propositions, principally in relation to the position of a director leading up to resignation and after resigning: ‘1.

A  director, while acting as such, has a fiduciary relationship with his company. That is he has an obligation to deal towards it with loyalty, good faith and avoidance of the conflict of duty and self-interest.

2.

A  requirement to avoid a conflict of duty and self-interest means that a director is precluded from obtaining for himself, either secretly or without the informed approval of the company, any property or business advantage either belonging to the company or for which it has been negotiating, especially where the director or officer is a participant in the negotiations.

3.

A director’s power to resign from office is not a fiduciary power. He is entitled to resign even if his resignation might have a disastrous effect on the business or reputation of the company.

4.

A fiduciary relationship does not continue after the determination of the relationship which gives rise to it. After the relationship is determined the director is in general not under the continuing obligations which are the feature of the fiduciary relationship.

5.

Acts done by the directors while the contract of employment subsists but which are preparatory to competition after it terminates are not necessarily in themselves a breach of the implied term as to loyalty and fidelity.

6.

Directors, no less than employees, acquire a general fund of skill, knowledge and expertise in the course of their work, which it is plainly in the public interest that they should be free to exploit in a new position. After ceasing the relationship by resignation or otherwise a director is in general (and subject of course to any terms of the contract of employment) not prohibited from using his general fund of skill and knowledge, the “stock in trade” of the knowledge he has acquired while a director, even including such things as business contacts and personal connections made as a result of his directorship.

7.

A director is, however, precluded from acting in breach of the requirement at 2 above, even after his resignation where the resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself any maturing business opportunities sought by the company and where it was his position with the company rather than a fresh initiative that led him to the opportunity which he later acquired.

8.

In considering whether an act of a director breaches the preceding principle the factors to take into account will include the factor of position or office held, the nature of the corporate opportunity, its ripeness, its specificness and the director’s relation to it, the amount of knowledge possessed, the circumstances in which it was obtained and whether it was special or indeed even private, the factor of time in the continuation of the fiduciary duty where the alleged breach occurs after termination of the relationship with the company and the circumstances under which the relationship was terminated, that is whether by retirement or resignation or discharge. 215

4.264  Employee fiduciary duties

9.

The underlying basis of the liability of a director who exploits after his resignation a maturing business opportunity of the company is that the opportunity is to be treated as if it were the property of the company in relation to which the director had fiduciary duties. By seeking to exploit the opportunity after resignation he is appropriating to himself that property. He is just as accountable as a trustee who retires without properly accounting for trust property.

10. It follows that a director will not be in breach of the principle set out as point 7 above where either the company’s hope of obtaining the contract was not a “maturing business opportunity” and it was not pursuing further business orders nor where the director’s resignation was not itself prompted or influenced by a wish to acquire the business for himself. 11. As regards breach of confidence, although while the contract of employment subsists a director or other employee may not use confidential information to the detriment of his employer, after it ceases the director/ employee may compete and may use know-how acquired in the course of his employment (as distinct from trade secrets – although the distinction is sometimes difficult to apply in practice).’

4.264 These propositions were drawn largely from the decisions in CMS  Dolphin Limited v Simonet [2001] 2  BCLC  704 and Island Export Finance Limited v Umunna [1986]  BCLC  460, in turn approving with some modification the comments of Laskin J  in the Supreme Court of Canada in Canadian Aero Service Limited v O’Malley (1973) 40 DLR (3d) 371. In Foster Bryant Surveying Limited v Bryant [2007] IRLR 425 (CA), Rix LJ referred (at paragraph 76) to the summary in Hunter Kane as being ‘perceptive and useful’, and it has been treated as authoritative in several subsequent decisions (including Sintra Homes Limited v Beard [2007] EWHC 3071 (Ch D); Michael Wilson and Partners v Emmott [2011]  EWHC  1411 (at paragraph  113); Thermascan Limited v Norman [2011]  BCC  535 (at paragraph  14) and Allfiled UK  Ltd v Eltis [2016]  FSR  11 (at paragraph  54)). In Foster Bryant Rix LJ emphasised that the application of the principles in any particular case is highly fact sensitive and that courts ‘have adopted pragmatic solutions based on a commonsense and merits-based approach’. However, as considered in more detail below: (1) Proposition 4 is now expressly qualified by section 170(2)  CA  2006 in relation to: (a) the continuation of fiduciary duties after termination of the directorship as regards the exploitation of any property, information or opportunity of which the director became aware when serving as a director, and (b) accepting benefits from third parties as regards anything done or omitted to be done prior to ceasing to be a director. (2) Related to this, the law is in a state of development as to the extent to which propositions 7 and 10 remain an accurate statement of the law, in particular in relation to the proposition that a former director will not be in breach of fiduciary duty if resignation was not prompted or influenced by a wish to secure a maturing business opportunity for himself. 216

Scope of fiduciary duties 4.265

2(l)(ii)  Do fiduciary obligations continue after resignation as a director? The position other than under the Companies Act 2006 4.265  The position prior to the CA 2006 (or where it does not apply, including for employees owing fiduciary obligations other than directors) was summarised at paragraphs 7–11 of the propositions set out in Hunter Kane. A  key issue, where there was no other breach of duty during the directorship, was therefore whether the director’s resignation was prompted or influenced by the wish to pursue a maturing business opportunity. Whilst this placed a focus on conduct prior to resignation, there was some divergence in the authorities as to whether this was explained on the basis: (a) that the fiduciary duties ended on resignation and the restrictions on conduct after resignation were explained by preventing the director benefitting from or taking advantage of a breach prior to resignation, or (b) that the no conflict rule ends, but the no profit rule continues. The issue continues to have significance even in relation to the position of former directors in cases governed by the CA 2006 regime since: (1) The theory that fiduciary duties end on resignation both explains the significance of the reasons for resignation, and leaves no scope for any liability where the decision to take advantage of an opportunity that was being pursued by the former employer is only conceived after termination. As explained in Foster Bryant Surveying Ltd v Bryant [2007]  IRLR  425 (see 4.211), the rationale for the restriction on the director’s conduct postresignation is to prevent advantage being procured from the disloyalty, and exploitation of an opportunity in circumstances of conflict of interest and duty, prior to resignation. (2) Conversely, the theory based on the continuation of the no profit rule provides a less cogent explanation of the focus on the reasons for resignation. As explained in CMS Dolphin v Simonet (see 4.295–4.297), the rationale lies in the treatment of a maturing business opportunity as being quasiproperty in relation to which the fiduciary continues to have duties after the termination of the directorship. However, if it is to be treated as a form of property, that begs the question as to why the duty in relation to it is dependent on the circumstances of departure. The explanation may lie in a merits-based assessment of where the balance is to be struck between preventing a director profiting from his or her position as director, and public policy against restraint of trade such as has also been endorsed in identifying the boundaries of permissible preparation to compete whilst still a director. If so, that suggests that the requirement that resignation be prompted or influenced by the requirement to procure the opportunity should be less hard-edged. It may be better regarded as one factor bearing on the merits-based assessment, but might not be essential in all cases. (3) That in turn has a bearing on the proper construction of the provisions under the CA 2006. First, identification of the position at common law/equity, and indeed whether it was settled, is relevant to the approach to construction militated by section 170(4) CA 2006. Secondly, since the statutory language adopts a position approximating more closely to the rationale based on 217

4.266  Employee fiduciary duties

continuation of the no-profit rule, that suggests a move away from an approach which flows from the hard-edged need to identify disloyalty and/or a conflict of interest prior to resignation of the directorship. That is further reinforced by the constraint on conflicts of interest under CA 2006 not only based on a conflict of duty and interest or duty and duty, but also a conflict between interest of the (former) director and interest of the company (see 4.140). 4.266 Prior to the decision in Foster Bryant Surveying Limited v Bryant [2007]  IRLR  425 (CA), the favoured analysis was that upon resignation as a director the no conflict rule ceased to apply, but the no profit rule continued (see Ultraframe (UK) Limited v Fielding [2005]  EWHC  1638 (Ch D) at paragraph 1308; Wilkinson v West Coast Capital [2005] EWHC 3009 at paragraph 251; CMS Dolphin v Simonet [2001] 2 BCLC 704; Quarter Master UK Ltd v Pyke [2005] 1 BCLC 245 at page 264 and British Midland Tool Ltd v Midland International Tooling Ltd [2003] 2 BCLC 523). On this analysis, since the director has no powers to exercise after resignation, there is no risk of being swayed in the exercise of any such powers, and so the no conflict rule has no application, but the no profit rule preventing a director profiting from his position continues. However, it was also recognised that the constraints entailed by the rule required fashioning in terms that entailed a lesser restriction than that which was applicable to a serving director. That balance was exemplified by the approach in Island Export Finance Limited v Umunna [1986] BCLC 460. Mr Umunna was the managing director of a company which pursued business in West Africa, and which obtained an order by the postal authorities in Cameroons for 6,000 postal caller boxes. After resigning as managing director, Mr Umunna obtained for his own company two further orders for similar equipment from the same department in Cameroons. In rejecting the claim that in doing so he breached a fiduciary duty, Hutchison J placed reliance on the absence of a maturing business opportunity which the company was actively pursuing, and that the resignation was not prompted or influenced by a wish to acquire that opportunity for himself (or to divert it to a third party). However, whilst that analysis entailed a focus on the reasons for departure, Hutchison J (at page 480E–G) also rejected as being unsustainable, the contention that there could be no continuing duty after termination of employment. Equally, though, he recognised (at page 482D–E) that any approach which had the effect in absolute terms of preventing a former director exploiting information obtained by virtue of his or her position as a director was too broad, particularly where the information could be regarded as part of the director’s ‘general fund of knowledge and their stock-in-trade’ (page 482D–E). 4.267 The approach in Umunna was explained by Lawrence Collins J  in CMS Dolphin Ltd. v Simonet [2001] 2 BCLC 704, at paragraph 96, in the following terms: ‘In my judgment the underlying basis of the liability of a director who exploits after his resignation a maturing business opportunity of the company is that the opportunity is to be treated as if it were property of the company in relation to which the director had fiduciary duties. By seeking to exploit the opportunity after resignation he is appropriating for himself that property. He is just as accountable as a trustee who retires without properly accounting for 218

Scope of fiduciary duties 4.270

trust property. In the case of the director he becomes a constructive trustee of the fruits of his abuse of the company’s property, which he has acquired in circumstances where he knowingly had a conflict of interest, and exploited it by resigning from the company.’

4.268  Given that the maturing business opportunity was regarded as a form of property, the analysis begged a question as to why the director was only constrained from exploiting it where he resigned from the directorship in order to do so. That question was answered by Rix LJ in Foster Bryant Surveying Limited v Bryant [2007] IRLR 425 (CA) on the basis that there was no continuing duty on ceasing to be a director. Rix LJ explained (at paragraph 69) that: ‘In my judgment, Lawrence Collins J  was not saying that the fiduciary duty survived the end of the relationship as director, but that the lack of good faith with which the future exploitation was planned while still a director, and the resignation which was part of that dishonest plan, meant that there was already then a breach of fiduciary duty, which resulted in the liability to account for the profits which, albeit subsequently, but causally connected with that earlier fiduciary breach, were obtained from the diversion of the company’s business property to the defendant’s new enterprise.’

4.269  The focus on conduct prior to ceasing to be a director is consistent with the approach in Industrial Development Consultants Limited v Cooley [1972] 1 WLR 443. Mr Cooley was the managing director of the claimant company with responsibility for producing business in the field of developing gas depots. The claimant company entered into negotiations with a gas board for the development of four depots. The negotiations were unsuccessful. However, the gas board approached Mr Cooley and indicated that they would be prepared to contract with him personally. Mr Cooley resigned from his position with the claimant after obtaining release from a five-year fixed term contract by misrepresenting to his employer that the state of his health was his reason for early departure. He entered into the contracts with the gas board, having obtained that work as a result of work he did whilst he was managing director of the claimant. He was found to be accountable for the profits made under the contracts, notwithstanding that the claimant would not in any event have obtained the work. The court placed emphasis on the fact that whilst he was still managing director Mr Cooley had received and failed to disclose information about the contracts, including that the gas board were coming back into the market and considering building the depots and regarded the project as a matter of urgency. The reasoning therefore proceeded on the basis of a breach of the no conflict rule (as well as the no profit rule) whilst Mr Cooley was still employed. 4.270  Rix LJ’s reasoning was consistent with the view expressed by the Court of Appeal in Attorney-General v Blake [1998] Ch  438 where the Court stated (at page 453H) that it did not recognise the concept of a fiduciary obligation which continues notwithstanding the determination of the particular relationship which gives rise to it. However, even aside from the CA 2006, the concept of treating the approach to departing directors as based on the fiduciary duty ending upon termination of the relationship could not be regarded as settled. In Global 219

4.271  Employee fiduciary duties

Energy Horizons Corp v Gray [2012] EWHC 3703 the approach in Umunna was again treated (by Vos J) as entailing a continuing fiduciary duty. The defendant was found to have held fiduciary obligations to the claimant company by virtue of his role in working on a strategy to acquire an interest in a business which owned a technology pertinent to increasing production of oil wells. This was an opportunity which had come to him in his capacity as a fiduciary of the claimant company. It was a corporate opportunity of the claimant since it was at all material times one which the claimant was actively pursuing. He sought to bring his obligations to the claimant to an end by stating that he intended to work for another investor and would pursue only his own interest and those of that investor. Vos J concluded that the defendant had not legitimately terminated his fiduciary relationship with the claimant company because he had sought to do so in order to take advantage of the claimant’s business opportunity for himself and the other investor. Vos J therefore concluded (at paragraphs 474–477) that the defendant continued to owe fiduciary duties to the claimant in relation to pursuing that opportunity but, as in Umunna, the focus was on the circumstances in which he purported to terminate those obligations. 4.271  Again in Harbro Supplies Ltd v Hampton and others [2014] EWHC 1781, the analysis proceeded on the basis that fiduciary duties could survive after ceasing to be a director. Further the analysis was to the effect that even aside from the statutory regime introduced by the CA 2006, proposition 10 in the Hunter Kane summary does not accurately state the law in that continued liability is not necessarily contingent on a fiduciary’s intention when resigning. Mr Hampton was a director of the claimant, Harbro, until December 2012 when he was asked to leave by the managing director. Following his departure from Harbro, he set up in competition with Harbro though his company, JSL. Harbro operated a database with details of customers and suppliers, and details of the buying history of customers and the price at which products were sold to them. He was found to have used the database after his departure for his competing business. The information contained in the database was found not to be confidential. HHJ  Saffman concluded that Mr Hampton had copied the Harbro database onto his own computer for purposes detrimental to the company. However, he proceeded to analyse the position on the basis that he was wrong about this, and that Mr Hampton had retained the database legitimately and only decided to make use of it for his competing business after termination of his directorship and employment. Although the relevant events occurred after the CA 2006 was in force, the position was analysed without reference to the statutory provisions. HHJ Saffman concluded that the views expressed in Foster Bryant did not exclude the possibility of fiduciary duties extending beyond the date of termination of employment with the company even where: (a) termination did not come about at the initiative of the director, and (b) the issue concerned use of property (here the database) legitimately acquired. Here, although the information on the database comprised information that was not confidential, the compilation constituted Harbro’s property (albeit that the reasoning did not refer to database rights). The reason for departure was regarded as relevant but not determinative. If the relationship had ceased at the initiative of the director because he sought to take advantage for purposes adverse to the company of information which 220

Scope of fiduciary duties 4.274

had come into his possession by virtue of his directorship Saffman J considered that would be sufficient to establish a breach of fiduciary duty. However, even if that was not the case, following the approach in Foster Bryant (see 4.196), there was to be a pragmatic, merits-based approach to whether there was a breach of fiduciary duty. Given that Mr Hampton himself acknowledged that the information in the database ought not to have been used, it was a blatant misuse of Harbro’s property in breach of fiduciary obligations. 4.272 The approach in Harbro might be explained on the basis that it was concerned with property in a narrow sense (intellectual property rights) and not merely a maturing business opportunity or confidential information (short of being akin to trade secrets). If and in so far as it was intended to say, more broadly, that an intention to resign to make use of information acquired as a director would be a breach of duty, rather than restricting this to information properly regarded as property of the employer (as in Harbro) or which is sufficiently confidential to be protectable after employment or which amounts to a maturing business opportunity (see 4.285–4.290), that would plainly be too wide. It would be directly contrary to the approach in Umunna, and encapsulated in proposition 6 in the oft-approved passage in Hunter Kane, that a director is ‘not prohibited from using his general fund of skill and knowledge, the “stock in trade” of the knowledge he has acquired while a director, even including such things as business contacts and personal connections made as a result of his directorship’. 4.273  Further, HHJ Saffman’s reliance on Foster Bryant, both in relation to the application of a pragmatic merits-based approach and for the proposition that fiduciary duties could continue after termination of the directorship, ran directly contrary to the analysis of Rimer LJ in Foster Bryant (at paragraph 69) that the fiduciary duty did not survive the end of the period of office. On that basis there was no scope to find that there could be a breach of fiduciary duty based only on a decision made after the period of office to make use of information which the director had legitimately obtained. However, the position is otherwise on the basis of the line of authority that the fiduciary duty may survive the fiduciary relationship, and now codified in the provisions of the CA 2006 (addressed below). On that basis the question instead arises of why it should be permissible for the director to exploit for his or her own purposes company property or opportunities where the ability to do so arises from the directorship. The answer may lie in the need to balance restraint of trade considerations, leading to the adoption of a merits-based pragmatic approach. The position under the Companies Act 2006 4.274  Section 170(2) CA 2006 provides that: ‘A person who ceases to be a director continues to be subject— (a)

to the duty in section 175 (duty to avoid conflicts of interests) as regards the exploitation of any property, information or opportunity of which he became aware at a time when he was a director, 221

4.275  Employee fiduciary duties

(b)

to the duty in section 176 (duty not to accept benefits from third parties) as regards things done or omitted by him before he ceased to be a director.

To that extent those duties apply to a former director as to a director, subject to any necessary adaptations.’

4.275  Where a duty arises other than pursuant to the no conflict and no profit rules, the duty (though not liability for breach of the duty) therefore comes to an end on ceasing to be a director. Disclosure obligations arising by reason of the duty to act in good faith in the interests of the company therefore do not apply. 4.276  However, contrary to proposition 4 in Hunter Kane Limited v Watkins [2003] EWHC 186 (Ch D) (see 4.263), it is clear that in the respects specified in section 170(2), the fiduciary relationship does continue after the termination of the relationship which gives rise to it. Section 170(2) therefore does not follow the approach in Foster Bryant and Attorney-General v Blake that fiduciary obligations do not survive the termination of the period of office. Nor does it follow the line of cases to the effect that the no conflict rule comes to an end upon resignation as a director. The approach adopted may, however, be regarded as similar to that in the line of cases indicating that the no profit rule may continue after termination. The premise for the proposition that the no conflict rule did not continue was that there was no scope for a conflict with the duty to the company once the role as director came to an end. That issue is side-stepped under the CA 2006 by the provision applying the restriction to a conflict of interest (of the company) and interest (of the director or ex-director) (section 275(1)). A conflict of interest and interest will ordinarily be inherent in unauthorised exploitation by a former director of property, information or opportunities of which he became aware during the directorship. 4.277  Further the provision for a duty which continues after the termination of the relationship in turn calls into question whether the conditions for liability set out in Hunter Kane propositions 7 and 10 (see 4.263) continue to apply. One aspect of this is that the restriction in section 170 does not on its face qualify the kind of property, information or opportunity to which it can apply. In that respect, however, the answer no doubt lies in the applying of the interpretive provision in section 170(4) CA 2006, together with section 170(2) which expressly provides that the duty applies to a former director subject to ‘necessary adaptations’. Read together these provisions would appear to provide an ample basis to construe the reference to ‘property, information and opportunity’ consistently with the prior approach. Thus, reference to information and opportunities is likely to be construed so as not to include any information but only that which is sufficiently confidential to be protected after termination of the relationship (see 6.21–6.38) or which amounts to a maturing business opportunity. 4.278  However, the position is less clear in relation to whether the reason for the director leaving office remains relevant. Indeed, as noted above, the analysis as to there being no fiduciary obligations after termination of the directorship provides the most cogent rationale for the condition that resignation be prompted 222

Scope of fiduciary duties 4.280

or influenced by the desire to acquire the maturing business opportunity. Once it is accepted that the fiduciary obligations may survive after ceasing to be a director, the door is opened to a relaxation of that requirement, as illustrated by the approach in Harbro. In this respect, since the approach applying common law/equitable principles is not clearly settled, reliance on the interpretative requirement in section 170(4) CA 2006 is less persuasive. Indeed, as illustrated in Harbro, whilst the reason for resignation was one basis on which liability could arise after termination of the directorship, it was not clearly settled that this was a necessary condition of liability arising. The express provision for a continuing duty may be regarded as clearly indicating that, in any event, there is no requirement to show a pre-resignation breach or to focus on the reasons for resignation. 4.279 In Coppage v Safety Net Security Limited [2013] IRLR 970 the Court of Appeal noted (per Sir Bernard Rix at paragraph 28) that it was not clear how the new statutory provisions and the existing common law principles were intended to bed down together. The Court declined to determine the issue of whether the pre-Act law in relation to where duties continued after termination remained unchanged. In Thermascan Limited v Norman [2011]  BCC  535, albeit on the basis that the parties were agreed on the position, the court proceeded on the basis that the CA  2006 did not, so far as material to that case, alter the preexisting law. Similarly in Odyssey Entertainment Limited (in Liquidation) v Kamp [2012] EWHC 2316, in the context of considering the scope of section 175  CA  2006, Judge Simon Barker QC set out the guidance in Foster Bryant on the apparent assumption that it continued to apply in relation to the statutory provisions, including that liability post termination was based not on a fiduciary duty surviving termination of the office, but upon conduct whilst still a director (planning future exploitation and resignation as part of a dishonest plan, entailing a breach during office as a director and a liability to account for subsequent conduct and profits causally connected with the earlier fiduciary breach). Again, however, there was no express consideration of whether the statutory language entailed any change, or an explanation as to how this analysis was to be reconciled with the express statutory provision for a continuing duty after resignation of directorship. 4.280  By contrast, in Killen v Horseworld Ltd [2012] EWHC 363 Robinson J (at paragraph 69) considered that section 170(2) CA 2006 had effected a change in the pre-existing law. Ms Killen had been a director of the two defendant companies, which had broadcast the Badminton Horse Trials over the internet in 2008. Whilst she was a director, Ms Killen was intimately involved in negotiating for these broadcast rights. In 2008, whilst still a director, Ms Killen had discussions with the owner of another company (Planet Horse) which resulted in proposals to merge the Planet Horse media business with that of the defendant companies. As part of that proposal a British Virgin Islands (‘BVI’) company, Horseworld International (HI), was to be incorporated, with the media interest of the defendant companies separated from the rest of the business. Ms Killen deliberately chose to exclude two other shareholders and directors (V  and W) from these discussions) knowing that they would not have approved of the proposal to set 223

4.281  Employee fiduciary duties

up a new BVI company in which they had no interest. Robinson J concluded that Ms Killen had intended to conclude a side deal with the owner of Planet Horse to the detriment of the defendant companies and the other shareholders, V and W. The attempt to divert the defendant companies’ media interests to the new BVI company was a plain breach of fiduciary duty. The attempt failed but Robinson J considered that it was relevant to whether there was a breach of duty in relation to conduct after the directorship ended. In August 2008 Ms Killen left the company and her directorship terminated. The circumstances of her leaving were not explored at trial, other than that she was ‘asked to leave’ (at paragraph 23). Because of her departure she was not able to complete the scheme of acquiring for herself the media interests of the defendant companies through HI. Instead she acquired a controlling interest in another company (Horse and County TV Ltd), and that company succeeded in securing the broadcast rights to Badminton events in 2009, which she knew the defendant company wanted to acquire. Robinson J concluded (at paragraph 86) that, whilst it remained the case that an assessment of whether there is a breach of duty is ‘acutely “fact-sensitive”’, in so far as there had previously been a condition for any continuing duty that resignation must have been influenced or prompted by the desire to secure a maturing business opportunity, the law had changed. Here Ms Killen had only become aware of the broadcasting opportunity arising out of the Badminton event in her capacity as a director of the defendant companies. She had already tried to separate out that part of the business into a new company prior to her departure, and she then entered into competition with the defendants resulting in taking over that opportunity through the company she established after her departure. Robinson J summarised the position (at paragraph 91) as follows: ‘The reality, in my judgment, is this. Whilst with the Defendant companies she gained access to all of the people who mattered who were concerned with broadcasting the Badminton event. She had the benefit of the analysis of the internet broadcast project, which must certainly have been of benefit in negotiating the package ultimately obtained by Horse and Country. She knew that Horseworld Ltd wanted the very broadcast rights that were included in the package obtained by Horse and Country. In thus competing, on behalf of Horse and Country, directly with Horseworld Ltd she placed herself in precisely the position of conflict of interest prohibited by the new statutory code. It is important to remember that Section 175(1) requires a director to avoid a situation where there is even the possibility of a conflict of interest, and Section 175(2) makes particular reference to the exploitation of an opportunity.’

4.281  In one sense Robinson J might be regarded as having applied the plain language of section 170(2) in finding that Ms Killen had exploited information and an opportunity of which she became aware whilst a director. Robinson J regarded section 170(2) as being a ‘clear provision’ in contrast to the ‘complex raft of considerations’ which were to be applied previously. Although he acknowledged that an intensely ‘fact-sensitive’ or ‘fact-specific’ approach was still required, that begged the question of the nature of the enquiry. Indeed it was consistent with focussing simply on the statutory language of whether there was ‘any property, information or opportunity of which he became aware when he was a director’. There was however no express consideration of the effect of 224

Scope of fiduciary duties 4.283

section 170(4)  CA  2006 (other than noting, at paragraph  63, that by virtue of sections 170(3),(4) the non-statutory regime remained of more than historical significance). Nor was there specific consideration of factors, notably considerations of public policy in relation to restraint of trade, which led the court in Foster Bryant to note the need for a pragmatic merits-based approach, and the court in Umanna to recognise that the restriction on profiting from the position as a director should not be applied to all information acquired through having been a director. On the facts, the decision might be regarded as consistent with the merits-based pragmatic approach indicated in Foster Bryant and supported by the decision in Harbro, resulting from balancing a restriction on profiting from the position (or former position) as a director, with public policy in relation to restraint of trade. Although the plan that had been pursued whilst a director to acquire the business through the BVI company could not be pursued and there was no finding of a resignation prompted or influenced by the desire to take the opportunity, viewed more broadly, there was a continuation of disloyalty whilst a director. 4.282  The impact of section 170(2) CA 2006 was again specifically considered in Allfiled UK Ltd v Eltis [2016] FSR 11. Again the decision suggests a move away from the hard-edged focus, in relation to departing directors, on whether resignation was prompted or influenced by a wish to acquire the company’s business. It was alleged that three former directors of the claimant, Allfiled, had conspired to set up their own business in competition with Allfiled (a software development company) and had enticed the team working on a ‘Personal Data Store’ system (‘the Allfiled PDS system’) to join them, to develop and sell a similar system to Allfiled’s previous customers. Hildyard J considered that under sections 175(1), (2) CA 2006 the question whether, having resigned, the defendant directors were, and remained, in breach of fiduciary duty to Allfiled, depended primarily on the nature of the property, information or opportunity that it was alleged that they had obtained from Allfiled. He proceeded to find that there was an arguable case that the work done in relation to the Allfiled PDS system, and the system itself, constituted intellectual property of Allfiled, which was confidential to it. As such, prima facie, under sections 170(2), 175 and 176 CA 2006, any use by directors or ex-directors of Allfiled otherwise than for the benefit of Allfiled, would give rise to a serious actual or potential conflict of interest on the part of the director or ex-director with Allfiled, and amount to a breach of that director’s duty owed to Allfiled. 4.283  It was argued by the defendant directors that the reference to ‘necessary adaptations’ in section 170(2) CA 2006 allowed for the fact that company directors might resign for innocent reasons and should then be able to ply their trade for a competing business, in circumstances where, it was alleged, their departure from Allfiled had in effect been forced on them by an irresolvable disagreement with the other director of Allfiled. Following Foster Bryant, Hildyard J accepted (at paragraph 102) that: ‘… the rigour of fiduciary accountability may occasionally be abated where resignation has been forced upon the director and he or she has not actively 225

4.284  Employee fiduciary duties

sought to seduce the company’s customers or to exploit any opportunity belonging to it.’

However, whilst this was a matter for trial, for the purposes of considering interim relief Hildyard J  (at paragraph  103) rejected the argument on the facts since it was clearly arguable that this was a very different case to Foster Bryant by virtue of the directors having made use of Allfiled’s proprietary and confidential information other than for Allfiled’s benefit, sought to entice away a customer of Allfiled and encouraged the migration of Allfiled staff to the company they had set up to compete with Allfiled. 4.284  Although only a decision on an interim application, we suggest that the decision in Allfiled provides a helpful indication of how the issues are likely to be approached in the case of a former director, in the light of section 170(2), (4) CA 2006. In particular: (1) It was appropriate to give some weight to the reference to ‘necessary adaptations’, read together with the interpretive obligation in section 170(4) CA 2006. At its narrowest ‘necessary adaptations’ might be treated as meaning only that references in sections 175(2) and 176 to a director should be read as including a former director. However, we suggest that is too narrow a view, when having regard to the corresponding common law and equitable principles and that the obligation under section 172 no longer applies once the director has departed. During the period of directorship, there is no need for a narrow interpretation of information or opportunities in section 175(2). However, in relation to a departed director it cannot have been the intention that there should be a restriction which would effectively operate to bar a director from competing, for example in relation to pursuing opportunities he became aware of whilst a director but which constitute public information or otherwise cannot be regarded as falling within the concept of a maturing business opportunity (see 4.285–4.290). (2) The focus on the nature of the property, information or opportunity provides an important limit on the scope of the restriction. In Allfiled the focus was on ‘property’, given that it was concerned with material that arguably constituted intellectual property of Allfiled. However, given both public policy in relation to restraint of trade, and the interpretive obligation in section 170(4), there is no reason to apply a broader meaning to the term ‘opportunity’ than has been developed through the concept of a maturing business opportunity. (3) The rejection of the approach that fiduciary duties come to an end upon resignation as a director has removed the most cogent reason for applying an immutable requirement that there either be a breach of duty prior to resignation or that the resignation be influenced or prompted by a desire to obtain the opportunity. Once freed of the constraint that fiduciary duties come to an end with the directorship, it is unsurprising that if the Allfiled PDS system was intellectual property of Allfiled, that exploitation of it would amount to a breach of the fiduciary duty under sections 170(2) and 226

Scope of fiduciary duties 4.286

175, irrespective of whether this was planned prior to departure. On the facts in Allfiled, it may have been in any event that at least at the interim stage a requirement which focussed on the reason for resignation would have been satisfied since the case advanced (at paragraph 35) was that the directors had been planning to leave since December 2014, before two of them had resigned, and intending to persuade the majority of the Allfiled staff to follow them. However, the reasoning did not proceed on this basis, and instead focussed on the nature of the information. (4) The reasoning leaves scope for a merits-based assessment applying the approach in Foster Bryant and taking into account public policy on restraint of trade. The legislation does not provide expressly for this, but it might be argued that by analogy with the prior approach: (a) to a director excluded from management, and (b) to circumstances in which a former director could be in breach of duty, there is scope to read in such a limitation by virtue of section 170(4) CA 2006 (quoted at 4.93). There is though, at a minimum, a difference of emphasis. Instead of applying a condition for liability by reference to reason for resignation, the starting point is that exploitation of a maturing business opportunity is a breach of duty irrespective of whether there is any plan to do so prior to resignation. Whilst Hildyard J allowed for the possibility that the ‘rigour of fiduciary accountability may occasionally be abated’, it might be argued that this exception is unnecessary if the meaning of ‘property, information and opportunity’ is suitably confined and risks excessive uncertainty. However, to the extent that the exception is available, it would be for the departing director to establish that such an exception was applicable in the particular circumstances. To that end evidence that the resignation was influenced or prompted by the desire to obtain the opportunity would remain relevant as negativing any scope for this exception to apply. As illustrated by the approach in Harbro and in Killen, disloyally planning to procure the opportunity prior to departure may be relevant in a similar way even where this did not prompt or influence resignation from directorship. 2(l)(iii) What constitutes a maturing business opportunity? 4.285  As set out above, and in proposition 8 in the summary in Hunter Kane (see 4.263), in relation to the position prior to the CA 2006, one condition of liability for an opportunity taken by a former director was that it amounts to a ‘maturing business opportunity’. In the light of section 170(4) CA 2006, and the reference in section 170(2) to ‘necessary adaptations’, that is no doubt equally the meaning to be attributed to the reference to ‘opportunity’ in section 170(2) CA 2006. Indeed that takes on all the more importance if there is no longer a necessary requirement that resignation was procured or influenced by the desire to obtain the opportunity. 4.286 A maturing business opportunity connotes a specific opportunity which is being actively pursued or negotiated by the company rather than general business aims. Indeed, this is implicit in the suggestion (proposition 9 – drawn from 227

4.287  Employee fiduciary duties

CMS Dolphin at paragraph 96) that the opportunity be treated as if it were property or an intangible asset of the company. Thus, in Island Export Finance Limited v Umunna [1986] BCLC 460 the mere hope that there might be further orders for postal caller boxes did not amount to a maturing business opportunity, and nor was the claimant actively pursuing such orders when Mr Umunna resigned. Similarly, in Dranez Anstalt v Hayek [2002] 1  BCLC  693 Evans-Lombe J  (at paragraph 76) drew a distinction between diversion of specific contracts in the course of negotiation, which could be regarded as ‘maturing business opportunities’, and general business aims which, in that case, were to sell certain ventilators to the medical profession world-wide. The company could not in any sense claim to have a property interest in the world-wide demand for ventilators. 4.287 To similar effect in Thermascan Limited v Norman [2011]  BCC  535, the court rejected the contention that the fact that a high proportion of business was repeat business justified the conclusion that there was a maturing business opportunity. Mr Norman had been a director of a company which was engaged in surveying commercial buildings to reveal hotspots caused by electrical faults which were fire risks. He resigned and initially took up employment with a competitor and then sought to set up his own business. Thermascan sought to restrain him from approaching customers, irrespective of whether he used any confidential information to do so, on the basis that he would be exploiting a corporate opportunity contrary to section 175 CA 2006. In rejecting the application, David Donaldson QC applied the requirements in Island Export that it was necessary to establish both that there was a maturing business opportunity and that the defendant director had resigned prompted or influenced by his wish to take advantage of it. Here there were no relevant maturing business opportunities. Whilst it might not be necessary to establish that there were formal negotiations underway, the judge noted (at paragraph 16) that it was hard to see how it could be demonstrated that there was a maturing business opportunity when there had been no or no significant discussion of the potential business. He rejected the argument that it was sufficient that historically 70% of the claimant company’s business was repeat business. Even if that justified the contention that the business in relation to each future contract was a ‘real possibility rather than a mere hope’ (as to which the judge expressed scepticism), it could not be said that there was an opportunity in the course of maturing. On the contrary, nothing was happening at that stage in relation to possible new surveys, and nothing was likely to happen in relation to them until much later. 4.288 The decision in British Midland Tool v Midland International Tooling Limited [2003] 2 BCLC 523 (at paragraphs 184–185) further illustrates the need for a specific opportunity in relation to which the directors could profit by diverting the opportunity. The contention that there were maturing business opportunities failed where this was based only on the opportunities afforded by the claimant’s goodwill to continue to manufacture and design goods for its existing and potential customer base. This amounted to no more than an allegation that the defendants had resigned in order to be able to compete with the claimant company in relation to its existing and potential customer base, as they were entitled to do. Nor was it sufficient that the claimant company was able to point 228

Scope of fiduciary duties 4.292

to one ‘discrete and readily identifiable opportunity’ to bid for a certain piece of work in circumstances where it was contemplated that the company would have to compete against others for the business. There was no evidence that this opportunity was in any sense a secret, or that the company had any special way in to this work of which the defendants were able to take advantage, other than by advertising the fact that they had previously worked for the claimant company. Further, there were at the time of the resignations no on-going negotiations in relation to this work between the claimant company and any of the potential customers which were in any sense taken over by the defendants. 4.289 Whilst a maturing business opportunity ordinarily connotes that the opportunity is being actively pursued, this will not avail the director if the reason it is not pursued is because information about it has been wrongly withheld from the company by the director. Thus, in Bhullar v Bhullar [2003] 2  BCLC  241 (CA), the opportunity to make a property purchase was not regarded as a ‘maturing business opportunity’, even though it was within the scope of the company’s business and would have been advantageous to it, because the company was not negotiating for the purchase at the time of the acquisition. However, this did not prevent liability arising by virtue of the no conflict rule. 4.290 Although the above summary in Hunter Kane Limited v Watkins [2003] EWHC 186 (Ch D) (see 4.263) refers to a ‘maturing business opportunity’, the same principles have been said to apply to an opportunity that has already matured into a contract (CMS Dolphin Limited v Simonet [2001] 2 BCLC 704 at paragraph 129; Hunter Kane at paragraph 58). The principles also apply to an opportunity consisting of an informal arrangement giving rise to an expectation of business rather than a single contract (Hunter Kane at paragraph 58). 2(l)(iv)  Resignation prompted or influenced by seeking to divert the opportunity 4.291  As set out at 4.277–4.284, in the light of the terms of section 170(2) CA 2006 we suggest that the better view is that, contrary to propositions 7 and 10 of the summary in Hunter Kane, there is no longer a necessary requirement that, for there to be a continuing fiduciary duty to avoid a conflict of interest after resignation in relation to a maturing business opportunity, the resignation must have been prompted or influenced by the director’s wish to acquire that opportunity for himself or to divert it to a third party. To the extent that this remains a relevant consideration in relation to departing directors (which is at least open to doubt), it is in relation to whether (taking into account section 170(4)) the duty that on its face arises under sections 170(2) and 175 is to be regarded as abated in all the circumstances including the circumstances of termination. 4.292  However, the position may be otherwise in relation to partners, or employees other than directors who owe relevant fiduciary duties or indeed other nondirectors who owe relevant fiduciary duties: see eg  Global Energy Horizons Corp v Gray [2012] EWHC 3703 (discussed at 4.270). In such cases statute has not intervened to provide for a continuing fiduciary duty after termination of the 229

4.293  Employee fiduciary duties

employment relationship. There is therefore no need to depart from the orthodox analysis, as adopted in Attorney-General v Blake [1998] Ch 439 (CA) and by Rimer LJ in Foster Bryant Surveying Ltd v Bryant [2007]  IRLR  425, that the fiduciary obligations come to an end with the relationship that give rise to it. In relation to employees that is consistent with the analysis in Ranson v Customer Systems Plc [2012] IRLR 769 of the fiduciary duties arising from the contractual obligations and job description. At least in such a case, we suggest, it will remain relevant to consider whether there has been a breach of fiduciary duty prior to the termination of the employment by virtue of resignation prompted or influenced by seeking to divert a maturing business opportunity. 4.293 In Hunter Kane (at paragraph 27) Bernard Livesey QC (sitting as a deputy judge) rejected a submission that the desire to obtain the opportunity must be the predominant motive for leaving; it was sufficient that it formed ‘any significant part of the intentions of the director at the time of his departure … All the circumstances need to be taken into account in determining whether the state of mind is sufficiently significant to cause the “rule” to apply.’ 4.294 A  further issue was raised as to the scope of this principle in Quarter Master UK Ltd (in liquidation) v Pyke [2005] 1 BCLC 245. Paul Morgan QC (sitting as a deputy judge) questioned (at paragraph 73) whether the motive for resignation was required only where the director did not, before the resignation, act in breach of duty (eg  by preferring his own interests to those of the company before the resignation) and did not, after the resignation, use pre-existing property of the company which remained impressed with a fiduciary obligation to the company. As noted above, the approach in Harbro (4.271–4.273), which concerned misuse of intellectual property, provides some support for a broader approach (where post-resignation liability is not dependent on the reasons for resignation), even aside from the CA 2006 regime, at least when dealing with property rights rather than only a maturing business opportunity. 4.295  Further, the merits-based approach endorsed in Foster Bryant Surveying Limited v Bryant [2007] IRLR 425 (CA) suggests that the motive to acquire or divert the maturing business opportunity may not of itself be sufficient, and that a more broad-ranging consideration is required of the fiduciary’s conduct in order to ascertain whether there was a breach of fiduciary duty. This is apparent from the analysis in Foster Bryant of the decision in CMS Dolphin Limited v Simonet [2001] 2 BCLC 704. In Simonet, although there was no finding of solicitation of staff or customers prior to the termination of the directorship, there were other steps found to have been taken as part of the plan to divert business away from the employer prior to the director’s resignation. Mr Ball and Mr Simonet formed an advertising agency called CMS Dolphin Limited. Simonet was the managing director. The company was to be financed by Mr Ball. Simonet later resigned with immediate effect, and set up a competing business, first in partnership with a friend (Patterson) and then via a limited company (Blue). Having made plans to do so prior to his resignation, following his resignation Simonet made clear to the staff of CMS Dolphin that there would be jobs for them with Blue, and all the staff then followed him to Blue. The principal clients also moved to Blue, having been 230

Scope of fiduciary duties 4.298

approached by Simonet after his resignation. It was not necessary to approach them beforehand, as they were his contacts and he had every expectation that they would follow him. The result was that within a short time CMS Dolphin was left with no staff or clients. 4.296  Lawrence Collins J concluded that Simonet had followed a dual strategy whilst still a director of CMS Dolphin. His first preference was to persuade Mr Ball to eliminate or reduce his interest in CMS Dolphin. His second strategy, if agreement could not be reached, was to set up on his own with the same clients, and he had resigned in pursuance of that strategy and in the expectation that the clients of CMS  Dolphin, and its staff, would follow him to the new business. Lawrence Collins J also expressly concluded (at paragraph 129) that liability did not depend on the failure to disclose business opportunities or the use of confidential information. There were, however, a series of steps taken prior to resignation as part of the plan. These included establishing a company which could be a vehicle to take over the business, approaching Mr Patterson as a potential partner and investor and planning the new business with him, seeking and arranging rental of new premises for the business and withholding information about this from Mr Ball, withholding information from Mr Ball as to key contracts with clients and opposing the involvement in the business of a contact of Mr Ball, in part so as to prevent Mr Ball discovering details of significant contracts with clients and that there was substantial unbilled business. Accordingly, although the ultimate resignation was prompted or influenced by a wish to acquire for himself or his company the business opportunities which he had previously obtained or was actively pursuing with the claimant’s clients and he had diverted them to his own profit, this was the culmination of the planning to divert business. 4.297 In explaining the decision in CMS  Dolphin, Rix LJ in Foster Bryant focused on this broader plan ‘having in mind the destruction of the company or at least the exploitation of its property in the form of business opportunities’, rather than solely focusing on the reason for resignation which was the culmination of it. On this view, the motivation for resigning was therefore clearly relevant, but it was the culmination of a planning process during which there was plainly a conflict between the director’s own interest and those of the claimant company, and plans to exploit the company’s opportunities for his own benefit. Consistently with this, in Kingsley IT Consulting Limited v McIntosh [2006] BCC 875 (Ch D), at paragraph 53, Terence Mowshenson QC (sitting as a deputy judge), characterised the decision in CMS Dolphin, along with IDC v Cooley, as exemplifying the principle that ‘a director cannot set the groundwork for diverting a corporate opportunity whilst a director, and then take it for himself after he has ceased to be a director’. 4.298  This approach is consistent with point 8 in the summary in Hunter Kane (4.263), which is drawn from Canadian Aero Service Ltd v O’Malley [1973] 40 DLR (3d) as approved in subsequent English cases, eg Island Export Finance Ltd v Umunna [1986] BCLC 460; CMS Dolphin. As noted by Rix LJ in Foster Bryant, this characterises the principles ‘in somewhat flexible and merits-based terms’. It is also consistent with the emphasis in CMS Dolphin Limited v Simonet 231

4.299  Employee fiduciary duties

[2001] 2  BCLC  704 that the power to resign is not itself a fiduciary power. A director may act in his own interest in choosing to resign and in the absence of relevant covenants is not then precluded from using his personal connections to compete with the company (CMS Dolphin). However, pursuit of a plan to divert the company’s maturing business opportunities involves a conflict of interest and exceeds the limits of permissible steps in preparation to compete after employment. The difference introduced by the Companies Act 2006 so far as concerns directors, at least as suggested by the decision in Allfiled, lies in the fact that the same may apply even where the plan to divert the company’s maturing business opportunity is conceived only after ceasing to be a director.

2(m) Comparison of the position of employees with and without relevant fiduciary duties 4.299 When considering the position of employees preparing to compete, whether individually or as a team, it is necessary to consider both the contractual obligations (the duty of fidelity and any express obligations) and any fiduciary obligations owed. Leaving aside differences in relation to remedy (as to which see Chapter 16), the position of the departing (ordinary) employee is in most respects not significantly different by virtue of any fiduciary duties which apply. Indeed where the employee is not a director, the same factors which affect whether there is a relevant fiduciary obligation also are central to the content of the duty of fidelity (Ranson v Customer Systems Plc [2012] IRLR 769). However, whilst any differences between the position of employees arising from the duty of fidelity and those arising from any fiduciary obligations should not be overstated, some possible differences do arise, particularly in relation to a director or de facto director whose fiduciary obligations arise by virtue of their office and under the CA 2006 rather than arising from their contractual obligations. In this section we draw together areas of potential difference (aside from remedy) which may be summarised under the following principal headings: (i) Preparations to compete. (ii) Business opportunities. (iii) Continuing duties after employment. (iv) The duty of disclosure. (v) Duty not to make secret profit/divert opportunities. (vi) Duty to avoid undisclosed conflicts. 2(m)(i)  Preparations to compete 4.300  Outside clearly impermissible preparatory activity (ie the ‘grey area’ of what a departing employee may or may not do, whilst still employed, to prepare to compete with the employer), the courts may be more inclined to find that a breach of fidelity has been committed by an employee who has fiduciary 232

Scope of fiduciary duties 4.304

duties than the employee who does not. In Tunnard Moses LJ commented (at paragraph 33) that: ‘Since the essence of the obligation of an employee as fiduciary is that the employee must act solely or exclusively in the interest of his employer, it will be easier for an employer to establish that activities in preparation for competition were themselves in breach of a fiduciary obligation.’

4.301  The difference between the impact on legitimate preparations to compete of fiduciary duties and the duty of fidelity should not be overstated. To some extent it may be better regarded only as a difference of emphasis. Even in relation to director employees, the law is keen to protect the right of all employees (including those with fiduciary duties) to prepare for future competition (see Foster Bryant Surveying Limited v Bryant [2007] IRLR 425 (CA) and Gamatronic (UK) Limited and others v Hamilton and Mansfield [2017]  BCC  670 at paragraphs 88(v), 147). Therefore public policy as to restraint of trade remains a relevant consideration in relation to whether a fiduciary obligation is engaged or infringed, as is consideration of the scope of the employee’s role and responsibilities. 4.302  Differences may, however, arise in relation to the position of a director because they have been held to stand in a position akin to ‘general trusteeship’ in relation to the company: O’Donnell v Shanahan [2009] BCC 822 (CA), and First Subsea Ltd v Balltec [2017] 3 WLR 896 (CA). In the case of a non-director employee, the scope of the areas of responsibility and any fiduciary obligations, are shaped by reference to the terms of the contract. Thus in Ranson v Customer Systems Plc [2012] IRLR 769 that left scope for the employee to take preparatory steps in relation to a customer who was not on his ‘patch’. That approach is not readily available in relation to a director, save possibly where and to the extent that the director has been excluded from management. 4.303  So far as concerns non-director employees, the same factors which may lead to the conclusion that such an employee owes fiduciary duties are also liable to lead to the duty of fidelity entailing similar obligations. In one sense (aside from in relation to remedies) this reduces the significance of the conclusion that there are fiduciary duties owed. At least where the employee is not also a director of the employer company, in our view the freedom of employees to prepare to compete is not significantly narrowed by reference to possible fiduciary duties compared with that which would be the case for such an employee by reason of the implied duty of fidelity. In those cases where an analysis of the employee’s role and contractual duties are likely to give rise to relevant fiduciary obligations, they are similarly important to the content of the duty of fidelity and as such are likely to give rise to an equivalent contractual obligation (cf Ranson at paragraphs 34, 35, 57–58). 4.304 However, where the analysis of contractual duties and responsibilities leads to the conclusion that relevant fiduciary obligations are owed and engaged, it is in turn more likely that, in grey areas, the steps preparatory for competition will not be permissible. The reverse is also true, so that in grey areas preparatory steps are more likely to be regarded as permissible if the analysis leads 233

4.305  Employee fiduciary duties

to the conclusion that fiduciary duties are not engaged. One instance was the decision in Helmet that there was no duty for the employee to report his own preparations to compete (see 3.27–3.30). A further example arose in Ranson v Customer Systems Plc [2012] IRLR 769 in relation to entertaining an approach by a customer, made during employment but to carry out work after employment, where the customer was not within the employee’s areas of responsibility (see the discussion of Ranson at 3.31, 3.87–3.88). 4.305  More generally, where the departure of an employee is part of a ‘team move’, the court is more likely to find that such concerted action without disclosure amounts to wrongdoing where the employee owes fiduciary duties of loyalty to the employer than in the case of the ordinary employee. This is so, both arising by virtue of fiduciary obligations and by virtue of the implied duty of fidelity, where the employee is in a senior position which involves responsibility for the business which is under threat. In those circumstances, by virtue of the implied duty of fidelity, as well as any applicable fiduciary obligations, the employee can be expected to take steps to protect or preserve the business, or report the threat to someone else so as to enable them to do so. 2(m)(ii)  Business opportunities 4.306  In relation to a director, the strict application of the no conflict rule and the requirement of undivided loyalty to the company, is liable to have the effect that there is an obligation not to exploit a business opportunity (in the sense explained at 4.285–4.290) without authority, even where information as to the opportunity comes to the attention of the director (or other fiduciary) other than in the course of acting on behalf of the company. Whether that is the case for a non-director employee turns on construction of the contractual obligations and whether it is part of the employee’s role to secure such opportunities for the employer’s benefit, or whether pursuing the opportunity during employment brings the employee into competition or gives rise to a conflict of interest or otherwise interferes with carrying out of the employee’s responsibilities. 2(m)(iii)  Continuing duties after employment 4.307 Whereas the duty of fidelity comes to an end with the termination of employment, in some circumstances fiduciary duties continue after employment. Again, however, the difference should not be over-stated. So far as concerns an employee, other than a director owing relevant fiduciary duties, the orthodox view is that a continuing obligation arises where the resignation can fairly be said to have been prompted or influenced by a wish to acquire a maturing business opportunity of the employer and where it was that person’s position with the company rather than a fresh initiative which led to the opportunity later acquired (see 4.265–4.298). (However, see Harbro Supplies Ltd v Hampton and others [2014] EWHC 1781, discussed at 4.271–4.273, which indicates that, even aside from the Companies Act 2006, there may be a fiduciary duty where the plan to exploit the property, information or opportunity is only conceived after 234

Scope of fiduciary duties 4.311

termination of the directorship.) A  similar conclusion may be reached on the basis of analysing this as arising from a breach of duty (whether fiduciary or of a duty of fidelity) during employment. A more substantial difference may arise in relation to directors by virtue of section 170(2)  CA  2006, which expressly provides for a continuing fiduciary duty after resignation including in relation to exploitation of property, information and opportunities, without (at least expressly) confining this by reference to the reason for resignation as a director (see 4.274–4.284). 2(m)(iv) The duty of disclosure 4.308  Closely connected with the question of what is or is not permissible preparatory conduct is the question of when the departing employee is required to disclose information relating to future competitive activities. In the case of both kinds of employee (those with or without relevant fiduciary obligations), subject to the extent of the employee’s knowledge, a duty of disclosure is more likely to exist where it relates to the misdeeds of colleagues, at least where there is an ongoing threat to the business. It is no answer that disclosure would inevitably lead to the disclosure of the disclosing employee’s own wrongdoing. 4.309  Particularly in relation to non-director employees, whether there is such a duty still requires analysis in the first instance of the employee’s role and contractual obligations. Where the wrongdoing relates to past misconduct in relation to an area of the business for which the employee is not responsible, a contractual duty of disclosure is unlikely to arise (Pennwell Publishing (UK) Limited v Ornstien [2007] IRLR 700 (QBD)), though exceptionally it may do so (see Marathon Asset Management LLP and another v Seddon and others [2017] IRLR 503 and 3.112). There may be greater scope for finding a breach of fiduciary duty in such a case if it is plainly in the interest of the employer to be informed of such conduct. 4.310  Outside of cases involving reporting misdeeds of others, the duty to disclose one’s own wrongdoing is more clearly established by case law in relation to the fiduciary – who is required to confess his own breaches of fiduciary duty where the obligation to act in good faith in the employer’s interest requires this. As to the position of ordinary employees, while they are not under a general default obligation to report their own wrongdoing, the position is fact-sensitive and such a duty may be found to exist in a particular case, dependent on the employee’s role and other contractual obligations which may give content to the duty of fidelity: see 3.90–3.100. 4.311 The duty to disclose other matters which may negatively affect the employer (not involving wrongdoing of employees) is also more likely to attach to a director than the ordinary employee. Where an employee who is not a director is held to owe fiduciary duties which entail a duty of disclosure, the analysis of the contractual position and role which lead to that conclusion is also likely to give rise to parallel contractual duties of disclosure: Ranson v Customer 235

4.312  Employee fiduciary duties

Systems Plc [2012]  IRLR  769. So far as concerns directors, a duty of disclosure will often be a natural consequence of applying the section 172 CA 2006 duty, and the issue will be whether a different result follows when taking into account public policy considerations as to restraint of trade. Such public policy considerations are more likely to be persuasive where the director acted alone and without knowledge of other employees being approached by the competitor. Conversely the disclosure duty is more likely to arise where the matters which constitute a threat to the employer relate, or relate also, to other employees. As in other areas, the effect of express terms (eg express duties of disclosure), and consideration of the particular role and responsibilities of the employer, need to be taken into account. 4.312  On current authority, whether an employee who is fiduciary has formed an irrevocable intention to engage in competition after employment is an important criterion as to the point at which the duty of disclosure arises (British Midland Tool v Midland International Tooling Ltd [2003] 2  BCLC  523). However, the obligation may arise at an earlier stage, whether because of the conflict which arises in the light of the director’s particular responsibilities (eg  Odyssey Entertainment (In Liquidation) v Kamp [2012] EWHC 2316) or because of the obligation to give disclosure to protect the employer’s position in the face of a competitive threat where it is known that other employees have been approached by a competitor (Kynixa Limited v Hynes [2008] EWHC 1495). 2(m)(v)  Duty not to make a secret profit/divert opportunities 4.313  The duty not to make a secret profit, or divert corporate opportunities, arises typically in cases involving directors and senior employees who are subject to fiduciary duties. Conceivably such claims could be formulated against junior employees. An example is that of the newspaper boy who is entrusted with a sum to pay to the proprietor, but fails to do so. 4.314  In most cases where an employee is found to have acted in breach of a fiduciary obligation not to make a secret profit, this will amount to a breach both of fiduciary duty and of the duty of fidelity. Certainly that is so where the employee is not a director and any fiduciary obligations arise from analysis of the employee’s role and contractual terms, since those same factors determine the scope of the duty of fidelity: Ranson. 4.315  There may, however, be a breach of the duty of fidelity in diverting a corporate opportunity notwithstanding that the employee owes no relevant fiduciary obligations. Some decisions concerning restrictions on competing with the employer or soliciting business from its clients might be analysed in these terms. An instance is the decision in Threlfall v ECD Insight Limited [2013] IRLR 185 (Lang J). Mr Threlfall worked as head of media for ECD, a management and communications development consultancy. Part of the work he carried out was event moderation, which was not otherwise an activity of ECD before he joined or after he left. Shortly before he resigned from ECD Mr Threlfall was invited to 236

Scope of fiduciary duties 4.317

moderate a conference for Eurofinance. He obtained the consent of the managing director to do so, and ECD was to be paid a fee. Having resigned he agreed with Eurofinance that he would continue to moderate the event, which was to take place after his employment with ECD ended, but would receive no remuneration. The work was to be under the auspices of his new employer, Reuters, although ultimately they refused to accept the fee. The effect was to cancel the fee that was to be paid to ECD. Lang J concluded that Mr Threlfall did not owe any relevant fiduciary duties. Although he was a senior employee of ECD he was under the close management and supervision of the managing director and, although he was under an obligation to keep the board informed of his conduct of the business of the company, there were no contractual duties such as to give rise to fiduciary obligations. He was, however, found to have acted in breach of his duty of fidelity in having diverted fee income away from ECD by virtue of negotiating that he would instead carry out the event under the auspices of Reuters. In so doing he had failed fairly to represent the interests of ECD due to his wish to secure the contract for himself in his new post at Reuters. Nor was it any answer that ECD would not have been able to fulfil the contract in any event once Mr Threlfall had left their employment. In addition, he had acted in breach of his duty of fidelity prior to the termination of his employment by seeking to solicit further moderation work from another organisation to whom he had provided his services on behalf of ECD. 4.316  On the other hand, in the case of an ordinary employee who is not subject to fiduciary duties, there may be circumstances where he will not be in breach of the duty of fidelity, whereas he would have been in breach of fiduciary duties, if they had existed. Accordingly, in Helmet Integrated Systems Limited v Tunnard [2007]  IRLR  126 (CA) (discussed more fully at 3.27–3.30 and 4.178–4.179) preparatory acts of an employee during employment to exploit after employment an opportunity which he discovered in the course of his employment were held not to amount to a breach of fidelity. However, had the opportunity come to him and preparatory steps been undertaken in the context of a fiduciary role, he would have been in breach of his fiduciary duty. If he had been a director he would have been subject to the duties now contained in sections 172 and 175 CA 2006; to act in good faith to promote the success of the company and to avoid conflicts of interests including in relation to the exploitation of property without informed consent. That duty extends to exploiting an opportunity without authority where there is a risk of conflict of interest, even where information as to the opportunity comes to the director’s attention other than in the course of acting on behalf of the company: see Bhullar v Bhullar [2003] 2  BCLC  241 (CA), considered at 4.161. 2(m)(vi)  Duty to avoid undisclosed conflicts 4.317  Likewise, the duty to avoid undisclosed conflicts of interest is an aspect of fiduciary duty and not normally seen as an element of the duty of fidelity: see British Midland Tool v Midland International Tooling Ltd [2003] 2 BCLC 523 at paragraph 94 (noted at 3.33–3.34). However, in Fulham Football Club (1987) 237

4.317  Employee fiduciary duties

Ltd v Tigana [2004] EWHC 2585 (QBD) Elias J (at paragraph 15) described the duty of a football manager, when negotiating on behalf of the club as follows: ‘… he must seek to advance the interests of the Club rather than his own interests or those of the player being acquired. This obligation arises under his contract, as an element of the implied term of good faith. It also, however, arises by virtue of his fiduciary obligations [as director].’

Accordingly, in practice (particularly in cases involving senior employees) the difference in standard between the duty of fidelity and fiduciary duty may not be that great.

238

CHAPTER 5

Express terms of the contract of employment Kate Brearley and Purvis Ghani Introduction

5.1

1. Terms recording/extending obligations included within the duty of fidelity 1(a) A general statement of the duty of fidelity 1(b) Working hours 1(c) Control of outside activities 1(c)(i) Total or partial ban? 1(c)(ii) Consent provision 1(d) Non-poaching of employees 1(e) Disclosure of information and reporting procedures 1(f) Identifying the employer’s property 1(g) Confidentiality and the protection of trade secrets 1(h) Patents, copyright and certain other intellectual property

5.6 5.15 5.16 5.24 5.27 5.32 5.35 5.37 5.43 5.44 5.45

2. Terms which define the employee’s role 2(a) Job title, duties and reporting line 2(b) Joint appointments 2(c) Mobility 2(d) Interaction with the press/media and social media 2(e) Garden leave 2(f) Special case of fiduciaries

5.54 5.61 5.66 5.67 5.72 5.75 5.76

3. Terms pertaining to termination 5.78 3(a) What justifies summary dismissal 5.79 3(a)(i) Suspension 5.87 3(b) Notice required to terminate the contract 5.88 3(b)(i) The implied term of reasonable notice 5.91 3(b)(ii) What is reasonable notice?  5.92 3(b)(iii) Length of the notice period 5.94 3(b)(iv) Service of notice 5.98 3(b)(v) Payments in lieu of notice  5.99 3(c) Controlling the employee’s communications regarding his departure5.122 3(d) Garden leave 5.123 3(d)(i) Drafting the garden leave clause 5.129 3(e) Return of property 5.138 239

5.1  Express terms of the contract of employment

3(f) Resignation from offices 3(g) Miscellaneous terms

5.142 5.146

INTRODUCTION 5.1  Chapter 3 examined the various aspects of the duty of fidelity which restrict competitive activities during employment. Whilst those aspects of the duty of fidelity are important – indeed, often claims against employees are based solely on breach of the implied duty – they are no substitute for properly drafted express terms. Through such terms not only can the employer gain additional protection against competition, he also acquires the advantages that: •

the employee is fixed with notice of his obligations; and

•

there is far less uncertainty surrounding the enforcement of express terms.

The use of express terms may also be of benefit to the employee, in the sense that he knows precisely what is and what is not permitted. 5.2  In this chapter we look at the various types of express terms available to protect the employer from competition until the contract of employment terminates (express terms applicable after termination are dealt with in Chapters 10–12). The employer should give careful consideration to inclusion of these express terms. There will, of course, be cases where particular terms would be inappropriate or commercially unacceptable. However, some of the terms, particularly those which deal with termination and matters connected with termination, are universally advisable and an employer ignores them at his peril. There are three basic categories of express term: •

those which record obligations included within the implied duty of fidelity, or extend those obligations;

•

those which define the employee’s role; and

•

those which pertain to termination of employment.

5.3  Each of the three categories of express term focuses on specific aspects of the employee’s relationship with the employer. The first category primarily sets out the detail of the employee’s obligations to the employer, and consequently it is to these terms that an employer will look first when formulating a claim of breach of contract by the employee. Terms which we will consider in this category include those relating to working hours, restrictions on the employee’s ‘spare time’ activities, and reporting and disclosure obligations. 5.4  The second category of express term includes terms such as the employee’s duties, the employer’s ability to appoint employees to act jointly with each other and the right to move the employee to different locations. Whilst in part also covering the employee’s obligations, the employer can by these terms build 240

Terms recording/extending obligations included within the duty of fidelity 5.7

flexibility into the contract. This flexibility is a key factor when it comes to avoiding arguments by an employee that he has accepted a repudiatory breach by the employer who as a result is deprived of the benefit of any post-termination restrictive covenants: General Billposting Co Ltd v Atkinson [1908] AC 118 (HL) (see 9.49–9.122 where we discuss repudiatory breaches and their effect in more detail). We also look at how terms within this category might determine whether the employee owes fiduciary duties to the employer. 5.5  The third category of express terms deals with how and when the relationship may be terminated, and the arrangements that will apply once either party has given notice of termination. This category of term is particularly important in regulating when an employee is free to join a competitor and in preserving the benefit for the employer of post-termination restrictive covenants. Terms which we will deal with under this third category include the length of notice and how it can be served, payment in lieu of notice provisions and garden leave clauses.

1. TERMS RECORDING/EXTENDING OBLIGATIONS INCLUDED WITHIN THE DUTY OF FIDELITY 5.6  One of the inherent problems with implied terms is their imprecision and the consequent uncertainty of their scope. The ambit of an implied term will ultimately depend on the particular facts that relate to the employment in question and this of course causes uncertainty (see 3.2–3.6). As a result, arguments as to whether or not a particular activity is a breach of the employee’s implied obligations are commonplace. Trends also change, so that predicting the precise ambit of a term to be implied in years to come is a difficult and rather precarious task. Because of these uncertainties it is common, and generally thought to be desirable, to translate into express terms a general statement of the employee’s duty of fidelity and at least some of the specific aspects implied by that duty. In addition, in some instances those obligations may be extended; for example, express terms in relation to outside activities (see 5.24–5.34). 5.7 An employer contemplating this course of action, which we recommend, should bear two general points in mind. First, the relationship between the express terms he includes and the terms implied by the duty of fidelity. In particular, can the inclusion of an express term mean the employer is deprived of relying on a corresponding or lesser obligation imposed by the duty of fidelity? This question was answered in the negative by Farwell J in Triplex Safety Glass Co Ltd v Scorah [1938] 1 Ch 211 at pages 216–17. See also Provident Financial Group plc v Hayward [1989] IRLR 84, where the Court of Appeal, considering an appeal against refusal of a garden leave injunction, held that the inclusion of an express term which was found to be too wide did not preclude Provident from relying on the implied duty of fidelity as the basis of its application for a garden leave injunction. On the facts Provident failed in their appeal, but that does not detract from the principle that, had the risk to Provident been significant, the court would have granted an injunction based on the implied duty of fidelity: see Dillon LJ at paragraph 17. As a matter of caution, however, some draftsmen 241

5.8  Express terms of the contract of employment

do specifically provide that the express terms are incorporated without prejudice to the implied duty of fidelity. Although in our view this practice is not strictly necessary, such a provision cannot be harmful and may be of some benefit in putting the issue beyond argument. For the draftsman who wishes to include a provision of this sort, the following is a sample clause: Precedent – Senior Executive Clauses [insert relevant clause numbers] are included without prejudice to the Executive’s implied duty of fidelity. 5.8  Secondly, the doctrine of restraint of trade can, in certain circumstances, apply during the contract of employment. This point was acknowledged by Lord Reid in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968]  AC  269 (HL) at page 294. It arose in the case of Electronic Data Systems Ltd v Hubble 20 November 1987 LEXIS (CA), where the Court of Appeal allowed an appeal against an order for summary judgment for repayment of training expenses on the ground that Hubble had an arguable case that the terms of repayment amounted to a restraint of trade. Mustill LJ, in delivering the judgment of the court, relied on the general principles enunciated in Schroeder Music Publishing Co Ltd v Macaulay [1974] 3 All ER 616 (HL). The point was also considered in 20:20 London Ltd v Riley [2012] EWHC 1912, where the High Court heard an application for summary judgment by 20:20 for repayment of £1.5 million paid to Mr Riley under a share purchase agreement. Under that agreement, Mr Riley sold his digital marketing business to 20:20 for a total of £1.5 million in cash and an allocation of shares. Simultaneously Mr Riley entered into a contract of employment with 20:20. The share purchase agreement provided that if Mr Riley ceased to be an employee at any time within the first three years in circumstances where he was a ‘Bad Leaver’ he would repay the £1.5 million cash he received as part of the sale. ‘Bad Leaver’ was defined as any termination of employment where Mr Riley was not a ‘Good Leaver’ and Mr Riley would be a ‘Good Leaver’ only if termination occurred because of death, disability, unfair dismissal or a change in his role. Mr Riley was made redundant after two years and 20:20 sought repayment of the £1.5 million. Mr Riley argued that the repayment provision in the share purchase agreement was a financial disincentive to resign and was an unlawful restraint of trade, which should be struck out. David Donaldson QC (sitting as a Deputy High Court Judge) concluded (at paragraph 47) that: ‘… there is no authority binding upon me which decides that a repayment provision can never through disincentive or “golden handcuff” [in] effect amount to a restraint of trade requiring objective justification. Indeed [Electronic Data Systems v Hubble] appears to suggest the contrary.’

Although Mr Riley was made redundant, the financial disincentive of repayment would also have applied had he chosen to leave 20:20. The Court ruled that the case should proceed to trial on the restraint of trade defence (the Court did not need to decide whether the repayment provision was reasonable given that it was a summary judgment application under which that type of issue was not appropriate to be decided). The circumstances that are likely to give rise to the restraint 242

Terms recording/extending obligations included within the duty of fidelity 5.11

of trade doctrine applying during employment are either that the effect of the contract is to sterilise rather than utilise the employee’s skills and abilities or, as in Electronic Data Systems Ltd v Hubble and Riley, where the employee is left with no option but to continue working for the employer or there is a significant financial disincentive not to do so. 5.9  The employer should consider including express terms covering the following: •

a general statement of the employee’s duty of fidelity;

•

working hours;

•

control of the employee’s outside activities during employment;

•

a prohibition on encouraging other employees to leave;

•

disclosure of information and reporting procedures;

•

identifying the employer’s property;

•

confidentiality and the protection of trade secrets; and

•

patents, copyright and certain other intellectual property.

In every case the precise drafting of the express term will depend on the circumstances and, in particular, the role and status of the employee. Included in the following paragraphs are precedent clauses appropriate for a senior employee engaged by a company on the terms of a service agreement. The employer company is defined as the ‘Company’ and the employee as the ‘Executive’. While the precedents will require changes to definitions where the employer is not a company and to style where they are to appear in a staff handbook or where the terms and conditions of employment are of a more junior employee, the basic principles will remain substantially the same. 5.10  In each of the precedent clauses, references to the ‘Group’ should only be included in appropriate cases and the term should be defined carefully to reflect the organisations for which the employer is seeking protection. For example, the ‘Group’ may consist exclusively of companies or partnerships, or it may be a mix of those two. The mere fact that the ‘Group’ consists only of companies does not obviate the need for a carefully drawn definition of which companies are included. In English law there is no single definition of ‘Group’ which could operate as a default option. By omitting a definition the employer will not have identified which companies he intended to be encompassed by the term, thereby leaving scope for argument by the employee. For the purpose of the precedents included in this chapter we have assumed that the ‘Group’ consists only of companies. 5.11  Included below is an example of the definition of ‘Group’ that would be appropriate where the companies to be caught within the definition are the holding company of the employer company and the subsidiaries of both that holding company and the employer company. Whilst this is a very common formulation of ‘Group’ for the purposes of a service agreement, it is by no means the only way of defining a Group and the definition will need adapting to reflect different 243

5.12  Express terms of the contract of employment

circumstances, for example where the ‘Group’ is to include a joint venture company owned in equal shares by the employer company and an entirely separate third party. Precedent – Senior Executive ‘Group’ means the Company and any company wherever incorporated which is for the time being a subsidiary or holding company of the Company and any subsidiary of any such holding company. For the purposes of this Agreement, the terms ‘subsidiary’ and ‘holding company’ shall have the meanings ascribed to them in section 1159 Companies Act 2006 as supplemented by Schedule 6 of that Act. ‘Group Company’ shall mean any company in the Group. 5.12  On a practical note, where the draftsman is in any doubt whether a particular company or organisation will fall within his proposed definition of Group, or there are any practical difficulties in formulating a definition that would catch the particular company/organisation, the safest course is simply to identify expressly the company/organisation by name in the definition. So, for example, the precedent above could be modified as follows: ‘Group’ means ABC  Limited and any company  … [definition continues as above]. Whilst this approach may seem a little cumbersome, it is a far safer course than taking a chance that a particular company/organisation will be included in the definition. 5.13 Employers looking for a Group definition which incorporates both corporate and non-corporate organisations could adopt the definition of ‘group undertaking’ in section 1161 as supplemented by section 1162 and Schedule 7 Companies Act 2006, which includes not only corporate bodies but also partnerships and unincorporated associations in business with a view to making a profit. If doing so, however, the draftsman will need to make consequential amendments to other precedents in this chapter, since, as already indicated, those precedents all proceed on the basis that the Group consists only of companies. 5.14  Finally, like all terms of a service agreement, it will be important for the employer to keep the Group definition current and ensure that it reflects accurately the organisations with which the employee may be involved and whose interests are to be protected. It is also worth bearing in mind that where ‘Group’ is defined broadly, the employer should consider whether the circumstances of the employee in question would require any particular term to apply only in relation to the employing company or for example only to those group companies with whom the employee has or has had some involvement. This issue is particularly important in the context of post-termination restrictive covenants where to have the best prospects of enforceability the covenants must be tightly focussed on the employee’s role and precisely what that entailed in terms of access to confidential information and interaction with customers and other business contacts of the employer. The issue of reasonableness is considered in Chapter 11 and the drafting of post-termination restrictive covenants in Chapter 12. 244

Terms recording/extending obligations included within the duty of fidelity 5.18

1(a)  A general statement of the duty of fidelity 5.15  Although this duty is implied into every contract of employment, there are three reasons why a general statement of the duty should be expressly incorporated. First, it draws the matter specifically to the employee’s attention, a deterrent to competitive activities in itself; secondly, where only certain aspects of the implied duty are expressly incorporated, it puts it beyond argument that there was no intention to exclude the entire duty in favour of those particular aspects; thirdly, if formulated in a negative as well as a positive way, it may found the basis of an injunction: Provident Financial Group plc v Hayward [1989] IRLR 84 (CA). Precedent – Senior Executive At all times during the continuance of this Agreement the Executive shall use his best endeavours to promote and protect the interests of the Company [and the Group] and shall faithfully and diligently perform such duties and exercise such powers as may from time to time be assigned to or vested in him and shall not do anything that is harmful to the Company [or any other company in the Group]. Note: The word ‘Group’ should be defined in the service agreement; see 5.10–5.14.

1(b) Working hours 5.16  As we saw in Chapter 3 (3.20–3.25) when considering the implied duty of fidelity, there is a distinction between the hours the employee has contracted to work for the employer and the employee’s spare time. In his contracted working time there is an absolute prohibition on any other activity, whilst in his spare time the employee is merely prohibited from doing anything which may cause serious damage to the employer. 5.17 A  commonly encountered problem is identifying what hours are the employer’s time and what is the employee’s spare time. This is particularly so in the case of more senior employees and those on flexitime. Section 1(4)(c) Employment Rights Act 1996 requires the employer to notify the employee of any terms and conditions relating to hours of work, including ‘normal working hours’. There is an exception to this, section 2(1) Employment Rights Act 1996 provides that the employer may simply state that there are no particulars under section 1(4)(c). In most cases, however, some details can be given. Because of the distinction between the employee’s working time and his spare time, from the perspective of limiting competition it is generally desirable, where possible, to include some details. A commonly used formula is to refer to certain core hours and then to provide that the employee will be required to work such additional hours as are reasonably required for the proper performance of his duties. 5.18 In addition, with the maximum average 48-hour week (regulation 4 Working Time Regulations 1998 (SI 1998/1833) as amended (the ‘Working Time 245

5.19  Express terms of the contract of employment

Regulations’)) applying to most employees, the identification of working hours has in theory become more important, although in practice many commentators have noticed no significant change in working patterns. To enforce the limit, the Working Time Regulations impose stringent record-keeping requirements which apply even where an employee has agreed to opt out of the 48-hour week (regulations 5 and 9 respectively). With some notable exceptions, these requirements are often more honoured in the breach than in the observance. 5.19  One particular issue that can arise in the context of senior employees is where the employer seeks to bring the employee within the exception to the Working Time Regulations, ie  on the ground that their working time is ‘not measured or pre-determined or can be determined by the worker himself’ (regulation 20(a)). The advantages to the employer of the employee falling within this exception are threefold: •

the employer does not have to concern himself with the bulk of the Working Time Regulations;

•

he does not have to obtain an opt-out agreement from the employee for the 48-hour week; and

•

he does not have to contend with the risk of the employee who has entered into an opt-out agreement exercising his right under the Working Time Regulations to opt back in by giving not more than three months’ notice.

The possible disadvantage, in the context of limiting competition, is that to support the contention that the employee is within the excluded category, his hours of work clause will need to be drawn very widely. The hours of work clause may, for example be on the basis that there are no normal working hours and that the employee is required to devote such hours to his employer’s business as are necessary to discharge his duties. In our view, in practice this is not a major problem. Technically, in the absence of set working hours a court could find that the activity of which the employer is complaining was done in the employee’s own time and is permissible. However, this issue rarely presents a problem for two reasons. First, employees who are intent on competing almost invariably undertake certain activities in what on any interpretation amounts to their employer’s time. They do so usually on grounds of convenience, or because that is when they need to be in contact with third parties, such as clients who are central to their plans, or because they feel it would arouse suspicion if they suddenly changed their working pattern. Secondly, courts are familiar with the typical activities of employees intent on competing. 5.20  In the case of more junior employees, however, it can be argued that the employer should choose between: (1) clarity on working hours (thereby enhancing his chances of a successful claim based on breach of the employee’s contractual obligations and/or duty of fidelity); and (2) escaping the requirements of the Working Time Regulations. Bearing in mind the subject matter of this book, for all but the most senior employees we favour the first option, coupled, where possible, with an opt-out agreement under regulation 5 Working Time Regulations. Our remaining comments on working hours proceed on the assumption that the employer has chosen the option of clarity on working hours. 246

Terms recording/extending obligations included within the duty of fidelity 5.23

5.21  It is important to bear in mind that insofar as the employer is looking to maximise its protection from competition until the contract of employment terminates, identification of working hours will be of less significance if the employer has an appropriate express restriction on their spare time activities. This is discussed further at 5.24–5.34. 5.22 Drafting hours of work clauses can be difficult. The key to success is careful thought as to what the basic hours are likely to be and the degree of flexibility the employer wants to incorporate. Employers should be realistic about what they expect, particularly bearing in mind the constraints imposed by the Working Time Regulations. Clauses which appear to require the employee to spend his entire time working are clearly unrealistic and will be of limited assistance in any dispute as to whether something was done in the employer’s or the employee’s time. Furthermore, hours of work clauses need to be kept up to date to ensure that they accord with the employer’s current practice. For employees for whom overtime is appropriate, the employer needs to decide whether overtime will be compulsory or voluntary. If it is to be compulsory, it is normally best to provide for a short period of notice to be given of the requirement to work overtime, save in the case of emergency or exceptional needs of the business. Precedent – Senior Executive The Executive shall devote the whole of his time and attention and abilities during normal business hours and at such other times as the Company or his duties may reasonably require to the business and affairs of the Company [and the Group]. Note: The phrase ‘normal business hours’ and the term ‘Group’ should be defined in the service agreement; on the latter point see 5.10–5.14. 5.23  Finally, one associated point arising from the Working Time Regulations which is relevant in the context of working time is holidays. The Working Time Regulations give employees a right to paid holidays (regulation 13). The Working Time Regulations also set out ‘a procedural mechanism’ for the taking of holiday from which the parties can ‘opt out’ through a ‘relevant agreement’, as defined in the Working Time Regulations. The length of notice the employee must give under the Working Time Regulations of his wish to take holiday is very short, basically twice the length of the holiday to be taken. The employer has the opportunity to reject a request but it will need to give the employee counter-notice. This must give at least as many calendar days before the date on which the leave is due to start as the number of days which the employer is refusing. Despite this option being available, employers would be well advised to ensure that they have a ‘relevant agreement’ requiring the employee to give longer notice to request holiday. The relevance of the issue of when holiday can be taken in the context of limiting competitive activity is that anything that weakens the employer’s position in terms of controlling working time is potentially disadvantageous. 247

5.24  Express terms of the contract of employment

1(c)  Control of outside activities 5.24  Having defined what the employee’s working hours are, the employer has taken the first step in controlling the employee’s activities. Provided the drafting of the provision is correct, he has ensured that it would be a breach of the employee’s implied duty of fidelity to do anything of a competitive nature during those hours: Thomas Marshall (Exports) Ltd v Guinle [1979] 1 Ch 227. In addition, by providing that the employee must devote his whole time and attention to the employer’s business during those hours, the employer has also prohibited non-competitive activities outside his employment during those hours. 5.25  What additional steps the employer takes to control the employee’s outside activities will largely depend on the status of the particular employee, the access he has to confidential information and the likelihood of his being a serious threat, either as a competitor or working with a competitor. In assessing the latter point employers should always bear in mind the possibility that the employee may set up in competition with fellow employees or may work for a competitor with other fellow employees. The employer should not look at the employee only as an individual. It is not clear to what extent it is permissible to prevent an employee from undertaking steps preparatory to competitive activity which would not of themselves amount to a breach of the implied duty of fidelity. Arguably such a prohibition might be struck down as being an unlawful restraint of trade although that is unlikely to be the outcome if the prohibition applies only where there is an actual or likely adverse impact on the employer’s business. See, for example, Ward Evans Financial Services v Fox [2002]  IRLR  120 (considered at 3.72), where the prohibition which the court upheld was the holding of any material interest in, inter alia, a company which ‘…  impaired or might reasonably be thought by the Company to impair …’ the employee’s ability to act in the best interests of the Company. 5.26  In every case the employer should consider the inclusion of an express term restricting the employee’s spare time activities. That term may be a total prohibition on outside business activities or a ban on certain defined business activities only. It may also provide that activities are permissible where the prior consent of the employer is given and that such consent will not be unreasonably withheld. On these formulations two questions arise: •

Should the employer choose a total or partial ban?

•

Should a consent provision be included?

1(c)(i) Total or partial ban? 5.27 As a general rule, where the employee works full time for the employer a blanket ban on outside business activities is normally unobjectionable. Such an employee is not normally faced with the alternative, in the phraseology of the older cases of ‘idleness and starvation’ or complying, although if he were, the clause will be struck down: Young v Timmins (1831) 1 Cr & J 331 approved 248

Terms recording/extending obligations included within the duty of fidelity 5.29

by Lord Reid in Esso Petroleum Co Ltd v Harper’s Garages (Stourport) Ltd [1968] AC 269. In Sunrise Brokers LLP v Rodgers [2015] IRLR 57 Underhill LJ at paragraph  32 thought that older phraseology was ‘more colourful than helpful’. Instead he preferred the formulation of Nourse LJ in Warren v Mendy [1989] IRLR 210 at paragraph 23 that a negative obligation will not be enforced where on the facts of the case having a ‘realistic regard for the probable reaction of an injunction on the psychological and material, and sometimes the physical, need of the servant to maintain the skill or talent’ the effect would be to compel performance of the contract. Consequently, a degree of financial hardship short of destitution may suffice to make the provision unenforceable and it is for this reason that a total ban in a part-time employee’s contract may be objectionable. A prohibition on the employee being involved in activities competitive with his employer’s business is valid and would almost certainly be enforced by injunction in circumstances such as arose in Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] Ch 169, where the employees were working for a competitor in their spare time. In Hivac the employees’ contracts contained no express restrictions on their spare time activities but nonetheless their work for a competitor was held to be a clear breach of the implied duty of fidelity since such employment might cause great harm to the employer. 5.28  Where the employee will not agree to the inclusion of a garden leave clause in his contract (see 5.123–5.134 and 15.3–15.73 in relation to garden leave and garden leave injunctions respectively) the safest course used to be to include only a partial ban on outside activities during employment, ie prohibiting only activities competitive with the employer. However, on the current state of the authorities there is a good argument that a total ban on outside business activities (ie irrespective of whether or not such activities are competitive with the employer’s business) is permissible. Whilst such a clause is unlikely to be enforced by injunction in its entirety, the courts have shown a clear willingness to reduce the scope of the contractual embargo to focus only on the competitive activity about which the employer complains. See, for example, Provident Financial Group plc v Hayward [1989] IRLR 84 (CA) and Symbian v Christensen [2001] IRLR 77. In each of these cases the employer was seeking a garden leave injunction to restrain the employee from joining the new employer before the expiry of the notice period. Both contracts included a prohibition on the employee being involved in any outside activities during the currency of the contract. In each case the Court of Appeal ruled that it had the power to grant an injunction in a reduced form of the contractual prohibition, ie only prohibiting the employee from joining a competitor. In Provident the court ultimately declined to grant an injunction but did so on the ground of insufficient evidence that serious damage would be caused to Provident. 5.29 In Provident the Court of Appeal ruled that in any event the employee’s activities could be restrained as a breach of his duty of fidelity. A similar conclusion was not reached in Symbian, primarily because at first instance the ViceChancellor had concluded that the duty of fidelity ends when an employee is sent on garden leave. The Court of Appeal in Symbian noted that the employee’s counsel ‘confessed to some difficulty’ in justifying the Vice-Chancellor’s views on this point, but as they had heard no argument from the employer’s counsel 249

5.30  Express terms of the contract of employment

on the point and it was not necessary to deal with it, they made no comment (Morrit LJ at paragraph 46). 5.30  In the previous edition of this book, we expressed the view that the Vice Chancellor in Symbian was incorrect in concluding that the duty of fidelity ends when the employee is sent on garden leave and this has been proved right by subsequent cases. In Tullett Prebon plc and others v BGC Brokers LP [2011] IRLR 420 (CA) Maurice Kay LJ (at paragraph  41) took the view (obiter) that the duty of fidelity may be attenuated, but not ended, during the period of garden leave depending on the factual circumstances. The subsequent High Court decision in Imam-Sadeque v Bluebay Asset Management (Services) Ltd [2013]  IRLR  344 also concluded that the Vice Chancellor was incorrect in Symbian. Popplewell J referred to the view expressed by Maurice Kay LJ in Tullett and accepted that this was correct in the sense that the employee on garden leave is relieved of the obligation to carry out work activities, and owes no duty to pursue those activities loyally or otherwise (at paragraph 144). He continued: ‘But the same cannot be said of the obligations which are imposed by the duty of fidelity and are of relevance in this case, which are obligations to refrain from acting in a particular way. Such negative obligations remain part of his duties for so long as he is employed’.

He added that: ‘There is no reason in principle, or authority, why the aspects of the duty of loyalty which touch upon competitive activity, or the enticing away of employees, should be attenuated so as to interfere with these legitimate purposes of garden leave’ (at paragraph 145).

This position was endorsed by the High Court in Thomson Ecology Ltd and another v APEM  Ltd and others [2014]  IRLR  184 (see paragraph  21). ImamSadeque and Thomson Ecology are consistent with the position that had been taken in Provident. Tullett, Imam-Sadeque and Thomson Ecology are considered in further detail at 3.76–3.84. Garden leave injunctions are considered in Chapter 15 at 15.3–15.73. 5.31  Where the employer adopts a total ban on outside business activities, it is common practice, and clearly sensible, to include a proviso permitting investment up to a specified (and small) ceiling in listed companies. It is common for this to be 3% of the total issued share capital of any company, which is also the threshold set in respect of any ‘significant shareholder’ under the AIM Rules for Companies (July 2016). Precedents of both total and partial ban clauses appear below. 1(c)(ii)  Consent provision 5.32  From the employer’s point of view there is little disadvantage to including a provision whereby outside business activities are permissible with his consent. Such a provision will, however, obviously be of limited value where the ban 250

Terms recording/extending obligations included within the duty of fidelity 5.34

on outside business activities is partial. In such cases the banned activities will normally be precisely those for which the employer would refuse consent in any event. To avoid disputes it is sensible to specify the title of the officer (rather than the name of an individual, in case the individual leaves) who will give consent on behalf of the employer, provide that consent must be given before the activity is undertaken and that consent must be in writing. Having taken these steps, it is important that the procedures are followed. 5.33  Providing that the consent will not be unreasonably withheld is less advantageous to the employer. Whilst it is unlikely to cause difficulty in the context of activities which are clearly competitive, where withholding of consent would be reasonable, it may lead to disputes in other areas. Where possible, the employer should resist such an inclusion. By the same token it is to the employee’s advantage to press for the inclusion of such a provision. Where the ban on outside activities is partial, provided the banned activities are those which are likely to harm the employer (which is normally the case), there is little point in including a provision that consent will not be unreasonably withheld. As the employer has gone to the trouble of identifying those activities that may cause him harm, it should always be reasonable for him to withhold consent. 5.34  Where the outside activities clause is otherwise unreasonable, it is highly unlikely that the inclusion of a consent provision will validate the clause. The cases in which this point has been considered all relate to post-termination restrictive covenants, but in our view the same principles apply to a clause controlling activities during employment. In both Chafer Ltd v Lilley [1947] LJR 231 and Technograph Printed Circuits Ltd v Chalwyn Ltd [1967] RPC  339 a consent provision did not validate an otherwise unreasonable restraint, but compare Kerchiss v Colora Printing Inks Ltd [1960] RPC 235, where Danckwerts J found such a provision was one of the factors validating the covenant. Precedents – Senior Executive Total ban Except as a representative of the Company the Executive shall not [without the prior written approval of [insert title of Company officer]] [which approval shall not be unreasonably withheld] during his employment by the Company be directly or indirectly engaged or concerned or interested in any capacity in any other trade or business [or the setting up of any business] save as a holder of the legal or equitable interest in the shares or securities of a company whose shares or securities are quoted or dealt in on any recognised stock exchange, provided that any such holding shall not exceed [3%] of the whole or any class of the issued share capital of the company concerned. Partial ban The Executive shall not [except with the prior written approval of the [insert title of Company officer]] [which approval shall not be unreasonably withheld] during his employment by the Company be directly or indirectly 251

5.35  Express terms of the contract of employment

engaged or concerned or interested in any capacity in any trade or business [or the setting up of any business] which is in competition with the business carried on by the Company [or any other company in the Group] or any part of such business save as a holder of the legal or equitable interest in the shares or securities of a company whose shares or securities are quoted or dealt in on any recognised stock exchange, provided that any such holding shall not exceed [3%] of the whole or any class of the issued share capital of the company concerned. Note: The word ‘Group’ should be defined in the service agreement; see 5.10–5.14.

1(d)  Non-poaching of employees 5.35 As we have seen from Chapter 3 (see 3.54), it would be a breach of the duty of fidelity for an employee to recruit another employee during employment to act in competition with the employer and attempts by senior employees to solicit more junior employees constitute particularly serious misconduct (see QBE Management Services (UK) Limited v Dymoke [2012] IRLR 458 and Thomson Ecology Limited v APEM Limited [2014] IRLR 184 at paragraph 16). The position is the same (or even stricter) where a fiduciary is involved in such recruitment. Whichever category of duty one is considering, there can be no harm in including an express provision prohibiting the poaching of colleagues, and we suggest a clause along the lines of the following precedent. Precedent – Senior Executive The Executive shall not at any time during his employment directly or indirectly and whether on his own behalf or on behalf of any third party entice or encourage or seek to entice or encourage any other employee of the Company [or any other company in the Group] to leave their employment. Note: The word ‘Group’ should be defined in the service agreement; see 5.10–5.14. 5.36  The courts have clearly accepted the stability of the workforce as a legitimate interest protectable after termination of employment: Ingham v ABC  Contract Schemes Ltd (12  November 1993)  LEXIS (CA), applied in Alliance Paper Group v Prestwich [1996]  IRLR  25; Dawnay Day & Co Ltd v De Braconier D’Alphen [1997]  IRLR  422 (CA) and Crystal Palace FC  (2000) Ltd v Bruce [2000] SLR 81, where the court recognised that the club had a legitimate interest to protect in relation to both coaching staff and players. In the circumstances, it is difficult to see on what grounds a provision such as the one in our precedent could be challenged, save, perhaps, that unlike a post-termination restrictive covenant it is not limited to specific categories of employee: all employees are caught. In our view, the distinction is justified, but an employer wanting to ‘play safe’ could easily refine the clause to limit it to particular categories of employee in the same way as a post-termination non-poaching covenant would be limited. For further guidance on that issue see 12.109–12.118 and the Appendices to Chapter 12. 252

Terms recording/extending obligations included within the duty of fidelity 5.39

1(e)  Disclosure of information and reporting procedures 5.37 The implied duty of fidelity imposes on an employee an obligation to disclose certain information to his employer. The extent of the obligation is considered at 3.85–3.138. The implied duty of fidelity does not have the effect of making the contract of employment a contract of utmost good faith. There is no general obligation on an employee who is not a fiduciary to disclose the misdeeds of his fellow employees. However, such a duty can arise where the employee is in a managerial position with reporting obligations and responsibility for disciplinary matters: Swain v West (Butchers) Ltd [1936] 3 All ER 261 (CA) and Sybron Corporation v Rochem Ltd [1983] 3 WLR 713. For the stricter position of a fiduciary see 4.226–4.262. Ultimately, any obligation on an employee to report certain information to his employee must arise out of the terms of the contract of employment (except where the employee is a Companies Act director where such duty may (also) arise from his fiduciary duty as a director). This point was reiterated by the Court of Appeal in Ranson v Customer Systems Plc [2012] IRLR 769. This case is discussed in further detail at 3.31 and 4.36–4.38. 5.38 Employers should therefore take care to ensure that those employees charged with managerial duties have this fact reflected in their contracts, and that reporting procedures should be clearly set out, including the intervals at which reports are to be made and an overriding provision requiring matters of particular significance to be reported to the employer forthwith. Furthermore, employees with responsibility for disciplinary matters should be given those responsibilities subject to an obligation to report to and, in certain cases, consult with more senior colleagues. 5.39  In addition, careful consideration should be given to the inclusion of a positive obligation on the employee to disclose certain information, including the misdeeds of his fellow employees. While it is unrealistic for the employer to expect that this will necessarily result in his being made aware of competitive activities of his employees (or plans to compete), it may nonetheless be sufficient to deter some competitive activities (or plans to compete). In addition, if the sanction for breach is clearly stated to be dismissal, it would in principle entitle the employer to dismiss summarily an employee who did not disclose, although this is not a course of action we would necessarily recommend in the absence of any other breaches of contract or misconduct by the employee. A positive obligation on the employee to disclose his own misdeeds should also be included. In Ranson, the Court of Appeal held that, ‘What goes for the reporting of misconduct of fellow employees must apply with at least equal force to reporting one’s own misconduct’ (Lewison LJ at paragraph  46). Although Ranson related to an employee with fiduciary duties, this adds weight to the argument that where the employer includes a term placing an obligation on the employee to report the misdeeds of his fellow employees, it does no harm to include a separate obligation to disclose his own misdeeds. Where the employee is a fiduciary it will add little, if anything, to his fiduciary obligations and the remedies available for breach of those obligations; for remedies see Chapter 16. However, in those borderline cases where it is questionable whether or not an employee should be classed as a fiduciary, an 253

5.40  Express terms of the contract of employment

express positive obligation might be beneficial and certainly would do no harm. In the case of an employee who is clearly not a fiduciary, such an express obligation could prove to be valuable in supporting an application for an injunction. 5.40  The difficulty is how to frame an express obligation to disclose. In Swain v West (Butchers) Ltd [1936] 3 All ER 261 the court found that it was Swain’s position as general manager (by virtue of which he was given general control of the company, subject to the overriding power of the managing director) coupled with the obligation in his contract to ‘… do all in his power to promote, extend and develop the interests of the company’ which gave rise to the obligation to report the unlawful orders of the managing director to the board. Although such an express term will be relevant, it would not be sufficient to impose an obligation of disclosure on an employee with no managerial responsibilities. This was borne out in Lonmar Global Risk Limited v West [2011]  IRLR  138 where the defendant employees were found to have engaged in competitive activity during their employment by conducting business for a competitor and both were under an express contractual obligation to use ‘best endeavours to promote the general interests and welfare of the company’. However, Hickinbottom J took the view that this was ‘a general clause which, certainly without more, could not require the law to impose wide-ranging duties to report wrongdoing and conduct that might be contrary to the interests of Lonmar, or to persuade clients or employees to stay when he is going’. The defendants were not part of senior management and the contractual obligation that they were under had to be considered in light of their role and responsibilities at Lonmar. 5.41 Therefore, an express term in clear language is advisable: Distillers Company (Bottling Services) Ltd v Gardner [1982]  IRLR  47. In Distillers the Scottish Employment Appeal Tribunal dealt ambiguously with the company’s contention that Mr Gardner, who had been employed to load goods onto container trailers, was under an obligation to report theft of the company’s goods by his fellow employees. While accepting that a final warning was justified in connection with an earlier failure to report theft by fellow employees, in relation to a second incident which led to dismissal, Lord McDonald MC (at paragraph 17), responded to an argument that the Tribunal had attached insufficient weight to the company’s need to prevent misappropriation and misuse of alcohol in the following way: ‘If, however this is a matter of great importance to the appellants, it would be reasonable to expect in their rules not merely a specific prohibition against misappropriation but a clear obligation placed upon employees who witness such behaviour to report it immediately. It is asking a lot of an employee to require him to report the misdemeanours of his colleagues, but if this is to be the rules it should, in our view, be very clearly spelled out.’

5.42  In all cases a general obligation along the lines of the clause in Swain, which is simply a general statement of the implied duty of fidelity, should be included (see 5.15 for a precedent). In addition, the employer can either include a general obligation to disclose misdeeds, perhaps with a non-exhaustive list identifying matters of particular concern, or simply an obligation to disclose specified matters. Examples of both formulae are set out below. 254

Terms recording/extending obligations included within the duty of fidelity 5.42

Precedent – Senior Executive General obligation to disclose with non-exhaustive list 1.

The Executive shall promptly disclose to [insert title of Company officer] any information which comes into his possession which affects adversely or may affect adversely the Company [or any other company in the Group]. Such information shall include, but shall not be limited to: 1.1. the plans of any employee to leave the Company [or any other company in the Group] (whether alone or in concert with other employees); 1.2 the plans of any employee (whether alone or in concert with other employees) to join a competitor or to establish a business in competition with the Company [or any other company in the Group]; 1.3 any steps taken by any employee to implement or continue to implement any of the plans referred to in clauses 1.1. or 1.2; 1.4 any approaches made to the Executive to join or otherwise work in collaboration with any third party who or which is a competitor or potential competitor of the Company [or any other company in the Group]. Where at the time of any approach to join or work in collaboration with a third party that third party is not such a competitor or potential competitor but subsequently becomes such a competitor or potential competitor and discussions with the Executive are ongoing the Executive shall promptly disclose to [insert title of Company officer] the fact of those discussions; 1.5 information relating to the competitive activities of any current or former employee (whether alone or in concert with other current or former employees) who has joined or is working with a competitor of the Company [or any other company in the Group] or who has set up a business in competition with the Company [or any other company in the Group]; 1.6 the disclosure or misuse by any employee of any Confidential Information of the Company [or any other company in the Group]; [and] 1.7 the Executive’s own misconduct or the misconduct of any other employee or officer of the Company [or any other Company in the Group] of which the Executive is aware or ought reasonably to be aware; [and] 1.8 [insert other examples as required]

Note: The word ‘Group’ should be defined in the service agreement; see 5.10– 5.14 as should the term ‘Confidential Information’ see 5.44. Also, where a business is conducted with independent contractors working alongside employees, consideration should be given to including independent contractors within the above clause (perhaps conveniently by adding a definition which expands the meaning of ‘employee’ for the purposes of this clause). 255

5.42  Express terms of the contract of employment

Specific obligation to disclose 1.

The Executive shall promptly disclose to [insert title of Company officer] any of the following information which comes into his possession: 1.1. the plans of any employee to leave the Company [or any other company in the Group] (whether alone or in concert with other employees); 1.2 the plans of any employee (whether alone or in concert with other employees) to join a competitor or to establish a business in competition with the Company [or any other company in the Group]; 1.3 any steps taken by any employee to implement or continue to implement any of the plans referred to in clauses 1.1. or 1.2; 1.4 any approaches made to the Executive to join or otherwise work in collaboration with any third party who or which is a competitor or potential competitor of the Company [or any other company in the Group]. Where at the time of any approach to join or work in collaboration with a third party that third party is not such a competitor or potential competitor but subsequently becomes such a competitor or potential competitor and discussions with the Executive are ongoing the Executive shall promptly disclose to [insert title of Company officer] the fact of those discussions; 1.5 information relating to the competitive activities of any current or former employee (whether alone or in concert with other current or former employees) who has joined or is working with a competitor of the Company [or any other company in the Group] or has set up a business in competition with the Company [or any other company in the Group]; 1.6 the disclosure or misuse by any employee of any Confidential Informa­tion of the Company [or any other company in the Group]; [and] 1.7 the Executive’s own misconduct or the misconduct of any other employee or officer of the Company [or any other Company in the Group] of which the Executive is aware or ought reasonably to be aware; [and] 1.8 [insert other examples as required].

Note: The word ‘Group’ should be defined in the service agreement; see 5.10– 5.14 as should the term ‘Confidential Information’ see 5.44. Also, where a business is conducted with independent contractors working alongside employees, consideration should be given to including independent contractors within the above clause (perhaps conveniently by adding a definition which expands the meaning of ‘employee’ for the purposes of this clause). 256

Terms recording/extending obligations included within the duty of fidelity 5.44

1(f)  Identifying the employer’s property 5.43  In many instances it will be clear what is and what is not the employer’s property. A laptop provided by the employer for the employee’s use during employment will be the employer’s property whereas an employee’s personal laptop which he uses for example to gain remote access from home to his employer’s systems will be the employee’s property. Similarly where the employer provides physical notebooks for the employee to record their notes of, for example, meetings or phone calls those physical notebooks will be the employer’s property. Where there is potential for disputes to arise however is, for example, where the employee records their meeting notes or notes of calls in their own physical property. To avoid that situation arising it is advisable for the employer to provide that materials of this type together with all other materials, in whatever form, provided to the employee or made by him in connection with his employment are and remain the employer’s property at all times. An example of this sort of clause is included below: Precedent – Senior Executive All documents, manuals, hardware and software provided for the Executive’s use by the Company [or any other company in the Group] and any data, notes or other documents (including all copies) made compiled or acquired by the Executive in the course of or in any way connected with his employment by the Company in whatever medium and wherever stored including on any computer, tablet, mobile phone or other electronic device or in paper form shall be and shall remain at all times the property of the Company and shall be promptly delivered up to the Company by the Executive on request.

1(g)  Confidentiality and the protection of trade secrets 5.44  The information the employer is entitled to protect by express covenant is considered in detail in Chapter  6. In broad terms, during employment the employer can protect most kinds of information, whereas once employment has ended he is limited to two categories: trade secrets and mere confidential information which the employer has protected by express covenant, usually in the form of a confidentiality covenant, sometimes supported by a non-competition covenant. However, in practice the employer will normally want to protect the same types of information both during and after employment, and for this reason it is normal for there to be an express covenant applying to both situations which identifies by non-exhaustive list (to allow for change) particular types of information which the employer wants to protect. The advantage of this approach is that it ensures the employer has addressed the question of what information should be treated as confidential, but without excluding other possible types of information that may arise and may be confidential. Precedent – Senior Executive The Executive shall not, save in the proper performance of his duties under this Agreement, directly or indirectly make use of, disclose or communicate or 257

5.45  Express terms of the contract of employment

facilitate the disclosure or communication to or use by any person and shall use his best endeavours to prevent the publication or disclosure of any trade secrets or other confidential information of or relating to the Company [or any other company in the Group] which he may have received or obtained as a result of or in any way in connection with his employment by the Company [or in performing services for any other company in the Group]. This restriction shall continue to apply after the termination of his employment without limit in point of time but shall cease to apply to information: (a) which comes into the public domain other than through any act or omission of the Executive, or any third party (where the third party disclosed or facilitated the disclosure of such information in breach of its obligation of confidence to the Company [or any other company in the Group] or at the Executive’s request or instigation) or (b) ordered to be disclosed by a Court of competent jurisdiction; or (c) otherwise required to be disclosed by law. For the purposes of this Agreement confidential information shall include, but shall not be limited to [insert types of confidential information]. Note: In this precedent the formulation of the employee’s obligations prohibits not only misuse of confidential information by direct action (eg the employee deliberately using a confidential customer list for a new employer’s benefit), but also by indirect action or omission. This is to catch those cases where the employee denies breach on the basis that the ‘leak’ did not derive from his direct acts. We have excluded from the clause information which comes into the public domain other than through an act or omission of the employee or a third party acting on the instigation of the employee or in breach of its obligations of confidence to the Company. We have done so on the basis that once information is in the public domain, then the courts are unlikely to make any order in relation to that information unless the (ex-) employee directly or indirectly caused or allowed that information to come into the public domain. In those circumstances, the court may grant a springboard injunction. Springboard injunctions are considered in detail at 15.78–15.152. Sometimes an additional obligation is included in these clauses requiring the (ex)employee to notify his (ex-)employer if either of the exceptions in (b) or (c) might be triggered. By being put on notice the (ex-)employer has the opportunity to challenge any disclosure or if disclosure is inevitable at least seek to manage the process. The word ‘Group’ should be defined in the service agreement: see 5.10–5.14.

1(h)  Patents, copyright and certain other intellectual property 5.45  Questions connected with patent and copyright and the like raise complex issues which are beyond the scope of this book. However, the following is an outline of some of the most important terms dealing with certain types of intellectual property which it is prudent to include in a contract of employment. 5.46 Subject to the cautionary note relating to ‘inventions’ at 3.143–3.146, the employee should disclose to the employer any discovery or invention or improvement to an existing invention or process created during the course of the 258

Terms recording/extending obligations included within the duty of fidelity 5.51

normal duties of their employment (or duties specifically assigned to them) by the employer. Subject to the relevant legislation (not least the Patents Act 1977), the employer should be first owner of the discovery, invention or improvement. 5.47  All other intellectual property (including copyright, design, trademarks created ‘in the course of employment’ and, where appropriate, similar or other rights in jurisdictions outside the United Kingdom) created by the employee in the course of his or her employment, together with the entitlement to apply for such rights, will be owned by the employer. Employers will need to give consideration to the meaning of the phrase ‘in the course of his or her employment’, as situations will vary, making a wider formulation necessary in some cases, such as where it is contemplated that the employee will spend time outside normal working hours engaged on the employer’s business. 5.48  Consideration should be given to a suitable waiver of moral rights associated with copyright, under Chapter  IV  Part  I  Copyright, Designs and Patents Act 1988. 5.49 There should also be a ‘further assurances’ provision, under which the employee undertakes to do everything necessary to vest in the employer all the intellectual property which, by virtue of the employment contract, is to vest in the employer. Sometimes, this may extend to the employee granting a power of attorney to the employer to carry out all necessary actions in the employee’s name, for example the completion of necessary filings with Patent registries and formal assignments of copyright and other intellectual property. It should be noted that assignments of intellectual property must be in writing and signed by the transferor or grantor. 5.50  In express confidentiality covenants contained in the contract of employment, the employer should consider whether special treatment is required in relation to software products where the employer is a software supplier (so that the software is itself treated as confidential information). Similarly, special treatment will be required for ‘paid to invent’ employees to ensure that technical information, test or experimental detail, technical trade secrets, formulae, embryonic inventions etc. are not taken or passed into the public domain by the departing employee. 5.51 On termination of the employment, the employee should return to the employer all material that belongs to the employer. Care should be taken to ensure that data and other intangible property are returned as well. Employees engaged in research and development work should, in particular, be under special obligations to return all working notebooks, testing and laboratory reports and similar documents. Information that cannot be returned, such as data held in a personal computer or other personal device should first be copied, eg onto a USB stick, and the copy delivered to a named officer of the employer together with a list of the items contained in the copy. Once the copy has been reviewed by the employer and the employer has confirmed the accuracy of the employee’s list of contents the information should be irrevocably deleted from the 259

5.52  Express terms of the contract of employment

computer memory and from all other data storage devices. Employees should be reminded of their confidentiality obligations during their exit interview. 5.52  Finally, employers will need to ensure that employees can, legally, comply with the above provisions. In some cases, because of undertakings given to a previous employer, an employee might not be able, say, to agree to the vesting of certain intellectual property in his new employer. It would be prudent to establish whether any such restrictions bind the employee before employing him. 5.53  Those employers who engage consultants, designers of logos, graphic artists, software writers or other freelancers should ensure that a similar provision is contained in the contracts under which those consultants and freelancers are engaged. Particular care is required when it comes to ownership of intellectual property because the commissioner does not by virtue of the contract of commission alone acquire ownership by implication: express transfer of ownership is required which must be in writing and signed by the commissionee.

2. TERMS WHICH DEFINE THE EMPLOYEE’S ROLE 5.54  The term ‘role’ is used here in the broadest sense to encompass not only the employee’s job title but also what his duties are, how and where he performs those duties, his status in the hierarchy of the employing organisation and where his reporting line lies. 5.55 In the context of competitive activities, it is in the employer’s interests (although not necessarily the employee’s) to define the employee’s role for two reasons. First, the precise ambit of the implied duty of fidelity is governed in each case by the employee’s role. Secondly, for an employee who is not a director the precise nature of the role and the terms of the contract will determine whether any fiduciary duties are owed. As discussed at 4.54 an express term to the effect that the employee owes fiduciary obligations, whilst not harmful, is likely to be of only limited value. Thirdly, by identifying the employee’s role, the employer will simultaneously have focused on the employee’s potential as a competitor and therefore have a good idea of the risks against which he should seek protection through the contract. 5.56 In defining the employee’s role the employer should, where possible, include a considerable degree of flexibility. For example, the employer might retain the right to allocate different duties to the employee or to change the employee’s role to a comparable position, although the more senior the employee, the fewer options the employer will have. One of the most common defences to an action by an employer to enforce post-termination restrictive covenants is that the employee has accepted the employer’s repudiation of the contract, and the employer cannot therefore rely on any term of the contract (repudiatory breach is considered in Chapter 9.) The employee frequently bases his claim of repudiatory breach on matters such as loss of status, change of duties, withdrawal of work, or change of place of work. 260

Terms which define the employee’s role 5.58

5.57  Such arguments are significantly more difficult to sustain where the contract allows for flexibility on these points. As discussed above, flexibility can be achieved either by the employer reserving the right to make specified changes or by the contract expressly contemplating certain events. The employer should never rely on a clause which purports to give him ‘carte blanche’ to vary the contract. Such clauses are unlikely to be regarded as effective and will come under considerable scrutiny by the courts. Any unilateral variation clause will, at the very least, need to be expressed in clear and unambiguous terms. In Wandsworth London Borough Council v D’Silva [1998]  IRLR  193, Lord Woolf MR commented (at paragraph 31): ‘The general position is that contracts of employment can only be varied by agreement. However, in the employment field an employer or for that matter an employee can reserve the ability to change a particular aspect of the contract unilaterally by notifying the other party as part of the contract that this is the situation. However, clear language is required to reserve to one party an unusual power of this sort.’

5.58 In United Association for the Protection of Trade v Killairn (17 September 1985, EAT 787/84, unreported), a clause which read: ‘This Handbook constitutes your contract of employment. The Association reserves the right to make alterations to the contract of employment. Such changes will be notified to you …’

was held by the EAT to permit only the most minor of changes and nothing more. The clause did not override the general principle that variations to a contract of employment normally require consent. A  relatively recent case which illustrated the difficulties in relying on a general unilateral variation clause is Norman and others v National Audit Office [2015] IRLR 634. The employees, who worked for the National Audit Office, were members of the Public and Commercial Services Union. The National Audit Office sought to agree changes to the employees’ employment contracts with the Union but the Union refused. The changes were a reduction in privilege leave and paid sick leave. Notwithstanding the Union’s refusal the National Audit Office subsequently unilaterally imposed the changes on the employees and notified them in writing purporting to rely on a general flexibility clause in the employment contract to unilaterally vary these terms. The clause in question referred to detailed particulars of conditions of service as being found in the relevant sections of the HR manual of the National Audit Office and that ‘they are subject to amendment; any significant changes affecting staff in general will be notified by Management Circulars (MCs), Policy Circulars (PCs) or by General Orders (GOs), while changes affecting your particular terms and conditions will be notified separately to you.’ The EAT held that the language relied upon did not clearly reserve the right to make unilateral amendments. It did no more than simply point out that the clauses could be amended and that, if they were amended (and the changes were significant and of general effect), they would be notified by various broadcast methods (such as circulars or orders or by specific notification or information). 261

5.59  Express terms of the contract of employment

5.59 One case which is often cited in support of general unilateral variation clauses is Bateman and others v Asda Stores Ltd [2010] IRLR 370 in which the EAT upheld a very wide unilateral variation provision (in the staff handbook) to impose a new pay regime. In Asda, the employees’ terms and conditions were set out in their offer letter and sections of the staff handbook. The handbook stated that Asda ‘reserved the right to review, revise, amend or replace the contents of this handbook, and introduce new policies from time to time reflecting the changing needs of the business’. One of the sections in the handbook set out terms governing pay. Asda consulted extensively with its employees and in only one of the six test cases employees claimed to have suffered a financial loss as a result of the new pay structure. The EAT was guided by Wandsworth and accepted the view that such unilateral variation provisions will be scrutinised carefully to ensure that they cover the particular changes made unilaterally by the employer but still upheld the variation as being effective. Asda was a unique case and the decision to uphold a wide unilateral variation clause turned on its specific facts. Had all of the employees suffered a reduction in pay, they would have had reasonable grounds to argue that there had been a breach of trust and confidence. Subsequent decisions have demonstrated the continued reluctance of the EAT to adopt the more liberal approach taken in Asda – see Norman and others v National Audit Office [2015]  IRLR  634, and Hart v St Mary’s School (Colchester) Ltd UKEAT/0305/14/DM, where the EAT found against the employer who sought to vary contract terms unilaterally concluding that the variation was ineffective. It follows caution must be exercised when relying upon general unilateral variation clauses to effect changes to an employee’s role. Unilateral variation clauses are discussed further at 13.30–13.40. 5.60  In defining the employee’s role the employer needs to address the following: •

Job title, duties and reporting line.

•

Joint appointments.

• Mobility. •

Interaction with the press/media and social media.

•

Garden leave.

2(a)  Job title, duties and reporting line 5.61  Section 1(4)(f) Employment Rights Act 1996 requires the employer to give the employee written notification of his job title or a brief description of the work he is employed to do. While technically, therefore, the employer can be silent on duties, it is undoubtedly good practice, and indeed increasingly common, for a list of duties to be drawn up by the employer. In deciding the employee’s title and duties, some caution must be exercised. 5.62  Where a contract of employment is very specific about the employee’s job title and/or duties, then there is often very little scope for alteration without the 262

Terms which define the employee’s role 5.65

employee’s consent. Virtually the only qualification to this is that there is an obligation on employees to adapt to new methods and improved technology, provided that the employer arranges any necessary training in the new skills and the nature of the work does not alter so radically that it is outside the contractual obligations of the employee: Cresswell v Board of Inland Revenue [1984] ICR 508. In that case the introduction of a computerised PAYE system, appropriately referred to throughout the case as ‘COP’, was found not to vary the duties of tax officers and clerical assistants. 5.63  How, then, does the employer obtain the necessary flexibility? First, he should give careful thought to the choice of job title. Some job titles are necessarily restrictive, for example ‘Senior Manager – Overseas Department’; others are more general, allowing the employer greater flexibility: for example simply ‘Manager’. For senior employees unspecific job titles, such as the commonly used ‘Executive’, should be adopted with caution. The preferred way of obtaining flexibility for these employees, who may well be potential competitors, is to have a reasonably specific job title, but coupled with a provision whereby the employer can require the employee to undertake another role instead of the original role. Prospective employees, with the exception of the most senior employees, will normally agree to such clauses, particularly where the other job is to be of a comparable status and there is an obligation on the employer to act reasonably. 5.64 Secondly, the employer should consider the definition of the employee’s duties. As a general rule the best course is to provide a reasonably specific list, but with a general ‘safety-net’ provision requiring the employee, in addition to the duties specified, to do such other duties which, in the opinion of the employer, are connected with or incidental to the duties set out in the contract. Where the employer has incorporated a right to change the employee’s job, a right to change the employee’s duties must be expressly reserved. For a recent case in which breach of specific obligations in the employee’s job description justified her summary dismissal see Reilly v Sandwell Metropolitan Borough Council [2018] UKSC 16. 5.65  Finally, the employer should consider specifying the reporting line of the employee. This can provide clarity on the seniority and importance of the role in question. It can ultimately help determine whether the relationship and contractual duties and responsibilities give rise to fiduciary obligations (see the summary at 4.55). The employer can obtain an element of flexibility when specifying the reporting line by making it clear that this may be subject to change as directed by, for example, the board of the company or a specified person such as the Chief Executive or Managing Director. Precedent – Senior Executive 1.1 The Company shall employ the Executive and the Executive shall serve the Company as [insert job title] or in such other [comparable] role as the Company may from time to time [reasonably] require. 1.2 The Executive shall report directly to [insert role of line manager] or any other person as directed by the Board. 263

5.66  Express terms of the contract of employment

1.3 The Executive’s duties for the Company shall be those specified in the Schedule to this Agreement or, in the event of the Executive being appointed to a new role pursuant to Clause 1.1 such other duties as are in the [reasonable] opinion of the Company appropriate to and consistent with such new role. [1.4 The Executive may be required to perform duties for and accept office in other companies in the Group without additional remuneration.] Note: The word ‘Group’ should be defined in the service agreement, see 5.10– 5.14 as should the word ‘Board’. Schedule The Executive’s duties shall be [Set out specific duties] The Executive will perform such other duties, appropriate to his position as [insert job title] or in such other [comparable] role as the Company may from time to time [reasonably] require in accordance with Clause 1.1.

2(b)  Joint appointments 5.66 Very senior employees may argue that any attempt to appoint another employee to act jointly with them amounts to a reduction in their status and consequently a repudiatory breach of the contract. To avoid this argument being available to the employee, it is sensible for the employer to include an express term permitting such an appointment. In the case of corporate employers when dealing with board level positions (for example a managing director), the draftsman should always check that the Articles of Association would permit a joint appointment. If a joint appointment is not permissible, then the employer will either have to revise his plans or the Articles will have to be altered. Precedent – Senior Executive The Company may from time to time appoint any other person or persons to act jointly with the Executive. An alternative (and possibly a compromise) approach for senior executives would be to permit a joint appointment only after notice has been given by either party.

2(c) Mobility 5.67  Section 1(4)(h) Employment Rights Act 1996 requires the employer to give the employee written notification of his place of work or, where the employee is permitted or required to work at various places, an indication of that fact and the address of the employer. 264

Terms which define the employee’s role 5.70

5.68  To avoid arguments of repudiatory breach, the employer should endeavour to include flexibility in the place of work provision. That flexibility can be achieved either by providing: (a) for an initial place of work with a power on the part of the employer to require a change within a defined area; or (b) that the employee work at various places, usually within a defined area. Such broad clauses can often be resisted by senior executives with significant bargaining power. It is, however, not unusual for senior executives to have as their workplace a wider geographical reach (for example, anywhere within the UK or currently Europe, although the latter may, of course, become unworkable in the light of the Brexit vote). It is rare to have such a wide geographical reach for junior level employees. Examples of both types of clause in (a) and (b) above, which are usually referred to as mobility clauses are set out below. Which one the employer chooses should be based on the factual background. Precedent – Senior Executive Right to change workplace The Executive’s normal place of work shall initially be the Company’s premises at [insert address] but the Company reserves the right to require the Executive to change his normal place of work to such other premises [within the United Kingdom] of the Company [or any other company in the Group] as the Company may from time to time require. Note: The word ‘Group’ should be defined in the service agreement; see 5.10–5.14. Precedent – Senior Executive Flexible workplace The Executive may be required in pursuance of his duties hereunder to work at such places within the United Kingdom as the Company may from time to time require. 5.69 Employers should be aware that retaining flexibility in place of work clauses is not risk-free and has some potential disadvantages. The key risk is that the clause may be struck down on the ground that it constitutes indirect sex discrimination if it cannot be justified on grounds other than sex: Meade-Hill and NUCPS v British Council [1995] IRLR 478 (CA). In Meade Hill the Court of Appeal were of the view that a contractual mobility clause could be discriminatory because women were less likely than their partners to be the primary earner in the family and consequently would be less able to relocate. In the case of senior executives it may be possible to justify the provision irrespective of sex. However, if there is any doubt at all, the only safe course is to include a proviso that the employee shall not be required to move if their personal circumstances would make such a move unreasonable. 5.70  The employer’s right to move an employee must not be exercised in a way likely to destroy trust and confidence: Woods v WM Car Services (Peterborough) Ltd [1981] IRLR 347 or (capriciously) United Bank v Akhtar [1989] IRLR 507. 265

5.71  Express terms of the contract of employment

Nor must the employer act in a way that renders it impossible for the employee to comply with the obligation: White v Reflecting Roadstuds Ltd [1991] IRLR 331. Obviously, having gone to the trouble of including the clause in the first place, it would be unfortunate were the employer to fall foul of an argument of repudiatory breach on implementation. 5.71  For a recent example of a case involving the exercise of a mobility clause see Kellogg Brown & Root (UK) Ltd v (1) Fitton UKEAT/0205/16 and (2) Ewer UKEAT/0206/16. In that case the EAT upheld an appeal by Kellogg against the Employment Tribunal’s decision that the requirement for Mr Fitton and Mr Ewer to relocate from the Greenford office to the Leatherhead office constituted a redundancy. Mr Fitton and Mr Ewer had the following mobility clause in their contracts: ‘The location of your employment is … but the company may require you to work at a different location including any new office location of the company either in the UK or overseas either on a temporary or permanent basis. You agree to comply with this requirement unless exceptional circumstances prevail.’

When Mr Fitton and Mr Ewer refused to relocate to Leatherhead, Kellogg cited a failure to carry out a reasonable instruction as the reason for dismissal. The EAT found that this reason was genuinely in the mind of Kellogg and the Tribunal was wrong to find that the reason for the dismissal was redundancy. Nevertheless, the EAT held that the dismissals had been unfair on the basis that the instruction was unreasonable and the employees’ refusal to relocate to Leatherhead reasonable; the Employment Tribunal had found as a fact that the mobility clause lacked certainty and was very widely drafted: see paragraph 21. Notwithstanding the potential problems outlined above associated with retaining flexibility in the place of work, it remains our view that such flexibility should be retained. Properly drafted and applied, a mobility clause should still prevent a successful repudiatory breach claim by an employee based on change of location.

2(d)  Interaction with the press/media and social media 5.72 For commercial reasons it is important that organisations control their relationships with the press and other media and that information and comments provided from an organisation are channelled through a small number of senior employees who are supported by experienced public relations advisers. For this reason it is common for contracts of employment to include a term prohibiting most employees from communicating with the press and other media, except with the prior approval of the employer and where the content of the communication has been authorised by an appropriate officer. Although prohibitions of this sort are normally included for much wider commercial reasons they can prove extremely helpful in the context of employee competition. Public speculation as to the threat the departure of a key employee or team poses to the employer’s business can be extremely damaging. By retaining the right to control employees’ communications with the print, broadcast, social and online media the employer should have at least some prospects of being able to ‘manage’ the way in which 266

Terms which define the employee’s role 5.74

the issue is aired in public thereby limiting potentially damaging speculation, However, it has to be recognised that controlling the dissemination of information in today’s electronic age is notoriously difficult. Precedent – Senior Executive Except with the prior written approval of [insert title of Company officer] the Executive shall not at any time whether directly or indirectly publish any opinion, fact, comment, statement or material or otherwise provide or facilitate the provision of any such information on any social media platform or any online, printed or broadcast media concerning the business or affairs of the Company [or any other company in the Group] or any director or employee (past or present) of the Company [or any other company in the Group] Note: The word ‘Group’ should be defined in the service agreement; see 5.10– 5.14. Also, where a business is conducted with independent contractors working alongside employees, consideration should be given to including independent contractors within the above clause (perhaps conveniently by adding a definition which expands the meaning of ‘employee’ for the purposes of the clause). 5.73  Given the pivotal role that social media plays for many organisations, it is also important that an organisation has in place a social media policy to help minimise the risks arising from employee use of social media and set out the parameters for unacceptable use against the background of the employment relationship. 5.74  Employees increasingly use social media networking sites (for example, LinkedIn) to store business contacts. Employees sometimes announce their departure or the set-up of a new venture on social media. Employees can also use social media to solicit customers and employees. It is therefore important that employers have provisions in their policies or contracts that mitigate the harm that use of social media can cause to the business and maximise the level of control that the employer has over the use of any confidential information. These provisions might cover the following: •

A  prohibition against making any comments on social media that could damage the business or the employer’s reputation.

•

A  prohibition against posting comments on any social media sites about sensitive business-related information or doing anything to breach confidentiality.

•

A prohibition against adding business contacts to personal social media sites (because this prohibition is likely to be resisted by many employees, we have adopted a different approach in our precedent wording below by giving the employer control over what should be done with such business contact information during and after the end of the employment relationship).

•

Making clear that any names and details of business contacts will be regarded as the employer’s confidential information and will at all times remain the property of the employer (even after termination of employment). 267

5.74  Express terms of the contract of employment

•

A  requirement for the employee to copy any business contacts that have been gathered during the course of their employment onto the employer’s contact database.

•

Upon request, an obligation on the employee to provide a current and accurate list of their business contacts.

•

An undertaking that the employee will on or before the termination of his/ her employment delete all business contacts they have gathered during the course of their employment and added to their social media sites, without retaining any copies.

•

Permitting the employer to have access to all user names, passwords and other access details to each personal social networking account maintained in the employee’s name or on his behalf, to confirm such deletion.

A precedent clause giving the employer the ability to control communications regarding an employee’s departure after notice has been given or the employee has breached his obligation to give notice is at 5.122. Precedent – Senior Executive 1.  Subject to the provisions of clauses 1.1 to 1.5, the names and details of any business contacts which the Executive makes whilst employed by the Company (‘Business Contacts’) may be added to a personal social/business networking account (including, without limitation, LinkedIn), maintained in the Executive’s name or on his behalf. Any Business Contacts added to such a personal networking account shall be described as ‘Online Business Contacts’. 1.1 The names and details of all Business Contacts, including Online Business Contacts, are the Company’s Confidential Information and will at all times remain the property of the Company notwithstanding the termination of the Executive’s employment. 1.2 From the Commencement Date the Executive must copy all available details relating to each Online Business Contact to the Company’s contact database within [two/five] working days of that Online Business Contact being added to a personal social/business networking account maintained in the Executive’s name or on his behalf. 1.3 The Executive shall within two working days of being requested to do so by the Company provide to the Company a current, accurate and complete list of all Online Business Contacts, including full details of each of them. If so requested by the Company, the Executive shall within two working days of any such request confirm that any such list provided is current, accurate and complete. 1.4 The Executive shall on or before the Termination Date or at the Company’s request made at any time (having first provided a current, accurate and complete list of all Online Business Contacts including full details of each of them to [insert title of Company officer]) 268

Terms which define the employee’s role 5.77

irretrievably delete from his personal networking accounts all Online Business Contacts and related details without retaining any copies in electronic or other format and the Executive will confirm in writing his compliance with this clause 1.4. 1.5 The Executive will permit the Company to have access to, and will provide the Company with all user names, passwords and other access details to, each personal social networking account maintained in the Executive’s name or on his behalf to confirm the deletion required by clause 1.4. Note: The terms ‘Commencement Date’, ‘Confidential Information’ and ‘Termination Date’ should be defined in the service agreement.

2(e)  Garden leave 5.75 Since the concept of garden leave arises primarily where either party has given notice or the employee has ‘walked out’ to join a competitor, it is considered in the next section dealing with terms pertaining to termination, and specifically at 5.123–5.132. It is important to bear in mind that garden leave should not be confused with suspension of the employee during the course of his/her employment. Suspension is appropriate primarily to investigate alleged serious misconduct and in our view should be limited to that purpose. Suspension is considered below at 5.87.

2(f)  Special case of fiduciaries 5.76  Following the Court of Appeal’s decision in Ranson v Customer Systems Plc [2012] IRLR 769 it would be remiss not to comment in this section on the importance of the nature and scope of an employee’s role in determining whether he or she is elevated to the position of owing any fiduciary duties to the employer. As Elias J commented in University of Nottingham v Fishel [2000] IRLR 471 (at paragraph 97): ‘in determining whether a fiduciary relationship arises in the context of an employment relationship, it is necessary to identify with care the particular duties undertaken by the employee, and to ask whether in all the circumstances he has placed himself in a position where he must act solely in the interests of his employer. It is only once those duties have been identified that it is possible to determine whether any fiduciary duty has been breached, as Lord Upjohn commented in Phipps v Boardman [1967]2 AC 46 at 127: “Having defined the scope of [the] duties one must see whether he has committed some breach thereof and by placing himself within the scope and ambit of those duties in a position where his duty and interest may possibly conflict. It is only at this stage that any question of accountability arises.”’

5.77 A  key question for employers is whether any particular express terms should be included in the contract to help establish fiduciary duties. Post Ranson, it is our view that the following points should be covered in an employment 269

5.78  Express terms of the contract of employment

contract to enhance the prospects of an employee being found to owe fiduciary duties: •

The level of seniority within the organisation – this can be linked to the job title but a description as to where the employee sits within the hierarchy of the organisation and the reporting line will be helpful.

•

A  description of the duties, including the employee’s responsibilities and obligations which in turn should indicate the degree of seniority and autonomy within the organisation.

•

An express duty to act in the best interests of the employer, which could be linked with the level of responsibilities the employee has and their position within the employer.

•

Express duties of disclosure.

See also 4.55 where we summarise the factors that are likely to be material in determining if fiduciary obligations are owed.

3. TERMS PERTAINING TO TERMINATION 5.78  There are five important issues that should be covered by express terms: •

What justifies summary dismissal.

•

The notice required to terminate the contract (including payments in lieu of notice).

•

Controlling communications made by the employee after notice of termination.

•

The return of property.

•

Resignations from directorships/offices held as a result of the employment.

3(a) What justifies summary dismissal 5.79  To sound one preliminary note of caution: where an employer discovers that an employee is engaged or is about to be engaged in competitive activity a natural reaction is to reach for the summary dismissal provisions. In many cases there may be good grounds to consider summary dismissal. However, often that may not be the best course particularly where the employer has the option to send the employee on garden leave. The disadvantages of summary dismissal are twofold: first, and most importantly, the employment terminates immediately and if the employer has miscalculated and does not in fact have sufficient grounds to summarily dismiss, the purported summary dismissal will almost certainly be a repudiatory breach of the contract of employment. The employee will be likely to accept that breach as discharging him from all future obligations including the 270

Terms pertaining to termination 5.81

restrictive covenants; General Billposting Co Ltd v Atkinson [1908] AC 118 (HL) see also 9.123–9.143 in relation to acceptance. Secondly, even if the employer is correct in the stance he has taken, he will still be left only with whatever protection is afforded by the post-termination restrictive covenants and/or, where there is sufficient evidence and resources to support an application, the possibility of relief provided by a springboard injunction; springboard injunctions are considered at 15.78–15.152. Both potential sources of protection afford significantly less certainty for the employer than keeping the contract alive. Consequently, tempting though it may be, employers are well advised to think carefully before opting for the route of summary dismissal. 5.80 Despite this note of caution it is clearly prudent for an employer to specify clearly in the contract what justifies summary dismissal. By doing so an employer who dismisses summarily, adhering strictly to the terms of the contract, will minimise the risk of a successful wrongful dismissal claim and may reduce the risk of an unfair dismissal claim. It is important to remember that there is a sharp distinction between the hurdles the employer has to get over to resist these two types of claim. In wrongful dismissal claims the employer must simply show that he acted in accordance with a contractual term (express or implied). In unfair dismissal claims the employer must establish that his reason for dismissal was one of those specified in sections 98(1) and (2) Employment Rights Act 1996, and that he acted reasonably in treating that reason as a sufficient reason for dismissal (section 98(4) Employment Rights Act 1996). Furthermore, the ACAS Code of Practice on Disciplinary and Grievance Procedures sets out recommendations for employers when dealing with disciplinary situations at work. A failure to comply with the ACAS Code may result in an uplift in any award made in respect of a claim for unfair dismissal. By virtue of section 3 Employment Act 2008 (which created a new section 207A Trade Union and Labour Relations (Consolidation) Act 1992) tribunals will be able to adjust awards made ‘by no more than 25%’ for failure of either party to comply with the ACAS Code. In an unfair dismissal claim it follows that the existence of a contractual term will be only one, among many, of the factors taken into account by the Employment Tribunal. 5.81 How should an employer frame his summary dismissal provisions? Traditionally, there was a significant difference in style between senior executive contracts and those of more junior staff. The former, focusing on avoiding a wrongful dismissal claim, have tended to consist of a combination of several fairly general provisions justifying summary dismissal, eg ‘any serious breach of this Agreement’ and ‘bringing the Company into disrepute’ and some very specific provisions such as conviction of an indictable offence or becoming a patient under the Mental Health Act 1983. In contrast, contracts for more junior staff have focused more on the possibility of an unfair dismissal claim. These contracts often only allow for summary dismissal in the event of gross misconduct, which is either a defined term or, and this is undoubtedly better practice (see below), identified by reference to a non-exhaustive list of examples. In short, the two types of contract have each focused on only one of the two potential types of claim. 271

5.82  Express terms of the contract of employment

5.82  With the cap on the compensatory award for unfair dismissal for the period 6 April 2017 to 5 April 2018 set at the lower of £80,541 and 52 weeks’ salary, the contracts of senior executives have begun to change in order to focus more clearly on what constitutes gross misconduct. (Note for dismissals on or after 6 April 2018 the cap will increase to £83,682.) In our view, that change of focus need not be at the expense of the more traditional general terms, although the employer will have to accept that these more general terms may be of limited use in contesting an unfair dismissal claim. For the future, we expect to see a continuation of the process of a greater alignment of summary dismissal provisions between senior executive contracts and those of more junior staff. We recommend that in each case the summary dismissal provisions should include the following: •

A right to dismiss summarily for gross misconduct defined by reference to a non-exhaustive list of conduct that may warrant summary dismissal. Note: failure to include an item as an example of gross misconduct will not prejudice the employer’s right to terminate summarily where the conduct is clearly gross misconduct: C A Parsons & Co Ltd v McLoughlin [1978] IRLR 65; The Distillers Company (Bottling Services) Ltd v Gardner [1982] IRLR 47, but see Lock v Cardiff Railway Co Ltd [1998] IRLR 358, where the employer’s failure to identify any specific examples of gross misconduct resulted in a dismissal for a particular offence being held by the EAT to be unfair.

•

Relevant generally drawn terms such as ‘bringing the employer into disrepute’ whether as a result of conduct in the course of employment or otherwise.

5.83  Specific terms normally include a right to dismiss: (a) where the employee has been off sick for a specific period (although care needs to be taken when relying on such a provision where the employee receives permanent health insurance cover as a benefit of employment where there may be a risk of disability discrimination); and (b) where the employee ceases to be a director or where he has breached his duties as a director under Part 10 Companies Act 2006 (which covers fiduciary duties). One important point is that the clause allowing for summary dismissal must be permissive only ie that the employer may summarily dismiss not that he is obliged to do so. Even where a particular type of behaviour falls within one of the specified examples, there is still a judgment to be made by the employer whether on the particular facts of the case the behaviour justifies dismissal and whether in any event he wishes to dismiss. For example, the employer may have the option to summarily dismiss if an employee resigns his directorship but there are very often good commercial reasons not to exercise that right, particularly where the employee is planning to join a competitor. On a slightly different note, some contracts provide for automatic termination if a director ceases to hold office. As a general rule we would not recommend such an inflexible provision. Precedent – Senior Executive 1.1 The Company may terminate the Executive’s employment with immediate effect and without notice, pay in lieu of notice, or payment of any compensation or liquidated damages if it has reasonable grounds 272

Terms pertaining to termination 5.83

to believe that the Executive has committed any of the following nonexhaustive examples of behaviour or conduct: 1.1.1 any repeated breach of this Agreement after warning in writing from the Company; or 1.1.2

financial dishonesty, including, without limitation, fraud or the misappropriation of funds or property of the Company [or any other company in the Group], or attempting to secure any personal profit related to the business or the business opportunities of the Company [or any other company in the Group] without the prior written approval of the Board; or

1.1.3

gross or serious misconduct or wilful neglect in the discharge of his duties under this Agreement; or

1.1.4

acting in any manner which in the reasonable opinion of the Company (whether in the course of his duties or otherwise) is likely to bring him or the Company [or any other company in the Group] into disrepute or prejudice the interests of the Company [or any other company in the Group]; or

1.1.5 continuing unsatisfactory conduct or performance of his duties, after having received a warning from the Company relating to the same; or 1.1.6

being [charged with] [convicted of] any criminal offence (except a road traffic offence not involving a custodial sentence); or

1.1.7

become of unsound mind or an in-patient for the purpose of any statute relating to mental health; or

1.1.8 becoming bankrupt, applying for a bankruptcy petition or having a bankruptcy order made against him, applying for or having made against him a receiving order or making any composition or entering any deed of arrangement with his creditors or having an interim order made against him; or 1.1.9

ceasing to hold office as a director of the Company; or

1.1.10 being disqualified from holding office in the Company, [or any other company in the Group] or any other company under the Insolvency Act 1986 or the Company Directors Disqualification Act 1986, or by any professional or other body; or 1.1.11 failing to comply in any material respect with any policy of the Company [or any other company in the Group] which has been communicated to him including without limitation any policy in respect of dealings in shares, equal opportunities and harassment, data protection and use of email and the internet; or 1.1.12 [committing any material breach of his duties as a Director under Part 10 of the Companies Act 2006]. 273

5.84  Express terms of the contract of employment

Note: if the employee is subject to regulatory requirements or obligations, it should refer to a breach of any such obligations. 5.84  In drawing up summary dismissal provisions, it is worth remembering the following: •

Although general definitions of grounds for summary dismissal may have a deterrent effect, they are unlikely to provide much assistance in the defence of an unfair dismissal claim in the sense of the employer being able to show that the employee knew without doubt what the consequences of his conduct would be. Where, however, the employer can establish that the employee knew the likely sanction for his actions, the dismissal will stand a good chance of being fair, even if the conduct would not, apart from its express inclusion in the definition of gross misconduct, normally be gross misconduct: Meyer Dunmore International Ltd v Rogers [1978] IRLR 167.

•

Consistency of application both to the employee and to all employees in parallel situations will be critical in the defence of an unfair dismissal claim (see MBNA Limited v Jones [2015] UKEAT/01/0120/15 in which two employees were involved in an altercation at a work event. Although the actions of both were reprehensible, the EAT held that the claimant’s actions could not be considered to be ‘truly parallel’ to the other employee involved, so as to justify a finding of disparity of treatment that rendered his dismissal unfair.

5.85  It has become common for employers to provide specifically that disciplinary procedures do not form part of the contract of employment. This practice stems from a string of cases where employers have been successfully sued for breach of contract in failing to follow their disciplinary procedure or restrained by injunction from dismissing until they have done so. In some instances the employee was awarded damages for the period it would have taken the employer to comply: Dietmann v London Borough of Brent [1987]  ICR  737 affirmed [1988]  ICR  842 (CA); in others, the court granted an injunction to keep the contract alive while the procedures were properly complied with; see Robb v London Borough of Hammersmith and Fulham [1991]  IRLR 72. A similar result was achieved by the employee in the case of Gryf-Lowczowski v Hinchingbrooke Healthcare NHS  Trust [2006]  IRLR  100. In that case the employer, having failed to persuade the court that the contract had been frustrated, was restrained from dismissing the claimant until it had completed the contractual disciplinary procedures. This was notwithstanding a finding by Gray J  that trust and confidence between the parties had broken down. See also Kircher v Hillingdon Primary Care Trust [2006]  EWHC  21 (QB). The courts have also been willing to restrain the employer by injunction from using an incorrect disciplinary procedure or where the employer was attempting to act outside the realms of the disciplinary procedure: Peace v City of Edinburgh Council [1999]  IRLR  417 and Jesudason v Alder Hey Children’s NHS Foundation Trust [2012] EWHC 4265. In the case of Mezey v South West London & St George’s Mental Health NHS Trust [2010]  EWCA  Civ 293, the Court of Appeal upheld the High Court’s decision to grant an injunction to 274

Terms pertaining to termination 5.87

prevent the Trust from pursuing disciplinary action against Dr Mezey on the basis that to do so on the evidence available would be in breach of the contractual capability procedure that was being invoked. 5.86  Where the practice of making the disciplinary procedure non-contractual is adopted (and it is one we recommend) the employer must make sure that the examples of gross misconduct are given contractual status, so that there is no problem in relying on them to terminate the contract summarily. 3(a)(i) Suspension 5.87 It is recommended that employers include in their contracts a right to suspend while investigations into the employee’s conduct are made. Although, employers need to bear in mind that any decision to suspend must be taken carefully and not adopted as a default position – it must not be a ‘knee-jerk reaction’ to an allegation of misconduct (see Agoreyo v London Borough of Lambeth [2017] EWHC 2019 (QB) in which Foskett J confirmed that suspension is not a ‘neutral act’ (paragraph 24)). The circumstances in which the right to suspend is exercisable should be clearly stated in the contract, as should the terms on which suspension is permitted. In particular, it must be clear what entitlement the employee has to pay and benefits while suspended. Commonly, pay and benefits are continued during suspension, and that would be the practice we recommend although in some cases the temporary removal of eligibility for bonus may be appropriate subject to it being retrospectively reinstated if the employee is found to be innocent of the issues under investigation. As a matter of good employment practice, investigations into misconduct should be conducted expeditiously and continuation of pay and benefits for which the employer is receiving no return is a useful means of focusing the employer’s attention on the task in hand. Swift investigation will also mitigate against the risk of discrimination claims developing. Whilst continuation of pay is the norm, some employers suspend the right to wages/salary, but provide that the employee will not suffer any loss of salary in the event of his being reinstated following the suspension. In very rare cases the employer reserves the right to suspend without pay. However, such provisions are disliked by the courts, and in McLory v Post Office [1992] ICR 758 the fact that the Post Office had reserved the right to suspend without pay was a significant factor in the court’s decision that the Post Office’s right to suspend was subject to an implied term that it could only suspend where there were reasonable grounds for doing so, and only carry on the suspension so long as those reasonable grounds continued (for a fuller discussion of McLory see 18.52–18.53). The subject of suspension (and in particular the position where there is no express right to suspend) is further considered at 18.54–18.59. Precedent – Senior Executive The Company may at any time by written notice suspend the Executive for the purpose of investigating any allegation of misconduct or breach by him of this Agreement.The period of such suspension may be for the entire duration 275

5.87  Express terms of the contract of employment

of any disciplinary process although it is anticipated that it shall not normally exceed [one month]. Whilst suspended the Executive shall continue to be entitled to his salary and all other contractual benefits. During any period of suspension pursuant to this Clause the Executive shall: (a) not, except with the prior written consent of [insert title of Company officer] attend at any premises of the Company [or any other company in the Group], conduct any business on behalf of the Company [or any other company in the Group] or contact any employee or customer or other business contact of the Company [or any other company in the Group]. The Executive shall be notified of the person within the Company who shall deal with any queries by the Executive and who shall act as a liaison between the Executive and any other persons engaged by the Company; (b) ensure that [insert title of Company officer] has a postal address at which the Executive is residing except during pre-approved holidays together with a personal email address and a mobile telephone number and the Executive shall throughout the period of his suspension be contactable at such postal address and on such email address and mobile telephone number; (c)

upon request by the Company immediately return to the Company all Company Property and Confidential Information that is in his possession or under his control, and having first provided a copy to [insert title of Company officer] and received written acknowledgement of safe receipt, irretrievably destroy or delete all Confidential Information held in an electronic format on any personal device in his possession or under his control that cannot reasonably be returned to the Company;

(d) provide [insert title of Company officer] with all user names, passwords and other access details in respect of any Company Property; and (e) permit the Company to set an out of office reply (the content of which shall be determined by the Company) in respect of his Company email account, divert emails from that account and alter any username and password that exists in respect of accessing any Company Property. Note: The terms ‘Company Property’ and ‘Confidential Information’ will need to be defined in the service agreement as will the word Group: see 5.10–5.14. This precedent presupposes that the employee does not receive any form of variable pay. Where he does, express provision should be made, either in the clause or in the documentation setting out the details of the variable pay, as to what the employee will receive while suspended and the employer should also consider whether it should expressly provide for suspension of any right to be considered for a bonus whilst the investigation continues. The precedent also includes a time frame with some flexibility within which the investigations are to be conducted. The key purpose of this is to provide the necessary discipline for the employer to focus on the investigation, but at the same time avoid too rigid a term where there is a legitimate reason for the investigation to overrun 276

Terms pertaining to termination 5.90

the stated period, for example in the case of a particularly complex issue involving several employees.

3(b)  Notice required to terminate the contract 5.88  The majority of contracts of employment can be determined by notice. The main exceptions are contracts for a fixed term where there is no provision for early termination by notice (and which, therefore, simply expire by effluxion of time), and the very rare cases of contracts for life (see eg McClelland v Northern Ireland General Health Services Board [1957] 2 All ER 129). 5.89  In the context of prohibiting competitive activities, agreeing the period of notice required to terminate the contract is advantageous to the employer for two reasons: •

It avoids arguments of repudiatory breach of contract based on insufficient notice having been given – see further 9.98–9.101.

•

Assuming the notice is of a reasonable length it allows a realistic and enforceable garden leave provision (see 5.123–5.133) to be agreed to operate during all or part of the notice period.

5.90  Subject to two limitations, the parties can agree whatever length of notice they wish. The limitations are: •

The notice cannot be shorter than the minimum periods specified in section 86 Employment Rights Act 1996. The effect of section 86 is to substitute automatically the statutory minimum periods for any shorter periods agreed. Note, however, that section 86(3) does allow either party to waive their right to notice.

•

In the case of directors of companies in England and Wales, under section 188 Companies Act 2006 contracts for a term which is, or may be, longer than two years require shareholder approval. To the extent that the contract contravenes section 188 the contract is terminable by reasonable notice: section 189. By section 222(1) a shadow director is treated as a director for the purposes of sections 188 and 189.

Where notice periods are agreed it is important that they are accurately recorded in the service agreement. Notice clauses come in varying degrees of sophistication but a typical clause providing for the same period of notice to be given by both employer and employee and including an initial probationary period is set out in the following precedent. Precedent – Senior Executive 1.1 The Executive’s employment shall commence on the Commencement Date and, subject to clause 1.2 and [insert relevant clause number dealing with circumstances in which termination 277

5.91  Express terms of the contract of employment

without notice is permitted] of this Agreement, shall continue unless and until terminated by either party giving to the other not less than [six months’] prior written notice. 1.2 The Executive’s employment is conditional upon the Executive’s satisfactory completion of an initial probationary period of [three] months (the ‘Probationary Period’). The Company reserves the right at its absolute discretion to extend the Probationary Period for any period up to a further [three] months. If the Company does so extend the Probationary Period, the Executive will be notified in writing and this clause shall apply as if the Probationary Period included the extended period. The Executive’s performance will be reviewed during the Probationary Period and, if found to be satisfactory, the conclusion of the Probationary Period and the Executive’s employment will be confirmed in writing prior to the end of the Probationary Period. During the Probationary Period the notice required by either party to terminate this Agreement is [one month’s] prior notice in writing. Note: In this precedent we have included an example of a probationary period clause. This clause provides that during the probationary period the employment can be determined on shorter notice. This shorter notice period is cross-referred to in the notice clause. A probationary period will often not be appropriate for, and may not be accepted by, a senior employee in which case the crossreference to the probationary period clause should be removed from the notice clause. The term ‘Commencement Date’ needs to be defined in the service agreement. 3(b)(i) The implied term of reasonable notice 5.91  If the parties fail to agree a notice period (which is surprisingly common even nowadays) in contracts that would otherwise be for an indefinite duration, the law implies a term that the contract is determinable on reasonable notice: see eg  Adams v Union Cinemas Ltd [1939] 3 All ER  136; Richardson v Koeford [1969] 3 All ER  1264 (CA). No such term will be implied into a contract for a fixed term: see the decision of the Privy Council in Reda v Flag [2002] IRLR 747. 3(b)(ii) What is reasonable notice? 5.92  What is reasonable notice in any particular case is a matter to be determined by the court: Cuthbertson v AML Distributors Ltd [1975] IRLR 228. The period of reasonable notice is a question of fact and will depend on the circumstances of the particular case; reported authorities are of limited value only. However, factors considered relevant by the courts in determining reasonable notice have included the employee’s seniority and level of responsibility; the level of salary and frequency of pay days; the employee’s length of service; the importance of the employee in the organisation; the difficulty the employer will face in replacing him; and local, trade or professional customs. An irrelevant 278

Terms pertaining to termination 5.94

factor, however, is the financial state of the employer at the time the reasonable notice falls to be determined. In the words of Altman J in Clark v Fahrenheit 451 (Communications) Ltd (6 June 2000, unreported) EAT 591/99 (commented on IDS  Brief 666, page 11), a company cannot ‘…  shift its obligations to its employees in terms of notice in accordance with the annual profitability of the company’. For examples of how reasonable notice has been determined see Hill v C A Parsons & Co Ltd [1971] 3 All ER 1345 (CA) and Clark. While reasonable notice will never be less than the statutory minimum, in the case of senior employees it will frequently be considerably more. 5.93  In agreeing provisions relating to notice, an employer seeking to limit the risk of competitive activities should ensure two things. First, that the notice period is clearly set out in the contract and that there is no ambiguity as to its length and, secondly, that there is an express reservation of the right of the employer to make a payment in lieu of notice or of any unexpired period of notice. 3(b)(iii)  Length of the notice period 5.94 The length of the notice period will ultimately depend on factors such as the seniority of the employee and the market/sector in which the employer operates. What would be regarded as market practice in one sector may not be in another sector. However, with the exception of highly valuable employees (considered at 5.95), we advise employers against overly long notice periods because of the commercial and legal difficulties they can cause. On the commercial side, once notice has been given and it is clear, or thought highly likely, the employee is planning to compete it is relatively unusual for either party to want the employee to remain actively employed for any length of time beyond perhaps a short period of handover. It follows that unless the parties are able to agree a shorter notice period, they face the unpalatable choice of continuing with a relationship for which neither has any great enthusiasm, breaching their obligations or in the employer’s case, facing the expensive alternatives of either paying in lieu of that long notice period or paying the employee whilst on a long period of garden leave (assuming the contract permits those options) in order to avoid committing a repudiatory breach. Often the employer is the first to find the strain intolerable and therefore risks his legitimate protection against competition. For this reason, with the exception of very valuable employees, employers should seek to agree a notice period of around six months to a maximum of 12 months for senior level employees or around three months for junior to mid-level employees, coupled with a garden leave clause which allows the relationship to continue for the notice period, but gives the employer the option to keep the employee away from the business for some, if not all, of that period (see 5.129 for a garden leave clause). By this route, the employer gains the best chance of keeping the contract alive and therefore of keeping the employee bound by the implied duty of fidelity, with the added option of excluding the employee from the business and thereby devaluing his worth as a competitor. Nowadays, it is not unusual in the case of senior employees in a strong bargaining position for the notice required to be given by the employee to be shorter than that required from 279

5.95  Express terms of the contract of employment

the employer although it is not a practice we would necessarily recommend. This is to an employee’s advantage. It may also be advantageous to an employer not to have to continue to pay salary and benefits for a longer period once the employee has served notice, as he is likely to be disaffected and unproductive if he works through a lengthy notice period. The exception will be those cases where the effect of the shorter notice is to reduce the period of garden leave below that which a court is likely to enforce. 5.95  In the case of highly valuable employees (for example a highly qualified/ skilled employee), who would be much prized by a competitor, there is an argument that a lengthy notice period of up to two years is appropriate. The rationale for this is that whilst the employer is likely to face a significant uphill struggle to obtain a garden leave injunction for more than 12 months and six months is still very much more usual (see 5.129 on the length of garden leave) where the employee joins a competitor within the balance of the notice period in breach of the notice provision, he faces the prospect of a significant damages claim for breach of contract by his then ex-employer. This is in addition to claims arising from breach of any post-termination restrictive covenants or breaches of other contractual terms. The combined threat of these claims can be, and in practice, in some cases is, enough to deter the employee’s proposed activities altogether. Alternatively, the threat operates as an extremely powerful bargaining tool for the employer when negotiating departure/settlement arrangements with the (ex-) employee and sometimes also his new employer. For example, the employer may be able to secure a percentage of revenues generated by the then ex-employee for his new employer for a limited period. 5.96  Employers should always reconsider the length of notice when an employee’s job duties are altered in any significant way, and in particular on a promotion. If the notice period is to remain the same that should be expressly stated so as to pre-empt any argument that the existing notice period became obsolete on promotion and that therefore reasonable notice should apply thereafter in the absence of an agreed term. Equally, if a new notice period is required by the employer, that should be specifically included as part of the offer and the employee’s written agreement to it obtained. 5.97  Finally, where employees work in teams and there is a possibility that a number of them may leave together either to join a competitor or to set up a competing business, the employer should consider carefully having the same notice periods for each team member. The reason for this is that it maximises the employer’s chances of holding the senior team members to their full notice periods and being able to send them on garden leave for those notice periods (see 5.123–5.133 on garden leave clauses). Where the more junior team members are on shorter notice periods and can compete legitimately after the expiry of those notice periods, that can result in the court granting a garden leave injunction against the senior team members for part only of their notice periods on the basis that the damage the injunction is intended to prevent has or will be capable of being done legitimately by the more junior team members: see GFI Group Inc v Eaglestone [1994] IRLR 119 (considered at 5.126). 280

Terms pertaining to termination 5.98

3(b)(iv)  Service of notice 5.98  Service of notice can be given orally or in writing. Oral notice is perfectly valid unless the parties have agreed otherwise and where notice is given orally on a day when work is carried out, the notice period does not begin to run until the following day. In relation to service of notice in writing, in the absence of a contractual term specifying when the notice is to take effect, precisely when the notice will be effective for contractual purposes is an issue currently being considered by the Supreme Court in the case of Newcastle upon Tyne NHS Foundation Trust v Haywood. Newcastle’s appeal has been heard and the Judgment of the Supreme Court is currently awaited. In a majority decision the Court of Appeal ([2017] EWCA Civ 153) held that the notice was effective only when personally received. For a detailed consideration of the Court of Appeal’s decision see 9.24–9.28. Service of notice is discussed further at 9.19–9.28. To avoid problems associated with the rules on service of notice it is sensible for the contract to include a provision which contains the following points: •

That notice should be given in writing (the employer can in any event waive the benefit of the written provision and accept an unequivocal oral resignation if necessary).

•

By what method written notice can be delivered, for example personally, by post (stating method, for example, first class post or special delivery), or by other means (eg email). For each method of delivery there should be a deemed delivery date or time (as appropriate). Whilst there have been instances reported in the press of notice being given by text message sent to mobile phones provided by the employer, this is not a method of delivery of notice that we would recommend be provided for in the contract. In response to potential disaster situations such as terrorist activities or a flu pandemic, companies may well now have a telephone cascade system which operates through employees’ mobile telephones. However, such systems were not established for the purpose of having a process for the giving of notice by text message. That should only be done in the most extreme cases, for example where the employer has reasonable grounds for believing that the employee is deliberately trying to evade the service of notice or, just possibly, where it is necessary or commercially desirable to communicate the same message to a group of employees simultaneously, which would in our view be very rare.

•

Where notice can be served on the employer.

•

To whom notice should be addressed at the employer: the contract should specify a position rather than give the name of a current employee.

•

Where notice can be served on the employee. Precedent – Senior Executive 1.1 Any notice to be given under this Agreement shall be given in writing. 1.2 Any notice shall be duly served on the Company if it is handed to [insert title of Company officer] or left at or sent by first class or special 281

5.99  Express terms of the contract of employment

delivery post to [the Company’s registered office] for the time being marked for the attention of [insert title of Company officer]. 1.3 Any notice shall be duly served on the Executive if it is handed to him personally or left at or sent by first class or special delivery post to his address given in this Agreement or such other address as he may have notified to the [insert title of Company officer] in writing or sent by email to [insert email address] or such other email address as he may have notified to the [insert title of Company officer] in writing. 1.4 Any notice handed personally to the [insert title of Company officer] or the Executive shall take effect at the time it is received. Any notice left for the Executive or the Company at his or its address in accordance with this Agreement shall be deemed to have been received and shall take effect on the day on which it was so left. Any notice sent by first class or special delivery post shall be deemed to have been received and shall take effect 48 hours after it was posted. Any notice sent by email to the Executive shall be deemed to have been received and shall take effect at the time that the email is sent to the email address of the Executive as provided in clause 1.3. Note: In this precedent we have also provided that service of notice on the employer should be at its registered office. Some companies choose to have their registered office at the offices of a professional adviser rather than their own trading premises. Where that is the case, it will be prudent to provide for notice to be served instead on the main premises of the company. In addition, as well as identifying those premises the clause should also provide for an alternative address to be notified by the employer in order to provide sufficient flexibility in the event of a change of premises. 3(b)(v)  Payments in lieu of notice 5.99  Once notice has been given by either the employer or the employee, it is very common for the employer to want the contract terminated immediately, even though for the employer sending the employee on garden leave may be a better option. Garden leave will generally be the better option where the employee is leaving to join a competitor or to set up in competition. In that situation, garden leave separates the employee from the business, but at the same time does not release the employee to compete immediately. In many cases the employer may prefer to have the protection of the continuing duty of fidelity (even if it involves having to pay the employee) rather than having to rely on post-termination restrictive covenants. 5.100  If the employer wants to bring the contract to an end, instead of giving notice or at the time notice is given, or indeed at any time during the notice period, by making a payment in lieu he should expressly reserve the right to do so. The employer may also expressly reserve the option to make a payment in 282

Terms pertaining to termination 5.103

lieu of notice by way of instalments. This might be done: (1) to improve cash flow for the employer by spreading the cost of the payment in lieu of notice over the instalment period; and (2) in combination with an express requirement for the employee to mitigate his loss of income during the period of time which otherwise would have been the notice period. If the employer does reserve the right to make a payment in lieu of notice, there is no breach if the right is exercised in accordance with the terms of the relevant clause in the contract, and therefore the post-termination restrictive covenants survive the operation of such a clause. If the employer does not reserve the right to terminate the contract with a payment to the employee or makes the payment in lieu in breach of the relevant clause, he is (in the absence of agreement by the employee) obviously in breach of the contract: Dixon v Stenor Ltd [1973] IRLR 28 (NIRC). The breach may, and often will, be a repudiatory breach: see 9.98–9.101. Where the breach is repudiatory, an employee who accepts it as terminating the contract is automatically released from all future obligations, including restrictive covenants: General Billposting Co Ltd v Atkinson [1909] AC 118 (HL) and see further Chapter 9. Because of this risk, an employer who includes post-termination restrictive covenants in his contracts intending to rely on them, should always consider including also a right to make a payment in lieu of notice. Although there are potential disadvantages to such provisions (see 5.102–5.114), an employer who wants to preserve his covenants but equally have the flexibility to terminate without notice, rather than, for example, relying on a garden leave clause, should reserve the right to make a payment in lieu of notice. 5.101  In the remainder of this section, we will look at the following issues: •

The potential disadvantages of including a payment in lieu of notice clause.

•

Constructing and implementing a payment in lieu of notice clause.

The potential disadvantages of including a payment in lieu of notice clause 5.102  The potential disadvantages are twofold. The first relates to the historical difference in the tax treatment of payments in lieu of notice made in accordance with a contract and those that were not and the second disadvantage to the risk that reserving the right to make a payment in lieu creates an obligation enforceable as a debt by the employee. As a result of changes in the tax regime due to come into force in part in April 2018 and in part in April 2019 (see 5.105) the tax disadvantage will very shortly more or less disappear. Consequently we can expect to see many more employers including payment in lieu provisions in their contracts. Until the tax changes take effect, however, it is relevant to understand how the current arrangements work and their consequences for both employer and employee. 5.103  Taking first the current tax disadvantage, any payment made pursuant to a contractual right to make a payment in lieu of notice will be treated as ‘earnings’ from the employment and taxable and subject to national insurance contributions in the same way as any other salary or earnings from the employment: EMI Group Electronics Ltd v Coldicott (HM Inspector of Taxes) [1999] IRLR 630 (CA). In 283

5.104  Express terms of the contract of employment

contrast, a payment in lieu of notice that is made as compensation for breach of contract is not treated as ‘earnings’ and is only taxable as a termination payment under section 401 Income Tax (Earnings and Pensions) Act 2003. Taxation as a termination payment has the advantage that the first £30,000 is tax free under sections 401–404 Income Tax (Earnings and Pensions) Act 2003. However, it would be prudent for the employer to have evidence documenting the fact that the payment was made as damages for loss of notice to mitigate the risk of HM Revenue & Customs deeming the payment to have been ‘earnings’ under section 62 Income Tax (Earnings and Pensions) Act 2003 (see the First-tier Tribunal decision in Goldberg v HMRC [2010] UKFTT 346 which involved a payment that had been described as a ‘payment in lieu of notice’ and found to have been taxable under section 62 Income Tax (Earnings and Pensions) Act 2003). The commercial significance of the loss of the tax advantage arises in the context of negotiating any termination agreement with the employee. Unless the employer is making other compensation payments that fully utilise the £30,000 tax-free threshold (for example to compromise statutory employment claims), which can legitimately be made tax free under sections 401–404A Income Tax (Earnings and Pensions) Act 2003, he loses the ability to ‘enhance’ the value of the termination package by the amount of the tax saving. For an employer dealing with a departing employee who is a higher or additional rate tax payer on current rates this can make a difference of up to £12,000 or £13,500 (ie  40% and 45% of £30,000 respectively) to the value of the employer’s compensation proposals. Undoubtedly, there will be cases where this difference is commercially unacceptable to the departing employee. In those cases, in order to increase the net value of the payment to the employee, the employer will have to increase the overall settlement package. In addition, a payment that is only taxable as a termination payment is not currently subject to national insurance contributions, which gives a further saving of between 2% and 12% to the departing employee and, more significantly, a saving of up to 13.8% to the employer. In other words, the effect of reserving the right to make a payment in lieu of notice will be to make any settlement more expensive for the employer. 5.104  At first blush, the tax disadvantage of including a payment in lieu of notice provision may seem a high price to pay for the privilege of keeping covenants alive. However, HM  Revenue & Customs has run a persistent campaign to ­whittle down the circumstances in which a termination payment to an employee is excluded from ‘earnings’ and can take advantage of the £30,000 tax-free threshold available under sections 401–404 Income Tax (Earnings and Pensions) Act 2003. This has met with some success, with the result that including a payment in lieu of notice clause does not put the employer at such a significant disadvantage. In Richardson (Inspector of Taxes) v Delaney [2001]  IRLR  663 the existence of a payment in lieu of notice provision, albeit that the right was not directly exercised by the employer, was relevant to the court’s finding that the employee was not eligible to receive any tax free sum. In Richardson, notice was given by the employer and the employee sent on garden leave. During the garden leave period the parties negotiated terms on which the contract would be brought to an end prematurely. Those terms represented substantially, but not exactly, what the employee would have received for the balance of the notice period. In the absence of any identifiable breach by the employer, the source of the payment 284

Terms pertaining to termination 5.106

was found to be the employer’s contractual right to make a payment in lieu of all or part of the notice period (and so was ‘earnings, and not a termination payment’), with the result that the £30,000 tax-free threshold did not apply. It is also HM Revenue & Custom’s view, as set out in the current Employment Income Manual (EIM12975–12978) addressing payments in lieu of notice, that even in the absence of an express clause, any payment made in lieu of notice that can be described as an ‘automatic response’ by the employer may, depending on the circumstances, be treated as paid under an implied term in the employment contact. Any payment under such an implied term becomes ‘earnings’ and so fails to qualify for the £30,000 tax-free exemption. Whilst HM Revenue & Customs recognise that some termination payments are genuinely damages and therefore tax free as to the first £30,000, such payments are less common than they used to be. Therefore, the employer seeking to protect his covenants by including a payment in lieu of notice clause may in fact not be in a significantly worse tax position than if he had not done so. This is particularly so where the practice of the employer is to pay in lieu of notice in all cases. 5.105  As mentioned above, the position on taxation of non-contractual payments in lieu of notice will very shortly change. Reforms to the tax treatment of termination payments will come into force from 6 April 2018 for all non-contractual payments in lieu of notice in respect of dismissals on or after that date. All such payments in lieu of notice will be treated as earnings and taxed and be subject to national insurance contributions in the normal way to the extent that they constitute what is now to be known as ‘post-employment notice pay’ as defined in section 402D Income Tax (Earnings and Pensions) Act 2003 (see also the guidance in HMRC Employment Income Manual updated 16 April 2018). Any payments in lieu of notice (even if expressed as damages for loss of notice) will no longer benefit from the £30,000 tax-free threshold. If an employee were to receive a payment as compensation or damages for failure to give notice, broadly speaking any part of that payment that the employee would have earned as basic pay had he worked his notice (‘post-employment notice pay’) will not count towards the tax free amount and will instead be subject to income tax and national insurance contributions. Furthermore, from 6 April 2019, an employer will also be required to pay Class 1A National Insurance Contributions on any part of a termination payment that exceeds the £30,000 tax-free threshold. 5.106 The second disadvantage of reserving a right to make payment in lieu of notice is the risk that the payment becomes a contractual entitlement of the employee not subject to the normal rules of mitigation that apply to damages claims for wrongful dismissal. The proper characterisation of a claim for breach of a payment in lieu of notice clause is something that has been debated in the courts in a number of cases. Is it really a debt or a damages claim? At the heart of the debate has been the unavoidable tension identified by Sedley LJ in Cerberus Software Limited v Rowley [2001] IRLR 160 between what he described as the ‘bedrock of our law’ that ‘a claimant’s damages should not exceed his losses’ and the principle that ‘people should honour their contracts’. The reality, however, is that sometimes, as happened in Cerberus, the two principles are irreconcilable and the court can support only one. 285

5.107  Express terms of the contract of employment

5.107  Following the decision of the majority of the Court of Appeal (Sedley LJ dissenting) in Cerberus, the risk of a properly drafted payment in lieu of notice clause giving rise to a debt is now very limited. Interpreting a fairly standard formulation of termination provisions, namely that Cerberus could either give Mr Rowley six months’ notice or ‘may‘ (our emphasis) make a payment in lieu of notice’, and overruling the EAT, the Court of Appeal found those provisions did not preclude Cerberus from terminating the contract in breach and paying damages. A right exercisable entirely at the employer’s election to make a payment in lieu of notice did not create any entitlement enforceable by the employee and, indeed, was ‘totally inconsistent’ with such a right. Consequently, Mr Rowley, who had secured more remunerative employment a mere five weeks after his wrongful dismissal by Cerberus, was entitled only to damages for the loss of earnings sustained from the wrongful dismissal rather than the full six months’ notice he claimed. The latter would, of course, have represented a significant windfall for him. In reaching their decision, the Court of Appeal distinguished an earlier decision (also of the Court of Appeal) in Abrahams v Performing Rights Society [1995] IRLR 486. 5.108  Whilst the Court of Appeal’s decision in Cerberus has clarified matters significantly, the issue of whether particular payment in lieu of notice clauses create a debt or damages claim continues to arise from time to time. For that reason, and to avoid the draftsman falling into some of the common traps involved in formulating payment in lieu of notice clauses, it is worth considering briefly the development of the case law on the debt versus damages debate. 5.109  Prior to Cerberus there were two key Court of Appeal decisions which dealt with the question whether a payment in lieu of notice constituted a contractual debt. In Abrahams v Performing Rights Society [1995] IRLR 486 (CA) the ex-employee succeeded in establishing that his particular payment in lieu provision was a contractual debt. In Gregory v Wallace [1998] IRLR 387 (CA) a differently constituted Court of Appeal, quite correctly in our opinion, distinguished Abrahams on its facts and ruled that the payment in lieu provision applicable to Gregory did not create a contractual debt. To understand the significance of these two cases, it is important to look at their very specific facts. 5.110 In Abrahams v Performing Rights Society [1995]  IRLR  486 (CA) the key facts were that, beginning on 1 April 1987, Mr Abrahams was employed by Performing Rights Society (‘PRS’) on a five-year fixed-term contract. Part way through that contract PRS became aware that the expiry of a fixed-term contract constituted a ‘dismissal’ for the purposes of the Employment Rights Act 1996. PRS therefore decided through its staff committee to introduce notice provisions into the fixed-term contracts of Mr Abrahams and others. These notice provisions were to the effect that, save in cases of gross misconduct, ‘two years’ notice of termination (or salary in lieu)’ would be given by PRS. By letter of 28  March 1989 to Mr Abrahams, PRS’s chief executive referred to the committee’s decision and then explained his understanding of the variation to Mr Abraham’s contract in the following way ‘… in the event of termination of your employment by the Society either at the end of the fixed-term contract period or at any time during the final two years of such period you would be entitled, other 286

Terms pertaining to termination 5.111

than in the case of dismissal for gross misconduct, to a period of notice of two years or an equivalent payment in lieu.’ Mr Abrahams accepted that variation by signing a copy of the letter ‘agreed’. In early 1992 negotiations began for the renewal of Mr Abraham’s contract. Those negotiations were not successful. Instead, an agreement was reached, and made public by a staff announcement of 12 March 1992, that Mr Abrahams was to remain in post until 31 March 1994 ‘under the terms of his existing contract’. Both parties accepted that the staff announcement accurately recorded the agreement. Notwithstanding this agreement, on 14 September 1992, Mr Abrahams was summarily dismissed without justification. Mr Abrahams claimed an entitlement to two years pay in lieu of notice in accordance with the 1992 Agreement which he alleged he was entitled to as a contractual debt. PRS defended the claim on the basis that they had wrongfully dismissed Mr Abrahams and that his entitlement to damages was based on the unexpired portion of a fixed-term contract due to expire on 31  March 1994, which they alleged was the proper effect of the 1992 Agreement. PRS lost comprehensively. The Court of Appeal first found that the 1989 variation as to notice was incorporated into Mr Abrahams’ contract and that he was therefore entitled to two years’ notice. The court also ruled that Mr Abrahams’ summary dismissal was not a wrongful dismissal, but simply, as Mr Abrahams’ Counsel put it, ‘deciding not to serve notice’, leaving Mr Abrahams with the ability to claim ‘the alternative contractual remedy available to him’, that is, to sue for the payment in lieu. The report does not record in detail the argument on whether the dismissal was wrongful. However, the court did specifically reject an argument for PRS that to infer that PRS was electing to make a payment in lieu of notice there would have to have been a tender of money due, or at the very least an assurance of a willingness to pay. The final blow for PRS was the court’s finding, unsurprising on the facts and particularly the use of the word ‘entitled’, that Mr Abrahams was not obliged to mitigate. In reaching this conclusion, the court relied on Rex Stewart Jeffries Parker Ginsberg Ltd v Parker [1988] IRLR 483. 5.111 Following Abrahams came the case of Gregory v Wallace [1998] IRLR 387. Mr Wallace was entitled to two years’ notice from his employer. Under the contract, upon the giving of that notice the employer became ‘entitled’ to terminate the agreement immediately by making a payment or payments to Mr Wallace, which Mr Wallace could elect to receive either in monthly instalments over the two-year period or as a single lump sum subject to a reduction for accelerated receipt. In 1992, Mr Wallace’s employer ran into financial difficulties. Administrative receivers were appointed and Mr Wallace was summarily dismissed on 3 August 1992, a decision confirmed in writing on 5 August 1992. Distinguishing the case from Abrahams, the Court of Appeal held that Mr Gregory had been wrongfully dismissed and that therefore his remedy lay in damages. The court ruled that the giving of two years’ notice was a pre-condition to the employer’s entitlement to make a payment in lieu of notice. Furthermore, distinguishing Rex Stewart Jeffries, it was a condition that could not be waived by Mr Gregory, since it was not for his benefit alone. The court found that, in order to succeed, Mr Gregory would have to show that his summary dismissal had been effected by his employer under the contractual provision and that, in turn, had to be preceded by the giving of two years’ notice. On the facts, although the court expressed a 287

5.112  Express terms of the contract of employment

general willingness to construe the employer’s actions as ‘consistent with rather than repudiatory of the contract’ (Peter Gibson LJ at paragraph 23), in this case it was not possible. In short, by inserting the ‘hurdle’ of the giving of notice and expressing the provision as an option, the Abrahams arguments were defeated. 5.112  Unsurprisingly, the decision in Gregory was greeted with considerable relief by employers. Undoubtedly it prompted some variations to the drafting of payment in lieu of notice clauses, most notably the insertion of the various ‘hurdles’ that had successfully defeated Mr Gregory’s ‘contractual debt argument’, but the general consensus was that Abrahams had been correctly and sensibly limited. For the future it was anticipated that, subject to sensible precautions, payment in lieu of notice clauses could safely be included in contracts of employment. 5.113  However, the equilibrium restored by Gregory was upset once again by the decisions of the Employment Tribunal and the EAT in Cerberus, both of which upheld Mr Rowley’s claim to six months’ notice in accordance with the payment in lieu of notice provision in his contract as a claim arising in debt. In reaching their conclusion, the EAT took, in our view and that of the majority of the Court of Appeal, a number of ‘wrong turns’. In referring to Abrahams and Gregory (as well as the House of Lords decision in Delaney v Staples [1992] IRLR 191) the EAT said ‘… we have not been persuaded that these cases bear directly on the point at issue …’ (Morrison J at page 891). In our view, the EAT was fundamentally wrong to reach that conclusion. The EAT concluded that because the contract included a right to make a payment in lieu of notice, albeit at the employer’s election, the contract could only be terminated either by notice or by Cerberus making the full payment in lieu. The EAT’s reasoning is extremely difficult to follow. The judgment contains a series of material inconsistencies, not least in some instances in treating debt and damages as though they are subject to the same principles. The EAT questioned the House of Lords’ analysis in Delaney v Staples [1992] IRLR 191 of situations where an employer makes a payment in lieu of notice. The EAT also took the opportunity, albeit obiter, to doubt the validity of pay in lieu of notice clauses generally, in so far as they purport to deprive an employee of the statutory minimum periods of notice laid down in section 86 Employment Rights Act 1996. The EAT took this line notwithstanding that section 80 Employment Rights Act 1996 expressly permits employer and employee to effectively ‘contract out’ by a payment in lieu being made. Furthermore, in our view, it is not without significance that the EAT did not in any way seek to comment on or distinguish either Abrahams or, more importantly, Gregory, other than to say (somewhat surprisingly) that they do not bear directly on the point in issue. 5.114 Thankfully, as we indicated at 5.107, the matter was put right when Cerberus reached the Court of Appeal ([2001]  IRLR  160), and it is now the case that: (a) where the employer simply retains the discretion to make a payment in lieu of notice; and (b), most importantly, does not act in a way that could be construed as exercising that right, the dismissed employee’s claim is for damages for wrongful dismissal, and not a debt (HM Revenue & Customs guidance in EIM 13924 is also consistent with this approach). For a case in which the employer failed on the second count see Breakspear v Colonial Financial 288

Terms pertaining to termination 5.117

Services (UK) Ltd (30 April 2002, unreported) (QB). In that case, Colonial initially gave notice in accordance with the contract and subsequently made a payment in lieu of the balance of that notice, again in accordance with a contractual provision. In the context of other claims for contractual payments brought by Mr Breakspear, Colonial sought to argue that the payment already made was subject to mitigation, and the sums earned by Mr Breakspear from his new employment should be taken into account by the court. Distinguishing Cerberus, Richard Ferryhough QC (sitting as a deputy judge) held that, once Colonial had exercised their contractual right to make a payment in lieu of notice, Mr Breakspear was entitled to receive the payment as a debt not damages. Constructing and implementing a payment in lieu of notice clause 5.115  There are three types of payment in lieu of notice clauses: •

A clause that provides for a single payment to be made in lieu of the entire notice period (or the portion of the notice period which is not served).

•

A clause that provides for payment to be made in lieu of the entire notice period (or the portion of the notice period which is not served) where the payment is made in instalments usually monthly over what would otherwise have been the notice period or the balance of notice.

•

A clause as described in the previous bullet point but where each instalment is subject to an obligation by the employee to mitigate with credit being given for any income earned or received by the employee during the period of each instalment.

5.116  In practice, because they are administratively cumbersome to operate the third and more sophisticated type of clause is still relatively rarely used except for very senior and highly remunerated employees, particularly those employed by listed companies. Even in those cases the financial savings achieved may be small since the ability to mitigate is likely to be constrained by the ex-employee’s post-termination restrictive covenants. We include the option, however, for completeness and because, of course, it will merely be a right the employer can exercise without there being any compulsion to do so. 5.117  Following the decision of the Supreme Court in Société Génerale London Branch v Geys [2013] IRLR 122 (discussed in detail at 9.30–9.38) the ingredients and requirements for implementation of an effective payment in lieu of notice provision are abundantly clear. The employer will need to exercise that provision transparently and in accordance with its terms, and to ensure that notification that the provision has been exercised is received by the employee. The precedent which follows addresses the key elements which should always be included in a single payment in lieu provision, namely: •

The employer may at its absolute discretion terminate the employment of an employee by notifying him in writing that it will be making a payment in lieu of notice within a specified period of time. 289

5.117  Express terms of the contract of employment

•

That a payment in lieu can be made of either the entire notice period or any unexpired part of it.

•

Precisely how the payment in lieu will be calculated, thereby avoiding arguments about whether or not the value of benefits such as bonus schemes, private health cover, provision of a car etcetera are included or excluded. In practice, valuing non-cash benefits for payment in lieu clauses can be extremely difficult and therefore it is usual for a payment in lieu clause to refer to salary only or salary and some other cash benefits, for example pension contributions but not normally commission or profit share schemes unless a pre-set formula for their calculation based on performance in a previous period is included. The employer should also ensure that there are no conflicts between the terms of the contract on pay in lieu and any scheme documentation, for example for bonus/profit share or, indeed, any other schemes. So, for example, in relation to bonus schemes, many will now provide that to be entitled to bonus the employee must be employed and not under notice at the end of the relevant financial year, or in some cases at the bonus payment date following the finalising of the audited accounts. A scheme in those terms would preclude in most instances bonus forming any part of a payment in lieu of notice. Particular care is required to avoid conflicts where the bonus scheme has been the subject of a listed company shareholder vote. Precedent – Senior Executive (Payment in lieu of notice by single payment)) 1.1 The Company reserves the right, exercisable in its sole and absolute discretion, to terminate the Executive’s employment with immediate effect by making a payment in lieu of the notice required by Clause [insert clause number dealing with period of notice] or where notice has already been given by either party any unexpired period of such notice. Any payment in lieu of notice shall consist solely of a sum equivalent to the Executive’s salary (at the rate applicable at the Termination Date) for the notice period required by Clause [repeat clause number dealing with period of notice] or any unexpired period of such notice and shall be subject to such deductions as the Company is required by law [or authorised in writing by the Executive (pursuant to the terms of the Agreement or otherwise)] to make. Any exercise of the Company’s rights under this Clause shall be made by notice in writing to the Executive and such notice shall be substantially in the form of Appendix [ ]. Appendix [ ] Dear In accordance with Clause [insert clause number of payment in lieu provision] of your Service Agreement dated [ ] the Company hereby confirms that it is exercising its right to terminate your employment with

290

Terms pertaining to termination 5.118

immediate effect by making a payment to you in lieu of the [entirety]* [unexpired portion]* of the notice period referred to in Clause [insert clause number of notice clause]. Accordingly, we [enclose a cheque in the sum of [£ ]* or [have today transferred the sum of [£ ] into your account with [insert name of Bank]]*. This sum has been calculated as follows: Salary at date of termination × [insert duration of notice period] * [insert duration of unexpired period of notice]* = £ Less: [Specify each item of deduction by description and amount] £____ Total Deductions: £ Net Sum Due = £ Yours sincerely For and on behalf of [insert Company name] * Delete as appropriate Note: The term ‘Termination Date’ needs to be defined in the service agreement and the precedent presupposes that the employee will receive salary only. On the first point, the clause is not favourable to the employee and it is sensible for the employee to identify the additional benefits he receives and endeavour to have some payment in respect of them included or, alternatively (where appropriate) for example, insurance benefits, for those benefits to be continued during what would have been the notice period. The precedent permits deductions the employer is required to make (for example tax), and has the option to permit deductions authorised by the employee in writing. It is vital to remember that in the latter case the written authorisation must precede the deduction if it is to be a permitted, as distinct from an unauthorised, deduction within section 13(1)(b) Employment Rights Act 1996. Payment in lieu of notice in instalments 5.118  If an employer wants to retain the right to make a contractual payment in lieu of notice but spread the cost of doing so, his option is to pay in instalments. Normally the instalments are paid monthly over what would have been the notice period, or the unexpired portion of the notice period, and at the same time as salary would have been paid, which makes the process administratively convenient. Precedent – Senior Executive (Payment in lieu of notice by instalments) 1.1 The Company reserves the right, exercisable in its sole and absolute discretion, to terminate the Executive’s employment with immediate effect by paying him in lieu of the notice required by Clause [insert clause number dealing with period of notice] or where 291

5.119  Express terms of the contract of employment

notice has already been given by either party any unexpired period of such notice. The payment in lieu of notice will consist solely of a sum equivalent to the Executive’s salary (at the rate applicable at the Termination Date) for the notice period required by Clause [insert clause number dealing with period of notice] or any unexpired period of such notice. 1.2 Payment shall be made in monthly instalments on the dates and in the same manner as salary payments were made to the Executive immediately prior to the Termination Date. Each instalment shall be subject to such deductions as the Company is required by law [or authorised in writing by the Executive (pursuant to the terms of this Agreement or otherwise)] to make. 1.3 Any exercise of the Company’s rights under this Clause 1 shall be made by notice in writing to the Executive and such notice shall be substantially in the form of Appendix [ ]. Appendix [ ] Dear In accordance with Clause [insert clause number of payment in lieu provision] of your Service Agreement dated [ ] the Company hereby confirms that it is exercising its right to terminate your employment with immediate effect by paying you in lieu of the [entirety]* [unexpired portion]* of the notice period referred to in Clause [insert number of notice clause]. The total amount to be paid to you will be £[insert amount] gross and payment of that sum (less deductions in accordance with clause [insert clause number of payment in lieu provision]) will be made in [insert number] monthly instalments by direct transfer into your account with [insert name of Bank] on the following dates [insert dates] or the nearest working day thereafter. Yours sincerely For and on behalf of [insert Company name]. * Delete as appropriate Note: The ‘Termination Date’ needs to be defined in the service agreement. See also the comments in the note to the single payment precedent. Payment in lieu of notice by instalments and subject to mitigation 5.119  In the case of long notice periods an employer may also want the option of reducing the cost by making payments subject to the ex-employee’s obligation to mitigate in the same way that a claim for damages would be subject to mitigation. In practice these more sophisticated types of provision are relatively uncommon except for very senior and highly remunerated employees particularly those employed by listed companies. To be effective the employee’s obligation to 292

Terms pertaining to termination 5.120

mitigate must be clearly set out in the clause, as must the obligation to give credit for sums earned. In advance of each instalment being due the ex-employee should be under an obligation to disclose the extent of his ‘mitigation’ in terms of effort made and results achieved, to allow for the relevant instalment to be reduced by any ‘mitigation’ achieved. An alternative method of the employer securing the benefit of mitigation although far less satisfactory for the ex-employer, would be for the payment in lieu to be made in a single lump sum payment, but with a right of claw-back. These alternative formulations of offsetting mitigation are not, however, risk-free and suffer from four disadvantages. First, they are potentially time-consuming in terms of administration; secondly, policing the disclosure obligations is by no means simple; thirdly, the ex-employee’s ability to mitigate will be constrained by any post-termination restrictive covenants thus affecting the cost saving and fourthly, there is a risk that the ex-employee dilutes the effect of his ‘mitigation’ in the short term, eg by taking a lower salary in favour of a non-quantifiable benefit, such as a share option, or simply deferring payments. However, for a key employee, where it is critical to protect the post-termination restrictive covenants, the sums involved are large and the employee has skills that can easily be utilised in a non-competitive business, the degree of effort required may be worthwhile in the case of a lengthy notice period. 5.120  The following precedent is an example of how a payment in lieu provision may be formulated using a stage payment system and requiring the employee to seek alternative work during the period the payments are being made. As with previous precedents in this chapter, the precedent needs to be used with care, and thought needs to be given to particular issues, for example the type of work the employee is obliged to find and whether or not non-cash benefits and deferred consideration are to be included in the deductions to be made from the payment in lieu. Both these issues are difficult ones in principle and in terms of drafting. In our precedent, assuming the notice period would not exceed a year, we have taken the view that the ex-employee should be obliged to try and find a comparable alternative role in terms of required skill set and remuneration package. We have, however, also provided that sums earned from any alternative role are to be deducted. We have, however, at the same time required him to give credit for any sums earned. We have also included a valuation of non-cash benefits and deferred compensation in the sums to be deducted. While this can create uncertainties and valuation difficulties, it seems to us that to omit them would enable the ex-employee to avoid the effect of the clause with considerable ease. Precedent – Senior Executive (Payment in lieu of notice by instalments and subject to mitigation) 1.1 The Company reserves the right, exercisable in its sole and absolute discretion, to terminate the Executive’s employment with immediate effect by paying the Executive salary (at the rate applicable at the Termination Date) in lieu of the notice required by Clause [insert clause number dealing with period of notice] or where notice has already been given by either party any unexpired period of 293

5.120  Express terms of the contract of employment

such notice (in either case the “Notional Notice Period”). Payment will be made in monthly instalments and subject to deductions as provided for in Clause 1.3. 1.2 During the Notional Notice Period, subject always to the Executive’s continuing obligations under this Agreement including Clauses [insert clause numbers for restrictive covenants) the Executive shall use his best endeavours to secure alternative work commensurate with his skills and abilities and providing an income and benefits that are overall the same as or substantially the same as those provided by the Company under this Agreement. Five working days before any payment is due to be made to the Executive under this Clause 1, the Executive shall deliver to the [insert title of Company officer] a written statement together with all relevant documents (where available) detailing in respect of the period to which the payment relates: (1) all efforts made by him to secure alternative work; and (2) all sums or benefits (including any entitlement to deferred compensation or benefits) earned whether or not received and whether or not from a role comparable to that which he held with the Company, in respect of work undertaken by him for any third party (collectively ‘Sums Earned’). In relation to non-cash benefits the Executive shall provide sufficient information to enable the Company to place a reasonable financial value on those benefits. The Company’s valuation of the benefits shall be final and binding on the parties. 1.3 Subject to the Executive complying with his obligations under Clause 1.2, the Company shall continue to pay the Executive at the rate of his salary applicable at the Termination Date on the dates and in the same manner as payments of salary were made prior to termination of his employment throughout the Notional Notice Period less, in the case of each payment: (a) the deductions which the Company is obliged by law to make, including but not limited to tax and employees’ national insurance contributions; and (b) any Sums Earned attributable to the period to which the payment relates. 1.4 Any exercise of the Company’s rights under this Clause I shall be made by notice in writing to the Executive and such notice shall be substantially in the form of Appendix [ ]. Appendix [ ] Dear In accordance with Clause [insert clause number of payment in lieu provision] of your Service Agreement dated [ ] (copy attached) the Company hereby confirms that it is exercising its right to terminate your employment with immediate effect by paying you in lieu of the [entirety]* [unexpired portion]* of the notice period. referred to in Clause [insert number of notice clause]. Payment will be made in monthly instalments less deductions in accordance with Clause 1.3 by direct transfer into your account with [insert name of Bank]. 294

Terms pertaining to termination 5.122

As you will be aware [insert Clause number of payment in lieu provision] imposes various requirements on you to secure alternative work and to account for monies earned. [I have discussed those obligations with you] * [please familiarise yourself with those obligations and if you have any questions please raise those with me promptly]*. The first date on which you must provide information in accordance with clause [1.2] is [insert date] and I look forward to receiving the required documentation from you on that date. Thereafter the relevant dates for the provision of information will be [insert dates] and where relevant the dates for payments to you will be [insert dates]. As provided for in the Agreement any payments due to you will be made by direct transfer into your bank account. The Company will within 5 working days of any sum being credited to your account provide you with a statement to be sent by email to the following address [insert Executives’ email address] of the sum credited to your account itemising each deduction made. Each statement will be deemed to be received by you on the date and time at which it is sent from the Company’s systems. Yours sincerely For and on behalf of [insert Company name]. * Delete as appropriate Note: the term “Termination Date” needs to be defined in the service agreement 5.121 As indicated at the outset of this section on the right to make a payment or payments in lieu of notice, the prime purpose of the employer retaining the right is to avoid the risk of an employee being able to claim successfully that he is released from his restrictive covenants where the employer terminates without notice. Currently, primarily because of the tax disadvantages of including payment in lieu of notice provisions outlined at 5.102–5.105, sometimes payment in lieu of notice clauses are only included in contracts where it is critical to the employer to protect the post-termination restrictive covenants or where for some other reason it is necessary to be able to terminate lawfully without giving notice, for example to prevent valuable share rights accruing. However, when the reforms to the tax treatment of payments in lieu of notice come into effect on 6 April 2018 (see 5.105), the current tax disincentive for inclusion will disappear and we are likely to see the right to make payments in lieu of notice becoming a standard term in contracts.

3(c) Controlling the employee’s communications regarding his departure 5.122  Where an employee is planning to leave (and even before notice has been given) challenges can arise for the employer as to how the news is leaked to fellow employees, clients and other relevant business contacts. Sometimes, the departing employee will choose not to make his plans public instead using the fact that he could but has not done so as a bargaining chip in negotiations for an 295

5.123  Express terms of the contract of employment

early release from his notice period. Whether or not that tactic is adopted, the employer is well advised to include appropriate provisions in the contract to seek to control the behaviour of the employee. Of course there is no guarantee that the provisions will be effective but at the very least they may have a deterrent effect and, if nothing else, if not honoured they will be yet another breach to add to the list of the departing employee’s misdemeanours in any litigation. They may also buy the employer enough time to get his communication processes organised at least as regards other key employees and customers. Precedent – Senior Executive 1.1. If notice of termination of employment has been given by the Executive or the Company, or the Executive decides to leave the Company’s employment, except with the prior written approval of [insert title of Company officer], the Executive shall not during such notice period or at any time after he has made such decision: 1.1.1 directly or indirectly disclose his departure or any information relating to his departure nor make any comment on his departure to any employee, officer, director, consultant, customer, prospective customer, supplier, agent, shareholder, adviser or any other professional or business contacts of the Company [or any other company in the Group]; or 1.1.2 directly or indirectly publish his departure or any information relating to his departure nor make any comment on his departure on any social media platform (including but not limited to LinkedIn), online, printed or broadcast media. 1.2 If the Executive becomes aware that any third party is intending to or has made any statement or comment regarding the Executive’s departure from the Company he shall notify [insert title of Company officer] immediately in writing and provide all details of which he is aware regarding the communication. 1.3 At any time prior to or during any period of notice, the Executive shall comply with any instructions given by the Company in relation to the content of any announcements or statements that the Executive may be required to make to any person (including but not limited to the content of any out of office replies in respect of the Executive’s company email account).

3(d)  Garden leave 5.123 Where either employer or employee has given notice to terminate the employment, the immediate issue that arises is what is to happen during the notice period. The issue is particularly acute where the employee has resigned without giving the entirety of the required notice, or sometimes has simply walked out giving no notice, to join a competitor or to set up a competing business. In those cases, the employee will be keen to pursue his future plans more 296

Terms pertaining to termination 5.124

or less immediately and, where he has given notice, may well ask for his notice period to be shortened. The employer, on the other hand, will normally want to create a ‘breathing space’ for the business: a period when the employee is not actively engaged in the business, but at the same time remains employed so that the business has all the protections against competition afforded by the employment contract. The employer’s goal can generally be achieved by sending the employee on what is commonly referred to as ‘garden leave’. 5.124  An employee is said to be on garden leave when he is required not to attend his employer’s premises, not to perform any duties for his employer and not to have any contact with the employer’s customers or employees, but he nonetheless remains an employee entitled to receive full salary and the majority, if not all, of his benefits. Most importantly, by remaining an employee the individual is precluded from engaging in activities which are competitive with his employer’s business. In addition, the employee is kept out of circulation for a period of time, thereby breaking his links with customers, other employees and contacts, and removing his access to confidential information. The High Court in Ashcourt Rowan Financial Planning Ltd v Hall [2013] IRLR 637 looked at the meaning of the expression ‘garden leave’. Mr Hall was a financial adviser at Ashcourt Rowan Financial Planning and his employment contract contained the following clause: ‘14.2 During any period of notice, the Company shall not be under any obligation to provide you with any work and may (without the need to give any reason for so doing) at any time require you to perform: (a) all of your normal duties; or (b) part of your normal duties and no others; or (c) any other such duties as it may reasonably require; or (d) no duties whatsoever and it may suspend or exclude you from all or any of its premises and may require you to refrain from contacting or dealing with any customer, clients, suppliers, contacts or staff of the Company or the Syndicate Group of companies (“the Group”) in connection with the business of the Company or the Group. You will continue to receive your salary and benefits in full during any such period (“the garden leave period”).’

The contract included the following offset provision reducing the period of Mr Hall’s post-termination restrictive covenants (which mistakenly referred to clause 14.4 instead of 14.2): ‘Any period spent by you on garden leave as envisaged by clause 14.4 [sic] above shall be deducted from the period of restrictions referred to in clauses 2, 3 and 4.’

Mr Hall had amongst other post-termination restrictive covenants a six-month non-competition covenant. Mr Hall resigned and was subsequently asked to report directly to the CEO and work from home on the handover of client work. He was also required to attend client meetings but accompanied by another financial planner. Mr Hall claimed that this period constituted garden leave and therefore the length of his non-competition restriction was reduced accordingly. 297

5.125  Express terms of the contract of employment

His employer argued that a period of garden leave only constituted exclusion from the company’s premises and from having contact with clients and employees; it did not cover alteration of duties. The High Court held that ‘garden leave’ naturally connoted a time when an employee is not required or permitted to do any work. Mr Hall was therefore not on garden leave when he had been given alternative duties during his notice period. 5.125  The development of the concept of garden leave is considered in detail at 15.14–15.32, together with its recent applications. As will be seen from those paragraphs, the concept stems from the courts seeking to strike a balance between the following competing principles: •

parties should be free to contract as they wish and generally should be held to the bargains they reach;

•

the courts will not order specific performance of a contract of employment against an employee; and

•

the right of certain employees to work and exercise their skills.

5.126  The ability to send an employee on garden leave is a considerable advantage to the employer and, as a means of protection from competition, significantly less risky than relying on restrictive covenants. Whereas the courts have no power to re-write restrictive covenants (see Prophet plc v Huggett [2014] IRLR 797; 12.44–12.45), they will reduce the duration or breadth of other contractual terms where they consider it is necessary to do so to create a reasonable curtailment of the employee’s activities. See GFI Group Inc v Eaglestone [1994] IRLR 119, where the employee was restrained from joining a competitor for part only of the balance of his notice period. GFI was a case involving a team move. The rationale for the court’s order was that the damage which GFI were seeking to prevent had to a certain extent already been done by more junior employees who had left and joined the same competitor; 13 weeks was therefore a more appropriate period for the injunction than the full 20 weeks remaining of Eaglestone’s notice period. See also Provident Financial Group plc v Hayward [1989] IRLR 84 (CA), where the Court of Appeal ruled it had the power to ‘narrow the scope of the contractual embargo’ (Taylor LJ at paragraph 30) and to grant an injunction restraining Hayward from joining a competitor during his notice period. In Provident, however, no order was made because Hayward’s proposed activities were held not to compete with Provident’s business. 5.127  For the purposes of this chapter, the key point to note is that, whilst there are circumstances in which it is possible to send an employee on garden leave without an express right to do so, nowadays those circumstances are more limited. In essence, the court must find either that as a matter of construction of the contract the employee has no right to work (as that right has been interpreted in William Hill Organisation Limited v Tucker [1999]  ICR  291) as was found to be the position in both Christie v Johnston Carmichael [2010] IRLR 1016 and SBJ Stephenson v Mandy [2000] IRLR 233 (both considered at 15.32), or that he has forfeited that right because of his behaviour (see SG&R Valuation Service Co LLC v Boudrais [2008] IRLR 770. An employer who omits a garden leave clause 298

Terms pertaining to termination 5.129

takes an unnecessary risk in doing so. Sending an employee on garden leave where to do so is a breach of the employee’s rights is likely to be a repudiatory breach of contract. Consequently, assuming the employee accepts the breach – and there can be little doubt he will do so immediately where he is proposing to compete – not only will the employee be freed from his notice period, but the employer will also have lost the benefit of the post-termination restrictive covenants: General Billposting Co Ltd v Atkinson [1908] AC 118 (HL). 5.128  Whether the employer wants to enforce the garden leave clause, or merely to use it as leverage to negotiate a quick and favourable separation agreement, all well drafted employment contracts nowadays will include a right on the part of the employer to send the employee on garden leave once notice has been given, or where the employee has simply walked out in breach of his notice obligations. 3(d)(i)  Drafting the garden leave clause 5.129  Drafting a garden leave clause requires some care. The essential features of the clause should be as follows: •

The right should only operate once notice has been given by either party or the employee has purported to breach his notice obligations by, for example, simply ‘walking out’.

•

In our view, the maximum period of garden leave should be 12 months and there are arguments in favour of a shorter period, for example six months. In Credit Suisse Asset Management Ltd v Armstrong and Others [1996] IRLR 450 the Court of Appeal indicated that garden leave of 12 months may be acceptable. However, the fall-back position for employers has been and continues to be the courts’ willingness in appropriate cases to grant garden leave injunctions for periods shorter than the notice period: see GFI Group Inc v Eaglestone [1994] IRLR 119 (see 5.126 and considered more fully at 15.25). It is worth noting that, notwithstanding the Court of Appeal’s view in Credit Suisse that a 12-month garden leave clause may be acceptable, the cases in which a garden leave injunction has been granted for 12 months are still relatively few (although, see J M Finn & Co Ltd v Holliday [2014] IRLR 102 (QB) and more recently ICAP Management Services Ltd v BGC Services Holdings LLP [2017] IRLR 811 where Garnham J granted a 12-month garden leave injunction to protect ‘highly confidential’ information (see further 15.61)). Furthermore, although in the current climate it is likely that the courts will cut down a lengthy garden leave period as they did in GFI, there is no absolute guarantee they will do so. The advantages of a relatively short garden leave period, for example six months, are: (a) it gives the parties greater certainty; (b) it takes into account the Court of Appeal’s views in Provident Financial Group plc v Hayward [1989] IRLR 84 (see 15.22–15.23) to the effect that skilled workmen and ‘even chartered accountants’ have a concern to work (Dillon LJ at paragraph 19) and that the effect of garden leave should not be that skills ‘atrophy’; 299

5.129  Express terms of the contract of employment

(c) it reflects a reasonable approach of the type the courts are seeking; and (d) although arguably less flexible than a longer period, it may often achieve the same result. That said clauses allowing for 12 months’ garden leave for senior employees are by no means unusual and in recent years are certainly less risky than they had previously been thought to be. •

It should relieve the employer of any obligation to provide work for the employee and prohibit the employee from performing further duties, unless specifically requested by the employer.

•

It should permit the employer to exclude the employee from the workplace(s).

•

It should allow the employer to prohibit contact between the employee and customers/clients, fellow employees and consultants and, in appropriate cases, other relevant classes of people such as suppliers, distributors, shareholders, professional advisers (including the employer’s bank) and agents. In addition, provision should be made for the employee to inform promptly a named company officer of any contact attempted by any person or organisation with whom contact is prohibited.

•

It should provide for the continuation of salary and benefits throughout the garden leave period, in appropriate cases with a fixed formula operating in respect of variable pay (for example bonuses/commissions). For employees who receive a very significant percentage of their remuneration in variable pay, it is our view that ideally provision should be made for receipt of a realistic level of variable pay during garden leave. Absent such a provision, there is a risk that the court could decline to exercise its discretion to grant a garden leave injunction. Care should, however, be taken where such a provision would conflict with the terms of a bonus scheme, particularly one which has been the subject of approval by shareholders of a listed company. Where the variable pay is set out in a separate document (for example a bonus scheme which is renewed/amended annually), there is no objection to setting out the amount(s) payable during garden leave in those documents rather than in the garden leave clause itself. The important point is that the issue is covered in documentation upon which the employer can rely as agreed by the employee.

•

It should address the ability of the employee to take up/continue with other roles. Where other roles during employment are already permitted by the contract, this is likely to involve some detailed drafting based on the precise permissive provision in the contract.

•

The contract should separately prohibit the employee making or facilitating the making of announcements or comments regarding his departure (see 5.122) but since this cannot bind third parties it is worth including a disclosure obligation on the employee in relation to third party activities of which the employee is aware.

•

Also, unless separately provided for in the contract it should give the employer the right to request that the employee resign from all offices held

300

Terms pertaining to termination 5.129

as a result of his employment. We have included the relevant right in a separate precedent clause dealing with resignations, see 5.144. •

It should contain a term which provides that outstanding holiday as at the date of the commencement of the garden leave is, insofar as there is a sufficient garden leave period in which the employee is not in fact required to do any work, to be taken during that period. Due to the decision in Whittle Contractors Ltd v Smith (1 November 1994, unreported) EAT 842/94 that holiday continues to accrue during garden leave, it had become common practice to include a term partially negating the effect of that decision (ie a term that no contractual holiday entitlement over and above that guaranteed by the Working Time Regulations 1998 shall accrue during any period of garden leave). (In view of regulation 13 Working Time Regulations 1998, such a term could arguably no longer be included in so far as it relates to the statutory holiday entitlement as distinct from any additional contractual entitlement). However, it is permissible to include a term in the contract providing that any outstanding holiday entitlement at the commencement of garden leave and any holiday entitlement guaranteed under the Working Time Regulations 1998 which may accrue during the period of garden leave shall be deemed to be taken during the period of garden leave. In Industrial and Commerce Maintenance Limited v Briffa [2008] UKEAT/0215/08/2207, the EAT found that a contractual term providing for holiday to be taken by the employee during his notice period was enforceable, as it amounted to a valid variation under regulation 15 Working Time Regulations 1998 relating to minimum notice of holiday. One point to note is that although it is accepted under English law that an employee would be entitled to a payment in lieu of any untaken statutory holidays that have accrued both before and during any period of garden leave (unless the employee is required to take such leave during the garden leave), the ECJ cast some doubt on this position in the case of Maschek v Magistratsdirektion der Stadt Wien: C-341/15 [2016]  IRLR  801. This case concerned a local government employee in Austria who reached an agreement with his employer to retire a year later. Until his agreed retirement date, he would continue to receive his salary but no longer perform his duties. He claimed that he was entitled to a payment in lieu of untaken annual leave but this was rejected by his employer. The ECJ took the view that his employment relationship ended when both parties reached the agreement on a retirement date but that the employment contract ended on the retirement date. The ECJ held that:



‘In those circumstances, and in order to ensure the effectiveness of the right to annual leave, it must be held that a worker whose employment relationship has ended and who, pursuant to an agreement with his employer, while continuing to receive his salary, was required not to report to his place of work during a specified period prior to his retirement, is not entitled to an allowance in lieu of paid annual leave not taken during this period, unless he was not able to use up that entitlement due to illness’ (at paragraph 35).

On the face of it, this position is inconsistent with that taken by the English courts and the ECJ has interpreted the Working Time Directive narrowly. 301

5.129  Express terms of the contract of employment

However, it is our view that a tribunal is unlikely to adopt the position taken by the ECJ given that it would have to apply a restrictive interpretation of the Working Time Regulations 1998 to give effect to a narrow interpretation of the Working Time Directive. •

The clause should expressly provide for the continuation of the implied duty of fidelity. The view advanced by Scott V-C at first instance in Symbian v Christensen [2001] IRLR 77 that the employee’s duty of fidelity ceases on his being sent on garden leave is now generally accepted, as we predicted, to be incorrect. Indeed, that view was rejected by the High Court in ImamSadeque v Bluebay Asset Management (Services) Ltd [2013] IRLR 344 (QB) (see Popplewell J at paragraph 145). See also the obiter comments of Maurice Kay LJ in Tullett Prebon and others v BGC Brokers LP [2011] IRLR 420 (CA) and Thomson Ecology Ltd and Another v APEM Ltd and Others [2014] IRLR 184. Considered at 5.29–5.30 and in further detail at 3.76–3.84. However, it is prudent (although, in our view, not strictly necessary) to provide expressly that the duty continues during garden leave.

•

The contract must be clear as to what constitutes ‘garden leave’ for the purpose of any offset provision (ie where post-termination restriction periods are reduced by any time spent on garden leave). Garden leave clauses have typically been drafted to give the employer a range of options including taking away certain duties from the employee, requiring him to undertake entirely different duties or excluding him entirely from the business and from his colleagues, with all of the options falling under the loose description of garden leave. The question then becomes which if any of those options trigger the reduction of the length of the covenants – see Ashcourt Rowan Financial Planning Limited v Hall [2013] IRLR 637 (considered at 5.124). Given the importance of ensuring clarity in determining exactly what time should be deducted from the post-termination restriction period and the desire to avoid a situation such as that which arose in Ashcourt, we have drafted our garden leave precedent clause below on the basis that it only covers complete exclusion from the employer’s business and that the employee will not perform any duties during this period. We have therefore included an additional precedent clause at 5.137 which covers the employer’s ability to require the employee to perform alternative duties for all or any part of the notice period. We have labelled this as the ‘Alternative Duties – Notice Period’ clause. When including an alternative duties clause care needs to be taken to ensure it does not cut down any general right of the employer to vary the employee’s duties (see 5.61–5.65). Our precedent addresses that issue by providing the right is without prejudice to any other provisions of the Agreement. Precedent – Senior Executive (Garden Leave) 1.1 Once notice to terminate the Executive’s employment has been given by either party or if the Executive purports to terminate his employment in breach of contract, for the whole or any part of the notice period required by Clause [insert number of notice clause], the Company:

302

Terms pertaining to termination 5.129

1.1.1 shall be under no obligation to vest in or assign any powers or duties to the Executive and the Executive shall have no right to nor shall he perform any duties or services for the Company [or any other company in the Group]; 1.1.2 may prohibit contact and dealings between the Executive and the customers, prospective customers, suppliers, employees, officers, independent contractors, agents, shareholders, advisers and business contacts [insert any other relevant categories] of the Company [or any other company in the Group]; 1.1.3 may exclude the Executive from any premises of the Company [or any other company in the Group]. 1.2 During any period or periods in which the Company exercises its rights under Clause [insert number of clause above] the Executive shall: 1.2.1 comply fully with all directions given to him by the Company in accordance with clause [insert number of clause above] or this clause [insert clause number]; 1.2.2 remain available for work as requested by the Company; 1.2.3 notify the [insert title of Company officer] immediately in writing of any change of address or contact details; 1.2.4 remain an employee of the Company and continue to be bound by the express and implied terms of this Agreement including but not limited to his duty of fidelity and good faith and his obligations under [insert clause number setting out the Executive’s duties of reporting and disclosure]; 1.2.5 continue to receive his Salary and any contractual benefits in the usual way and subject to the rules of any relevant schemes in force from time to time; 1.2.6 not commence any other employment or engagement; 1.2.7 where any person or organisation with whom the Company has directed the Executive to have no dealings, contacts or attempts to contact the Executive, immediately inform [insert title of company officer] of the details of the contact or attempted contact; and 1.2.8 take any holiday accrued or which will accrue during any period the Company exercises its rights under [insert number of clause above] as directed by the Company. Note: This precedent is based on the following assumptions: •

that both the Executive and the Company are required to give the same period of notice to terminate the contract;

•

that the notice period is not more than 12 months; 303

5.130  Express terms of the contract of employment

•

that ‘Salary’ is a defined term in the contract; and

•

that there is a total ban on outside activities during employment.

5.130 Note also the importance of ensuring that all relevant complementary clauses addressing matters such as resignations from directorships, return of property and communications are included in the contract see 5.133–5.143. 5.131  Suitable adjustments may be necessary where the facts are different. For example, say the notice period is two years. In those circumstances the draftsman will need to think carefully how he structures the employer’s options and, in particular, how the options of alternative duties, garden leave and payment in lieu of part of the notice period might work together. So for example, a way forward may be alternative duties for a period, followed by garden leave with the balance of notice being paid in lieu. The best route is almost certainly to keep maximum flexibility for the employer, although it would be prudent in our view to provide expressly that the garden leave is capped at 12 months, which in any event is likely to be the maximum period any employee will accept. In considering the combination of the options it also has to be recognised that once an employee has been sent on garden leave, it is extremely unlikely that any return to active service will be a practical proposition. It is only likely to happen in the most unusual commercial circumstances (for example in the case of a sale of the business). 5.132  Our garden leave precedent is drafted on the basis that the employer is able to require the employee to be entirely separated from the business. If the draftsman follows our suggestion of providing for a garden leave clause and an alternative duties notice period clause, it is important that any offset provision contained in any post-termination restrictions must be linked only to the garden leave period as set out in the garden leave clause (see Ashcourt Rowan Financial Planning Limited v Hall [2013] IRLR 637, discussed at 5.124). 5.133 As a ‘belt and braces’ measure to complement a garden leave clause, wherever commercially possible the contract should also include a provision to the effect that the employer has no obligation to provide work, nor has the employee any right to perform services. This provision should apply generally during the currency of the contract. Precedent – Senior Executive Nothing in the Agreement shall mean or be deemed to mean that the Company is obliged to provide work to the Executive or that the Executive has the right to perform services for the Company [or any other company in the Group]. Note: The word ‘Group’ should be defined in the service agreement; see 5.10–5.14. 5.134  Where the employee is a statutory director, particularly one with specific responsibilities, such as a managing director or finance director, some thought will need to be given to the interaction of a garden leave provision with the individual’s responsibilities as a director. In practice, directors may well resist 304

Terms pertaining to termination 5.136

the inclusion of such a provision precisely because of the tension it could create with their statutory directorship. The solution to this problem is for the contract to provide that the employee is required to resign as a director if the employer sends the employee on garden leave: see our precedent resignation clause at 5.144. 5.135  Previously in this chapter we have referred to various express terms which we recommend should be included in the contract. A number of these terms are necessary to maximise the effectiveness of a garden leave clause, and it is worth identifying them collectively; they are: •

A statement of the duty of fidelity phrased in both a positive and negative way (see 5.15).

•

A working hours clause (see 5.16–5.23).

•

A  prohibition on the employee undertaking outside activities possibly limited to activities of a competitive nature (at least during any garden leave period, although arguably this is not absolutely necessary): see 5.24–5.34. Where the prohibition is partial (so that, for example, non-competitive work is permitted), it will be sensible to consider giving the employer a right of offset of any sums received by the employee from other employment during the garden leave period against sums due from the employer; see Gregory v Wallace [1998]  IRLR  387). In Gregory, the claimant was entitled to damages for wrongful dismissal, however the employer was not able to set-off by way of mitigation the sum Gregory was receiving from full-time employment because (unusually) that full-time employment was expressly permitted by the contract.

•

A confidentiality clause (see 5.44).

•

A notice period of sufficient length to make the garden leave meaningful (see 5.94–5.97).

5.136  An employer taking the trouble to include an express garden leave clause, and all the complementary provisions identified above, should also include the following provisions (which should also be included where a clause is included providing for alternative duties during the notice period for which see 5.137): •

An obligation on the employee to return property (excluding contractual benefits) at any time on request, or (if this is too broad, and it may be – particularly in relation to some property in the case of a director), at the very least at any time after notice to terminate has been given or the employee has purported to resign in breach of contract; see 5.138–5.141.

•

A provision making communications regarding the employee’s departure the sole preserve of the employer except where expressly authorised by the employer; see 5.122.

•

A right to call for the employee’s resignation from all offices held as a result of the employment at any time after notice to terminate has been given or the employee has purported to resign in breach of contract; see 5.142–5.145. 305

5.137  Express terms of the contract of employment

5.137 As an alternative to garden leave we have suggested that the draftsman also include a right for the employer to allocate alternative duties during the notice period. An example of this type of clause is included below: Precedent – Senior Executive (Alternative Duties – Notice Period) Once notice to terminate the Executive’s employment has been given by either party, or if the Executive purports to terminate his employment in breach of contract, without prejudice to any other provisions of this Agreement the Company may in its sole and absolute discretion require the Executive to perform only such duties, specific projects or tasks as are assigned to him expressly by the Company, in any case for such period or periods and at such place or places (including, without limitation, his home) as the Company may decide.

3(e)  Return of property 5.138  Every contract of employment should as a minimum include a term that the employee shall return all the employer’s property and property of any relevant group companies/organisations when the relationship terminates. Where the contract includes a garden leave clause (as most now do following the Court of Appeal’s decision in William Hill Organisation Ltd v Tucker [1999] ICR 291 (see 15.28–15.29)) or the right to put the employee on alternative duties once notice has been given, or the employee has purported to terminate in breach, it is prudent for the employer to have the right to require return ideally at any time on request or alternatively at least when either option is activated. Where a provision for the return of property prior to termination is included care needs to be taken to exclude from the obligation any property provided as a contractual benefit, for example a car. If that type of property is not excluded, there will be a potential conflict with the clause providing the benefit. So for example, a garden leave clause will usually provide that all contractual benefits (with the possible exception of bonus see 5.129) are continued. 5.139  Some employers omit an obligation to return property from their contracts on the ground that it is no more than a statement of their common law right to have their property returned on request. While an express clause will invariably incorporate that right, it can also improve the employer’s position in the following ways: •

By providing that property is to be returned automatically on employment terminating, the employee is on notice of the position from the outset.

•

Where the contract provides that notes, records or documents made or compiled by the Executive during his employment are the property of the employer, it can ensure that property is delivered up even if the actual physical property (eg a diary, notebook, laptop/hard drive or memory stick) belongs to the employee.

•

It can set out an administrative mechanism for dealing with the return of property under which the employee lists the property returned and warrants that he has retained nothing in any form (including any copies of company

306

Terms pertaining to termination 5.140

property). Not only is this a useful reminder to ensure that the mechanics of return are gone through but it can also be a significant practical deterrent to an employee proposing to keep, for example, a crucial customer list. Unless he is prepared to lie about documents returned, his only other option is to be evasive about the procedure, which in itself will arouse the employer’s suspicions. A precedent incorporating all these features is set out below. Where return occurs either at termination or on an employee being sent on garden leave, a well-organised employer will deal with all these administrative matters as part of a managed exit process including an exit interview. 5.140  Since it is common for employees to use personal computers, mobiles or handheld devices at home to work on their employer’s business, it is also important to include an obligation requiring the irrevocable deletion of information relating to the employer’s business and, where relevant, that of the Group from the employee’s personal computer systems and mobile/handheld devices. However, prior to that obligation being triggered it is vital that the employee is first required to deliver an electronic copy to the employer, together with a list of its contents and for the employer to have reviewed and checked the copy and confirmed in writing that the employee should delete the information. This is for two reasons: first, because in rare instances it may be the only copy of the information available and, secondly, because if subsequently the employer has reason to believe that the employee is threatening to compete, it can be a very useful source of the information to which he had access at a relevant time. In some instances it can provide the key evidence on which the employer secures an injunction. Nowadays, it is common for employers to have a bring your own device policy, which specifically deals with information stored on personal computers, mobile and handheld devices and those types of policy are discussed at 8.126–8.127). How sophisticated the procedures for enforcing these types of obligation will need to be will depend on the level of risk associated with the employee being able to retain and have access to information of the employer and/or the Group of which the employer is part. In cases of significant risk it may be necessary to include a mechanism under which an information technology expert has access to the employee’s equipment to ensure all procedures, including deletion, are executed correctly. Precedent – Senior Executive 1.1 Upon the termination of the employment or earlier on request of the Company the Executive shall subject to Clause 1.2: 1.1.1 not use or access or facilitate any use of or access to any property in his possession, custody or under his control belonging to or relating to the Company [or any other company in the Group] including but not limited to keys, credit cards, computers, laptops, tablets, mobile phones, passwords, security and computer passes, facsimile machines and all documents and other records (whether on paper, in electronic format or in any other form and including correspondence, lists of clients or customers, notes, memoranda, software, plans, drawings and other documents and records of whatsoever nature and all copies thereof) made or compiled or 307

5.141  Express terms of the contract of employment

acquired by the Executive during his employment hereunder and concerning the business, finances or affairs of the Company [or any other company in the Group] or its [or their] customers or suppliers (‘Company Property’). 1.1.2 immediately deliver up to [insert title of Company officer] at [insert address] all physical items of Company Property together with a list setting out each item of Company Property returned. The Executive shall also sign a statement in which he warrants that he has not retained any Company Property in any form whatsoever. 1.1.3 immediately deliver on a disc or USB stick, electronic copies together with a complete list of the same to [insert title of Company officer] at [insert address] of all Company Property held on any personal computer, mobile or any other handheld device, and/ or word processing system in his possession or under his control to [insert title of Company officer] at [insert address] and thereafter, subject to having received written confirmation from [insert title of Company officer] of safe receipt, when instructed to do so by written instruction from [insert title of Company officer] immediately and irrevocably delete all such information. The Executive shall not delete any information belonging to the Company unless instructed to do so by [insert title of Company officer]. 1.1.4 immediately permit the Company to inspect any property in his possession, custody or under his control which may contain information belonging to or relating to the business finances or affairs of the Company [or any other company in the Group] or its [or their] customers or prospective customers or suppliers and to delete any such information. 1.2 Where the Company exercises its rights pursuant to Clause [insert clause number of garden leave clause] the Executive shall not be obliged to return any property provided to him as a contractual benefit immediately. The Executive shall return such property immediately on the termination of this Agreement to [insert title of Company officer] at [insert address]. 1.3 If so requested the Executive shall on each occasion he is obliged to deliver up property or delete information pursuant to this Clause 1 provide to the [insert title of Company officer] a signed statement confirming that he has fully complied with his obligations under this Clause 1. Note: The word ‘Group’ should be defined in the service agreement; see 5.10–5.14. 5.141 There is one practical point that needs to be borne in mind before an employer exercises the right to delivery up of any property belonging to it as set out in this precedent. There might be instances where it would be beneficial to allow the employee to keep the property in question, for example a mobile phone 308

Terms pertaining to termination 5.143

or laptop – this might be done to monitor the employee’s competitive activities. This would need to be balanced against the risk of the employee using confidential information and the employer’s property to their own advantage and causing harm to the employer’s business. There are two other points to be made regarding this precedent. First, we have provided that property will be returned at any point on request. However, it is rare for return to be needed before (at the earliest) a garden leave clause is activated, except possibly where an employee is suspended due to a disciplinary investigation. Secondly, this precedent pre-supposes that it is clear what items of property are provided to the Executive as contractual benefits. It is crucial that clarity is achieved on this point, not only for the purposes of this clause, but also to avoid any argument of breach where the employee is sent on garden leave. Employers should state clearly in their service agreements what benefits are contractual. Where an additional item of property, for example a mobile phone, is provided after the service agreement has been signed, the employer should make it clear at the time he first agrees to provide the benefit whether or not it is being provided as a contractual benefit. To avoid arguments precisely on this point, some service agreements now specifically provide that, with the exception of benefits referred to in the agreement, all benefits are deemed to be non-contractual. While such a provision may not be determinative in every case, it will certainly resolve many potential disputes and is worth including. Set out below is a sample clause. Precedent – Senior Executive Any benefits and/or property provided by the Company [or any other company in the Group] to the Executive [or his family] which are not expressly referred to in this Agreement shall be provided to and be enjoyed by the Executive [or his family] at the absolute discretion of the Company [or relevant Group company] and shall not form part of the Executive’s contractual entitlements. Note: The word ‘Group’ should be defined in the service agreement; see 5.10–5.14.

3(f)  Resignation from offices 5.142  Where an employee is also a director of the employing company, or any other company within the same group or holds any office as a result of his employment, and the service agreement includes a garden leave provision, it is sensible to include a clause requiring him to resign from the office when he is sent on garden leave or, if he is not, on termination of employment and, in the event of default, entitling the company to appoint someone else to resign on his behalf. Our precedent resignation clause has been drafted with resignation from any offices, including directorships, taking place on this basis; see 5.144. Alternatively, the obligation can be framed so that it operates automatically, for example, once the employee is sent on garden leave or is triggered by a request from the employer made at any time although this last option is unlikely to be acceptable to many senior employees and is not an option we would generally recommend. 5.143 Traditionally, a clause requiring a director to resign on termination of employment was included as a matter of administrative convenience. It enables 309

5.144  Express terms of the contract of employment

a company to circumvent the procedural requirements of sections 168 and 169 Companies Act 2006, should the employee not tender his resignation although in practice it is rare for an employee engaged in competing activities to withhold his resignation. Normally such an employee would prefer to attempt to divest himself of his fiduciary duty as a director at the earliest opportunity. However, directors generally delay doing so until, at the earliest, the time of giving notice to terminate employment because of the suspicion which earlier resignation would arouse. With the increasing popularity of garden leave clauses, this type of clause has acquired two additional functions in the context of an employee who is sent on garden leave. First, by giving the right to remove the employee as a director, it deprives the employee of the argument that sending him on garden leave was a repudiatory breach. Secondly (if the employee is required to resign as a director), he is legitimately deprived of all access to up-to-date confidential information. 5.144  In the rare cases where the employee does not tender his resignation, the second limb of the clause operates. It should, however, be remembered that, like all other provisions in a service agreement, it will not survive an accepted repudiatory breach: General Billposting v Atkinson [1909] AC 118 (HL), which is considered in Chapter 9. Precedent – Director Upon termination of this Agreement howsoever arising [or at any time after the Company has exercised its rights pursuant to Clause [identify garden leave clause] or Clause [allowing for alternative duties during notice]] the Executive shall within three days of a request from the Company resign from his office as a director of the Company and all offices held by him in any other companies in the Group or otherwise as a result of his employment and his membership of any organisation acquired by virtue of his tenure of any such office, and should he fail to do so he hereby irrevocably authorises [the Company Secretary] in his name and on his behalf to sign any documents and do anything necessary or requisite to give the Company the full benefit of this Clause. Note: the word ‘Group’ should be defined in the service agreement; see 5.10– 5.14. Since the clause includes a power of attorney, the agreement needs to be executed as a deed by the employee: section 1(1) Powers of Attorney Act 1971. 5.145  When including a clause along the lines of the precedent, the draftsman needs to think carefully how it will interact with other parts of the service agreement. It is not unusual for service agreements to provide either that resignation as a director automatically triggers termination of the agreement, or that it gives the employer a power of summary dismissal. Bearing in mind that the primary function of this type of clause in the context of this book is in support of garden leave, it would be very unfortunate if exactly the opposite effect were achieved as a result of the draftsman failing to ensure that a resignation under this type of clause did not trigger, for example, an automatic termination provision. Also, where the employee’s job title and description specifically reflects his position 310

Terms pertaining to termination 5.148

as a director (eg  managing director), the employer should reserve the right to change the title at the same time as requiring the employee’s resignation as a director. By doing so, not only is yet another alleged ground for repudiatory breach removed, but in appropriate cases it also allows the employer to appoint a replacement director without risk of any breach of the company’s Articles of Association (eg because the employee is the managing director and the Articles of Association do not allow for two such office holders).

3(g)  Miscellaneous terms 5.146 Finally, having included all the express terms referred to above, the employer should also include three key ‘boilerplate clauses’ which will determine how those terms are interpreted by the courts. These clauses commonly appear under a section at the end of the service agreement headed ‘Miscellaneous’ or ‘General’ and are as follows: •

a governing law clause;

•

an entire agreement clause (including a restriction on variation); and

•

a clause addressing the status of headings in the service agreement and confirmation that any references to clauses, schedules or appendices are to clauses, schedules and appendices in the service agreement.

5.147 As a general rule, and subject to certain exceptions, the parties to an employment contract are free to choose which law they wish to govern their agreement – see 17.95. To avoid potentially costly disputes as to the relevant law, it is advisable for the parties to include a governing law clause in the contract. A typical example is set out below. For a full discussion on governing law, see 17.90–17.130. Some contracts will also include a clause nominating a jurisdiction for the determination of any disputes. Issues of jurisdiction are complex and are addressed in Chapter 17. Precedent – Senior Executive This Agreement shall be governed by and interpreted in accordance with English law. 5.148  The function of a well drafted entire agreement clause is twofold, it records which document(s) contain the agreement between the parties and precludes reliance on, and remedies for, any matters which preceded the final document(s). Typically, for a senior employee the service agreement is preceded by both oral discussions and then a series of draft agreements. As the arrangements are negotiated it is by no means uncommon for the deal between the parties to change significantly. From the employer’s perspective he will want certainty that the terms finally agreed are those by which the employee will be bound and that the employee cannot undermine those terms by reliance on the pre-contract negotiations or representations. The normal rule is that parties who have reduced their agreement to writing cannot rely on the pre-contract negotiations in interpreting the written agreement (see 12.25–12.31 311

5.149  Express terms of the contract of employment

for the modern approach to the construction of contracts). However, in the absence of an entire agreement clause there is scope for the employee to argue that, for example, the service agreement relied on by the employer is only part of the overall agreement or that he was induced to enter into the agreement based on a representation made by the employer. For this reason, inclusion of an entire agreement clause along the lines suggested below is recommended. 5.149  Also, employers often include a provision that any variation of the agreement is only valid if agreed in writing by both parties and sometimes, in the case of the employer, only with the authority of a nominated officer. We have incorporated wording in the precedent below to cover this. However, whilst these clauses may have some commercial deterrent effect following two recent Court of Appeal cases currently they cannot be relied upon to defeat an argument that a contract has been varied orally or by conduct. The Court of Appeal in the recent case of Globe Motors Inc v TRW Lucas Variety Electric Steering Ltd [2016] EWCA Civ 396 raised considerable doubt as to the effectiveness of such anti-oral variation clauses. The case concerned a dispute arising out of a supply agreement between Globe Motors and TRW for the provision of certain products from Globe Motors relating to electric motors for cars. The agreement contained the following entire agreement clause: ‘6.3 Entire Agreement; Amendment: This Agreement, which includes the Appendices hereto, is the only agreement between the Parties relating to the subject matter hereof. It can only be amended by a written document which (i) specifically refers to the provision of this Agreement to be amended and (ii) is signed by both Parties’. The dispute related to a mechanism for agreeing engineering changes to certain products. Beaston LJ made the following obiter comments (at paragraph 100): ‘The parties have freedom to agree whatever terms they choose to undertake, and can do so in a document, by word of mouth, or by conduct. The consequence in this context is that in principle the fact that the parties’ contract contains a clause such as art 6.3 does not prevent them from later making a new contract varying the contract by an oral agreement or by conduct.’

In MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] 3 WLR 1519, the Court of Appeal endorsed the position taken in Globe. MWB concerned a dispute about arrears of licence fees between a landlord and tenant. The Court of Appeal held that a clause permitting only written variations to the contract did not prevent a valid oral variation. In our view, this applies equally to employment contracts (including those executed as a deed, provided that there was consideration for the variation: see Chitty on Contracts (32nd edition), Volume 1, Chapter 1 (at paragraphs 1–143)), which are now regarded as no different from other contracts. The authorities prior to Globe and MWB were inconsistent on the effectiveness of anti-oral variation clauses (see United Bank Ltd v Masood Asif [2000] EWCA Civ 456 which supported the view that anti-oral variation clauses are effective, compare World Online Telecom Ltd v I-Way [2002] EWCA Civ 413, which took the view that, in the words of Sedley LJ, ‘the parties have made their own law by contract, and can in principle unmake or remake it’). Globe and MWB reaffirm the principle of freedom of contract. MWB has been appealed to the Supreme Court. The appeal was heard on 1 February 2018 and judgment is currently awaited. 312

Terms pertaining to termination 5.151

Pending the outcome of the appeal since an anti-oral variation clause may still have some deterrent effect, and in any event will do the employer no harm even if it does him no good, we have included such a provision in our precedent below. Precedent – Senior Executive This Agreement [together with name specific documents that are to form part of the agreement]] contains the entire understanding between the parties and supersedes all (if any) subsisting agreements, arrangements or understandings (written or oral) relating to the employment of the Executive which such agreements, arrangements or understandings shall be deemed to have been terminated by mutual consent.The Executive acknowledges that in entering into this Agreement [and the documents referred to in it] he has not ­relied on, and shall have no right or remedy in respect of, any representation, statement, assurance or warranty made by or on behalf the ­Company [or any other company in the Group]. Nothing in this clause shall limit or exclude any liability for fraud. Any variation of this Agreement shall not be effective unless agreed in writing and signed by both parties. Note: The word ‘Group’ should be defined in the service agreement; see 5.10–5.14. 5.150  In interpreting a service agreement, a court is entitled to look at all the words used in the agreement. Often the headings used in service agreements are shorthand terms designed primarily to help the parties navigate their way through the agreement rather than words used with any great precision. In view of this, it is common practice to provide that the headings are not to be used in the construction or interpretation of the Agreement and we have included this type of provision in our precedent below. It is also common practice to provide that Schedules to an agreement form part of the agreement and that, to avoid disputes, references to clauses are generally to clauses within the agreement unless that is obviously not so. Our precedent below includes wording to address that issue also. Precedent – Senior Executive 1.1 The headings in this Agreement are for convenience only and shall not affect its construction or interpretation. 1.2 The Schedules [or Appendices] form part of this Agreement and shall have effect as if set out in full in the body of this  Agreement. Any reference to this  Agreement  includes the Schedules [or Appendices]. References to any clauses shall unless the context otherwise permits be to clauses in this Agreement. By including a provision of this sort the draftsman has flexibility to use short headings that do not necessarily encapsulate the whole subject matter of a clause but are nonetheless a practical way of guiding the parties through the service agreement. 5.151  Finally, it would be remiss not to touch very briefly on alternative dispute resolution, as some employers may want to consider including an alternative 313

5.151  Express terms of the contract of employment

dispute resolution clause in the employment contract. The two types of alternative dispute resolution options that are sometimes found in employment contracts are mediation and arbitration. Although an employee cannot be prevented from bringing a claim in an employment tribunal, there can be some benefits in incorporating such a clause: • •

• •

It can result in keeping any dispute out of the public arena through the confidentiality of the alternative dispute resolution process. It may deter the employee from bringing a claim in an employment tribunal or in the High Court, and provide for the process to take place on pre-agreed terms and, particularly in the case of mediation provide the opportunity for solutions to be found which would not be available in formal proceedings. There may be significant savings in legal and management costs. It may achieve a lasting solution which has been created and owned by the parties involved.

We set out below two precedent clauses – one for mediation and one for arbitration. The mediation clause is a model clause that is recommended by the Centre for Effective Dispute Resolution (CEDR). The arbitration clause is a model clause recommended by the London Court of International Arbitration (LCIA), which is the most well-known arbitration body in the UK. Mediation is discussed in further detail in Chapter 18. Precedent – Senior Executive (Mediation) If any dispute, complaint or disagreement arises in connection with this Agreement, the parties will consider resolving it by mediation in accordance with [the Company’s Mediation Policy] [the CEDR model mediation procedure] before engaging in any adversarial procedure. Unless otherwise agreed between the parties, the mediation service provider, CEDR, will nominate the mediator. Mediation is a confidential process and will be entered into both voluntarily and in good faith, and neither party, by entering into such a process will waive their respective statutory or contractual employment rights. Precedent – Senior Executive (Arbitration) Any dispute arising out of or in connection with this Agreement, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause. The number of arbitrators shall be [one/three]. The seat, or legal place, of arbitration shall be London. The language to be used in the arbitral proceedings shall be English. The governing law of the contract shall be the substantive law of England and Wales 314

CHAPTER 6

Confidential information Selwyn Bloch QC and Craig Rajgopaul Introduction Different kinds of business information Practical effect of the distinction between different types of information Summary of practical effect of distinction between the different types of business information When is it necessary to distinguish between trade secrets, mere confidential information and general skill and knowledge? Uncertainty in the law regarding different categories of information 1. Requirements of confidential information 1(a) Quality of confidence 1(b) Circumstances importing an obligation of confidence 1(c) Detrimental breach

6.1 6.3 6.4 6.4 6.6 6.7 6.10 6.12 6.17 6.19

2. Distinction between trade secrets, mere confidential information and skill and knowledge: detail 6.21 2(a) Definition of trade secrets 6.24 2(a)(i) The nature of the employment 6.25 2(a)(ii) The nature of the information itself 6.26 2(a)(iii) Whether the employer impressed on the employee the confidentiality of the information 6.27 2(a)(iv) Whether the information can be easily isolated from other information which the employee is free to disclose 6.30 2(a)(v) Application of the Faccenda principles6.31 2(b) Other definitions of trade secrets 6.35 2(c) EU Trade Secrets Directive definition of trade secrets 6.39 2(d) Impact of European Convention on Human Rights and Human Rights Act 1998 and possible effect on definitions of trade secrets and confidential information 6.41 2(d)(i) Protection of privacy versus protection of confidentiality 6.46 2(d)(ii) Effect of European Convention on Human Rights on definition of confidential information/trade secrets? 6.50 2(e) Case study on trade secrets: Faccenda in detail 6.55 2(e)(i) The facts 6.55 2(e)(ii) The arguments 6.57 2(e)(iii) Special case: where the ex-employee wishes to sell the information6.61 2(e)(iv) Particular example: pricing information 6.63 2(f) Conclusion regarding the distinction between trade secrets and mere confidential information 6.64 315

6.1  Confidential information

2(g) Distinction between general skill and knowledge and confidential information/trade secrets (including relevance that information is remembered) 6.68 2(h) Non-confidential information 6.76 2(i) Can (mere) confidential information be protected by express covenant?6.80 2(i)(i) Faccenda6.83 2(i)(ii) Cases after Faccenda6.84 3. Express confidentiality covenants

6.98

4. Confidential information must be properly identified

6.113

5. Restricted shelf life of confidential information

6.120

6. Confidential information received by third parties

6.122

7. Injunctions to protect confidential information affecting vested rights of third parties

6.129

8. Confidential information disclosed in pre-employment period

6.131

9. Jointly owned confidential information

6.136

10. Defences 6.137 10(a) Publication 6.138 10(a)(i) When will publication destroy confidentiality? 6.138 10(a)(ii) How management can protect confidential information which needs to be circulated to the workforce 6.142 10(b) Public interest defence 6.143 10(b)(i) Distinction between public interest and what may be interesting to the public 6.148 10(b)(ii) Narrow category of wrongs 6.153 10(b)(iii) Broader category of wrongs 6.154 10(b)(iv) Examples of broader category wrongs 6.155 10(b)(v) On what evidence may the employee disclose? 6.156 10(b)(vi) Disclosure to whom? 6.159 10(b)(vii) Bad faith on the part of the employee 6.163 10(b)(viii) Distinction between public interest defence (breach of confidence) and defence of justification in defamation 6.164 10(c) Effect of repudiatory breach of contract in relation to breach of confidence6.167 10(d) Whistleblowing 6.168 Appendix to Chapter 6

INTRODUCTION 6.1  In Chapter 1 we referred to the potential conflict which is inherent in the relationship of employer and employee. In this chapter we consider one of the aspects of the employment relationship which is often the key source of conflict 316

Introduction 6.2

between employer and employee, namely business information of the employer which the employee acquires in the course of his employment. We shall deal with: •

Different kinds of business information (6.3–6.9).

•

Requirements of confidential information (6.10–6.20). Later (at 6.70) the important point is made that the fact that certain information is remembered by an (ex-)employee has no bearing on whether or not it is confidential. Indeed, memorable confidential information will often be exactly the kind of information which the (ex-)employer will be concerned to protect.

•

The distinction between the different kinds of business information of an employer which an employee may receive during employment (6.21–6.97); in particular: >

trade secrets;

>

(mere) confidential information;

>

information which is (or has become) part of the employee’s own general skill and knowledge.

•

The extent to which the employer can by express covenant protect his mere confidential information, which is not automatically protected by the general law (6.98–6.112); at 6.112 we draw together the threads in relation to mere confidential information, what it is (especially when it is remembered by the (ex-)employee) and how it may be protected.

•

The requirement that the employer, who seeks to have the court protect trade secrets or confidential information, must be able to identify precisely the information in question (6.113–6.119) – this is often more difficult than might at first appear.

•

The duration of the duty of confidence (6.120–6.121).

•

The position of third parties such as a (proposed) new employer to whom confidential information of the (ex-)employer is disclosed (6.122–6.128).

•

Injunctions affecting the rights of third parties (6.129–6.130).

•

Confidential information disclosed pre-employment (6.131–6.135).

•

Jointly owned confidential information (6.136).

•

The principal defences to breach of confidence claims – namely publication and public interest – and we also consider the defence that confidence has been destroyed by the repudiatory breach by the employer of the contract of employment (6.137–6.167).

•

The impact of ‘whistleblowing’ protection (6.168–6.169).

6.2  Our focus in this chapter: •

Is on confidential information/trade secrets received in the course of commercial employment rather than ‘privacy’ cases involving ‘kiss and tell’ revelations in the context of other contractual relationships. While we do touch 317

6.3  Confidential information

on this sort of case – and in particular on the effect of the European Convention on Human Rights in this connection – we conclude that the Convention does not affect substantially the issues which arise in ordinary employment cases (but see 14.80–14.82 regarding the effect of section 12 Human Rights Act 1998 on interim injunctions in relation to confidential information). •

Is not on the theoretical underpinning of breach of confidence claims. Therefore, we do not dwell on whether such a claim is founded in contract or in equity, given that in employment cases there will always be a contract of employment and there is generally no practical distinction to be drawn between claims made on one or the other basis (see for example Marathon Asset Management LLP v Seddon [2017] ICR 791 at paragraphs 121–123). There is a possible exception where an employee claims that the contract of employment has been terminated upon repudiatory breach by the employer. Here, the employer may argue that even if the contractual underpinning of confidential information has gone, the duty of confidence in equity remains: see 6.167 and 6.107–6.108.

Different kinds of business information 6.3  In the decisions of the courts dealing with information which an employee may acquire in the course of employment, reference is made to four kinds of business information. In descending order of significance to the employer they are information which: (a) is especially confidential so as to amount to trade secrets or their equivalent (which we generally refer to below as ‘trade secrets’); (b) is merely confidential (which we generally refer to below as ‘mere confidential information’); (c) amounts to general skill and knowledge of the employee (which we generally refer to below as ‘skill and knowledge’); (d) is trivial or easily accessible from public sources. Only information in categories (a) and (b) amount to protectable or ‘proprietary’ information of the employer. Although the word ‘proprietary’ has long been used, in Douglas v Hello! (No 6) [2006] QB 125 (at paragraph 119) the Court of Appeal held that confidential or private information which is capable of commercial exploitation but which is only protected by the law of confidence does not fall to be treated as property that can be owned and transferred. In similar vein see Douglas v Hello! [2008] 1 AC 1 per Lord Walker (at paragraphs 275–277 and 282). Accordingly, the expression ‘proprietary’ used in this chapter does not mean (transferable) property but is instead generally used to denote information that is a trade secret of the employer or (if not a trade secret) which can be traced to the employer’s stock of confidential information and which has not become merged with the general skill and knowledge of the employee: see Force India Formula One Team v Aerolab [2013] RPC 36 discussed at 6.74. 318

Introduction 6.5

Practical effect of the distinction between different types of information Summary of practical effect of distinction between the different types of business information 6.4  In view of the complexity of the law on this subject we set out an initial summary of the practical effect of the distinction between the different types of business information: •

•

•

Trade secrets of the employer will be protected: >

even after termination of employment; and

>

even though there is no express covenant relating to such information.

Mere confidential information will only be protected during employment and not thereafter. To this there are two exceptions: >

Express covenants: the employer may obtain protection over such information after termination of employment by means of a properly drafted express covenant, especially a non-competition covenant or (we suggest) by a properly drafted express confidentiality covenant (see 6.98–6.112), provided the information cannot fairly be regarded as part of the employee’s general skill and knowledge, ie does not fall into category (c) at 6.3.

>

Springboard injunctions: where the employee misuses confidential information of the employer so that he gains for himself an unfair head start over the (ex-)employer, even if the information is no longer confidential (eg  because the information has been widely published after the termination of employment) the (ex-)employee may nonetheless be prevented by injunction for a limited period from using this head start – so placing him under a special disability for a limited period from using this information. Typically, such a ‘springboard’ injunction will apply to an ex-employee who during employment removes a customer list for the purposes of competing with the ex-employer and after employment uses the list. The ex-employee may be prevented from dealing after employment, even with customers whose names he can remember without using the list. Springboard injunctions are discussed in detail at 15.78– 15.152.

It is impermissible (as being against public policy) to seek to prevent an ex-employee from using his general skill and knowledge after termination of employment.

6.5  These principles are derived from, among others, the decisions of the Court of Appeal in Faccenda Chicken Ltd v Fowler [1987] Ch 117, Roger Bullivant Ltd v Ellis [1987] IRLR 491, Johnson & Bloy (Holdings) Ltd v Wolstenholme Rink plc [1987] IRLR 499 and PSM International plc v Whitehouse [1992] IRLR 279. 319

6.6  Confidential information

When is it necessary to distinguish between trade secrets, mere confidential information and general skill and knowledge? 6.6  In practice, it is necessary to distinguish between these categories of information in two different situations: •

Where there are no express restrictive covenants in the employment contract (for example, prohibiting competition after employment), the ex-employer may want to restrain the ex-employee from competing with the ex-employer by his using or disclosing information concerning the ex-employer’s business (which the ex-employee acquired in the course of his employment); generally the ex-employer will only be able to restrain use or disclosure of information which is so confidential as to amount to a trade secret or which is equivalent to a trade secret.

•

Where there are express restrictive covenants in the employment contract, the question is whether the employer can by way of those express covenants gain protection over mere confidential information, which the general law would not otherwise protect after termination of employment. There is some uncertainty as to whether an express covenant can achieve this end, although the consensus now is that it can (particularly by means of a properly drafted non-competition covenant, but also, we suggest, by means of a properly drafted express confidentiality covenant), except in relation to information which can fairly be regarded as the employee’s skill or knowledge. The employer cannot by express covenant prevent the use by the employee after employment of information which amounts to his general skill and knowledge. As regards express confidentiality covenants, (see more fully 6.98–6.112), categorising certain kinds of information in express confidentiality covenants as being confidential or a trade secret may assist the employer to gain protection for such information, by making it clear that the employer does not intend such information to be regarded as being or becoming part of the employee’s general skill and knowledge but, on the other hand, the employer cannot by labelling render information confidential if it intrinsically does not have the quality of confidentiality.

Uncertainty in the law regarding different categories of information 6.7 The validity and extent of the distinction between categories (a), (b) and (c) referred to at 6.3 are not universally apparent from the reported cases on the subject. Whilst it is clear that general skill and knowledge must be distinguished from ‘confidential information’ generally (‘confidential information’ being used to denote categories (a) trade secrets and (b) mere confidential information taken together), there is often a blurring of the distinction between (b) (mere confidential information) and (c) (skill and knowledge). Equally there is often a lack of clear distinction between (a) (trade secrets) and (b) (mere confidential information). 320

Requirements of confidential information 6.10

6.8  It is often not too difficult to distinguish between genuine trade secrets of the employer, such as secret processes of manufacture, and general skill and knowledge acquired by the employee in the course of his employment, such as knowledge of general scientific and technical principles and methods. However, between these two extremes there is an intermediate area of information, where it is extremely difficult to differentiate between that which is the employer’s confidential information and that which the employee may properly regard as his own skill or knowledge. An example of this is the identity of the employer’s customers or even manufacturing knowledge which, although particular to the employer’s process, has become part and parcel of the employee’s general knowledge. It is in this intermediate area that a controversy has developed, namely the extent to which an employer can by express covenant protect such information which would not, without such express covenant, be protected by the general law. 6.9  The law relating to both the kind of information which is automatically protected in favour of the employer and that which, absent such automatic protection, the employer can protect by means of express covenants is unduly complex and in need of clarification by the courts.

1. REQUIREMENTS OF CONFIDENTIAL INFORMATION 6.10 In order to found an action for breach of confidence, information must satisfy three requirements to qualify as confidential: •

It must have the necessary quality of confidence.

•

It must have been imparted in circumstances importing an obligation of confidence.

•

There must be an unauthorised use of that information to the detriment of the person entitled to the benefit of the confidential information.

As to these requirements, see eg  Saltman Engineering Co Ltd v Campbell Engineering Co Ltd (1948) 65 RPC 203 (CA); Coco v A N Clark (Engineers) Ltd [1969]  RPC  41 at page 47 (Megarry  J); Attorney-General v Guardian Newspapers Ltd (No 2) [1988] 3 All ER 545 (HL) (the Spycatcher case) at pages 648–9 per Lord Griffiths; and Douglas v Hello! (No 3) [2008] 1 AC 1 (at paragraph 111). The requirements were expressed more generally by the Supreme Court in Vestergaard Frandsen v Bestnet [2013]  ICR  981 (a case in which a former employee of an insecticides company was held not to be liable for the misuse of confidential information of which she had no actual knowledge). Lord Neuberger, with whom the other members of the court agreed, stated at paragraph 23: ‘The classic case of breach of confidence involves the claimant’s confidential information, such as a trade secret, being used inconsistently with its confidential nature by a defendant, who received it in circumstances where she had agreed, or ought to have appreciated, that it was confidential: see eg  per Lord Goff 321

6.11  Confidential information

of Chieveley in Attorney General v Guardian Newspapers Ltd (No 2) [1990] 1 AC 109, (at page 281). Thus, in order for the conscience of the recipient to be affected, he must have agreed, or must know, that the information is confidential.’

(As to whether the test of knowledge referred to by Lord Neuberger is objective or subjective – see 6.17 and 6.122–6.127.) 6.11 Given its time-honoured pedigree, in our view the courts will continue to have regard to the classic Saltman/Coco formulation set out above: Wade v British Sky Broadcasting Ltd [2016]  EWCA  Civ 1214 (at paragraph  2) and Personal Management Solutions Limited [2014] EWHC 3495 (QB) (especially at paragraphs 163, 175 and 190). By way of relatively recent example see also Tata Consultancy Services Limited v Prashant Ashok Singh Sengar [2014] EWHC 2304 (QB) Sengar (relating to information obtained pre-employment).

1(a)  Quality of confidence 6.12  This element is difficult to define in the abstract. The basic attribute or quality which must be shown to attach to the information for it to be treated as confidential is inaccessibility: the information cannot be treated as confidential if it is common knowledge or generally accessible and in the public domain. Whether the information is so generally accessible is a question of degree depending on the particular case. It is not necessary to show that no one else knew of or had access to the information. The classic formulation of Cross J in Printers & Finishers Ltd v Holloway [1965] 1 WLR 1 is whether a man of average intelligence and honesty would think that there was anything improper in his putting his memory of the matters in question at the disposal of his new employers. This formulation is similar to the approach adopted in the ‘privacy’ cases in the House of Lords; in Campbell v MGN Ltd [2004] 2 AC 457 (at paragraph 14) Lord Nicholls regarded the touchstone as being whether the recipient of the information knows or ought to know that it is fairly or reasonably to be regarded as confidential. He added that (since Attorney-General v Guardian Newspapers Ltd (No 2) [1988] 3 All ER 545 (HL), the Spycatcher case), there is no longer a need for an initial confidential relationship. 6.13  Whilst confidentiality does not attach to trivial or useless information, confidentiality may reside in a simple idea: Under Water Welders & Repairers Ltd v Street and Longthorne [1968] RPC 498 at page 506 (referring to a new process which might be one which, when someone looks at it, is found to provide a self-evident solution for some problem). Equally, the mere size of the body of information does not make it confidential: Yates Circuit Foil Co v Electrofoils Ltd [1976] FSR 345 at page 393. Something which has been constructed solely from materials in the public domain may possess the necessary quality of confidentiality, for something may have been brought into existence by the application of skill and ingenuity: Coco v A N Clark (Engineers) Ltd [1969] RPC 41 at page 47. Confidentiality will often reside not in individual items but in a compilation of those items, such as a list of customers: Roger Bullivant Ltd v Ellis [1987] IRLR 491. However, confidentiality 322

Requirements of confidential information 6.17

is unlikely to reside merely in the manner in which information, which would otherwise not be confidential, is stored: British Midland Tool Ltd v Midland International Tooling Ltd [2003] 2 BCLC 523 (a case in which directors were alleged to have conspired to solicit employees to join their new competing business and remove certain electronically stored information for use in that business). 6.14 In Douglas v Hello! (No 3) [2008] 1 AC 1 (in which a well-known celebrity couple sued a celebrity magazine in relation to the publication of unauthorised photographs of their wedding) the majority of the House of Lords (see especially Lord Hoffmann at paragraphs 123–124) emphasised the elements of: (a)  commercial value; and (b) control which the claimants were able to exercise, which enabled them to impose a duty of confidence in respect of any photographs which might be taken of their wedding (although anyone was free to communicate other information about the wedding). Lord Walker (in the minority) stated (at paragraph 299) that the confidentiality of information must depend on its nature, not on its market value. The majority view seems to indicate a ‘commercial’ approach, giving primacy to the factors of commercial value and the ability of the ‘confider’ to control accessibility of the information. Subsequent first instance decisions have stated (without any detailed analysis of Douglas) that the criterion is not its commercial value per se; it is whether the preservation of its confidentiality is of substantial concern to the claimant, and that the threshold in this regard is not a high one: see, for example, the judgment of Arnold J at first instance in Force India Formula One Team Limited v 1 Malaysia Racing Team [2012] RPC 29 (at paragraph 223), and the judgment of Hildyard J in CF Partners (UK) v Barclays Bank plc [2014] EWHC 3049 (at paragraph 123). We suggest that in the ordinary cases arising from employment in the commercial sphere the focus will be on whether preservation of confidentiality is of substantial concern to the claimant. However, in particular circumstances such as those in Douglas (which will not ordinarily arise in standard commercial employer-employee cases), commercial value of itself (combined with control) may enable a claimant to claim the necessary quality of confidence in respect of information which would not otherwise be confidential. 6.15 Of particular significance for the purposes of this book is the distinction drawn between confidential or secret information and general skill and knowledge of the employee which cannot be the subject of a duty of confidentiality. This issue is discussed below: see 6.68–6.75. 6.16 That which is initially confidential may lose that quality through dissemination, and this is discussed in the context of the defence of publication (at 6.138–6.142).

1(b)  Circumstances importing an obligation of confidence 6.17 As set out by Lord Neuberger in Vestergaard Frandsen v Bestnet [2013] ICR 981 (at paragraph 23), the question is whether the individual ‘agreed, or ought to have appreciated, that it was confidential’. In other words, the question is whether the recipient knew or ought to have known that the information was 323

6.18  Confidential information

confidential: see also Napier and another v Pressdram Ltd [2009] EWCA Civ 443 (at paragraph  42). The test is an objective one. As set out in 6.10, Lord Neuberger in Vestergaard, referred to breach of confidence arising from confidential information ‘… being used inconsistently with its confidential nature by a defendant, who received it in circumstances where she had agreed, or ought to have appreciated’ [our emphasis]. However, in the very next sentence he continued: ‘Thus, in order for the conscience of the recipient to be affected, he must have agreed, or must know, [our emphasis again] that the information is confidential’. While it seems strange, given the ‘conscience’ basis of the action for breach of confidence (see eg 6.10 and 6.122) that negligence should suffice to establish liability, current authority leans in this direction, so that it is the first sentence of Lord Neuberger which is apparently correct and not the second. The second sentence of his statement must not have been intended to contradict the first sentence: Primary Group (UK) Limited v Royal Bank of Scotland [2014] EWHC 1082: see further 6.126–6.127. However, this important point is not without doubt and will need to be clarified by the Supreme Court. 6.18  In the context of employment, this element is chiefly concerned with the identification by the employer and communication to the employee of what the employer (properly) regards as confidential. This is commonly done by way of an express term of the contract of employment. Sometimes, even without express identification, the circumstances (eg the employer’s method of treatment of the information) will make it clear that the information is regarded as confidential. Indeed, where information is plainly confidential, it will amount to confidential information, notwithstanding that it was not imparted in circumstances importing a duty of confidence. On the other hand, and somewhat surprisingly, in Mars UK Ltd v Teknowledge Ltd [2000] FSR 138 Jacob J held that the fact of encryption of information did not render the encrypted information confidential or necessarily render someone who de-encrypted the information subject to a duty of confidence. This element is considered under the definitions of trade secrets and confidential information (see, in particular 6.21–6.75).

1(c)  Detrimental breach 6.19  Plainly, where an action for damages is brought in response to the misuse of confidential information, then detriment is a necessary part of the claimant’s claim. However, where an injunction is sought by a claimant, then the element of detrimental breach is more controversial. It has been suggested that in cases of commercial confidence no element of detrimental breach is necessary. There is little case law dealing with the subject since, in particular in cases of misuse of confidential information by an employee or ex-employee, the detriment to the (ex-)employer will usually be clear, rendering the question of whether it is necessary to demonstrate detriment academic. 6.20 In Jack Allen (Sales & Service) Ltd (pursuers) v Smith (defender) [1999]  IRLR  19, where the Court of Session allowed an appeal in respect of an injunction granted, the court held that not only was it necessary to show that 324

Distinction between trade secrets, mere confidential information and skill and knowledge: detail 6.21

there had been a breach of an obligation of confidentiality in order that an injunction was granted but, in addition, it was necessary to show a perceived actual or potential harm, which was real and not fanciful, flowing from the breach. On the other hand, in Imerman v Tchenguiz [2011] 2 WLR 592 (a family law case where there had been unauthorised access to a husband’s computer for the purposes of a wife’s claim for financial relief, and an injunction was granted in favour of the husband) the Court of Appeal held that intentionally looking at documents which a person knows are confidential is capable of constituting an actionable wrong in equity, and that (at paragraph 69): ‘It is of the essence of the claimant’s right to confidentiality that he can choose whether, and, if so, to whom and in what circumstances and on what terms, to reveal the information which has the protection of the confidence. It seems to us, as a matter of principle, that, again in the absence of any defence on the particular facts, a claimant who establishes a right of confidence in certain information contained in a document should be able to restrain any threat by an unauthorised defendant to look at … the contents of the document (or any copy), and also be able to enforce the return (or destruction) of any such document or copy.’

If an injunction should be available for the purposes of preventing someone looking at confidential information on the basis of the ‘essence’ of such right set out above, it seems to us that a claimant should generally not be required to show any detriment other than that the right to confidentiality might be breached. The absence of any loss might, however, tend to indicate that the information in question is not actually confidential: Crowson Fabrics Ltd v Rider [2008] IRLR 288 (at paragraph 104).

2. DISTINCTION BETWEEN TRADE SECRETS, MERE CONFIDENTIAL INFORMATION AND SKILL AND KNOWLEDGE: DETAIL 6.21  In the leading case of Faccenda Chicken Ltd v Fowler [1984]  ICR  589 (upheld in the Court of Appeal at [1987] Ch  117) Goulding  J, (having first referred to information of the employer which is not confidential as ‘category 1’) classified confidential information in the field of employment contracts as falling into two categories: •

Category 2 is information which the employee must treat as confidential (either because he is told it is confidential or because from its character it is obviously so) but which, once learnt, necessarily remains in the employee’s head and becomes part of his own skill and knowledge applied in the course of his employer’s business. So long as the employment lasts he cannot otherwise use or disclose such information without infidelity and therefore breach of contract. However, when he leaves his employment, he may use his full skill and knowledge for his own benefit in competition with his ex-employer. Goulding J was of the view (with which the Court of Appeal did not agree, but which has been supported by subsequent court decisions: see 6.84–6.96) that, if an employer wants to protect information of this kind, he can do so by express covenant restraining the employee from 325

6.22  Confidential information

competing with him (within reasonable limits of time and space) after the termination of employment. Examples of this category given by Goulding J  were manufacturing processes and lists of customers. It is in our view clear from the examples he was here citing that Goulding  J  was referring to information which is ‘proprietary’ in character, ie  that which relates to the particular employer’s business and which has not become merged with general skill or knowledge of the employee acquired in the course of the employment (see also 6.68–6.75). An employee cannot after termination of his employment be prevented from using his general skill or knowledge. •

Category 3 amounts to trade secrets which, even though they have been learnt by heart, may not, even after termination of employment, be used for anyone’s benefit, except that of the ex-employer (eg secret processes).

6.22  The Court of Appeal in Faccenda also drew a distinction between trade secrets and mere confidential information, stating that the implied term which imposes an obligation on the ex-employee after termination of employment not to misuse confidential information was restricted in its scope: it might cover such information as secret processes of manufacture such as chemical formulae, or designs, or special methods of construction and ‘other information which is of a sufficiently high degree of confidentiality as to amount to a trade secret’. It did not extend to all information which is only ‘confidential’ in the sense that an unauthorised disclosure of such information to a third party while the employment subsisted was a clear breach of the duty of good faith. It is not clear to what extent the Court of Appeal had in mind in its category of mere confidential information the distinction between protectable or ‘proprietary’ information of the employer and skill or knowledge of the employee, since use or disclosure during employment of either kind of information for the benefit of a third party would be a breach of the duty of good faith (see eg  QBE  v Dymoke [2012]  IRLR  458 particularly paragraphs 257, 258, 259(9) and  268. 6.23  Since information which is so confidential as to be regarded as a trade secret will enjoy protection after termination of employment even without an express restrictive covenant, it is vital to understand what is meant by trade secret in contradistinction to mere confidential information.

2(a)  Definition of trade secrets 6.24  In order to determine whether any particular item of information falls within the implied term so as to prevent its use or disclosure, even after the termination of employment, the Court of Appeal in Faccenda Chicken Ltd v Fowler [1987] Ch 117 listed (non-exhaustively) the following factors. 2(a)(i)  The nature of the employment 6.25  Employment in a capacity where ‘confidential’ information was habitually handled might impose a high obligation of confidentiality because the employee 326

Distinction between trade secrets, mere confidential information and skill and knowledge: detail 6.28

could be expected to realise its sensitive nature to a greater extent than if he were employed in a capacity where such material reached him only occasionally or incidentally. 2(a)(ii) The nature of the information itself 6.26  The information would only be protected if it can properly be classed as a trade secret or as material which, while not properly to be described as a trade secret, is, in all the circumstances, of such a highly confidential nature as to require the same protection as a trade secret: examples were secret processes of manufacture, but there were innumerable other pieces of information capable of being trade secrets, although the secrecy of some information might be shortlived. In addition, the fact that the circulation of certain information is restricted to a limited number of individuals might throw light on the status of the information and its degree of confidentiality. 2(a)(iii)  Whether the employer impressed on the employee the confidentiality of the information 6.27  Although the employer cannot prevent the use or disclosure of information merely by telling the employee that it is confidential, the manner in which the employer treats the information may be significant. In Bjorlow (Great Britain) Ltd v Minter (1954) 71 RPC 321 the ex-employer’s claim for an injunction failed principally because of their failure to show that they had impressed on the employee during employment that the information was confidential. On the other hand, in Poly Lina v Finch and Another [1995] FSR 751 at page 762, the way in which the information in question was treated by both the employer and the employee during the course of the latter’s employment was held to be a crucial factor in determining whether that information warranted protection as a trade secret. On the facts of the case, it was held that the employee had been well educated as to the confidential nature of the information the employer sought to protect. 6.28 See also the decision in Lancashire Fires Ltd v SA  Lyons & Co Ltd [1997] IRLR 113: in that case an employee, during the currency of his employment, set up a business that used his employer’s process for manufacturing ceramic fire mouldings. The question was whether the information he obtained during his employment came within the third Faccenda category. The Court of Appeal held that the judge below had erred in holding that the duty of confidence ended on termination of employment, because the claimant had not precisely defined and pointed out those aspects of the production process which they sought to protect as a trade secret. It was not incumbent on the employer to point out to the employee the precise limits of what he sought to protect as confidential. Plainly, each case turns on its own precise facts, but it is noteworthy that, in that case, the size and resources of the employer was relevant to the question. Sir Thomas Bingham MR stated at paragraph 18 that ‘it would be unrealistic to expect a small and informal organisation to adopt the same business disciplines as a larger and more bureaucratic concern’. 327

6.29  Confidential information

6.29 There are many means by which an employer might impress upon his employees that information is confidential, such as inserting a clause into the employee’s contract of employment, a non-contractual policy document, or labelling a document ‘confidential’. 2(a)(iv)  Whether the information can be easily isolated from other information which the employee is free to disclose 6.30  The severability of the information is not conclusive, but the fact that the ‘confidential’ information is part of a package and that the remainder of the package is not confidential is likely to throw light on whether the information in question is really a trade secret. 2(a)(v)  Application of the Faccenda principles 6.31  Of the four elements referred to in Faccenda Chicken Ltd v Fowler [1987] Ch  117, the second element (the nature of the information) is easier to state than to apply in practice, while the fourth (severability) also tends to have an elusive quality. It is therefore valuable to consider how those principles have been applied in practice, and other formulations by the courts of the definition of trade secrets. 6.32  For a fairly straightforward application of the above principles, see Brooks v Olyslager Oms (UK) Ltd [1998] IRLR 590, in which the Court of Appeal refused to treat as trade secrets subject to an implied term of confidentiality (after the end of employment of a managing director) information regarding the ex-employer’s solvency, its ability to carry on business for a period of time and its relationship with its holding company. There was no evidence that the information was not widely known or that its ‘confidentiality’ had ever been impressed on the employee, nor could this information be easily separated from other information which he was free to use. 6.33  Similarly, in AT Poeton (Gloucester Plating) Ltd v Horton [2000] ICR 1208, the Court of Appeal allowed the appeal of the defendant against the imposition of an injunction preventing the use of a manufacturing process. Charles LJ found that the method of electroplating used by the claimants did not amount to a trade secret. The defendant was a sales engineer for the claimant, who only occasionally operated the system which was claimed to be a trade secret, the concept was ‘well known’, and it would be difficult for the defendant to separate knowledge gained of the process from the general knowledge which he gained in his employment with the claimant. 6.34  These decisions should be contrasted with the decision in Poly Lina v Finch [1995] FSR 751. It was held that profit margins, costs, sales and development plans all represented confidential information equivalent to a trade secret. This was despite the fact that much of the information could be gleaned, at least partially, by alternative means – eg  market research. HHJ  Phelan found that the 328

Distinction between trade secrets, mere confidential information and skill and knowledge: detail 6.37

alternatives would have been expensive and only partially successful in obtaining the information in question. He also placed emphasis on the degree of damage that would be done to the claimant if the information was released: this was plainly a factor in favour of the information being regarded as confidential.

2(b)  Other definitions of trade secrets 6.35 In Lansing Linde Ltd v Kerr [1991] 1 All ER 418 Staughton LJ defined a trade secret (in the context of that case) as information: •

used in a trade or business;

•

which, if disclosed to a competitor, would be liable to cause real (or significant) damage to the owner of the secret;

•

in respect of which the owner has sought to limit its dissemination, or at least has not encouraged or permitted widespread publication.

Trade secrets would cover not only secret formulae for the manufacture of products but also, in an appropriate case, the names of customers and the goods which they buy. Butler-Sloss LJ (at page 435) also favoured a broader definition of trade secrets: ‘to be interpreted in the wider context of highly confidential information of a non-technical nature or non-scientific information which may come within the ambit of information the employer is entitled to have protected, albeit for a limited period.’

6.36 In Printers & Finishers Ltd v Holloway [1965] 1 WLR 1 Cross J put forward the test of what is a trade secret as being whether a man of average intelligence and honesty would think that there was anything improper in his putting his memory of the matters in question at the disposal of his new employers. In Thomas Marshall (Exports) Ltd v Guinle [1979] Ch 227 (a case relating to breach of confidence during the subsistence of the employment contract) the Vice-Chancellor, Sir Robert Megarry (at page 248), identified four elements which might be of assistance in identifying confidential information and trade secrets: •

The owner of the information must believe that the release of the information would be injurious to him or of advantage to his rivals.

•

The owner of the information must believe that the information is confidential or secret.

•

His belief under the first two points must be reasonable.

•

The information must be judged in the light of the usage and practices of the particular industry or trade concerned.

6.37 In FSS Travel & Leisure Systems Ltd v Johnson [1998] IRLR 382 the Court of Appeal stated (at paragraph 33) that, in identifying whether there were trade secrets which could fairly be regarded as the employer’s ‘property’, there needed 329

6.38  Confidential information

to be examined the nature of the employment, the character of the information, the restrictions imposed on its dissemination, the extent of use in the public domain, and the damage likely to be caused by its use and disclosure in competition with the employer. 6.38  The above definitions are helpful in focusing on: •

Ordinary notions of honesty and fair dealing as being the touchstone of secrecy or confidentiality.

• Inaccessibility of the information including restrictions placed on dissemination of the information. •

The likelihood of harm to the employer if disclosure is made (or reasonable belief of the employer in this connection).

2(c)  EU Trade Secrets Directive definition of trade secrets 6.39 Member States have until 8  June 2018 to implement the EU  Trade Secrets Directive published on 8  June 2016 (Directive 2016/943 on ‘the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure’). As summarised in the IPO ‘Consultation on draft Regulations concerning trade secrets’ published in February 2018 (the ‘Consultation’) this Directive seeks to address the uneven protection of trade secrets in EU Member States by bringing legal clarity and a level playing field to all European companies (and, we assume, individuals). It provides minimum standards for measures, procedures and remedies that 'trade secret holders' should be able to rely on in the event of unlawful acquisition, use or disclosure of their trade secrets. It also seeks to harmonise the definition of trade secrets in accordance with existing international standards, although Member States will be free to provide greater protection. A trade secret is defined in Article 2(1) as information which meets all of the following requirements: (a) it is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question; (b) it has commercial value because it is secret; (c) it has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret. 6.40 The draft Regulations (attached to the Consultation) seek to transpose the Directive into English law. The Consultation summarises the proposed Regulations as providing for a statutory definition of the term ‘trade secret’ and setting out rules concerning time periods for bringing proceedings. They include provisions concerning the preservation of confidentiality of trade secrets during and after proceedings have concluded, as well as measures relating to interim orders for delivery up. They also set out time limits within which a claim needs 330

Distinction between trade secrets, mere confidential information and skill and knowledge: detail 6.42

to be brought after an interim order for delivery up has been made. The proposed Regulations include provisions relating to measures which may be imposed on an infringer and set out the factors that need to be considered. They also provide for compensation to be paid under certain conditions, set out the factors that need to be taken into account when awarding damages, and include measures concerning the publication of information relating to judicial decisions in legal proceedings for breach of confidence. In broad terms the Regulations do not appear to change substantively either English common law or the procedures for protecting trade secrets and confidential information, but they may have value in harmonising the approach to trade secrets and confidential information in different UK jurisdictions. The Regulations are, however, silent as to whether they are intended to exist alongside English law or whether they are intended to codify and replace existing common law rights, remedies and defences. The Consultation set a period of only four weeks for response (16 March 2018). In their Response, the Employment Lawyers Association set out their understanding (with which we agree) that the Regulations clarify and (where necessary) expand existing English law procedural protections and remedies without replacing or diluting existing common law rights of action or defences. The Response helpfully sets out the broad areas of overlap between the Regulations and existing English common law and identifies areas of potential difference (usually matters of nuance only) and makes various drafting suggestions aimed at clarifying the Regulations or transposing the Directive more effectively into English law. It also seeks clarification of the extent to which parties are free to ‘contract out’ of the Regulations, eg to provide for protection of trade secrets which is wider or narrower from that in the Regulations. Given the uncertainties at the time of finalising this edition of the book regarding the final form of the Regulations and the relatively limited impact they are in any event likely to have in England and Wales, we do not expand on this topic at this stage.

2(d) Impact of European Convention on Human Rights and Human Rights Act 1998 and possible effect on definitions of trade secrets and confidential information 6.41 In the light of sections 2, 3, 6 and 12 of the Human Rights Act 1998, the cause of action for misuse of confidential information has been adapted to provide a remedy for unauthorised disclosure of personal information. This has developed by reference to the right of privacy conferred by Article 8 European Convention on Human Rights and has required a balancing of that right against the right to freedom of expression conferred by Article 10. This has developed through a series of cases referred to immediately below. 6.42 In Campbell v Frisbee [2003] ICR 141 Lord Phillips MR commented (at paragraph 33) that: ‘The Courts are in the process of adapting the law of confidentiality in the light of the Human Rights Act 1998 in order to reflect the conflicting convention rights of respect for private and family life and freedom of expression.’ 331

6.43  Confidential information

That was a case involving the breaching of a duty of confidence on the part of a domestic servant of a famous fashion model to a well-known Sunday newspaper. Actions for breach of privacy might include the balancing of the rights enshrined in Articles  8 and 10 European Convention on Human Rights. In Campbell v Mirror Group Newspapers Ltd [2004] 2 AC 457 (HL) Lord Nicholls of Birkenhead commented (at paragraph 11) that: ‘In this country, unlike the United States of America, there is no over-arching, all-embracing, cause of action for “invasion of privacy” … But protection of various aspects of privacy is a fast developing area of the law …’

Lord Nicholls added (at paragraph 17) that: ‘The time has come to recognise that the values enshrined in Articles 8 and 10 are now part of the cause of action for breach of confidence.’

6.43  In balancing these competing rights, there is no presumptive priority as between them: Campbell v Frisbee (at paragraph  25). In PJS  v New Group Newspapers Ltd [2016] AC 1081 the Supreme Court (at paragraph 20) summarised the correct approach as follows: ‘(i) neither article has preference over the other, (ii) where their values are in conflict, what is necessary is an intense focus on the comparative importance of the rights being claimed in the individual case, (iii) the justifications for interfering with or restricting each right must be taken into account and (iv) the proportionality test must be applied.’

6.44 Consistent with the overall theme of the book, this chapter is concerned essentially with commercial confidences. In our view, the development of a remedy for unauthorised disclosure of personal information under the umbrella of the action for breach of confidence has not substantially changed and is unlikely in the future substantially to change the courts’ approach to commercially confidential information. In Douglas v Hello! (No 3) [2008] 1 AC 1 (at paragraph 118) Lord Hoffmann regarded the Convention rights as irrelevant to the claim in that case, since it was to protect commercially confidential information and nothing more. 6.45  In a similar vein see Wade v British Sky Broadcasting Ltd [2016] EWCA Civ 1214 (at paragraph 2). Further, the Court of Appeal held in Imerman v Tchenguiz [2011] 2 WLR 592 that ‘… there are dangers in conflating the developing law of privacy under article 8 and the traditional law of confidence.’ That said, the development of the privacy remedy may have indirectly impacted on the approach of the courts to (especially the definition of) confidential commercial information (see 6.50–6.54), so that some further (limited) exploration of the protection of privacy claim (including its similarities with and differences from the traditional breach of confidence claim) is appropriate. 2(d)(i)  Protection of privacy versus protection of confidentiality 6.46 As referred to immediately above, there is a clear distinction between breach of confidence cases involving: (a)  protection of privacy; and (b)  those 332

Distinction between trade secrets, mere confidential information and skill and knowledge: detail 6.49

involving protection of commercial information. The Supreme Court’s judgment in PJS News Group [2016] AC 1081 makes clear (at paragraphs 25–26 and 57) that – regardless of any Convention rights – claims based on the tort of invasion of privacy can attract greater protection from the courts than claims based on breach of confidence, because the extent to which confidential information is widely known can be decisive in confidentiality claims, whereas claims based on invasion of privacy require more nuanced consideration of matters such as invasiveness and the extent of the distress that may be caused. 6.47 In Douglas v Hello! (No 3) [2008] 1 AC 1 Lord Hoffmann in his majority speech distinguished (at paragraph 118) between the position of the claimants, Mr and Mrs Douglas, and that of OK!. The magazine’s claim was to protect commercial information and nothing more, so that there was no need in that case for the court to be concerned with Convention rights. Moreover, Lord Hoffmann (at paragraph 111) quoted with apparent approval the reliance of the trial judge on the definition of confidential information in Coco v A N Clark (Engineers) Ltd [1969] RPC 41 at page 47 (referred to at 6.10). 6.48  Therefore, in an employment context, the pre-Convention jurisprudence as to what amounts to confidential information continues to be regarded as good law and the balancing act required of the courts in applying Articles  8 and 10 European Convention will usually be restricted to those cases where engagement is of a domestic nature (such as Campbell v Frisbee) or where the defence of public interest disclosure (usually arising in a journalistic or ‘whistleblowing’ context) is put forward in a claim for breach of confidence. See, by way of comparison, Matuz v Hungary [2015] IRLR 74 where, in finding that the state broadcaster had acted in breach of Article 10 by dismissing a journalist on grounds of breach of an express duty of confidence, the European Court of Human Rights held that obligations of confidentiality could not apply with the same force to journalists as they did to others. Journalists had a responsibility to encourage and contribute to public debate, and it was in the nature of their functions to impart information and ideas. Moreover, the journalist’s obligations of loyalty and restraint had to be weighed against the public character of the broadcaster for which he worked. 6.49  Where the balancing of rights is relevant to an action for breach of confidence, it ought not to matter whether or not the obligation of confidentiality arises in contract or by reason of an equitable duty: see London Regional Transport v Mayor of London [2001]  EWCA  Civ 1491 (at paragraph  46) – although in Campbell v Frisbee (at paragraph 22) the point was regarded as arguable the other way, the court contrasting the London Regional Transport case with AttorneyGeneral v Barker [1990] 3 All ER 257 (at page 260). These and related topics are dealt with in more detail elsewhere in this book: see 6.137–6.166 (defences to claims for breach of confidence) and 14.80–14.83 (the effect of section 12(3) and (4) Human Rights Act 1998 relating to interim injunctions to restrain dissemination of confidential information). 333

6.50  Confidential information

2(d)(ii)  Effect of European Convention on Human Rights on definition of confidential information/trade secrets? 6.50 There appears, to date, to be no judicial consideration of the impact of Articles  8 and 10 European Convention on Human Rights on the judicially constructed divide between trade secrets on the one hand and mere confidential information on the other hand. However, the scope of the duty of confidence has been discussed in a series of decisions relating to public interest disclosures. Thus, in A v B (a company) [2003] QB 195 Lord Woolf CJ considered that, in the light of the European Convention on Human Rights, a duty of confidence arose in English law whenever the party subject to the duty is in a situation where he knows or ought to know that the other person can reasonably expect his privacy to be protected. 6.51  Further, in Campbell v Mirror Group Newspapers [2004] 2 AC 457 Lord Nicholls (at paragraph 14) expressed the matter as follows: ‘Now the law imposes a “duty of confidence” whenever a person receives information he knows or ought to know is fairly and reasonably to be regarded as confidential.’

Similarly, Baroness Hale of Richmond stated that a duty of confidence would arise where there is a reasonable expectation that the information in question will be kept confidential by the recipient. 6.52  However, these dicta emerge from cases relating to privacy claims brought under the umbrella of the breach of confidence action. Notwithstanding this distinction, this developing jurisprudence might well provide a more rational structure to the distinction between information which an employee is entitled to disclose after the termination of his contract of service and that in respect of which the employee must maintain confidentiality only during employment. Rather than considering whether the information amounts to a trade secret or mere confidential information – a distinction which is both somewhat arbitrary and is plainly not universally accepted (as to which see 6.87 in relation to the Lansing Linde case) – the courts might, in considering whether or not information is confidential so as to restrict disclosure after the termination of the employment, simply ask whether or not the employer had a ‘reasonable expectation’ in maintaining confidentiality, or alternatively, whether the information ought ‘fairly and reasonably to be regarded as confidential’ notwithstanding the termination of the employment. Presumably, many of the considerations discussed above such as the nature of the information, the manner in which the information was imparted, and whether or not the confidential nature of the information was expressly communicated to the recipient, would continue to be relevant. 6.53  This approach can be supported by reference to the approach of the court in Thomas v Farr plc [2007] IRLR 419 (referred to more fully at 6.90–6.92), where, in dealing with the question of whether the ex-employee had been exposed to confidential information sufficient to support a post-termination non-competition covenant, Ramsay J  had asked himself whether Mr Thomas’s appointment as 334

Distinction between trade secrets, mere confidential information and skill and knowledge: detail 6.56

managing director had exposed him to information which Farr was entitled to require to be kept confidential after the termination of his employment. The Court of Appeal endorsed this approach (per Toulson LJ at paragraph 44): ‘Applying the correct test, there was ample evidence to support the conclusion that in the nature of things Mr Thomas’ appointment as Farr’s managing director exposed him to information which Farr was entitled to require to be kept confidential after the termination of his employment.’

The question of the quality of information necessary to support a restrictive covenant is discussed at 6.80–6.112. 6.54  Whichever definition is adopted, it is often the practical application of that definition which proves to be difficult. Each case has to be carefully considered on its own merits and, in this context, Faccenda Chicken Ltd v Fowler [1987] Ch 117 provides a useful case study.

2(e)  Case study on trade secrets: Faccenda in detail 2(e)(i)  The facts 6.55  Faccenda were in the business of breeding, rearing and preparing chickens for sale. Fowler was the former sales manager of Faccenda, who had built up a large van sale operation whereby fresh chickens in travelling refrigerated vehicles were offered to the trade. The van salesmen each operated in a different area and after a few weeks knew well the following sales information which Faccenda claimed as confidential: •

The names and addresses of their customers in the particular sector.

•

The general limits of the area and the detailed routes taken day by day for supplying the customers.

•

The customers’ usual requirements both as to quantity and quality.

•

The times of delivery.

•

The prices paid – which varied with individual circumstances.

6.56  After resigning from the employment of Faccenda, Fowler set up a similar competing business with eight ex-employees of Faccenda. None of the contracts of employment contained express covenants against the use of confidential information or trade secrets gained by the employees while in the employment of Faccenda. Goulding J refused to grant an injunction, regarding the information as falling within the category of mere confidential information which was automatically protected by the implied duty of fidelity during employment, and there was no express covenant applying thereafter. The Court of Appeal refused the appeal by Faccenda on the basis that the sales information in question fell into a class of information acquired and remembered by the employee which, while the employment continued, the employee might not use or disclose otherwise than in his employment, even though it became part of his own skill and knowledge. 335

6.57  Confidential information

However, on leaving his employment the ex-employee was free to use this information for his own benefit. 2(e)(ii)  The arguments 6.57  Before the Court of Appeal, Faccenda argued that the confidentiality of the sales information resided in its entirety (as a ‘package’) and that the pricing information was in itself confidential on the basis of Goulding J’s findings that: •

It would be of value to competitors.

•

Persons outside the claimant’s employment could only obtain approximate knowledge of the prices to individual customers.

•

Even a slight price difference might be important in the competitive trade.

It was further argued that the judge below was wrong: (i) in that there was only one class of confidential information (and not trade secrets and confidential information); (ii) in holding that information in his second category (mere confidential information) could be protected by express covenant; and (iii) in that a clear distinction could be drawn between the skill and general knowledge of trade or business which an employee might obtain in the course of the exemployer’s business and which he was entitled to use in subsequent employment, and the special knowledge of his ex-employer’s business which he could not use thereafter. 6.58  In drawing a distinction between trade secrets and confidential information the Court of Appeal stated in Faccenda that the implied term which imposes an obligation on the ex-employee after termination of employment was restricted in its scope. It might cover information such as secret processes of manufacture, for example chemical formulae or designs or special methods of construction and ‘other information which is of a sufficiently high degree of confidentiality as to amount to a trade secret’. It did not extend to all information which is only ‘confidential’ in the sense that an unauthorised disclosure of such information to a third party while the employment subsisted was a clear breach of the duty of good faith. Examples of this latter class of information included the identity of suppliers and printing instructions (used in a printing factory) remembered (but not memorised or copied for the purposes of post-employment competition with the ex-employer – which was not permissible). 6.59  Applying the above criteria to the sales information in question, the Court of Appeal held that neither the pricing information nor the sales information as a whole had the degree of confidentiality necessary for it to be regarded as a trade secret because: •

The sales information contained some material which was not confidential when looked at in isolation.

•

The information about the prices was not clearly severable from the rest of the sales information.

336

Distinction between trade secrets, mere confidential information and skill and knowledge: detail 6.62

•

Neither the sales information in general nor the pricing information could be regarded as plainly secret or sensitive.

•

The sales information, including the pricing information, was necessarily acquired by the salesmen to do their work, and each salesman could quickly commit the whole of the sales information relating to his area to memory.

•

The sales information was generally known among the van drivers and the secretaries at quite a junior level.

•

There was no evidence that Faccenda had ever given any express instructions that the sales information was to be treated as confidential.

6.60 One cannot help having some sympathy in particular with Faccenda’s submission that the information in question was more in the nature of special knowledge of the ex-employer’s business than general skill or knowledge, but the factors we have listed at 6.59 outweighed this. 2(e)(iii)  Special case: where the ex-employee wishes to sell the information 6.61  The Court of Appeal in Faccenda (at pages 138–139) also left open for future decision whether additional protection should be afforded to an employer where the ex-employee is not seeking to earn his living by making use of the body of skill, knowledge and experience which he has acquired in the course of his career, but is merely selling to a third party information which he acquired in confidence in the course of his former employment. In Mainmet Holdings plc v Austin [1991]  FSR  538, Mainmet alleged that its former managing director, Austin, had leaked certain potentially embarrassing information to customers regarding problems being experienced with equipment installed by Mainmet – not in order to compete with Mainmet, but out of malice. Lionel Swift QC (sitting as a deputy High Court judge) held that the principles concerning the protectability of (mere) confidential information and skill and knowledge after termination of employment were applicable, even though the defendant was allegedly using the information for purposes other than competing with the ex-employer. 6.62  We suggest, however, that the need for the ex-employee to use his knowledge to earn a living is a compelling reason for marking the moment of termination of employment as the point where the employer is no longer entitled to protection against the use by the employee of mere confidential information or knowledge against the interests of the employer. Where confidential information is to be divulged, not for the purpose of enabling the ex-employee to earn a livelihood, whether in his own or someone else’s business, but for some other purpose, the court ought to approach the matter more strictly and be prepared to protect even (mere) confidential information. That is what the court would do outside the employment relationship, without having to consider whether or not information amounted to a trade secret – see eg  Imerman v Tchenguiz [2011] 2 WLR 592 (CA) in which the brother of a wife who was petitioning for divorce, fearing that her husband would conceal his assets to prevent her from obtaining 337

6.63  Confidential information

a fair financial settlement, accessed his computer without his permission and copied information and documents stored there. The Court of Appeal upheld an injunction restraining use of information obtained from the documents obtained from the husband’s computer. 2(e)(iv)  Particular example: pricing information 6.63  A recurring question which arises in practice is whether pricing information amounts to a trade secret. It will often be difficult successfully to contend that pricing information amounts to a trade secret, since by its very nature, pricing information is often widely communicated to customers, eg via price lists, on the internet or on request. However, the Court of Appeal in Faccenda accepted that there may well be circumstances where pricing information would be regarded as a trade secret or its equivalent. Examples were: •

The price put forward in a tender document.

•

The price to be charged for a new model of car or some other product.

•

Prices negotiated in a highly competitive market in which it is known that prices are to be kept secret from competitors.

Other pricing information may be protected by express covenant (see 6.98–6.112).

2(f) Conclusion regarding the distinction between trade secrets and mere confidential information 6.64  The elements referred to above under the definition of trade secrets (especially 6.25–6.38) are helpful in defining what information may be protectable (whether as mere confidential information or trade secrets) but they do not necessarily provide any definitive guidance in distinguishing between the two categories themselves: it remains difficult to distinguish between trade secrets and mere confidential information. Indeed, somewhat startlingly (in the light of the decisions of the Court of Appeal in Faccenda Chicken v Fowler, Roger Bullivant Ltd v Ellis and Johnson & Bloy (Holdings) v Wolstenholme Rink plc), Staughton LJ in Lansing Linde v Kerr [1991] 1 All ER 418 at pages 425h–j and 426d questioned whether there was a difference at all between trade secrets and mere confidential information. That said, one can have sympathy with this view: while the distinction between trade secret and mere confidential information is often difficult to draw in practice, the distinction is (at least according to the Court of Appeal in Faccenda) fundamental, and the claim of an employer (absent an express restrictive covenant) will often depend entirely (as it did in Faccenda) on whether the information in question falls into one or the other category. Yet there does not appear to be any difference in principle between the two categories of confidential information (ie trade secrets and mere confidential information) the difference being rather a matter of degree (see Faccenda Chicken Ltd v Fowler [1987] Ch 117 at page 299ff per Neill LJ and PSM International plc v Whitehouse [1992] IRLR 279 (CA) at page 282). 338

Distinction between trade secrets, mere confidential information and skill and knowledge: detail 6.68

6.65  The employer who wishes to contend that his information is a trade secret and not mere confidential information must (even in obvious cases, such as secret processes) provide the court with proper details justifying this higher categorisation. Further, in seeking to identify secret or confidential information it is vital to bear in mind the distinction between general skill and knowledge of the employee and information which relates to the specific business of the employer which has not become merged with the employee’s general skill and knowledge: see 6.68–6.75. 6.66  The court ought to be especially careful not to raise to the status of trade secret that which is more in the nature of general skill or knowledge of the ex-employee which has been derived during employment, even if it relates to the employer’s business. Thus, in Lancashire Fires Ltd v SA Lyons & Co Ltd [1997] IRLR 113 (at page 117) Sir Thomas Bingham MR stated that the distinction between mere confidential information and trade secrets may often be very hard to draw on the facts: ‘… but ultimately the court must judge whether an ex-employee has illegitimately used the confidential information which forms part of the stock-in-trade of his former employer either for his own benefit or to the detriment of the former employer, or whether he has simply used his own professional expertise, gained in whole or in part during his former employment.’

6.67  However, again, the statement by Sir Thomas Bingham MR might be said to assist more in determining the difference between confidential information (whether trade secret or mere confidential information) and general skill and knowledge of the employee rather than the difference between trade secret and mere confidential information. We suggest that an admittedly ‘rough and ready’ indication is that confidential information that would (objectively) be considered the ‘crown jewels’ or ‘lifeblood’ of an employer’s business is more likely to be a trade secret, and information not meeting that description may often be mere confidential information.

2(g) Distinction between general skill and knowledge and confidential information/trade secrets (including relevance that information is remembered) 6.68 The courts have long distinguished between: (1)  confidential or secret information; and (2)  general skill and knowledge of the employee. In a wellknown passage in Herbert Morris Ltd v Saxelby [1916] AC 688 (at page 709) Lord Parker stated: ‘Wherever such covenants have been upheld it has been on the ground not that the servant or apprentice would, by reason of his employment or training, obtain the skill and knowledge necessary to equip him as a possible competitor in the trade, but that he might obtain such personal knowledge of and influence over customers of his employer, or such an acquaintance with his employer’s trade secrets as would enable him, if competition were allowed, to take advantage of his employer’s trade connection or utilise information confidentially obtained.’

(See also Wessex Dairies Ltd v Smith [1935] 2 KB 80.) 339

6.69  Confidential information

6.69  The distinction between: (1)  general skill and knowledge; and (2)  confidential information or trade secrets often lies at the heart of disputes relating to confidential information, yet despite recourse to the above-mentioned definitions of trade secrets and confidential information, it often remains very difficult in practice to decide on which side of the line given information falls. In particular, it is often extremely difficult to say whether a specific item of information forms part of the employee’s skill and knowledge or amounts to special knowledge of the ex-employer’s business (Faccenda provides a good example of this difficulty). 6.70  However, the mere fact that the ex-employee has retained information in his memory (even though he did not deliberately memorise it to compete with his employer after termination of employment) does not mean that this information is not secret: Amber Size & Chemical Company Ltd v Menzel [1913] 2 Ch 239. This point was made by Bell J in SBJ Stephenson v Mandy [2000] IRLR 233, where he pointed out that a trade secret such as a chemical compound could well be retained in an employee’s memory, but that did not prevent the information from being a trade secret. Bell J went on to draw a distinction between objective knowledge and subjective knowledge, based on a well-known passage of the judgment of Lord Shaw in Herbert Morris v Saxelby [1916] AC 688 (at page 714): ‘Trade secrets, the names of customers, all such things which in sound philosophical language are denominated objective knowledge – these may not be given away by a servant; they are his master’s property … On the other hand, a man’s aptitudes, his skill, his dexterity, his manual or mental ability – all those things which in sound philosophical language are not objective, but subjective – they may, and they ought, not to be relinquished by a servant; they are not his master’s property ….’

6.71 We doubt, however, that the terminology of objective and subjective knowledge is helpful in distinguishing between trade secrets and confidential information on the one hand and an employee’s general skill and knowledge on the other. It is simply an adoption of different terminology and provides no workable test. Moreover, the passage in Herbert Morris v Saxelby which refers to information which is the property of the employer and information which is the property of the employee is somewhat circular in determining whether or not a given piece of information amounts to the employer’s confidential information or trade secret so as to render it protectable by covenant or by means of a common law or equitable duty. 6.72 In Formula One Team v Aerolab [2013]  RPC  36, Lewison LJ stated (at paragraphs 66–67): ‘In Terrapin Ltd v Builders’ Supply Company (Hayes) Ltd [1967] RPC 375, at p 391 Roxburgh J said in a similar case: “… when I use the word ‘information’, I mean something that can be traced to a particular source and not something which has become so completely merged in the mind of the person informed that it is impossible to say from what precise quarter he derived the information which led to the knowledge that he is found to possess.” 340

Distinction between trade secrets, mere confidential information and skill and knowledge: detail 6.75

In my judgment that is an eminently sensible approach to interpreting a covenant that deals with confidential information.’

Rather than determining the distinction between skill and knowledge and confidential information through a test of ‘objective’ versus ‘subjective’ knowledge, we suggest that focusing on whether information can be traced to a particular (confidential) source specific to the employer’s business may be helpful in many circumstances – but will not always be definitive. Thus, knowledge relating to a particular manufacturing process which is set out in the employer’s confidential operation procedures or work instructions may be a trade secret, even though it is remembered naturally (ie without deliberate memorisation in order to compete: see 6.58) by the (ex-)employee. 6.73 However, an (ex-)employee’s knowledge of the employer’s manufacturing methods (even if traceable to manuals to which he referred during his employment with the employer) may have become part of his general skill and knowledge. The fact that such knowledge is traceable to the manuals may not be definitive, unless such information has been ‘isolated’ by the employer impressing on the employee the confidentiality of the relevant information, (as referred to in Faccenda: see 6.59). 6.74 In Force India Formula One Team v Aerolab [2013] RPC 36 (see further 6.107–6.108) the information in question in that case was held to be confidential, Lewison LJ stating (at paragraph 67): ‘The judge appears to have considered … that if the CAD files contained a precise dimension that was “memorable” then that dimension could be regarded as part of the employees’ skill, knowledge and experience. I  disagree. An identified piece of confidential information does not cease to be confidential simply because it is memorable.’

It is worth adding that misuse in the form of copying of information need not always be conscious or deliberate. A person may be shown to have learned of the relevant features of the claimant’s format, and then to have been prompted in the creation of his own format by the presence of those derived features in their subconscious memory: see Wade v British Sky Broadcasting Ltd [2016] EWCA Civ 1214 (at paragraph 4). In that case the appellant had pitched a reality TV format to the respondent which it rejected but later produced a similar format itself. However, Birss J  found that, despite these similarities and the coincidence in time between the pitch and the broadcast, there had been no misuse of confidential information. The Court of Appeal upheld that decision. 6.75 As we have said, it is clear that an employer cannot restrict the use by the employee of his general skill or knowledge after employment. Thus, the decision of the Court of Appeal in FSS Travel & Leisure Systems Ltd v Johnson [1998] IRLR 382 serves as a reminder that the employer must adduce sufficiently cogent evidence to identify a separate body of objective knowledge qualifying for protection by means of a restrictive covenant. It was not sufficient for the employer to assert that he had an accumulated mass of knowledge which he 341

6.76  Confidential information

regarded as confidential. In that case the employer failed to justify a 12-month UK-wide non-competition covenant when the confidential information relied on comprised a computer program in relation to its computerised booking system for the travel industry. It was not established that the defendant took with him or memorised any software programs. The only evidence relied on related to problems encountered and solutions to problems in the computer system and knowledge that ‘something could be done’: this was held to be too vague. The employers were in fact seeking to restrict the ex-employee’s use of his skill, knowhow and general experience, inevitably gained while employed as a computer programmer by the ex-employers. In order further to illustrate the distinction between: (1)  confidential information; and (2)  skill and knowledge, examples from the decided cases are set out by way of an Appendix to this chapter.

2(h)  Non-confidential information 6.76 That which is not confidential the employee is free to use. The starting point is, of course, the other way round, namely that of freedom of speech. The principle of freedom of speech is set out in Article 10 European Convention on Human Rights as implemented into domestic law by the Human Rights Act 1998: see Attorney-General v Guardian Newspapers Ltd (No 2) [1988] 3 All ER 545 (HL) (the Spycatcher case). In the Court of Appeal ([1988] 3 All ER 545), Sir John Donaldson MR said (at page 596): ‘The starting point of our domestic law is that every citizen has a right to do what he likes, unless restrained by the common law, including the law of contract, or by statute. If therefore, someone wishes to assert a right to confidentiality, the initial burden of establishing circumstances giving rise to this right lies on him. The substantive right to freedom of expression contained in Article 10 is subsumed in our domestic law in this universal basic freedom of action.’

Freedom of speech is limited (principally) by the law of defamation and the law relating to confidential information. 6.77 In Faccenda Chicken Ltd v Fowler [1984] ICR 589 Goulding J indicated (in the employment context) that this category of non-confidential information should not be interpreted too broadly; for instance, it is perfectly possible to have a document which is the result of work done by the maker on materials which may be readily accessible to the public, but what makes it confidential is that the maker of the document has used his brain and thus produced a document which can only be produced by someone who has gone through the same process. (For the position now in relation to database rights see Chapter 7.) 6.78  Occasionally an employer will seek to protect even non-confidential information. For example, sometimes an employee will agree in a severance agreement in consideration of the payment of money not to disclose or publish any information whatsoever regarding the employer’s affairs (for the taxation consequences of such an arrangement see 13.111–13.119). Even in relation to nonconfidential information such an agreement can be effective (Attorney General 342

Distinction between trade secrets, mere confidential information and skill and knowledge: detail 6.82

v Barker [1990] 3 All ER 257 (CA)), subject to the public interest defence (see 6.143–6.166). Thus, in Ministry of Defence v Griffin [2008] EWHC 1542 (a case concerned with obligations to government of a sensitive nature) Eady J observed: ‘A contract may embrace categories of information within the protection of confidentiality even if, without a contract, equity would not recognise such a duty.’ 6.79  However, conceivably, if the vow of silence inhibits the employee from earning his living, such an agreement might be void as being an unreasonable restraint of trade: see 6.61 in relation to the distinction made by the Court of Appeal in Faccenda Chicken Ltd v Fowler [1987] Ch  117 between the exemployee who uses mere confidential information in the course of new employment and one who seeks to sell it.

2(i) Can (mere) confidential information be protected by express covenant? 6.80 An important question which arose following the decision of the Court of Appeal in Faccenda Chicken Ltd v Fowler [1987] Ch 117 was whether mere confidential information could be protected by a post-employment restrictive covenant. In our view the answer is yes but there is a further question as to the kind of restrictive covenant which may afford such protection. It is fairly clear that mere confidential information may be protected by a properly drafted non-competition covenant (the kind of covenant which is usually drafted to protect confidential information, rather than client or supplier non solicitation/dealing covenants which are usually justified by reference to business connections). However, there is a further question whether mere confidential information may be protected by express confidentiality covenants and, if so, the extent of such protection. 6.81 Until the decision of the Court of Appeal in Faccenda, it was always assumed that mere confidential information (ie Faccenda category 2) could be protected by express covenant, in particular, by a non-competition covenant. In Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472, at page 1479, Lord Denning MR said: ‘It is thus established that an employer can stipulate for protection against having his confidential information passed on to a rival in trade. But experience has shown that it is not satisfactory to have simply a covenant against disclosing confidential information. The reason is because it is so difficult to draw the line between information which is confidential and information which is not: and it is very difficult to prove a breach when the information is of such a character that a servant can carry it away in his head. The difficulties are such that the only practicable solution is to take a covenant from the servant by which he is not to go to work for a rival in trade. Such a covenant may well be held to be reasonable if limited to a short period.’

6.82 Lord Denning referred to the judgment in Printers & Finishers Ltd v Holloway [1964] 3 All ER 731, where Cross J said (at page 736): 343

6.83  Confidential information

‘Although the law will not enforce a covenant directed against competition by an ex-employee it will enforce a covenant reasonably necessary to protect trade secrets … If the managing director is right in thinking that there are features in the [claimants’] process which can fairly be regarded as trade secrets and which their employees will inevitably carry away with them in their heads, then the proper way for the [claimants] to protect themselves would be by exacting covenants from their employees restricting their field of activity after they have left their employment, not by asking the court to extend the general equitable doctrine to prevent breaking confidence beyond all reasonable bounds.’

See also Lawrence David Ltd v Ashton [1989] ICR 123 (CA) (at page 132) in which the Court of Appeal cited this passage with approval. 2(i)(i)  Faccenda 6.83  Faccenda was not a case where there were any relevant express post termination covenants. Nonetheless, the question of whether the information which the employers were seeking to protect could have been protected by an express covenant was considered by Goulding J and the Court of Appeal. The type of sales information in question was exactly the sort which ex-employers will often wish to protect as against ex-employees. (The trial judge, Goulding J, found that the sales information was clearly of value to a competitor.) Although upholding the decision of Goulding J, the Court of Appeal disagreed with the judge that this category of mere confidential information could be protected by express covenant. It is that part of their judgment (probably obiter) that is most controversial. 2(i)(ii)  Cases after Faccenda 6.84 In Balston Ltd v Headline Filters Limited [1987] FSR 330 (at pages 347– 348) the correctness of the proposition that mere confidential information could not be protected by an express covenant was doubted by Scott J, who thought that the Court of Appeal could not have intended to exclude all such information from possible protection by a restrictive covenant. Scott J referred to the passage from the judgment of Cross J in Printers & Finishers Ltd v Holloway [1965] 1 WLR 1 (see 6.82), quoted with approval by the Court of Appeal in Faccenda Chicken Ltd v Fowler [1984] ICR 589, as to the necessity for employers to protect their trade secrets by exacting express covenants from their employees. Scott J pointed out that an express covenant would not be needed to protect trade secrets – they would fall within the terms of the implied covenant between employer and employee. 6.85  Thus, the Court of Appeal in Faccenda must have been contemplating the protection by an express covenant of confidential information in respect of which an obligation against use or disclosure after termination of the employment could not be implied. Scott J accordingly did not understand the Faccenda judgment as meaning that mere confidential information could not be protected by a suitably worded covenant. This understanding of Scott J  of Faccenda in Balston was approved (obiter) by the Court of Appeal (per Lewison LJ) in Force India Formula One Team v Aerolab [2013] RPC 36 (at paragraph 60). 344

Distinction between trade secrets, mere confidential information and skill and knowledge: detail 6.88

6.86 In Systems Reliability Holdings plc v Smith [1990]  IRLR  377 (a case treated by Harman J on the basis that the covenants were truly vendor and purchaser type covenants and not employer-employee covenants, as to which see 10.51), Harman J agreed with Scott J’s reservations and regarded the remarks of the Court of Appeal in Faccenda as obiter: they did not bind him to hold that an express restrictive covenant could only protect information which was trade secret or the like. These remarks of the Court of Appeal were ‘improbable as being the law’. 6.87 In Lansing Linde Ltd v Kerr [1991] 1 All ER 418 the Court of Appeal supported the move away from the excessively narrow view of confidential information of the Court of Appeal in Faccenda of the type of information which may be protected by express covenant. In this case an ex-director of housing had a contract of employment which included a term that for a period of 12 months after termination of the contract he would not be engaged in any business which competed with Lansing or its associated companies. Staughton LJ regarded the question of whether Goulding  J’s category of mere confidential information could be protected by express covenant as a matter of definition of trade secrets and whether they differ (if at all) from confidential information. (As we have said (6.64) this was surprising in the light of Faccenda but understandable given the difficulties in distinguishing between trade secrets and confidential information). Further, in Lancashire Fires Ltd v SA Lyons & Co Ltd [1997] IRLR 113 at pages 116–17, the Court of Appeal (obiter) supported the view that ‘mere’ confidential information could be protected by a non-competition covenant (paragraph 16) (judgment of Sir Thomas Bingham MR). 6.88 Accordingly (by way of example) it may now be expected that the kind of information referred to in Thomas Marshall (Exports) Ltd v Guinle [1979] Ch 227 will be capable of being protected by way of an express covenant. In that case the Vice-Chancellor, Sir Robert Megarry (at page 248) regarded the following categories of trade information as being potentially confidential: •

Names and telex addresses of the company’s manufacturers and suppliers and their individual contacts.

•

The negotiated prices paid by the company.

•

The names of some overseas buying agents through whom the company dealt.

•

The company’s new ranges, actual or proposed.

•

Information as to the requirements (such as styles) of the company’s customers.

•

Details of the company’s current negotiations.

•

Negotiated prices paid by customers to the company.

•

The company’s samples.

•

The company’s current fast-moving lines. 345

6.89  Confidential information

See also Spafax Ltd v Harrison [1980] IRLR 442 at page 447 where the court regarded as confidential such matters as names and addresses of customers, names of buying agents, recent selling history (dates of recent calls and details of recent purchases) and computer print-outs containing details regarding customers and price lists. 6.89 In AT  Poeton (Gloucester Plating) Ltd v Horton [2000]  ICR  1208 (CA) the Court of Appeal appears to have accepted that mere confidential information could be protected by an express covenant. Charles  J  stated (at paragraph 26) that: ‘If my assumption that the information came within [the class of information which is merely confidential] is right then Aptec could have protected themselves by covenant or patent from which the duties of Mr Horton would have been plain.’

6.90 In Thomas v Farr plc [2007] IRLR 419 (CA), in dealing with the question of whether the ex-employee had been exposed to confidential information sufficient to support a post-termination non-competition covenant, Ramsay J simply asked himself whether Mr Thomas’s appointment as managing director had exposed him to information which Farr was entitled to require to be kept confidential after the termination of his employment. Likewise, in the Court of Appeal Toulson LJ (at paragraph 44) concluded that there was ample evidence to support the judge’s conclusion that the claimant’s appointment as managing director exposed him to information which Farr was ‘entitled to require to be kept confidential after the termination of his employment’. 6.91  That said, Toulson LJ (at paragraph 41) stated that to justify a non-competition covenant, the employer needs to establish that at the time of the contract the nature of the proposed employment was such as would expose the employee to ‘information of the kind capable of protection beyond the term of the contract (ie trade secrets or other information of equivalent confidentiality)’. This comment should be seen in the context of a case in which it was not contended by either party that it was necessary for the information to fall into Faccenda category 3 (trade secret) for it to be capable of protection by restrictive covenant, so that the post-Faccenda cases referred to at 6.84–6.89 were not cited on this point. 6.92  If ‘other information of equivalent confidentiality’ means the same kind of information as Toulson LJ was referring to at paragraph 44, there is no difficulty. If, however, he was saying that an employer may not ‘require’ protection of Faccenda category  2 information (mere confidential information), ie  may only ‘require’ protection of category 3 information (being information which is already protected by implied term), in our view this would be incorrect, for the reasons set out in those post-Faccenda cases above. 6.93  Faccenda was considered in Pennwell Publishing v Ornstien and others [2007] IRLR 700. In that case, Mr Justin Fenwick QC (sitting as a deputy judge of the Queen’s Bench Division) considered whether or not a contact list kept electronically could be protected post-termination as a trade secret, or alternatively pursuant to a covenant. The judge found that individual addresses and 346

Express confidentiality covenants 6.98

contact details did not amount to a trade secret, nor did they fall within the ambit of a covenant protecting confidential information. However, the judge found that a database containing the contact details and private email addresses in respect of the contact list did fall within the ambit of a covenant and therefore was protectable by the employer after termination of the employee’s contract of employment. (Regarding the database aspect of this case see 7.25). 6.94  The judgment is not clear as to whether the judge regarded the database to be a trade secret or, indeed, whether the judge considered that there was any difference at all as between trade secrets and mere confidential information. This judgment would therefore appear to fall within a line of cases which views the distinction between mere confidential information and trade secrets as an unhelpful distinction and looks, instead, to the question of whether information is of a sort which can properly be protected after the termination of an employee’s contract of employment. 6.95  In our view post-termination restrictive covenants in the sense of covenants against competition can be justified by reference to confidential information falling short of trade secrets (the position in respect of an express confidentiality covenant is considered in the next section). It is only what can truly be regarded as general skill or knowledge which cannot be used to justify an express covenant of that sort. Where the information is ‘proprietary’, or more in the nature of protectable or ‘proprietary’ information of the employer than skill and knowledge of the employee, the employer has a legitimate interest which he may protect by restrictive covenant. 6.96  For example, in Routh v Jones [1947] 1 All ER 758 (a covenant by a medical practitioner) Lord Greene MR said (at page 761) that a covenant might be taken to protect for the employer the employee’s knowledge of the clients of the practice and their peculiarities, but not his skill or reputation. Likewise, in SBJ Stephenson v Mandy [2000] IRLR 233 Bell J indicated that an employee’s subjective knowledge could not be protected even by express covenant, whereas the employer’s property, or objective knowledge could be so protected (but see criticism of the language of ‘subjective’ and ‘objective’ knowledge referred to in 6.71). See also Force India Formula One Team v Aerolab [2013] RPC 36 (6.72, 6.74 and 6.107–6.108). 6.97  The cases set out in the Appendix to this chapter help to indicate how the courts have tended to draw the line between the two types of information.

3. EXPRESS CONFIDENTIALITY COVENANTS 6.98  Because of the difficulty of drawing the line between confidential information of the employer and general skill and knowledge of the employee, and also the difficulty of policing breaches of confidence, most employers prefer to protect their trade secrets and confidential information by means of non-competition 347

6.99  Confidential information

covenants – at least in relation to senior employees. However, most contracts of employment also contain express covenants requiring the employee to maintain confidentiality during and after employment. These covenants are helpful, provided that they define and communicate to the employee the kinds of ‘proprietary’ information for which the employer seeks protection. 6.99 It is clear that an express confidentiality covenant unlimited in time is enforceable to the extent that it relates to trade secrets or confidential information akin to trade secrets – to that extent the express covenant would replicate the implied term, and as the Court of Appeal stated in Caterpillar Logistic Services (UK) Limited v Huesca de Crean [2012] IRLR 410 (at paragraph 66): ‘Agreements restricting the misuse of an employer’s trade secrets are commonly of indeterminate length, and are enforced.’

(The decision of the High Court in that case had wrongly (as held by the Court of Appeal) regarded the absence of a time limit in a confidentiality covenant as fatal to the covenant, a position which was not supported by either party to the appeal.) 6.100  It is equally clear that a covenant against post-employment use of confidential information is unenforceable as being in restraint of trade in so far as it purports to prevent the ex-employee from using for his own benefit or that of a subsequent employer information which has become part of his general skill, knowledge and experience. In Ixora Trading Incorporated v Jones [1990]  FSR  251 Mummery J held (at pages 258–9) that the contents of a feasibility study and two manuals (alleged to constitute a fund of technical knowledge and experience) in fact comprised organisational and day-to-day management information which was part of the employee’s skill and knowledge and not confidential, even if this information was acquired in the course of employment and was useful in setting up a similar operation after termination of employment. This was so, despite express contractual obligations not to disclose any of the employer’s affairs or trade secrets during or after employment and providing that any information acquired in the course of employment would remain confidential and would not be used for the benefit of the employee. The express covenants were too wide to be enforceable for the protection of confidential information. 6.101  This approach is preferable to that adopted in SBJ Stephenson v Mandy [2000]  IRLR  233, where the court appears to have given undue weight to a very generally drafted standard confidentiality clause – with the result that a former employee of an insurance broking business was prevented from using his recollection of the names of clients of that business. The court (surprisingly – and contrary to the approach in Ixora) determined that the clause was a valid restraint of trade, and this appeared to influence its decision that the identity of clients (which fell within the broad ambit of the clause) was protectable by the employer, even after termination of employment. 6.102  If the court had examined the nature of this information without regard to any express confidentiality clause, then, in accordance with Faccenda, it should have held that this kind of information was not in the nature of a trade 348

Express confidentiality covenants 6.104

secret so as to be protectable after employment. If regard was then had to the confidentiality clause, it would be most surprising if a very generally drafted confidentiality clause could (in effect) raise the status of such information to that of trade secret: see Balston v Headline Filters [1987] FSR 330 at pages 351–2, in which Scott J referred to the inappropriateness of using confidential information restrictions to fetter the ability of employees to use their skills and experience after employment to compete with the ex-employer. Although he was referring to implied terms (which by their very nature the employee does not have the opportunity of rejecting before employment), the same point can be made in relation to generally drafted confidentiality covenants, which are hardly likely to be rejected by the employee, who is unlikely to realise how swingeingly these covenants may be used against him once he has left employment. 6.103  Indeed, in Reuse Collections v Sendall [2015]  IRLR  226, HHJ  Davies (sitting as a High Court judge) said (at paragraph 163) that: ‘… it would be wrong in principle to allow an employer, by the simple technique of defining confidential information in the widest possible terms, to categorise conduct which, on the facts … would not after employment amount to a breach of reasonable and hence enforceable express restrictive covenants, as a breach of an express confidentiality clause and thus achieve protection against … actual competition through the back door which it could not achieve through the front door.’

We suggest that HHJ Davies is right that the validity of the confidentiality obligation found by the judge should be measured in like manner as covenants in restraint of trade. 6.104  What is not entirely settled, however, is whether an express confidentiality covenant (as opposed to some other form of restrictive covenant such as a noncompetition covenant) can be effective after the end of employment to prevent use of confidential information which is not so confidential as to amount to a trade secret, but does not amount to the employee’s general skill, knowledge and experience. We believe that answer is yes, with certain caveats. In Force India Formula One Team Ltd v 1 Malaysia Racing Team (also known as Force India Formula One Team Ltd as Aerolab Srl) [2012] RPC 29 Arnold J (at first instance) said (obiter, at paragraph 230) that: ‘… in the absence of a restrictive covenant in the strict sense [i.e. a covenant such as a non-competition covenant], the position of an ex-employee is the same whether his contract contained an express confidentiality clause or only an implied term, namely that he can only be restricted from using information which is a trade secret or akin thereto.’

In that case the subsequent use by a specialist aerodynamic design company of certain elements of its design for Lotus’s racing car in a car designed for another Formula 1 team (Force India) amounted to a misuse of confidential information. However, on the facts neither Lotus nor its chief technical operator (who had worked as designer and technical director for a number of Formula 1 teams, including Force India) was liable for breach of confidence. 349

6.105  Confidential information

6.105  In this regard (at paragraph 230) Arnold J noted that Caterpillar Logistics Services (UK) Limited v Huesca de Crean [2012] IRLR 410: ‘… proceeded upon the basis that the covenant against use of confidential information only restrained misuse of trade secrets: see Stanley Burnton LJ at [66].’

6.106  However, there was no contention, still less a decision, in the Caterpillar case that such covenants were limited to protecting trade secrets as opposed to mere confidential information. The comment by Stanley Burnton LJ was obiter. To the contrary, we consider that there is no reason in principle why ‘mere’ confidential information, which does not form part of the employee’s skill and knowledge, should not be capable of protection by an appropriately drafted express confidentiality covenant, in the same way that it can support a non-competition covenant. 6.107 In the Force India case, Force India and Aerolab had entered into an aerodynamic development contract (‘the Development Contract’) to run until 31  December 2009. The Development Contract included express terms as to confidentiality and exclusivity. Employees of Aerolab were also required to enter into ‘analogue’ confidentiality agreements with it in the form of an agreed draft. That draft included an express term making it clear that the employees’ obligations thereunder would continue for a period of two years after termination of their employment by Aerolab and/or the Development Contract itself. 6.108 The Force India case went to the Court of Appeal on an (ultimately unsuccessful) appeal by Force India against Arnold J’s finding that it was in breach of contract and owed the respondent aerodynamic design consultants’ unpaid fees due under the contract, notwithstanding that in some respects it was in breach of contract because some of its employees had copied confidential material belonging to Force India. Relevant to the issue of confidential information, Lewison LJ, considering – again obiter – the express confidentiality covenant (limited to two years’ duration) said (at paragraph 63): ‘The first step in the argument that the judge accepted was that if Aerolab’s employees had left Aerolab’s employment on 1 August 2009 and joined a new employer, they could not have been prevented from putting their skill, knowledge and experience at the disposal of the new employer. I am not sure that it is quite as simple as that. First, the confidentiality agreement between Aerolab and its employees is limited in duration. It will come to an end either two years after the termination of the employee’s employment or two years after the termination of Aerolab’s contract with the customer. Restrictive covenants limited in duration can be valid, if they are reasonable in duration. What is reasonable is a question of fact. In the case of a specialist field like the aerodynamic design of F1 racing cars, determining that question might well require evidence. Second, the employee’s agreement contemplates that if the employee leaves Aerolab the confidentiality agreement might restrict his ability to find alternative employment. But in that event he is entitled to ask to be released from the agreement, either in whole or in part; and Aerolab cannot unreasonably withhold consent. Third, there is a distinction to be drawn between the general skill and experience of an employee and particular pieces of knowledge whose origin can be traced to confidential information.’ 350

Express confidentiality covenants 6.111

These comments need to be considered against the unusual facts of the case: Lewison LJ noted (at paragraph 61) the court was ‘… dealing with a commercial agreement negotiated between commercial parties of equal bargaining power bargaining at arms’ length. Second, we are not dealing with a case in which the clause is sought to be enforced only after the relationship has come to an end’. (Further, it is suggested that looking at the judgment as a whole, Lewison LJ was not suggesting that general skill and knowledge of an ex-employee can be protected by a post-employment restrictive covenant, absent the existence of the usual legitimate interests necessary for the enforceability of a restrictive covenant (the most relevant of which is likely to be confidential information as opposed to general skill and knowledge) – see Chapter 10.) 6.109  We suggest that a tightly drafted express confidentiality covenant which carefully details specific items of confidential information which do not amount to trade secrets but in respect of which the employer reasonably requires protection from use or disclosure post-termination should be enforceable given the right facts. Such a covenant might provide useful protection where there are concerns regarding the enforceability of other kinds of covenants, eg for quite junior employees, such as back office employees, who are exposed to confidential information but in respect of whom a non-competition clause would be seen as excessive and a non-solicitation of clients covenant possibly inapplicable. Such a covenant could help protect information relating to the business of the employer of the kind listed in 6.63 and 6.88. However, the confidentiality covenant would fall to be carefully scrutinised by the court in order to assess whether the information was truly deserving of post-termination protection or instead amounted to an attempt to prevent an employee using his skill and knowledge. 6.110  Further, in certain cases (which we assume would be rare, possibly limited to commercial agreements such as that in Force India) it may be that in order to bring it into line with the position regarding other restrictive covenants, a confidentiality covenant relating to mere confidential information (rather than trade secrets) would have a better chance of being upheld, if it were limited in time to a specified short period of, say, 12–24 months. The draftsman of such a clause might need to be careful that the clause was limited to information which fell into the intermediate category (Faccenda category 2), so as not to detract from the employer’s right to protection in respect of trade secrets or information akin to trade secrets (Faccenda category 3) until they are in the public domain. That said, it will often be too difficult in practice to distinguish between the two categories, so that a pragmatic compromise might be to apply the time limit to information in both categories. 6.111  These difficulties point up the advantages to the employer of including a properly drafted non-competition covenant, when appropriate, in particular where senior employees are involved. (The non-competition covenant must of course have appropriate limitations such as limiting the scope of the covenant to the type of activities with which the employees were involved in his employment: see 11.101–11.117). Further, we are not suggesting that draftsmen of employment contracts should now generally time limit confidentiality covenants: 351

6.112  Confidential information

that is not necessary (see 6.99). Nor do we suggest that such covenants should generally seek to distinguish between mere confidential information and trade secrets – that is impractical: see 6.7–6.8. However, in certain sectors there may well be categories of ‘mere’ confidential information which the employer would wish to prevent the employee from using but may not amount to a trade secret or equivalent (by way of example, the names of customers may well be confidential but not a trade secret). In those circumstances, we consider that it will be worth employers taking the time to draft express, time limited confidentiality covenants which relate to such mere confidential information (particularly for back office and more junior employees). For the sake of completeness it should be mentioned that in Personnel Hygiene Services Limited v Rentokil Initial UK Limited [2014] EWCA Civ 29 the Court of Appeal rejected a submission (based on the Caterpillar decision) that the validity of the confidentiality obligation found by the judge should be measured in like manner as covenants in restraint of trade. The rejection of the submission was on a narrow basis and in our view the Court of Appeal in Personal Hygiene was not saying that express confidentiality covenants could never be subject to restraint of trade principles. In the light of both the practicalities and the authorities referred to in this section any such suggestion would be wrong. 6.112  Conclusion regarding ‘mere confidential’ information. Drawing together the threads, in our view: (a) An employer cannot restrain the use by an (ex-)employee of his general skill and knowledge (perhaps better described as skill and general knowledge or ‘know how’) – whether by any kind of covenant or express term or by resorting to an implied obligation of confidentiality. (b) An employer can protect ‘mere confidential information’ (which is not protected by the implied duty of confidentiality) by a covenant such as a non-competition covenant or by an express confidentiality covenant, properly drawn. (c) As to whether information relating to the employer’s business is mere confidential information, it is helpful (in addition to the usual confidentiality elements (see 6.10–6.18)), to give particular consideration to: (1) Whether the information which is remembered by the (ex-)employee is traceable to a confidential source. (2) Whether it was deliberately memorised by the employee even if not traceable to a confidential source – although the true nature of the complaint may here be breach of fidelity (or fiduciary duty where applicable – see Chapter 4) rather than breach of confidence.

4. CONFIDENTIAL INFORMATION MUST BE PROPERLY IDENTIFIED 6.113  Leaving aside the advantages to the employer of identifying confidential information in the contract of employment (see 6.109–6.111) a common problem which faces employers when approaching the court is to define with 352

Confidential information must be properly identified 6.117

sufficient precision the confidential information which the employer wishes to protect as against ex-employees. The problem may arise because the court regards the employer’s view of what is confidential as exaggerated, but also because the affidavits or witness statements filed on behalf of the employer do not move away from generalities: see, for example, Mainmet Holdings plc v Austin [1991] FSR 538. Part of the reason for the insistence on particularity is that an injunction must be framed with sufficient precision to enable the person enjoined to know what he is prevented from doing (Lawrence David Ltd v Ashton [1989] IRLR 22 (CA)) or to prepare properly for trial (Ocular Sciences Ltd v Aspect Vision Care Ltd [1997] RPC 289). 6.114  The application of the requirement to identify confidential information is highly fact-sensitive: in Lancashire Fires Ltd v SA Lyons [1997] IRLR 113 the Court of Appeal held that it was inappropriate to require the employer (a company of relatively small size) to have to set out for employees the precise limits of what it regarded as confidential, when what was new was an integral part of a process. However, in Poeton v Horton [2003] ICR 1208 the decision in Lancashire Fires was distinguished on the basis that the Court of Appeal there in its reference to ‘precise limits’ made clear that ‘it was not dealing with a case in which extravagant claims are made from which the confidential nature of a small part is to be inferred’. 6.115 In Lawrence David Ltd v Ashton [1989] IRLR 22 at page 27 Balcombe LJ (relying on Littlewoods Organisation Ltd v Harris [1977] 1 WLR  1472 (CA) at page 1479) regarded the difficulty of defining confidential information with sufficient precision for the purposes of a confidential information injunction as one of the reasons justifying the taking of a non-competition covenant. (See also Turner v Commonwealth & British Minerals Ltd (CA) [2000] IRLR 114 (at paragraph 19) to similar effect.) Accordingly, while the Court of Appeal in Lawrence David refused an injunction prohibiting the disclosure of confidential information on the ground of insufficient identification of the information, it upheld the non-competition covenant, which was justified principally (but not exclusively) on the basis that it protected confidential information. 6.116  The requirement fully to particularise the precise confidential information which is relied upon in support of an injunction to enforce an express confidentiality covenant was reiterated by the Court of Appeal in Caterpillar Logistic Services (UK) Limited v Huesca de Crean [2012] IRLR 410 (at paragraph 68). The Court of Appeal there emphasised that: (i) an order specifying that the confidential information be protected by way of injunction should not include wording such as that the restriction included ‘in particular but without limitation’ specified information; and (ii) fully particularised particulars of claim should normally be served before an application for an interim injunction, at least in the ordinary case where an application is on notice, so that the defendant knows precisely the nature of the case against them. 6.117 From an evidential point of view there is therefore a clear distinction between cases where an employer: 353

6.118  Confidential information

(a) seeks to obtain a confidentiality injunction, in which event he must set out his case regarding the existence of confidential information with particularity; and (b) relies upon confidential information as the basis for enforcing a restrictive (usually a non-competition) covenant: here, the trade secrets or confidential information must be particularised sufficiently to enable the court to be satisfied that the employer has a legitimate interest to protect (see Littlewoods Organisation v Harris [1978] 1 All ER 1026, [1977] l WLR 1472 at page 1479F). ‘Sufficient detail must be given to enable that to be decided but no more is necessary’: Scully UK  Ltd v Lee [1998]  IRLR  259 (CA) at paragraph 23 per Aldous LJ. 6.118 In UK  Power Reserve v Read [2014]  EWHC  66, Jeremy Cousins QC sitting as a deputy High Court judge limited the terms of an injunction previously granted without notice to enforce a (quite widely drafted) confidentiality injunction, so that it applied only to information contained in or derived from two specified spreadsheets. The reason for doing so was that it was necessary for the defendant to know precisely what he was prohibited from doing. However, the court granted an injunction enforcing a non-competition covenant because (on the evidence) there may be ‘a body of other information, of a like degree of confidentiality, which remains confidential after the end of the employment, but whose boundaries are more ill-defined’ (paragraph 74). The likely existence of such information was sufficient (at least at the interim stage) to justify the noncompetition covenant. 6.119 Unless the court is satisfied that the ex-employee was at the time of entering into the non-competition covenant likely to be exposed to confidential information, the covenant (if it is taken to protect such information) ought to be struck down: Thomas v Farr plc [2007]  IRLR  419 (CA). This means that the employer must identify at least some of this information, sufficient to show the existence of a legitimate interest. However, in FSS  Travel & Leisure Systems Ltd v Johnson [1998] IRLR 382 the Court of Appeal (per Mummery LJ at paragraph 34) referred to lack of precision in pleading (and absence of solid proof) of trade secrets as being frequently fatal to enforcement of restrictive covenants. If this was intended to mean something different from what was said by Aldous LJ in Scully (the cases were both decided in 1998 without reference to each other), the approach in Scully is to be preferred. There is no point in treating an employer who has troubled to take a restrictive covenant (a key rationale for which is the difficulty of defining confidential information precisely) as if he did not have the benefit of such a covenant. Moreover, as a matter of logic, in seeking to show that the covenant is enforceable, the employer should be required to prove no more than the existence of the legitimate interest (and the reasonableness of the covenant). In Thomas v Farr plc Toulson LJ (with whom the other members of the Court of Appeal agreed) cited with approval the passage by Aldous  LJ in Scully quoted at 6.117(b).

354

Confidential information received by third parties 6.122

5. RESTRICTED SHELF LIFE OF CONFIDENTIAL INFORMATION 6.120  Confidential information or trade secrets do not normally maintain their confidentiality forever. It is a question of fact in each case for how long protection is merited. Once the information no longer has the quality of confidence, in particular because it has lost the attribute of inaccessibility or has become obsolete, it will no longer be protected as confidential. In Balston Ltd v Headline Filters Ltd [1987] FSR 330 at page 348, Scott J thought that the implied duty of confidentiality would always be unlimited in time (and probably in area as well). However, once the information loses the attribute of inaccessibility or is obsolete it will no longer be confidential and therefore the duty to be implied might preferably be said to last until the information is no longer confidential. 6.121 In Prout v British Gas plc [1992]  FSR  478 it was held by the Patents County Court that the duty of confidence (in relation to information placed by an employee under an ‘employee’s suggestion scheme’) would ordinarily have come to an end when the suggestion was publicly used for the employer’s purposes without objection from the employee. However, if the employee gave notice that he intended to seek patent protection, the employer was under a duty to continue to respect the confidence, at least until the employee’s rights had been safeguarded by the filing of a patent application on his behalf. Where the parties have entered into express covenants for a limited period (for example, a non-competition covenant) for the protection of confidential information, the court will often take that agreed period as marking the duration of the duty of confidence (express or implied): Systems Reliability Holdings plc v Smith [1990] IRLR 377; Roger Bullivant Ltd v Ellis [1987] IRLR 491. See also 11.28–11.37 in relation to the reasonableness of the duration of restrictive covenants. The circumstances under which publicity can destroy confidentiality are further discussed at 6.138–6.142 (in the context of the defence of publication).

6. CONFIDENTIAL INFORMATION RECEIVED BY THIRD PARTIES 6.122 A  third party who knowingly receives confidential information may be restrained from using it: Prince Albert v Strange (1849) 64 ER 293; Schering Chemicals Ltd v Falkman Ltd [1981] 2  All ER  321. He will also be liable to account for profits derived from using the information, or for damages. A  third party who ‘turns a blind eye’ where the circumstances are suspicious will be taken to have knowledge: London & Provincial Sporting News Agency Ltd v Levy (1928) MacG  Cop Cas 340 (1923–28). In Vestergaard Frandsen v Bestnet [2013]  ICR  981, the Supreme Court (per Lord Neuberger) held that an individual could not be liable for a breach of confidence if she does not know the identity of the relevant trade secrets, or that they were being used or misused, because ‘an action in breach of confidence is based ultimately on conscience’. Notwithstanding that the cause of action is based on an individual’s conscience, it remains controversial whether something less than ‘blind eye’ knowledge on the part of the third party is enough to impose a duty of confidence on him. 355

6.123  Confidential information

6.123 In Attorney-General v Guardian Newspapers Ltd (No  2) [1988] 3  All ER 545 (CA) (the Spycatcher case) Lord Goff stated (at page 658): ‘I start with the broad general principle (which I do not intend in any way to be definitive) that a duty of confidence arises when confidential information comes to the knowledge of a person (the confidant) in circumstances where he has notice, or is held to have agreed, that the information is confidential, with the effect that it would be just in all the circumstances that he should be precluded from disclosing the information to others. I  have used the word “notice” advisedly, in order to avoid the (here unnecessary) question of the extent to which actual knowledge is necessary; though I of course understand knowledge to include circumstances where the confidant has deliberately closed his eyes to the obvious. The existence of this broad general principle reflects the fact that there is such a public interest in the maintenance of confidences, that the law will provide remedies for their protection.’

6.124 In Campbell v Mirror Group Newspapers Ltd [2004] 2  AC  457 Lord Nicholls at paragraph 14 referred to a duty of confidence being imposed ‘whenever a person receives information he knows or ought to know is fairly and reasonably to be regarded as confidential’, and in Imerman v Tchenguiz [2011] 2 WLR 592, at paragraph 69 Lord Neuberger MR (delivering the judgment of the Court of Appeal) referred to a breach of confidence in looking at documents which ‘were (or ought to have been) appreciated by the defendant to be, confidential to the claimant’. 6.125  Subsequently, in Vestergaard, Lord Neuberger (at paragraph 23) referred to the classic case of a breach of confidence relating to a situation where an individual ‘had agreed, or ought to have appreciated, that’ an item was confidential, but said (at paragraph 39) that an injunction to restrain use of confidential information might be justified if it could be shown that the defendant ‘appreciated or, perhaps, ought to have appreciated, that’ the information was confidential. 6.126 Accordingly, while it is clear that actual or ‘blind eye’ knowledge that the information in question is confidential will place the recipient under a duty of confidence there is some doubt whether negligence is sufficient. Two first instance authorities have decided that negligence is sufficient. In Primary Group v RBS  [2014]  EWHC  1082, Arnold J  reviewed the authorities and concluded that whether or not a person has notice that information is confidential is to be assessed objectively by reference to a reasonable person standing in the position of the recipient (see further 6.17). 6.127 In Personal Management Solution v Brake Bros [2014]  EWHC  3495, HHJ Curran QC (sitting as a High Court judge) said that he considered himself effectively bound by Arnold J’s reasoning that the test is an objective one, and stated that in any event he agreed with Arnold J’s reasoning. It is plain that the concept of ‘conscience’, the basis of the law of confidence, is now being used in an extended, special sense (ie one not dependent on actual or ‘blind-eye’ knowledge that the information is confidential). Indeed, in Vestergaard the Supreme Court confirmed that, once it is found that an individual has received information in confidence, ‘their state of mind when using the information’ is irrelevant; in 356

Confidential information disclosed in pre-employment period  6.131

other words, an individual can be liable for breach of confidence although they are not conscious that they are using the information at all. 6.128  A third party who receives confidential information not knowing that it is confidential may be restrained from using it after notice of impropriety: Malone v Commissioner of Police of the Metropolis (No 2) [1979] 2 All ER 620; Printers & Finishers Ltd v Holloway [1964] 3 All ER 731; Fraser v Evans [1969] 1 All ER 8; Vestergaard Frandsen v Bestnet [2013] ICR 981. This would appear to be subject to two provisos, namely that it has not lost its quality of confidence by becoming too widely disseminated, and the third party has not provided value for it.

7. INJUNCTIONS TO PROTECT CONFIDENTIAL INFORMATION AFFECTING VESTED RIGHTS OF THIRD PARTIES 6.129  Often the ex-employer obtains injunctive relief not only against the exemployee but also the new employer (to whom the ex-employee has transferred his loyalties) to prevent both from using the ex-employer’s trade secrets or confidential information. Also, the court may grant an injunction preventing the ex-employee from continuing with a contract of employment where to enter into such employment would be in breach of a covenant as against the ex-employer (often a non-competition covenant taken to protect confidential information). The effect may be to deprive the new employer (who may be entirely innocent) of his contractual rights to the services of the employee. Although the court will be readier to restrain the entering into of future contracts, it may even deprive the third party of acquired contractual rights. 6.130 Accordingly, in PSM  International plc v Whitehouse [1992]  IRLR  279 the Court of Appeal (while reiterating that the court should be wary of granting equitable remedies which would interfere with the contractual rights of innocent third parties) upheld the grant of an injunction restraining the new employer (a company controlled by the ex-employee) from proceeding with or fulfilling orders which had been placed by a former customer of the claimant in circumstances in which it was arguable that in obtaining these orders the ex-employee had used trade secrets of the claimant. It is worth adding that the English courts do not recognise a doctrine of ‘inevitable breach’, that is a doctrine preventing an employee from assuming employment with a rival on the basis that he will inevitably breach confidence in his new position (absent a restrictive covenant to that effect): see 15.92–15.95.

8. CONFIDENTIAL INFORMATION DISCLOSED IN PRE-EMPLOYMENT PERIOD 6.131  Interesting problems may arise in the pre-employment period, particularly in relation to the imparting of confidential information by the proposed employer or proposed employee during discussions about the possible appointment. The 357

6.132  Confidential information

employer who is proposing to employ a senior employee may reveal confidential information about the business (eg confidential financial information) in order to enable the proposed employee to value a share option offered by way of a ‘sweetener’ or in response to a due diligence question. On the other hand, the prospective employee may reveal confidential information regarding the identity and volume of business received from customers of his present employers whom the proposed employee expects will follow him to his new employment. This is likely to amount to a breach of confidence and a breach of the duty of fidelity visà-vis the present employer, except in the unlikely event of his having consented to disclosure, and may therefore render the prospective employer vulnerable to proceedings. The usual principles governing the definition and the protection of such information will apply. 6.132 For the proposed employer contemplating disclosing important confidential information it is well worth his considering entering into a written confidentiality agreement with the potential employee before any confidential information is revealed. Such an agreement will be particularly important where the potential employee is currently working for a competitor who could cause significant damage to the proposed employer, were they aware of the confidential information. 6.133  The confidentiality agreement should: •

identify the information to be treated as confidential;

•

limit the use of that information by the potential employee solely to the preemployment negotiations and employment, if it results;

•

prohibit disclosure of the information to any third party other than financial and legal advisers in confidence; and

•

require delivery up of documents and all copies containing the information, and irrevocable deletion of the information incorporated into any computer system immediately upon the breakdown of the negotiations.

6.134  Where the negotiations result in employment, the employer should also ensure that the contractual obligations on confidentiality and return of property are sufficiently widely drawn to catch information disclosed pre-commencement of employment. In Tullett Prebon Plc v BGC Brokers LP [2011] IRLR 420 the Court of Appeal (per Maurice Kay LJ) appeared (at paragraph  42) to expand the implied term of trust and confidence to include confidential information disclosed during an interview process prior to entering into the contract, using the following example: ‘Take … a man who goes for a job interview and accepts an offer of employment on being told confidential details of the prospective employer’s business plan. He then returns to his current employer, intending to hand his notice in, but is persuaded not to move, whereupon he divulges the confidential details of the now rejected employer’s business plan to his present and future employer, a competitor. In those circumstances, it seems to me that he would be in breach of an obligation of trust and confidence vis-à-vis the rejected employer.’ 358

Defences 6.137

We consider that the example given by the Court of Appeal can better be analysed as a breach of confidence, rather than a breach of trust and confidence by an employee who never commences work. (For further detail on suggested contractual provisions on confidentiality and return of property see 5.43–5.44 and 5.138–5.140.) 6.135 It is also worth new employers (and employees) bearing in mind that entering into an express non-disclosure agreement will not relieve the employee of his obligations of fidelity to his current employer, which may (depending upon the circumstances) require disclosure of information about the proposed activities of competitors by the employee to his current employer. As the High Court (Popplewell J) held in Imam-Sadeque v Bluebay Asset Management [2013] IRLR 344 (at paragraphs 147–149): ‘If a senior employee, who is seeking to join what he knows to be a potential rival, learns of a competitive threat from that source, of which he would otherwise be under a duty to warn his employer, he cannot relieve himself of that obligation by virtue of having entered into a contractual duty towards the rival not to fulfil it. If he could, the duty of fidelity in such cases could be bypassed or severely emasculated by the expedient of entering into an NDA with the competitor. It is not unusual for parties to undertake mutually inconsistent contractual obligations. The existence of one does not excuse non-performance of the other.’

In those circumstances, the entering into of such a non-disclosure agreement may give rise to a tortious claim for inducement of breach of contract by the potential new employer.

9. JOINTLY OWNED CONFIDENTIAL INFORMATION 6.136  In the absence of any contractual relationship, a claimant who co-owned a package of confidential information put together to facilitate a business project was held to be powerless to protect the information after a decision taken by his co-owner to exclude him from participating in the project. The use of the information to the detriment of the claimant could not be relied on to found an action for breach of confidence: Murray v Yorkshire Fund Managers Ltd [1998] 1 WLR 951.

10. DEFENCES 6.137  The principal defences which an employee or ex-employee may raise when faced with a breach of confidence action by the employer or ex-employer are: • publication; •

the public interest defence.

We also consider a further potential defence in relation to an alleged breach of a contractual duty of confidence, namely repudiatory breach by the (ex-)employer 359

6.138  Confidential information

of the contract of employment – which may arguably destroy the duty of confidence (although in our view it does not).

10(a)  Publication 10(a)(i)  When will publication destroy confidentiality? 6.138 It is very difficult to describe the degree of publication that is necessary to destroy confidentiality. This matter was the subject of much debate in Attorney-General v Guardian Newspapers Ltd (No 2) [1988] 3 All ER 545 (CA) (the Spycatcher case). In that case Sir John Donaldson MR said in the Court of Appeal (at page 595): ‘As a general proposition, that which has no character of confidentiality because it has already been communicated to the world, ie made generally available to the relevant public, cannot thereafter be subjected to a right of confidentiality … However, this will not necessarily be the case if the information has previously only been disclosed to a limited part of the public. It is a question of degree.’

In the same case Bingham LJ said (at page 624): ‘The information must not be “public knowledge” (Seager v Copydex [1967] 1 WLR 923, 931G per Lord Denning MR), nor in the public domain: Woodward v Hutchins [1977] 1 WLR 760, 764D per Lord Denning MR. To be confidential, information must have what Francis Gurry recently called the basic attribute of inaccessibility.’

6.139  The law may still treat as confidential information which is quite widely available: Exchange Telegraph Company Ltd v Central News Ltd [1897] 2 Ch 48, and see also the Spycatcher case (at page 643) per Lord Keith. In deciding whether confidence has been destroyed by publication it is necessary to focus precisely on what it is that is the subject of confidence. In Douglas and another v Hello! Ltd and others (No 3) [2007] UKHL 21, [2008] AC 1, the opinion of Lord Nicholls (in the minority) was that once the authorised photographs of the wedding of Mr and Mrs Douglas were published by OK!, the publication of the unauthorised photographs by Hello! a few hours later was not a breach of confidence. In his opinion ‘the unapproved pictures contained nothing not included in the approved pictures’. However, Lord Hoffmann (in the majority) concluded (at paragraphs 120–125) that the obligation of confidence was maintained even after publication of some (authorised) photographs. OK! had paid significant sums for the exclusive rights to images of the wedding. Every such image would be treated as a separate piece of information which OK! would have the exclusive right to publish. Once the pictures published by OK! were put into the public domain, those particular pictures were no longer protected by the law of confidence (but they were protected by law of copyright). However, no other pictures of the wedding were in the public domain – and they did not enter the public domain merely because they resembled other pictures which had. 6.140 In PJS v News Group Newspapers [2016] AC 1081 the Supreme Court (at paragraph 25) held that, in a confidentiality case (rather than a claim based 360

Defences 6.143

on privacy, as was that case) a ‘quantitative test … measuring what has already been disclosed with what is yet undisclosed … is not only appropriate but potentially decisive in the context of an application based on confidentiality’. Lord Neuberger noted (at paragraph 57) that 25% of the population were said to know the identity of ‘PJS’ (who brought the claim for a permanent injunction preventing publication of his name in connection with a story), and: ‘there comes a point where it is simply unrealistic for a court to stop a story being published in a national newspaper on the ground of confidentiality, and, on the current state of the evidence, I would, I think, accept that, if one was solely concerned with confidentiality that point had indeed been passed in this case.’

6.141  If the claimant publishes the confidential information before he brings proceedings (eg  by including it in the specification for the purposes of a patent application), that will ordinarily destroy the confidentiality: Mustad & Son v Allcock & Co Ltd and Dosen [1963] 3 All ER  416; Franchi v Franchi [1967] RPC 149. However, that is not the case where it is the confidant who is responsible for its publication: Speed Seal Products Ltd v Paddington [1986] 1 All ER  91. See also Attorney-General v Guardian Newspapers Ltd (No  2) [1988] 3 All ER  545 at page 649 per Lord Griffiths. However, Lord Goff (at pages 661–2) expressed doubts in this regard, saying that once confidential information has ceased to exist as confidential information, the duty of confidence must be destroyed no matter who destroyed it; the confidant who so destroys the confidential information may, however, be put under a special (‘springboard’) disability: see 15.78–15.152 regarding springboard injunctions. 10(a)(ii)  How management can protect confidential information which needs to be circulated to the workforce 6.142  Confidentiality is not lost where information is disclosed to a limited number of people who have an interest to receive it. In Sun Printers Ltd v Westminster Press Ltd [1982] IRLR 292 Donaldson LJ said: ‘There is nothing, in my judgment, to prevent the fullest communications between management and the workforce under a seal of confidentiality.’

The claim for an injunction failed in that case because the employer failed to stamp ‘confidential’ on each document and to make it clear that the widespread distribution of information to the workforce did not mean that the report in question ceased to be confidential.

10(b)  Public interest defence 6.143  The public interest which requires that (in general) confidences should be upheld sometimes dictates the opposite, namely that confidences be broken: as, for example, where the alleged confidence relates to the commission of a crime or civil wrong. This is expressed by the maxim ‘there is no confidence as to the disclosure of iniquity’ (per Wood V-C  in Gartside v Outram (1856) 26 LJ Ch 113). From this has developed the (broader) public interest defence: 361

6.144  Confidential information

Attorney-General v Guardian Newspapers Ltd (No 2) [1988] 3 All ER 545 (HL) at page 649 per Lord Griffiths. 6.144 In Initial Services v Putterill [1968] 1 QB 396 Lord Denning MR stated (at page 405) that the defence: ‘… should extend to crimes, frauds and misdeeds, both those actually committed as well as those in contemplation, provided always, and this is essential, that the disclosure is justified in the public interest.’

See also: Beloff v Pressdram Ltd [1973] 1 All ER 241 at pages 259–60. 6.145 The defence was broadened in Lion Laboratories Ltd v Evans [1985] QB 526 (see first example in 6.155), in which Griffiths LJ expressed it as follows (at page 550): ‘I  can see no sensible reason why this defence should be limited to cases in which there has been wrongdoing on the part of the [claimants] … [I]t is not difficult to think of instances where, although there has been no wrongdoing on the part of the [claimant], it may be vital in the public interest to publish a part of his confidential information.’

In that case the claimant manufactured a device which was approved for use by the Home Office as a device for testing the breath of drivers suspected of driving with excess alcohol. Two technicians who had worked on the instrument left the claimants’ employment and contacted national newspapers with copies of the claimant’s internal correspondence. The Court of Appeal held that it had to weigh the public interest in maintaining the confidentiality of the claimant’s documents against the public interest in the accuracy of an approved device on which depended the liability of a person to disqualification, a fine, or imprisonment for a drink driving offence. The claimant was the only manufacturer licensed to produce the instrument and owed an obligation to the public to ensure that it was maintained to the highest standards, otherwise there would be the possibility of wrongful convictions and loss of liberty. Accordingly, it was in the public interest that information which showed that the instrument was not reliable should be made public. 6.146  In the same case Stephenson LJ formulated the defence in this way (at page 536): ‘The courts will restrain breaches of confidence … unless there is just cause or excuse for breaking confidence. The just cause or excuse with which this case is concerned is the public interest in admittedly confidential information. There is confidential information which the public have a right to receive and others, particularly the press, now extended to the media, may have a right and even a duty to publish, even if the information has been unlawfully obtained in flagrant breach of confidence and irrespective of the motive of the informer.’

A useful summary of the cases on the public interest defence is contained in the judgment of Rose J in X v Y [1988] 2 All ER 648. 362

Defences 6.150

6.147  Further, the public interest in freedom of expression (enshrined in Article 10 of the European Convention on Human Rights) may well be engaged. In Matuz v Hungary [2015] IRLR 74, the European Court of Human Rights decided that a journalist’s Article 10 rights had been infringed when he was dismissed for breach of confidentiality by publishing a book alleging censorship by his employer, a state broadcaster. The court held that, where the right to freedom of expression of a person bound by professional confidentiality is being balanced against the right of employers to manage their staff, the criteria laid down in the ECHR’s case law is as follows: (a) the public interest involved in the disclosed information; (b) the authenticity of the information disclosed; (c) the damage, if any, suffered by the authority as a result of the disclosure in question; (d) the motive behind the actions of the reporting employee; (e) whether, in the light of the duty of discretion owed by an employee toward his or her employer, the information was made public as a last resort, following disclosure to a superior or other competent body; and (f) the severity of the sanction imposed. As will be seen below, many of these criteria are broadly encompassed within the English court’s general approach to the public interest defence. 10(b)(i) Distinction between public interest and what may be interesting to the public 6.148  As to what is to be regarded as in the public interest, it is relevant to bear in mind the words of Lord Wilberforce in British Steel Corporation v Granada Television Ltd [1981] 1 All ER 417 at pages 455e–f: ‘… there is a wide difference between what is interesting to the public and what is in the public interest to make known.’

As Stephenson  LJ said in Lion Laboratories Ltd v Evans [1985]  QB  526 at page 537C: ‘The public are interested in many private matters which are no real concern of theirs and which the public have no real pressing need to know.’

6.149  However, the distinction between matters which are strictly private and those which it is considered the public need to know is not always easy to draw: compare Campbell v MGN [2004] 2 All ER 995, in which the House of Lords (by narrow majority) held that the details of the appellant’s medical condition and treatment for drug addiction were private information importing a duty of confidence, with Campbell v Frisbee [2003] ICR 141, in which the Court of Appeal reluctantly held that it was arguable that details of a public figure’s private relationships could be disclosed in the public interest to correct a false impression that the individual had placed before the public (relying in part on Woodward v Hutchins [1977] 1 WLR 760). 6.150  See also A v B plc [2002] All ER 545, where the public interest in a premiership footballer’s behaviour off the field contributed to the Court of Appeal allowing the appeal against the grant of an interlocutory injunction restraining the publication of his name in a newspaper article, despite the player not actively courting publicity, and Theakston v MGN Ltd [2002] All ER (D) 182 (details of a visit by a television presenter to a brothel could be published but not photographs 363

6.151  Confidential information

of his activities there). In Barrymore v MGN [1987] FSR 600 a distinction was drawn between disclosure of the existence of a sexual relationship by unmarried sexual partners (which might be a breach of confidence) and publication of what that partner revealed they disclosed to each other about other relationships, in particular marital relationships (which might cross the line so as to amount to a breach of confidence). In Mosley v News Group Newspapers Limited [2008] EWHC 1777 (QB) the details of a high-profile businessman’s sex life conducted on private property were accepted as private, although Eady J suggested (at paragraph 122) that had it been shown that there was a Nazi or racist element to the sexual role play that was being carried out, such acts could potentially be disclosed, at least to those to whom Mr Mosley was accountable. 6.151  See also SKA, PLM v CRH at the interim stage [2012] EWHC 766 and at full hearing [2012]  EWHC  2236, where the court granted an injunction to restrain the disclosure (by blackmailers) of photographs, financial information and intimate details of the private lives of the claimants, but declined to grant an injunction restraining disclosure to the wife and children of one of the claimants that he was having a sexual relationship with the second claimant, or the fact that she was shortly due to give birth to twins fathered by the first claimant. The court held that there will not commonly be a reasonable expectation of privacy in respect of ‘the bare fact of a sexual relationship, or a parental or other family relationship’, and the interests of the first claimant’s grown children, wife (and twins when they were born) in knowing these facts (and the Article  8 and 10 European Convention on Human Rights rights of those individuals) were important considerations. At the interim stage, the court said this: ‘The argument that it is no business of the Defendants in the present case to be giving information to the First Defendant’s wife and grown up children adds nothing to the discussion. It may well be none of their business, in colloquial terms. But individuals who wish to exercise their rights of freedom of expression do not have to demonstrate that they are minding their own business. They can say what they choose, when, and to whom they choose, subject to the general law and the rights of others.’

6.152  As stated by Keene LJ in Douglas v Hello! Ltd (No 1) [2001] 2 All ER 289 at page 329: ‘breach of confidence is a developing area of the law, the boundaries of which are not immutable but may change to reflect changes in society, technology and business practice.’

That being said, the distinction between what is interesting to the public and what is in the public interest to make known remains a true distinction: see CC v AB [2006] EWHC 3083 (at paragraph 36). 10(b)(ii)  Narrow category of wrongs 6.153 Initially the public interest defence appeared to be limited to a quite narrow category of wrongs but later cases have indicated a broader approach. Examples of the narrower category are: 364

Defences 6.155

•

Where accounting and business information indicated that the employer was defrauding his customers: Gartside v Outram (1856) 26 LJ Ch 113.

•

Where there were breaches of regulatory schemes or improprieties in relation to tax: Re a Company’s Application [1989] 3 WLR 265.

•

(Arguably) where there was information of breach of the claimant’s duty to register a pricing agreement under the Restrictive Trade Practices Act 1956: Initial Services v Putterill [1968] 1 QB 396.

10(b)(iii)  Broader category of wrongs 6.154 In Fraser v Evans [1969] 1 QB 349 Lord Denning MR (at page 361) said that ‘iniquity’ was merely an instance of ‘just cause or excuse for breaking the confidence’. There are, however, difficulties in defining this broader category of matters which may be disclosed in the public interest. The broader approach: ‘…  involves the judge in balancing the public interest in upholding the right to confidence, which is based on the moral principles of loyalty and fair dealing, against some other public interest that will be served by publication of the confidential material … I have no doubt … that in the case of a private claim to confidence, if the three elements of quality of confidence, obligation of confidence and detriment or potential detriment are established, the burden will lie on the defendant to establish that some other overriding public interest should displace the [claimant’s] right to have his confidential information protected. (Attorney-General v Guardian Newspapers Ltd (No 2) [1988] 3 All ER 545 at page 649 per Lord Griffiths; and see Lord Goff at page 659).’

10(b)(iv)  Examples of broader category wrongs 6.155  Examples of the broader category are: •

Internal memoranda casting doubt on the accuracy of breathalyser instruments relied on in prosecutions: Lion Laboratories Ltd v Evans [1985] QB 526.

•

Matters regarded by the court as constituting a threat to the health or welfare of the community: Hubbard v Vosper [1972] 1 All ER 1023 and Church of Scientology of California v Kaufman [1973]  RPC  635 (information regarding scientology), but not where the threat has passed: Schering Chemicals Ltd v Falkman Ltd [1981] 2 All ER 321 (allegedly dangerous drug already withdrawn from the market).

•

Conduct misleading to the public: Initial Services v Putterill [1968] 1 QB 396 (arguably): wrongly claiming to the public that a price increase was because of tax; see also Church of Scientology (that large fees were being charged for what was ‘mumbo-jumbo’).

•

Information revealing corruption regardless of whether there is a lack of hard evidence of criminality: Jockey Club v Buffham [2003] 1 QB 462. It was noted in this case (at page 479) that a regulatory body such as the 365

6.156  Confidential information

Jockey Club may be more readily open to scrutiny than an individual or private company. •

An accountant’s report (in redacted form) criticising a ‘value for money’ evaluation which was a crucial part of the public-private partnership for London Underground: London Regional Transport v Mayor of London [2001] EWCA Civ 1491.

•

Disclosures exposing the alleged falsity of the claimant’s public image (possibly): see Campbell v Frisbee [2003] ICR 141.

• In Woodward v Hutchins [1977] 1 WLR 760, Lord Denning MR said that there should be ‘truth in advertising’ so that the public should not be misled (private lives of pop musicians could be disclosed by their former public relations officer). This decision seems to stretch the limits of the public interest defence and has long been thought to have been wrongly decided. However, in Campbell v Frisbee the Court of Appeal reluctantly accepted that it might be arguable that the public interest in disclosure might take precedence over the public interest in a duty of confidence where the subject of the disclosed information is in the public eye and has misrepresented themselves to the public; contrast Stephens v Avery [1988] Ch 449, where information disclosed on the express basis that it was confidential included the claimant’s sexual conduct, including details of her lesbian relationship. This information was regarded as capable of being subject to a duty of confidence in the circumstances. In Douglas v Hello! Ltd (No  1) [2001] 2  All ER  289 at page 330 the Court of Appeal confirmed that personal sexuality was an extremely intimate aspect of a person’s private life, and therefore the reasons for interference must be concomitantly serious before disclosure will be legitimate. 10(b)(v)  On what evidence may the employee disclose? 6.156  There must be reasonable grounds for the employee to suspect that the misdeed has been or will be committed. It must not be ‘upon a mere roving suggestion … or even perhaps on a general suggestion’ (Gartside v Outram (1856) 26 LJ Ch 113). 6.157 In Attorney-General v Guardian Newspapers Ltd (No  2) [1988] 3  All ER 545 at page 644 Lord Keith of Kinkel was of the view that there must at least be a prima facie case that the allegations have substance. Lord Goff said (at page 660): ‘… a mere allegation of iniquity is not of itself sufficient to justify disclosure in the public interest. Such an allegation will only do so if, following such investigations as are reasonably open to the recipient, and having regard to all the circumstances of the case, the allegation in question can reasonably be regarded as being a credible allegation from an apparently reliable source.’

6.158 In Re a Company’s Application [1989] 3 WLR 265 at page 270 Scott J said (referring to Lord Keith’s remark) that it was made in the context of a disclosure 366

Defences 6.161

threatened to be made to the world at large, a disclosure which would have taken place in the national press. He said that where the disclosure which is threatened was no more than a disclosure to a recipient which has a duty to investigate matters within its remit, it was not, in his view, for the court to investigate the substance of the proposed disclosure unless there was ground for supposing that the disclosure went outside the remit of the intended recipient of the information. 10(b)(vi)  Disclosure to whom? 6.159  Disclosure of what would otherwise be confidential information in order to be justified by the defence of just excuse must be to a person with a proper interest to receive such information. In Initial Services v Putterill [1968] 1 QB 396 at page 405 Lord Denning MR said that the disclosure must be to one who has a proper interest to receive the information. Accordingly, it would be proper to disclose a crime to the police, or a breach of a regulatory scheme to the regulator: Re a Company’s Application [1989] 3 WLR 265. Likewise, in Imutrans Ltd v Uncaged Campaigns Ltd [2001] 2 All ER 385 an interim injunction was granted which did not prevent the defendants from communicating the relevant information to the specialists connected with the regulatory authorities. There might be cases where the misdeed was of such a character that the public interest might demand, or at least excuse, publication on a broader field, including to or by the media – especially by a responsible publisher: see Jockey Club v Buffham [2003] 1 QB 462 (at paragraph 57(iv)). 6.160 Put differently (in the words of Sir John Donaldson MR in AttorneyGeneral v Guardian Newspapers Ltd (No  2) [1988] 3 All ER  545 (CA) (the Spycatcher case) at page 596): ‘… the nature and degree of the communication must be proportionate to the cause or excuse.’

See also Lord Griffiths at page 649. In cases of civil misdeeds the appropriate person to whom disclosure should be made is the victim, and in cases involving the community, disclosure to the press might be appropriate. 6.161  The significance of the nature and extent of the proposed disclosure is illustrated by the decision in Re a Company’s Application [1989] 3 WLR 265, in which Scott J refused to grant an injunction against a former employee of a company providing financial services restraining him from informing FIMBRA (the appropriate regulatory body) of alleged breaches of the regulatory scheme. Likewise, the ex-employee was not restrained from informing the Inland Revenue of confidential information relating to fiscal matters. Scott J doubted that an employee’s duty of confidence extended to not disclosing information to the regulatory authority or not to disclose fiscal matters to the Revenue. If the ex-employee had threatened general disclosure of the company’s information, there would have been no answer to an injunction (at page 269C). Accordingly, the court would probably have granted an injunction restraining the ex-employee from communicating to anyone other than his legal advisers the fact that he had 367

6.162  Confidential information

instigated the relevant investigations – but the defendant proffered an appropriate undertaking to that effect to the court. See also W v Edgell [1989] 2 WLR 689. 6.162  Where the publication of confidential information is justified in the public interest, and disclosure has been made to an appropriate person or authority, there is no obligation on the publisher to first disclose to the owner of the information the material which is to be published in order to give the owner an opportunity to reply: Tillery Valley Foods Ltd v Channel Four Television Corpn [2004] EWHC 1055. 10(b)(vii)  Bad faith on the part of the employee 6.163 Generally, where the public interest defence exists, the motive of the employee will not be relevant: Lion Laboratories Ltd v Evans [1985] QB 526 at page 536; Re a Company’s Application [1989] 3 WLR 265; and Mosley v News Group Newspapers Limited [2008] EWHC 1777 at paragraph 112. However, in doubtful cases bad faith may tip the balance against the employee: see Schering Chemicals Ltd v Falkman Ltd [1981] 2 All ER 321 at pages 338–9; Weld-Blundell v Stephens [1919] 1 KB 520. Of course, bad faith may also go to the strength of the public interest defence, indicating that it may have been ‘dreamt up’ by the defendant: see Re a Company’s Application at page 269. 10(b)(viii)  Distinction between public interest defence (breach of confidence) and defence of justification in defamation 6.164  In a defamation case the court will not (except in rare cases) grant an injunction to prevent publication where the defence of justification is raised. The public interest in freedom of speech will be upheld, but the court will restrain the publication of obvious lies: Harakas v Baltic Mercantile and Shipping Exchange Ltd [1982] 1 WLR 958. In the case of breach of confidence there is, however, a competing public interest in the duty of confidence being upheld, and it is for the defendant to show a prima facie public interest defence. In Lion Laboratories Ltd v Evans [1985] QB 526 at page 550 Griffiths LJ said: ‘But if the same approach [as in defamation] was adopted in actions for breach of confidence it would … indeed be a mole’s charter. There is a public interest of a high order in preserving confidentiality within an organisation. When there is an admitted breach of confidence, there will usually be a powerful case for maintaining the status quo by the grant of an interlocutory injunction to restrain publication until trial of the action. It will, I  judge, be an exceptional case in which a defence of public interest which does not involve iniquity on the plaintiff will justify refusing an injunction. But I am bound to say that I think this is such a case.’

6.165 The difference in approach of the courts in relation to defamation and breach of confidence cases was neatly summarised by Lord Hoffmann in Jameel v Wall Street Journal SPRL [2006] UKHL 44 (at paragraph 38), where he stated: 368

Defences 6.168

‘Until very recently, the law of defamation was weighted in favour of claimants and the law of privacy weighted against them. True but trivial intrusions into private life were safe. Reports of investigations by the newspaper into matters of public concern which could be construed as reflecting badly on public figures domestic or foreign were risky. The House attempted to redress the balance in favour of privacy in Campbell v MGN Ltd [2004] UKHL 22 and in favour of greater freedom for the press to publish stories of genuine public interest in Reynolds v Times Newspapers Ltd [2001] 2 AC 127.’

6.166  Accordingly, where there is a possible public interest defence or defence of justification, the claimant who can sue either for breach of confidence or defamation is usually in a stronger position to obtain an interlocutory injunction relying on breach of confidence: see the discussion in Lion Laboratories Ltd v Evans [1985] QB 526 at page 538 where earlier authorities to the contrary are doubted. The decision of the Court of Appeal in Woodward v Hutchins [1977] 1 WLR 760, in which an injunction based on breach of confidence was refused, essentially because it was interwoven with a claim based on libel, appears to have been wrongly decided in this respect. The approach in Lion Laboratories is to be preferred. As to the effect of section 12 Human Rights Act 1998 on an interim injunction which might, if granted, affect the exercise of the right to freedom of expression, see 14.80–14.82.

10(c) Effect of repudiatory breach of contract in relation to breach of confidence 6.167 In Campbell v Frisbee [2003]  ICR  141 the Court of Appeal held that the effect of wrongful repudiation on contractual duties of confidence was not so clearly established to enable the confider to be granted summary judgment against the confidant whose defence was that a repudiatory breach of contract released the confidant from the duty of confidence. It could not be said that this defence was bound to fail at trial. However, the Court of Appeal did not expect this defence to succeed at trial. In our view, this defence is indeed flawed, and the judgment below of Lightman  J  [2002] EWHC 328 (Ch) (based in part on a passage of Morritt  LJ in Rock Refrigeration Ltd v Jones [1996] IRLR 675 at paragraph 48) is correct, namely that the fact that a contract of employment is terminated upon repudiatory breach of the employer could not displace the employer’s rights in respect of confidential information. In our view, even though there may be (as is usual) an express duty of confidence, confidentiality does not reside in contract alone; it also exists in equity. It is illogical to assume that rights to confidentiality are expropriated by the confidant/employee, simply by virtue of a repudiatory breach of the confider/employer.

10(d)  Whistleblowing 6.168 Under the Public Interest Disclosure Act 1998 specific rights were introduced for those who disclose information to a third party about an alleged 369

6.169  Confidential information

wrongdoing in defined circumstances. The Act does not provide a general ‘whistleblowers’ charter, but provides instead for the channelling of disclosures through specific sources. Where disclosure takes place through those specific sources, and where in the reasonable belief of the employee making the disclosure it relates to one of the six specific categories amounting to qualifying disclosures (section 43B  Employment Rights Act 1996) and is in the public interest, the employee will be protected from victimisation on the grounds of making that disclosure (section 47B), and any dismissal by reason (or principal reason) of making the disclosure will be automatically unfair (section 103A). Any agreement is void insofar as it purports to preclude the worker from making a protected disclosure (section 43J). 6.169  A full analysis of the purpose and effect of the Public Interest Disclosure Act 1998 is beyond the scope of this book. The Act is in effect a statutory enactment of the ‘just cause’ defence echoing the concept of permitted limited breach of confidence to appropriate parties. The reader is referred to the leading text on the subject: Bowers, Fodder, Lewis and Mitchell Whistleblowing Law and Practice (OUP, 2012).

370

APPENDIX TO CHAPTER 6

Examples of cases showing the difference between confidential information and general skill and knowledge

NON-TECHNICAL INFORMATION (1) In Island Export Finance Ltd v Umunna [1986]  BCLC  460 Hutchinson J held (at page 483g) that knowledge of a potential market which could be exploited was something which became part of the employee’s/director’s own skill and knowledge and which he could use for his own benefit in competition with the employer after termination of his appointment. Here the alleged confidential information was of a requirement for a large number of caller boxes in the Cameroons and that there was a manufacturing source in the United Kingdom. It was held that directors (no less than employees) acquire a general fund of knowledge and expertise and will not, where such knowledge and expertise in truth becomes part of their stock in trade, be precluded from exploiting it merely because they came by it solely because of their position as directors (page 482b-e). (It would of course be entirely different where the ex-director uses his knowledge of a business opportunity which was being actively pursued by the company.) See E Warsley & Co Ltd v Cooper [1939] 1 All ER 290 (a case in which there were no express covenants) in which Morton J held that the names of suppliers (of paper to the employers who were paper merchants) amounted to knowledge, skill and experience, although this information was treated by the employers as confidential. Arguably, the type of information in these cases could have been protected by express confidentiality covenant. (2) In Stephenson Jordan and Harrison Ltd v MacDonald and Evans [1952] 1  TLR  101 the compilation and application of certain (well-known) accounting principles to a particular business were held to be general skill and knowledge and not confidential information. We suggest that this type of information could not have been protected by an express covenant. (3) In Baker v Gibbons [1972] 1 WLR 693 the name and address of a particular employee of the employer/names of the employer’s selling agents were not (apart from the case where a list was taken or memorised) regarded as 371

Examples of cases showing the difference between confidential information and general skill and knowledge

confidential: arguably the information relating to the selling agents might have been protected by an express covenant. (4) In G D Searle v Celltech [1982] FSR 92 (CA) the Court of Appeal held that names, aptitudes, characteristics or fields of specialisation of employees (in the absence of express covenants relating to such matters) were not confidential. In the absence of restrictive covenants, there was nothing to stop a number of employees in concert deciding to leave their employer and set themselves up in competition with him (it is very doubtful whether this latter statement remains good law, save in very narrow circumstances: see the analysis in QBE v Dymoke [2012] IRLR 458 (at paragraphs 176–179), citing with approval an earlier edition of this book). In Searle, Brightman LJ (dissenting on this point) was prepared to accept (at page 106) that an employee leaving one commercial organisation for another was not prima facie at liberty to divulge to his new employer the identity of the skilled workforce of his former employer in order to enable his new employer to poach such workforce, if such information was in the possession of the ex-employee only because of his former employment. The view of Brightman LJ is in our view correct, at least where there is an express covenant identifying such information as confidential and where the identity of such members of the workforce is not widely known, although questions may arise as to the ‘shelf-life’ of the confidentiality of such information. (5) In Sir W C Leng & Co Ltd v Andrews [1909] 1 Ch 763, 774 Farwell LJ held that details of office organisation, general organisation and management of the business of the employer, were not capable of protection by express covenant: the employer’s claim failed for the same reason in Herbert Morris Ltd v Saxelby [1916]  AC  688; and see also Commercial Plastics Ltd v Vincent [1964] 3  All ER  546, 551 (CA); Amway Corporation v Eurway International Ltd [1974] RPC 82; and Ixora Trading Incorporated v Jones [1990] FSR 251. On the other hand, in Littlewoods Organisation Ltd v Harris [1977] 1  WLR  1472, 1484 (CA) Megaw LJ accepted that knowledge obtained by Harris as chairman of the Littlewoods Organisation of such matters as the trend of mail order sales, the percentage and identity of the returns, and the sources of manufacture, plans for future catalogues and the results of market research were confidential. (6) In Berkeley Administration Inc v McClelland [1990] FSR 505 (related to the litigation in Ixora Trading Incorporated v Jones referred to above) Wright J  held that financial information in a business plan, namely the average operating profit per bureau de change operated by the employer, the average profit in the first year of operation expressed as a percentage of the full year‘s profit, the average capital cost per bureau, the average number of annual transactions per bureau and the average value per transaction, was not confidential, since the information was either wellknown or part of the general knowledge and experience of the employees. This finding was made despite the fact that most of the information was contained in a book marked confidential, of which a limited number of copies were produced, each copy being numbered, a record being kept of all 372

Non-technical information

recipients and confidentiality firmly impressed on anyone who had anything to do with it. There were apparently also express contractual confidentiality covenants, although they are not considered in the judgment, the question of confidentiality being dealt with on general principles. The decision of the court can be justified on the basis of the key factual finding that figures contained in the book were not genuine historical or forecast figures, but were merely assumptions for the purpose of supporting any proposal to raise a particular sum of money. Further, some of the information had actually been advertised by Berkeley in the press. (7) In FSS Travel & Leisure Systems Ltd v Johnson [1998] IRLR 382 a computer program in relation to computerised booking systems for the travel industry was held not to be trade secret. Problems encountered and solutions to problems in the computer system and knowledge that ‘something could be done’ was held to be too vague: the employers were in fact seeking to restrict use of the ex-employees’ general skill and knowledge. (8) In Systems Reliability Holdings plc v Smith [1990] IRLR 377, 384 Harman J held that in the case of vendor and purchaser type covenants it was proper that the vendor should be prevented from using or disclosing confidential knowledge in his head concerning the business or services supplied by the company. (9) In British Midland Tool Ltd v Midland International Tooling Ltd [2003] 2  BCLC  523 it was held that confidentiality is unlikely to reside merely in the manner in which information, which would otherwise not be confidential, is stored. Rejecting a submission that confidentiality resided in the totality of the information comprising technical know-how, available to the claimant in an accessible library form, the court held that the electronic library comprised simply a collection of individual drawings containing information which the claimant was unable to assert was confidential to it alone. The fact that they were stored compendiously and accessibly in folders created by an AutoCAD system did not remedy that defect in the claim. (10) In Thomas v Farr plc [2007] IRLR 419, the Court of Appeal upheld the judge’s findings that Mr Thomas (ex-Managing Director) had confidential information which Farr had a legitimate continuing interest to protect (by a non-competition covenant) in the following categories: (i) business development through the use of a captive insurer; (ii) exploitation of new areas of business within social housing; (iii) exploitation of new geographical markets; (iv) business development through acquisition of other businesses; and (v) pricing and financial information relating to clients and insurers. (11) In Pennwell Publishing v Ornstien [2007] IRLR 700 the court considered whether or not a contact list kept electronically could be protected posttermination as a trade secret, or alternatively by means of a covenant. The judge found that individual addresses and contact details did not amount to a trade secret, nor did they fall within the ambit of a covenant protecting 373

Examples of cases showing the difference between confidential information and general skill and knowledge

confidential information. However, the judge found that a database containing the contact details and private email addresses in respect of the contact list did fall within the ambit of a covenant and therefore was protectable by the employer after termination of the employee’s contract of employment. (12) In Towry EJ v Bennett [2012] EWHC 224, in considering the efficacy of an express confidentiality covenant covering such details and the general law of confidence, Cox J found that the body of clients (or customers) and the details relating to them are the ‘lifeblood’ of any business involved in the provision of financial advice, and that those details constitute the type of information which such a business needs to protect. She rejected a submission that, to the extent that individual defendants would have retained such details in their head, they amounted to stock in trade or skill and knowledge: ‘The fact that a financial adviser may retain such information in his head, without any deliberate effort to do so, does not … render it any the less confidential. If it were otherwise, an employee who left his employment would then be entirely free to use such client information in any way he chose, and the employer would be unable to rely upon contractual, posttermination clauses preventing the misuse of such information.’ However, the claimant failed to prove misuse of such information. Similarly, in Le Puy Ltd v Potter [2015] IRLR 554 the court (at the interim stage) regarded it as ‘well arguable’ that the contact details of customers referred to in an express confidentiality covenant were sufficiently valuable information as to deserve protection.

TECHNICAL INFORMATION (1) In Printers & Finishers Ltd v Holloway [1964] 3  All ER  731 in a wellknown passage Cross J, in putting forward a reasonable man test of honesty to distinguish between the employee’s knowledge and confidential information of the employer, put the onus squarely on the shoulders of the employer to take express covenants so as to enable the employee to distinguish between the two categories: the employer failed principally because: •

the employee might not realise that a particular feature of the employer’s process was peculiar to the employer’s process; and

•

even if he did, the knowledge in question was not readily severable from his general knowledge of the flock printing process and his acquired skill in manipulating a flock printing plant (page 736D–F).

(2) In Under Water Welders & Repairers Ltd v Street and Longthorne [1968] RPC 498 a novel process for the cleaning of ships’ hulls was held (for purposes of an interlocutory injunction against ex-employees) to be confidential even though the claimant’s evidence did not provide details of the process which gave it a confidential character, the court basing its 374

Technical information

decision on the fact that there was strong evidence that the information was treated by the claimant and both defendants (and others) as confidential and that the defendants’ case did not sufficiently negate confidentiality. It is unlikely in today’s atmosphere of greater scepticism regarding claims of confidentiality that an injunction would have been granted in these circumstances. (3) In United Sterling Corporation Ltd v Felton and Mannion [1974] RPC 162 (in contrast with Under Water Welders), Brightman J undertook a useful review of the earlier authorities bearing on the distinction between general knowledge and confidential information, holding that in the absence of an express covenant the knowledge of an ex-employee gained during employment as to a new process for producing polystyrene was knowhow and not the employer’s confidential information. He sought to explain (at pages 172–173) the differing decisions in Printers and Under Water Welders. In both cases the claimant company had operated the process in question under licence from a third party imposing a duty of confidence. Further, in both cases the employee was aware of the employer’s duty of confidence and had either expressly or impliedly been under instruction to preserve confidence. The difference was, however that: • In Printers there was no secret feature of the process readily severable from Holloway’s general knowledge and skill. This led Cross J  to conclude that a reasonable man would not have thought there was anything improper in his using that information post-employment for the benefit of another employer. In contrast in Under Water Welders the judge concluded that the process did involve some secret characteristic readily distinguishable from the managing director’s general knowledge of the business of cleaning ships’ hulls; •

Printers was decided after full trial with full opportunity to debate the principles involved, whereas Under Water Welders was decided in interim proceedings.

The latter point is significant: it may be considerably more difficult to persuade a judge at trial on all the evidence that the process is truly confidential than to set up an arguable case of confidentiality on paper for the purposes of obtaining interim relief. Thus in Lawrence David Limited v Ashton [1989] IRLR 22 (CA) the Court of Appeal (in emphasising that the principles of American Cyanamid Co v Ethicon Ltd [1975]  AC  396 (HL) were normally applicable to applications for interim injunctions in restrictive covenant cases) held that all the claimant must establish was that there was a serious issue to be tried as to confidentiality, and held (following Cranleigh Precision Engineering Ltd v Bryant [1964] 3 All ER 289) that various manufacturing techniques (as well as customer connection and knowledge of their requirements in a highly specialised field) were arguably confidential so as to support an area covenant. See also Diamond Stylus Company Ltd v Bauden Precision Diamonds Ltd [1973] RPC 675. 375

Examples of cases showing the difference between confidential information and general skill and knowledge

(4) In Balston Ltd v Headline Filters Ltd [1987] FSR 330 the court followed the strict approach of the Court of Appeal in Faccenda towards the definition of what was a trade secret. While Scott J regarded it as arguable that the claimant’s specific blend of fibres (for the glass microfibre tubes which it sold) was a trade secret, he regarded a claim to be entitled to restrain the ex-employee from using blends substantially the same as the specific blends as a claim to prevent him from using his knowledge and experience of mixing grades of fibres to produce filter tubes with particular specifications. The ex-employee’s knowledge of the mixes necessary to meet particular specifications included knowledge of the claimant’s mixes which could not be separated from the sum total of the ex-employee’s knowledge of the manufacturing process. In the absence of an express non-competition covenant the ex-employer was not entitled to protection against anything more than its specific fibre mixes. At trial – [1990]  FSR  385 – Falconer J appeared to accept that the fibre mix recipes were confidential (at page 420) although not highly secret, but was of the view that the sort of recipes which would be likely to produce a particular filter tube was part of the knowledge and expertise of the ex-employee. Accordingly, while the specific recipes were confidential, the knowledge of the general area in which a recipe must lie to produce a particular result was part of the ex-employee’s expertise or know-how. (5) In Johnson & Bloy (Holdings) Ltd v Wolstenholrne Rink plc [1987] IRLR 499 (CA) Fox and Parker LJJ held (at pages 501 and 502) that to limit any restraint to the precise details of the ex-employer’s precise formulae was not adequate since it would or might enable the restraint to be avoided by small variations in the percentages of the constituents or otherwise. In this case the claimant alleged that the combination of the ingredients and the particular proportions in which they were used in the drying agent utilised in the manufacture of one of the inks was unique and amounted to a trade secret. The Court of Appeal upheld the employer’s claim for an injunction preventing the use of this information on grounds (among other things) that there was an arguable case that the information amounted to a trade secret. Unlike Balston this was a case where the ex-employee had improperly removed documents containing information relating to the ex-employer’s formulae. The fact that the ex-employee might by the injunction be prevented from using his general chemical knowledge was accordingly regarded as a problem of his own making. Although the illicit removal of documentation is primarily relevant to the second ground of the decision of the Court of Appeal, namely the application of the springboard doctrine, the ex-employee’s conduct may also have encouraged the Court of Appeal to take a wider view of what amounted to trade secrets. (6) At the interim stage the claimant need only establish an arguable case of confidentiality (see Graham v Delderfield [1992] FSR 313) and it may be a tempting course for the judge in a case involving complicated scientific data to say that the matters can only be properly investigated at trial and that for interim purposes the claimant must be treated as having an arguable case. However, in Lock International plc v Beswick [1989] 3 All 376

Technical information

ER 373 Hoffmann J refused to ‘… allow the [claimant] to blind the court with scientific banalities’, and held that (save in one respect) the claimant did not have even an arguable case in relation to technical information relating to metal detectors manufactured by the claimant. Hoffmann J distinguished between a case where the employee has general familiarity with the claimant’s product (which was pre-eminently the kind of skill and knowledge which the honest employee cannot help taking away with him) and one where the ex-employee is shown to have detailed knowledge of the employer’s trade secrets. See also Mainmet Holdings plc v Austin [1991] FSR 538. (7) In Morison v Moat (1852) 21  LJ  Ch  248. one of two business partners unlawfully disclosed to his son, the defendant, a secret recipe which constituted the confidential information of the other partner. After the death of the partners the personal representatives of the partner entitled to the obligation of confidence obtained an injunction to prevent the defendant commercialising the secret recipe. The case is cited as authority for the proposition that an equitable duty of confidence towards another may survive the death of the party to which it is owed as the question is not one of property (ie, whether or not a cause of action once owned by the deceased has been assigned) but is one of conscience. (8) In Reid & Sigrist Ltd v Moss Mechanism Ltd (1932) 49  RPC  461 the defendant was restrained from disclosing methods of construction or design for turn indicators for use in aeroplanes developed by his employer during his employment. In the course of the development of the indicators by the employer, the employee took part in confidential discussions with an outside expert advising on the best method of dealing with certain problems which had arisen. While still employed, the defendant made and later took away with him drawings covering the various matters discussed. (9) In Lancashire Fires Ltd v SA Lyons & Co Ltd [1997] IRLR 113 the Court of Appeal held that the claimant’s production process was a trade secret even though the employer had not pointed out to the employee the precise limits of what he sought to protect as confidential. (10) In Poeton Industries Ltd v Horton [2000] ICR 1208 Charles LJ found that the method of electroplating used by the claimants did not amount to a trade secret. (11) In Cray Valley Ltd v Deltech Europe Ltd [2003]  EWHC  728 (Ch) in relation to structural resin business a breach of confidence claim against ex-employees failed. Jacob J held that former employees were not liable where they were able to produce resin from remembered knowledge and there were no express provisions relating to confidentiality or trade secrets.

377

CHAPTER 7

Database rights Gavin Mansfield QC Introduction

7.1

1. Databases qualifying for the database right 1(a) Database 1(b) Fruit of substantial investment 1(c) Territorial qualification

7.5 7.5 7.8 7.26

2. Infringement of the database right 

7.28

3. Duration of the database right

7.37

4. Ownership of the database 

7.40

5. Remedies 

7.50

6. Allocation of claims

7.54

INTRODUCTION 7.1  Protection for the owners of databases is to be found in the Directive on the Legal Protection of Databases 96/9/EC (‘the Database Directive’). The Database Directive was given effect in English law by the Copyright and Rights in Databases Regulations 1997 (SI 1997/3032) (‘the Regulations’). 7.2 The Regulations create two rights: first, ‘database copyright’, where the database itself is a literary work capable of receiving copyright protection; and, secondly, a ‘database right’, which is a sui generis right distinct from both copyright and confidentiality. Whereas the provisions of the Regulations dealing with database copyright address the application of the existing law of copyright to databases, the database right is a creature of statute, and its limits are defined entirely by the Regulations. The focus of this chapter is on the database right, not database copyright. The database right derives from an EU Directive, at the time of writing it is unclear what the effect of the UK’s decision to leave the EU will be on its continued existence and scope. 7.3  A claim of infringement of database rights may be a useful claim as an additional or alternative claim to a claim of breach of confidence – see Chapter 6 (Confidential Information). Comparison between the database right and other intellectual property rights, such as copyright, is outside the scope of this work (for further information see Copinger and Skone James on Copyright (17th 379

7.4  Database rights

edition, 2016)). However, the claim for infringement of the database right may have advantages. Principally, there is no requirement that the information contained in the database is confidential. The database right may be relied on where the information does not have the quality of confidence, even where the employer allows the public to consult the database. On the other hand, the protection offered by the database right is weakened by the fact that the focus is on the investment in the collection of materials, rather than the investment in the underlying materials themselves. Employers and their representatives will need to produce evidence as to the time and effort that went into obtaining, verifying and presenting the collection of materials (see 7.8–7.25). 7.4  In summary, this Chapter covers the following topics: •

Databases which qualify for the database right: 7.5–7.27.

•

Infringement of the database right: 7.28–7.36.

•

Duration of the database right: 7.37–7.39.

•

Ownership of databases: 7.40–7.49.

•

Remedies: 7.50–7.53.

•

Allocation of claims: 7.54.

1. DATABASES QUALIFYING FOR THE DATABASE RIGHT 1(a) Database 7.5  The Regulations protect ‘databases’ as defined in section 3A(1) Copyright, Designs and Patents Act 1988. A database is defined by that section as: ‘a collection of independent works, data or other materials which— (a)

are arranged in a systematic and methodical way, and

(b)

are individually accessible by electronic or other means.’

7.6  It follows from the breadth of the definition, and in particular from the language ‘accessible by electronic or other means’ that a database may be a manual paper-based database, such as a card index, or a client list maintained on paper. However, it is most likely that database rights will arise in relation to computerbased databases. 7.7  There may be scope for argument in marginal cases as to whether a particular document or series of documents constitutes a database or not. For there to be a database there must be a collection of independent ‘works, data or other materials’. Those materials may be gathered together in a single document, but they must each be independent materials. So, for example, a list of client contact details may constitute a collection of independent materials. On the other hand, a business plan (even one containing references to the identities of clients) is more likely to 380

Databases qualifying for the database right 7.12

constitute not a collection of independent works, but a single whole, with each part dependent for its sense and meaning on the other parts of the document. The database right subsists in the collection of works, not the constituent elements. Each element may, or may not, be confidential or subject of copyright, but the database right subsists only in the collection of works. On the other hand, a collection of data qualifying for the database right remains a protectable database even if it is incorporated into a copyright work: see Football Dataco Ltd v Sportradar GmbH [2013] EWCA Civ 27 [2013] Bus LR 837 per Sir Robin Jacob (paragraphs 24–30).

1(b)  Fruit of substantial investment 7.8  A database will be protected by database right if ‘there has been a substantial investment in obtaining, verifying or presenting the contents of the database’ (regulation 13(1)). Investment for these purposes means ‘any investment whether of financial, human or technical resources’ (regulation 12(1)). This gives rise to two questions. First, as to the nature of the activity in which investment is made. Secondly, whether the investment is ‘substantial’. 7.9  As to the first question, the investment condition places the emphasis on the way in which information is collected and maintained, rather than on the quality of the information itself. The relevant investment must be in ‘obtaining, verifying or presenting’ the contents of the database. Two points flow from this. First, as mentioned above in relation to the definition of a database, it is immaterial whether or not the database or any of its contents is a copyright work (regulation 13(2)). It is also immaterial whether the database or its content is confidential. Secondly, investment in creating the constituent elements data of the database is not a relevant investment: see 7.13. 7.10  The database right may therefore be a useful alternative method of protection of databases such as client lists, where the information contained in the database may arguably not be confidential, but where the employer has invested considerable resources in collating and maintaining the information. 7.11  However, that is not to say that it will always be easy to demonstrate that a particular database qualifies for the database right. It will in most cases be relatively easy to show that a particular set of information is a database, but demonstrating that there has been substantial investment in obtaining, verifying or presenting the contents may not be straightforward. 7.12  The nature of the investment required by regulation 13 was considered by the CJEU in British Horse-Racing Board Ltd v William Hill Organisation Ltd [2005] RPC 260. The British Horse-Racing Board kept a database of information concerning horse racing in Britain. This included, amongst other things, ‘pre-race’ information on races due to take place. For example, the date, time and location of the race and the names of the horses in each race. The British HorseRacing Board was responsible for collating lists of entrants for each race, and for tasks such as allocating a race number and starting gate to each entrant, and 381

7.13  Database rights

such information was included in the lists it published. William Hill published information from the database on its website. The British Horse-Racing Board claimed that William Hill had infringed its database right by extracting and reutilising a substantial part of the database. 7.13  Although the cost expended on the database amounted to around £4 million per year, the British Horse-Racing Board failed to establish that its database qualified for the database right. The relevant investment for the purposes of regulation 13 is the investment in ‘obtaining, verifying or presenting’ the contents of the database, and not the investment in the creation of the contents. The CJEU held that the maker of a database cannot therefore rely on his investment in creating the underlying material contained in the database. The CJEU held at paragraph 31 that the relevant investment is that of: ‘the resources used to seek out existing independent materials and collect them in the database, and not to the resources used for the creation as such of independent materials. The purpose of the protection by the sui generis right provided for by the directive is to promote the establishment of storage and processing systems for existing information and not the creation of materials capable of being collected subsequently in a database.’

7.14 Similarly, investment in ‘verification’ for the purposes of the Directive refers to: ‘the resources used, with a view to ensuring the reliability of the information contained in that database, to monitor the accuracy of the materials collected when the database was created and during its operation. The resources used for verification during the stage of creation of data or other materials which are subsequently collected in a database, on the other hand, are resources used in creating a database and cannot therefore be taken into account in order to assess whether there was substantial investment in the terms of Article  7(1) of the directive’ (CJEU at paragraph 34).

7.15  The CJEU held that the fact that the person creating the database is also the creator of the materials contained in the database does not preclude that person from claiming the protection of the database right, provided that he establishes that the obtaining of those materials, their verification or their presentation required substantial investment which was independent of the resources used to create those materials (British Horse-Racing Board Ltd, paragraphs 34–36). 7.16 In Football Dataco (see 7.7) the claimant engaged analysts who watched live football matches and communicated information about the matches to a processor who entered the information into a database. The Court of Appeal held that in so doing the claimant was obtaining data, not creating it, and therefore the database qualified for protection. It did not matter that some subjective information (the assessment of the analysts of the match) was mixed in with the objective data such as the facts of goals, free kicks and corners. 7.17 In Freistaat Bayern v Verlag Esterbauer GmbH [2015] Bus LR 1428 the CJEU decided, perhaps surprisingly, that a topographical map constituted a 382

Databases qualifying for the database right 7.22

database. It might be thought that a map would be an example of a single artistic work, rather than a collection of independent works. However, the CJEU held that a map comprised a collection of independent materials, the independent elements comprised geographical co-ordinate points and the codes which identify what features are located at those points (eg churches, tracks, cycle paths). A significant part of the CJEU’s reasoning appears to be the fact that those individual elements were valuable to the defendants, who extracted them from the map (by scanning) to create different maps of their own showing some but not all features of the infringed map. 7.18 In the employment context, the problem is illustrated by the following example. In the course of employment an employee is likely to generate a large number of electronic documents: correspondence, presentations, business plans and financial documents. Typically, these may be stored in one or more folders on the employer’s computer systems. Such materials, taken as a whole, may be of value to the employee in setting up a competing business: they may amount to a ‘how to’ set of tools for setting up in competition. They may or may not contain confidential information: the employer would have to prove the confidentiality of the material. Would the database right attach to such a collection of materials? 7.19  Such documents would fall within the expression ‘works, data or other materials’ (section 3A(1) Copyright, Designs and Patents Act 1988). 7.20 As the materials are stored on a computer, then certainly they would be ‘accessible by electronic or other means’, and could doubtless be searched using standard search facilities commonly provided within computer operating systems. 7.21  Whether or not the documents are arranged in a ‘systematic and methodical way’ will require careful consideration in each case. At one extreme, the employer may operate a system whereby a central bank of documents is stored and maintained for future use (eg a solicitor’s precedent bank). At the other end of the spectrum, each individual employee may store or delete particular documents according to their own particular working method, and may pay no attention to how the documents are arranged, or where they are stored. Arguably, a haphazard accumulation of such material would not amount to a database. On the other hand, it may be argued that a computer’s operating system will automatically store material in a systematic and methodical way (eg  in alphabetical or date order); it is unclear whether such a minimal ‘default’ arrangement is sufficient to amount to a database. 7.22  Even if the materials are arranged in a systematic and methodical way, the next question is whether there has been substantial investment in obtaining, verifying or presenting the contents of the database. There is very little guidance on what will constitute a substantial investment. Two points emerge from the legislation. First, the Regulations provide that the substantiality of the investment can be either qualitative or quantitative (regulation 12(1)). Secondly, Recital 19 of the Database Directive provides an exclusionary illustration: 383

7.23  Database rights

‘the investment in the compilation of several recordings of musical performances on a CD would not generally come within the scope of the Directive as it would not represent a substantial enough investment.’

7.23  In our example at 7.18, there may well have been much time, effort and investment devoted to creating individual documents, but when it comes to storing and arranging them, all the employee is likely to do is store them to a default location, or choose a folder to store them in. In that situation there is little or no investment by the employee; so, unless there has been some form of substantial investment in a bespoke system for storing and searching a database of documents, all of the relevant investment is likely to have been in the creation of the underlying materials, and not in obtaining, verifying or presenting those materials in a database. 7.24  It would, of course, be possible for the employer to argue that any particular individual document was confidential, or the copyright of the employer. 7.25  A similar line of argument would be available in relation to contact lists, particularly those stored in commonly available programmes such as Microsoft Outlook, or stored in the contacts software of a mobile device. A substantial list of contacts can be built up simply by adding to a list from time to time; for example, if each time an employee receives an email or text from a new client he saves their contact details. In Pennwell Publishing (UK) Ltd v Ornstien [2007]  EWHC  1570  QB, a claimant succeeded in showing it had a database right in relation to an Outlook Contacts address list. However, the issue in the case was ownership of the database, and the point does not seem to have been taken that the list did not qualify for the database right at all. It should of course be borne in mind that where an employer is seeking to protect a contact list, or a list of business opportunities, there will frequently be a good argument that the compilation of materials is confidential to the employer, so that the compilation may be protected by a claim for breach of confidence (see Chapter 6).

1(c) Territorial qualification 7.26  There is a territorial limitation to the database right: by regulation 18, the maker (or one of the joint makers) of the database must be: •

a natural person who is a national of, or habitually resident in, a European Economic Area (‘EEA’) state (ie a member state of the European Union, Iceland, Liechtenstein, or Norway); or

•

a legal person incorporated under the laws of an EEA state with its central administration or principal place of business in an EEA state, or its registered office in an EEA state and its operations linked on an ongoing basis with the economy of an EEA state; or

•

a partnership or other unincorporated body formed under the laws of an EEA state.

384

Infringement of the database right 7.31

7.27  This would seem to suggest that if a US company carries on business in the UK, even if a database is created in the UK by persons employed in the UK, the database would not be protected by the database right, if the company did not have a registered office in the UK.

2. INFRINGEMENT OF THE DATABASE RIGHT 7.28 A database right in a particular database is infringed if a person extracts or re-utilises all or a substantial part of the contents of the database without the owner’s consent. 7.29  Extraction means ‘the permanent or temporary transfer of those contents to another medium by any means or in any form’ (regulation 12(1)). So, for example, copying the contents of a client list onto a USB drive, or disk, or emailing the contents of a database to another computer would be extraction. Printing off a hard copy would also constitute extraction. Re-utilisation means making those contents available to the public by any means (regulation 12(1)). In the Database Directive reutilisation is defined to include the distribution of copies, renting, on-line and other forms of transmission (Art 7(2)(b)). Although this wording does not appear in the Regulations, the Regulations should be read subject to the Database Directive in this regard. 7.30 The CJEU in the British Horse-Racing Board case made the following points regarding extraction and re-utilisation: •

Extraction and re-utilisation should each be interpreted widely as referring to any unauthorised appropriation or distribution to the public.

•

The extraction or re-utilisation need not be directly from the database, but may be from a copy or other extract.

•

It is irrelevant whether the extraction or re-utilisation is for the purposes of competition; nor is it relevant whether the extraction or re-utilisation takes place in the course of an activity which is not the creation of a new database (British Horse-Racing Board, paragraph 47).

•

However, unauthorised consultation of the database is not extraction or re-utilisation.

7.31  Extraction does not necessarily require the mechanical copying of the database, eg by cutting and pasting it into a computer file, or by photocopying a print out. Extraction may be carried out by an employee consulting the database and manually transcribing its contents: see Case C-304/07: DirectMedia Publishing GmbH v Albert-Ludwigs-Universitat Freiburg [2008] WLR (D) 312 (CJEU). In that case, the University had a collection of verse titles which it published on the internet. It was accepted for the purposes of the reference that the collection constituted a database. DirectMedia produced a CD-ROM of German verse. It did so by consulting the University’s database, assessing which poems it wished 385

7.32  Database rights

to include and manually transcribing the title. The CJEU held that this was an extraction, but left the question of whether the extraction was of a substantial part to the national court. Extraction is to be interpreted broadly, and refers to any unauthorised appropriation of the whole or part of the contents of a database. The extraction occurs when the contents are stored in a medium other than the protected database: Apis-Hristovich EOOD v Lakorda AD C-545/07 [2009] Bus LR 1554. 7.32  Re-utilisation requires making the contents available to the public (regulation 12(1)). The CJEU held in Innoweb BV v Wegener ICT Media Case C-202/12 [2014] Bus LR 308 paragraph 37 that ‘“re-utilisation” refers to any unauthorised act of distribution to the public of the contents of a protected database or a substantial part of such contents’. Further, the nature and form of the process used are of ‘no relevance’. ‘The public’ is not defined in the Regulations, nor in the Copyright, Designs and Patents Act 1988, but in copyright law the term has traditionally been given a wide meaning: the public may be a narrower group of people than the public at large. Whether a group of people constitutes ‘the public’ depends on the size and nature of the group. See for example Sociedad General de Autores y Editores de España (SGAE) v Rafael Hoteles SA [2007] IP&T 521 at paragraphs 48–54 where the CJEU held that distribution of television programmes by a hotel to guests in its rooms amounted to ‘communication to the public’ for the purposes of breach of copyright. 7.33  The CJEU in Apis-Hristovich (see 7.31) at paragraph 46 held that the objective pursued by the act of extraction or re-utilisation is immaterial. In Executive Grapevine International Ltd v Wall [2012] EWHC 4152 Norris J held (paragraphs 13–14) that innocent infringement (by a defendant who claimed he did not know that the database right persisted in the particular database) was no defence, but may be relevant to the question of the measure of damages. Similarly, the Court of Appeal in Football Dataco v Sportradar GmbH (see 7.7) held that it was not necessary for the customers of the infringing service to have knowledge in order to be joint tortfeasors. 7.34  For the purpose of establishing jurisdiction for a claim of infringement of the database right, it may be necessary to consider where the extraction or reutilisation occurs. Where a defendant is domiciled in an EU member state he may be sued in tort (including statutory torts) in the courts of the place where the harmful event occurred. Database infringements may often happen over the internet, and the infringement may involve a number of different States. In Football Dataco the question of jurisdiction was referred to the CJEU (Case C-173/11 [2013] 1 CMLR 29). The defendants placed material from the claimant’s database on their web servers in Germany. They made the data accessible to their customers, located in various countries, including the UK. Sending data to a customer, via a web server, at the customer’s request was a re-utilisation or extraction. However, the mere fact that the customer was in the UK was not sufficient to mean that the re-utilisation took place in the UK. It was necessary to consider whether the defendants had intended to target persons in the UK. Similarly, in the law of copyright, an infringing communication may occur both 386

Duration of the database right 7.38

in the state where the communication originates, and in the state where it is received, if the communication was targeted at the public in the latter state: see EMI Records Ltd v British Sky Broadcasting Ltd [2013] Bus LR 884. The CJEU has held in relation to copyright that where harmful events occur in a number of member states, the court seised only has jurisdiction to adjudicate with respect to the harm caused in that member state: Pinckney v KDG Mediatech AG Case C-170/12 [2013] Bus LR 1313. It remains to be seen whether the same approach will be taken in relation to the database right. 7.35  In the employment context, it is more likely that databases will be infringed by extraction rather than re-utilisation. An employee who takes with him to his new employer a copy of a client list or other database can easily be seen to have carried out an extraction: see eg Crowson Fabrics Ltd v Rider [2008] IRLR 288 (Ch D). There may be cases in which an employee takes a database so that he can publish it himself, if the employer and employee are both in the business of making databases available to the public. However, in most employee competition cases, the employee will take a database to use it himself, not to publish it. If the employee keeps a copy of a database and consults it for his own purposes (eg to contact clients on a client list) this would not amount to re-utilisation. 7.36  To amount to an infringement, the extraction or re-utilisation must be of a substantial part of the database. ‘Substantial’ means substantial in relation to quantity, or quality, or a combination of both (regulation 12(1)). A substantial part, evaluated quantitatively, refers to the volume of data extracted from the database and/or re-utilised, and must be assessed in relation to the volume of the contents of the whole of that database. A substantial part, evaluated qualitatively, refers to the scale of the investment in the obtaining, verification or presentation of the contents extracted and/or re-utilised, regardless of whether that subject represents a quantitatively substantial part of the general contents of the protected database. A quantitatively negligible part of the contents of a database may in fact represent, in terms of obtaining, verification or presentation, significant human, technical or financial investment (see British Horse-Racing Board). In Beechwood House Publishing Ltd (t/a Binleys) v Guardian Products Ltd [2012] ECC 14, (Patents County Court), the defendants acquired records which had been extracted from the claimant’s marketing database. HHJ Birss QC held that the extracted data, which comprised 11–14% of the claimant’s database, was quantitatively substantial, though at the lower end of what could be regarded as such. The extracted data was also qualitatively substantial.

3. DURATION OF THE DATABASE RIGHT 7.37  The database right lasts for 15 years from the end of the calendar year in which the making of the database was completed (regulation 17(1)). 7.38  Regulation 17(3) allows for renewed protection where changes are made to the database. However, the drafting of the provision is unclear. Regulation 17(3) 387

7.39  Database rights

provides that where a substantial change to the contents of the database is made, including a substantial change from the accumulation of successive additions, deletions or alterations, which would result in the database being considered to be a substantial new investment, that change shall qualify the database resulting from that investment for its own term of protection, ie a fresh period of 15 years. 7.39  Whilst it is easy to see that a one-off change to a database results in the 15-year period starting again, it is difficult to see how regulation 17(3) applies where a database is continuously updated by the addition, for example, of new clients, or the updating of their details. It is unclear if such an accumulation of changes is what is contemplated by regulation 17(3), or whether such changes would not be sufficiently substantial to amount to a new investment in the database.

4. OWNERSHIP OF THE DATABASE 7.40  The owner of the database is its maker. The maker is defined (regulation 14(1)) as the ‘person who takes the initiative in obtaining, verifying or presenting the contents of a database and assumes the risk of investing in that obtaining, verification or presentation’. If those functions are carried out by more than one person, the database will vest jointly in each such person (regulation 14(5)). 7.41  Where the work to obtain, verify or present the database is carried out by an employee in the course of his employment, the owner of the database is the employer, in the absence of agreement (regulation 14(2)). Even though it is clear from regulation 14(2) that the default position is that ownership vests in the employer, not the employee, it is advisable to include in the contract of employment for employees who may be involved in compiling or updating a database a provision that the database, and any product of their work, vests in the employer. 7.42  The provision for databases created in the course of employment is almost identical to the language used in section 11(2) Copyright, Designs and Patents Act 1988 (the ‘CDPA 1988’) regarding the first ownership of copyright in works created in the course of employment. It is likely therefore that the case law on section 11(2) will apply by analogy to regulation 14(2) – although this is yet to be judicially decided. In determining whether work is done ‘in the course of employment’ under section 11(2), the court asks two questions: (i) was the work which was done the kind of work which the employee was engaged to do; and (ii) was the work in fact done in the course of employment. The former requires consideration of the terms of the contract of service, as well as other factors, such as whether the work was done during normal office hours or using materials provided by the employer. The latter is concerned with the question of whether work was done for the benefit of the employer. (See Copinger and Skone James on Copyright 17th edition, Chapter 5.) 7.43 There may be room for debate about the ownership of particular data sources, even when stored on an employer’s computer servers. For example, 388

Ownership of the database 7.48

in Pennwell Publishing (UK) Ltd v Ornstien [2007] IRLR 700 (QB) a dispute arose about the ownership of an Outlook contact list. The defendant, a journalist, kept an address list in Outlook on his employer’s server. The list comprised a mixture of personal contacts, journalistic contacts, and business contacts. Some had been added while working for the claimant, and in the course of his employment. However, a large portion of the list comprised an earlier list, pre-dating the defendant’s employment with the claimant, which the employee had copied into the list. The key question was whether the database was prepared by the defendant in the course of his employment (in which case it belonged to the claimant), or was prepared by the defendant outside his employment for his own purposes (in which case it belonged to him). 7.44 The judge held that the database belonged to the employer. Where an address list is maintained in Outlook, or a similar program which is part of the employer’s email system and backed up by the employer, the database will belong to the employer. If the database was created in the course of the employee’s employment, the fact that some of the material was derived from information which the employee has already does not change the nature of the database (paragraph 109). 7.45  The judge thought that the fact that such a contact list would be owned by the employer would not be likely to be appreciated by many employees, and said that it was highly desirable that employers should devise and publish an email policy dealing with ownership of such information (paragraph 129). 7.46  In the absence of such a published policy, the judge was willing to imply a term that: ‘an employee will at the end of their employment be entitled to take copies of their own personal information and, where the information is personal and confidential to them, such as details of their doctor, banker or legal adviser, to remove them from the employer’s system.’

7.47  Most forms of email system will permit the creation of compartmentalised address books, so that an employee can put personal contact details of friends and relations into a personal address book. In the absence of clear evidence of an email policy, the judge held that ownership of this part of a database resided with the employee. Only if that part improperly contained information confidential to the employer, which was being removed for the purpose of competition, would the employer be able to challenge its removal. 7.48  The practical advice for employers following Pennwell is twofold. First, it is important to ensure that there is an appropriate policy in place and circulated to employees to encourage them to keep personal (ie non-professional) contacts in separate folders. Secondly, employers must maintain the appropriate IT facilities and give appropriate training in order to allow that policy to be followed. A further option is to ban employees from storing any personal information on the employer’s system. That is a viable option in relation to computer systems, 389

7.49  Database rights

but harder to manage in practice for handheld devices and cloud based storage systems. Employers should think carefully about the use of devices for mixed personal and work use, and the extent to which they wish to provide for information on such devices at the end of employment. 7.49  Regulation 14(2), which vests ownership of a database in an employer, applies only to the employer-employee relationship. Thus, in Cureton v Mark Insulations Ltd [2006]  EWHC  2279  QB, the individuals who compiled and maintained a database of customer contact details were commercial agents, not employees. The judge held that the case fell outside regulation 14(2) and that therefore the database belonged to the agents, not the claimant.

5. REMEDIES 7.50  The remedies available for infringement of database rights are those which are available for infringement of copyright under sections 96, 97 and 98 CDPA 1988. Section 96 provides that in an action for infringement of copyright, all such relief by way of damages, injunctions, accounts or otherwise is available to the claimant as is available in respect of the infringement of any other property right. The court may, for example, grant an injunction to restrain misuse of a database, and/ or damages and/or an account of profits. Subject to the following paragraph, the principles applicable to the grant of final relief will be essentially the same as those dealt with in Chapter 16. A claim of infringement of database right may of course lie against the database owner’s employee, and against any third party who infringes the right – for example the employee’s new employer. 7.51  In relation to damages: •

It is a defence to a claim for damages that the defendant did not know and had no reason to know that a database right subsisted in the database (section 97(1) CDPA 1988).

•

Damages of two kinds may be awarded. Damages may be awarded on the ‘normal’ basis to put the claimant in the position he would have been in had the copyright not been infringed (Fenning Film Services Ltd v Wolverhampton [1914] 3 KB 1171. In addition, section 97(2) CDPA 1988 provides that a claimant can recover damages, in excess of compensatory damages, if the court is satisfied that justice requires it, having regard to the flagrancy of the infringement, and any benefit accruing to the defendant by reason of the infringement. The court has a wide discretion whether to award such additional damages, and, if so, in what amount.

•

Where a claim concerns breach of confidence and breach of database right, the court must be careful to consider what losses flow from each type of breach. Where the causes of action arise from the same facts, the claimant can only be compensated once for the loss it has suffered: Flogas Britain Ltd v Calor Gas Ltd [2013] FSR 34.

390

Allocation of claims 7.54

7.52 Additional damages under section 97(2) have long been available for breach of copyright, and fall to be awarded for breach of the database right on the same principles applying in copyright cases. Such damages are in addition to any sum that might be found due by way of compensatory damages. The section permits consideration of the benefit accruing to the defendant, and the flagrancy of the breach. ‘Flagrancy’ suggests scandalous conduct, deceit, or such like; it includes deliberate and calculated infringement. However, the purpose of the award is not to punish the defendant: Nottinghamshire Healthcare v News Group [2002]  RPC  49 at paragraphs 48–51. Such damages will often be appropriate where the infringement was deliberate and calculated to enable the defendant to secure a financial reward exceeding the amount of damages he would otherwise have to pay. However, awards under section 97(2) have tended to be relatively small, often of a few thousand pounds. 7.53  Section 99 CPDA 1988 permits a claimant to obtain an order for delivery up of an infringing copy of a work. This form of relief is not available for breach of the database right. However, despite this, the court may still order delivery up of a claimant’s property, including a database, if it can be shown to belong to the claimant, under CPR 25.1 (see 15.165–15.170 and 16.67–16.70).

6. ALLOCATION OF CLAIMS 7.54 A  claim in relation to database rights must be brought in the Chancery Division, or in an Intellectual Property Enterprise Court, or in a Chancery District Registry (CPR, rule 63.13 and PD  63, paragraph  18.1). There are Chancery District Registries at Birmingham, Bristol, Cardiff, Leeds, Liverpool, Manchester, Newcastle upon Tyne and Preston.

391

CHAPTER 8

Practical steps to protect the employer’s interests during employment Kate Brearley and Kiersten Lucas Introduction 

8.1

1. Ensuring that the employee is motivated and properly rewarded during employment  8.4 1(a) What are the benefits to the employer of motivated and properly rewarded employees? 8.5 1(b) How does the changing working landscape impact employee motivation and reward? 8.7 1(b)(i) Diversity 8.8 1(b)(ii) Employment status 8.9 1(b)(iii) Advances in technology 8.10 1(b)(iv) Employee engagement trends 8.11 1(c) Practical steps designed to motivate and properly reward employees8.12 1(c)(i) Provide suitable pay and benefits 8.14 1(c)(ii) Recognise the value of the employee 8.18 1(c)(iii) Recognise the employee’s need for leisure time 8.19 1(c)(iv) Recognise the employee’s outside business/quasi business interests 8.21 1(c)(v) Recognise the employee’s family commitments 8.23 1(c)(vi) Keep the employee challenged 8.27 1(c)(vii) Provide a proper career structure, including adequate learning and training 8.28 1(c)(viii) Review the employee’s terms of employment and performance regularly 8.31 1(c)(ix) Consider the use of long-term incentives for the employee8.32 1(c)(x) Involve the employee in management 8.41 2. Maximising the possibility of detecting competitive activities during employment 2(a) General principles regarding taking practical steps to detect competitive activities during employment 2(a)(i) What are the challenges of detecting competitive activities during employment?

8.44 8.45 8.45 393

8.1  Practical steps to protect the employer’s interests during employment

2(a)(ii) What factors can impact the practical steps that can/should be taken to detect competitive activities during employment? 8.48 2(a)(iii) What are some of the key legal principles relevant to implementing practical steps to detect competitive activities during employment?8.50 2(b) Practical steps to detect competitive activities during employment 8.56 2(b)(i) Monitoring employee behaviour 8.57 2(b)(ii) Instituting proper reporting procedures 8.66 2(b)(iii) Ensuring that proper controls are kept on which employees have access to confidential information 8.73 2(b)(iv) Instituting procedures regarding correspondence and other hard copy documents 8.84 2(b)(v) Instituting procedures regarding email and other electronic messaging platforms 8.90 2(b)(vi) Instituting telephone protocols 8.99 2(b)(vii) Instituting expenses policies 8.105 2(b)(viii) Monitoring the use of printers and photocopiers on business premises 8.108 2(b)(ix) Monitoring the removal of the employer’s physical property from business premises 8.118 2(b)(x) Controlling the use of computers away from the workplace8.122 2(b)(xi) Ensuring that employees take proper holidays 8.128 2(b)(xii) Ensuring that customers deal regularly with a number of employees 8.129 Appendix 1 – Remuneration in the financial services sector and corporate governance requirements for executive pay in listed companies Appendix 2 – Is there a general right to privacy in the workplace? Appendix 3 – Guidelines for maintaining confidentiality

INTRODUCTION 8.1  The purpose of this chapter is to look at the key practical steps the employer can take, during the subsistence of the employment relationship, to protect the business from employee competition. These practical steps can afford significant additional protection to that given by the various other legal safeguards considered in Chapters 3, 4 and 5. 8.2  Most of the practical steps outlined in this chapter are not unduly onerous and require little more of the employer than a degree of foresight and common sense, together with the investment of some time and resources. It is therefore surprising how infrequently employers take them. 8.3  The practical steps fall into two broad categories: 394

Ensuring that the employee is motivated and properly rewarded during employment 8.6

(a) those designed to ensure that the employee is motivated and properly rewarded during employment (8.12–8.43); and (b) those designed to maximise the possibility of detecting any competitive activities during employment or acts in preparation for competition once employment has ended (8.56–8.130).

1. ENSURING THAT THE EMPLOYEE IS MOTIVATED AND PROPERLY REWARDED DURING EMPLOYMENT 8.4  In this section we consider: (a) the benefits to the employer of motivated and properly rewarded employees; (b) how the changing working landscape impacts employee motivation and reward; and (c) ten basic practical steps designed to motivate and properly reward employees.

1(a) What are the benefits to the employer of motivated and properly rewarded employees? 8.5  In theory, a motivated and properly rewarded employee is far less likely to leave the employer and engage in competitive activities than an employee who feels ‘taken for granted’, exploited or overlooked. By treating the employee fairly and honourably and showing that his interests have been considered, even if they have not prevailed, the employer will often gain the allegiance of the employee. That allegiance may in itself be enough to stop the employee from competing with the employer. The employee may feel under a moral obligation to treat his employer in the same fair and honourable way as he has been treated and the strength of that moral obligation should not be underestimated. In many cases, it will obviate the necessity for time-consuming and expensive litigation and, on that ground alone, is of considerable benefit to the employer. Of course, this will not always be the case: as some of the ‘headline-grabbing’ team move cases have demonstrated (see further at Chapter 19), some employers/employees are not averse to taking a fairly ruthless and aggressive approach when joining a competitor (either alone or as part of a team). 8.6  Additionally, an employer with a reputation for fair treatment of his employees should find recruitment and retention easier. For example, such a reputation may give the employer the ‘edge’ over a rival where both are competing for the services of a valuable individual. Retaining staff also avoids the inevitable financial costs associated with employee turnover, including the costs of: recruitment; any business lost with the departing employee or whilst the new recruit establishes himself; and any associated litigation. The employer also has to consider the non-financial impact of employee turnover on the remaining workforce, such as re-distributing workloads and the emotional effect on morale. The remaining employees may, 395

8.7  Practical steps to protect the employer’s interests during employment

in turn, have concerns about their own position and wonder if there are better opportunities elsewhere, exacerbating the employer’s competition woes. That said, a degree of employee turnover is not necessarily a bad thing. Handled the right way, employee departures and new hires can have positive effects on the business, including opening-up career development opportunities and breathing new life and ideas into the workforce. Conversely, retaining disgruntled or poorperforming staff can be just as damaging as employee departures, if not more so. It is a matter of striking a sensible balance.

1(b) How does the changing working landscape impact employee motivation and reward? 8.7  The working landscape has changed dramatically in a number of key areas, which (either separately or in combination) present an array of challenges for the employer in terms of motivating or rewarding employees. 1(b)(i) Diversity 8.8  First, modern workforces are – or are expected to be – increasingly diverse and inclusive in terms of age, gender, ethnicity, disability, sexual orientation, religion and social mobility. Employers can find it challenging to understand what motivates each represented group, what they consider to be a ‘good working environment’ and what engenders their loyalty. There is an inherent danger in adopting a ‘one-size-fits-all’ approach to employee engagement, or making assumptions about what motivational or reward tools appeal to the different sections of the workforce. For example, it would be unwise to assume that men and women are looking for the same things from their jobs or, with more people starting families later in life, that an older employee is less interested in familyfriendly benefits than a younger employee. 1(b)(ii)  Employment status 8.9 Secondly, there have been significant developments in the way in which employees can – and increasingly want to – carry out their day-to-day duties. Today’s employers find themselves grappling with an array of flexible working practices, including part-time working, hot-desking, remote/home-working, job-shares and flexible hours. Even the basis on which individuals contract with their ‘employer’ varies considerably. For example, many individuals prefer the flexibility of fixed-term contracts, working on a consultancy or agency basis, or even having zero-hours contracts (which can no longer contain exclusivity of services clauses). This too presents challenges for the employer in terms of the extent to which he can prevent the misuse of confidential information or curtail the individual’s post-termination activities through restrictive covenants. In practice, a consultant may have just as much exposure to the employer’s confidential information, customers and other employees/independent contractors as an employee. It is therefore natural for the employer to want to impose 396

Ensuring that the employee is motivated and properly rewarded during employment 8.11

the same contractual restraints on both. It is fairly commonplace to impose confidentiality and non-solicitation restrictions on consultants. However, imposing non-competition restrictions on consultants is less common, partly because it is a factor that can be indicative of employment status. That said, the courts have shown more willingness to enforce contractual provisions agreed between commercial parties of equal bargaining position (like some consultants), than in the employment context. Much depends on whether the consultancy is really a pseudo-employment relationship or not. It is also not uncommon for employees, particularly senior employees, to have more than one type of relationship/ status with the employer. For example, an employee who sells his business (or a stake in his business) to the employer, or enters into a joint venture or similar commercial venture with the employer, will be both an employee and an ‘employee-vendor’. The employer needs to make sure that he has sophisticated systems in place for keeping track of the different bases on which the workforce is retained/their ‘status’. This also needs to be reflected accurately in any contractual restraints (in particular restrictive covenants) imposed on the individual, and factored into any practical steps taken to prevent/detect competitive activities. Employment status is considered in Chapter 2. The potential advantages to the employer of giving the employee a stake in the business is considered at 8.29. 1(b)(iii)  Advances in technology 8.10 Thirdly, advances in technology have revolutionised the way employees access and use their employer’s proprietary and confidential information. Today’s employer has to contend with the ‘paperless office’, email, the internet, social media sites, and a vast number of portable electronic devices and online datastorage platforms (such as ‘Dropbox’ or the ‘Cloud’) which allow the high-speed backup and transfer of vast quantities of data. It is also very common nowadays for employees to use their personal devices for work purposes (‘bring-your-owndevice’ – ‘BYOD’ – see further at 8.126–8.127). In a competitive market, it will clearly be advantageous to allow employees to access information quickly and easily, and from a wide variety of sources or locations, so that they can respond to customer demands. However, monitoring that access, and detecting abuse, inevitably becomes a far more complex issue for the employer. These issues are explored in more detail later in this chapter (see, in particular, 8.52–8.65 (data protection/privacy and monitoring employee behaviour), 8.90–8.104 (email etc procedures and telephone protocols), 8.108–8.127 (monitoring/controlling the use of equipment and the removal of property from business premises) and Appendix 2). 1(b)(iv)  Employee engagement trends 8.11  Finally, there is a plethora of research and surveys on employee engagement trends which show that employees expect their jobs to deliver more than just decent pay. They want a combination of interesting and challenging roles which allow scope for their personal development/future career opportunities and for 397

8.12  Practical steps to protect the employer’s interests during employment

which their contribution is openly recognised, valued and properly rewarded. For example, the culture and behaviour of the employer’s organisation, and its corporate social responsibility profile, have become increasingly important to employees. With people working long hours and later in life, many employees also place great importance on finding ways to make their work and personal lives co-exist more harmoniously. If press reports are to be believed, employers are responding to that challenge in innovative, and sometimes unconventional, ways, including: bring-your-dog-to-work days; relaxation lounges and games rooms; free breakfasts; drive/cycle-to-work schemes (where employers subsidise the cost of new bicycles or hybrid cars); in-house classes (such as yoga or languages); and monthly allowances towards the cost of personal grooming (such as haircuts and manicures). Some of the more extreme examples have divided public opinion, such as the introduction of menstruation leave by some employers, or offers to pay for female employees to freeze their eggs. Whether or not he agrees with some of the more unusual solutions, the employer should invest in understanding employee engagement trends and what will have the most positive impact on the different sections of his workforce. Employee engagement surveys/research will provide the employer with the general market/sector view, but there is no substitute for raising questions about employee engagement with the workforce directly, eg at individual annual appraisals. The employer who actively invests in employee engagement and implements strong corporate social responsibility policies is likely to have a more loyal and motivated workforce than a competitor who disregards these issues.

1(c) Practical steps designed to motivate and properly reward employees 8.12  At 8.7–8.11, we identified some features of the modern workplace which present challenges for the employer who is trying to determine how best to motivate and reward his employees, namely: the changing composition of the workforce; the varied bases on which the workforce can contract with the employer; advances in technology; and employee engagement trends. With those in mind, we have identified ten practical steps that are designed to help the employer motivate and properly reward his employees, as follows: (i) provide suitable pay and benefits (8.14–8.17); (ii) recognise the value of the employee (8.18); (iii) recognise the employee’s need for leisure time (8.19–8.20); (iv) recognise the employee’s outside business/quasi business interests (8.21– 8.22); (v) recognise the employee’s family commitments (8.23–8.26); (vi) keep the employee challenged (8.27); (vii) provide a proper career structure, including adequate learning and training (8.28–8.30); 398

Ensuring that the employee is motivated and properly rewarded during employment 8.15

(viii) review the employee’s terms of employment and performance regularly (8.31); (ix) consider the use of long-term incentives for the employee (8.32–8.40); and (x) where appropriate, involve the employee in management (8.41–8.43). 8.13  These steps reflect the fact that, whilst proper financial reward is always likely to be an important factor in retaining and motivating employees, it is by no means the only factor, or necessarily the most important one. 1(c)(i)  Provide suitable pay and benefits 8.14  The employer needs to review regularly how he remunerates his employees and look for innovative ways to do so. Part of that exercise involves ensuring that employee ‘pay’ is benchmarked correctly for the employer’s particular sector (and for this purpose rewards surveys are a good source of data, such as those published by McLagan). The term ‘pay’ encompasses a broad range of contractual and/or discretionary payments, including basic salary, fixed or variable bonuses or other cash allowances. It is clear that ‘pay’ still has its place amongst the most commonly used motivation and reward tools. However, simply increasing ‘pay’ is not always an option (or the best option) for employers, particularly in difficult economic conditions. For example, basic salary represents a fixed cost for the employer, which is not dependent on the financial performance of the business or employees in the same way that variable bonuses traditionally are. In addition, most employment contracts provide for basic salary to be reviewed annually and, in some cases, automatically increased in line with the Consumer Prices Index (‘CPI’) or Retail Prices Index (‘RPI’). Few contracts provide for basic salary to be decreased, save as a potential disciplinary sanction. It is understandable, therefore, why the employer may be reluctant to award large basic salary increases to encourage employee loyalty. 8.15 Generally, bonus schemes provide greater flexibility for the employer. Most schemes are expressed to be discretionary and make it clear that, in each financial year, bonuses may vary (up or down) or there may be no bonus at all. For this reason, discretionary bonus schemes are often the preferred pay-related method of incentivising employees. However, the employer must remember that he does not have an unfettered discretion regarding bonuses: in particular, the employer must not act in a way that is arbitrary, capricious or irrational (see Clark v Nomura International plc [2000] IRLR 766 (QB) and Commerzbank v Keen [2007] IRLR 132 (CA)), or which is discriminatory or otherwise breaches the implied duties of good faith or trust and confidence. See further at 9.103 regarding the court’s approach to the employer’s decision-making process in light of the Supreme Court’s decision in Braganza v BP Shipping Ltd [2015] IRLR 487. Discretionary bonus schemes can also have a number of unintended consequences. For example, if there is an expectation that bonuses will be paid routinely, the bonus scheme will do little to motivate employees. The scheme may even have become contractual over time depending on how it is operated. In addition, if a large portion of any bonus is dependent on overall business 399

8.16  Practical steps to protect the employer’s interests during employment

performance, rather than individual performance, an employee who personally has had a very successful year may feel demoralised if the company itself has not performed well and this is reflected in his bonus. Similarly, if bonus payments are deferred over too many years and are subject to reduction or clawback in the interim, employees may come to view them as little more than ‘paper’ money (ie  not something that they are likely to receive in real terms). In those circumstances, their only real value to the employee may be as a tool for negotiating a ‘buy-out’ of his deferred entitlement by a competitor employer (see Appendix 1 on the subject of ‘buy-outs’ in the financial services sector). Bonus schemes can also encourage the wrong type of employee behaviours, for example, excessive risk taking by employees in order to secure the biggest rewards for themselves. 8.16  Since the 2007/8 financial crisis, the ‘pay’ of certain employees has come under increased scrutiny and regulation. The restrictions imposed on pay in the financial services sector, and the corporate governance requirements for executive pay in listed companies, are prime examples of this. The Government is currently considering proposals to set corporate governance standards for large private companies following the issue of its response, in 2017, to the Green Paper consultation on corporate governance reforms. A detailed analysis of these restrictions is outside the scope of this book but the basic position is set out in Appendix 1 to this chapter. 8.17  It is also important to provide a good balance between cash and non-cash benefits, and ensure that non-cash benefits are of actual value to the employee. That tends to be less of a problem for the employer who offers ‘cafeteria’ or ‘flexed’ benefits, where the employee is given a notional pot of money which he can ‘spend’ on individually priced benefits selected from a menu of benefits. However, even ‘cafeteria’ or ‘flexed’ benefit schemes can include compulsory core benefits which may be of little or no value to the employee (eg if he already receives that benefit through a partner/spouse’s employer). 1(c)(ii)  Recognise the value of the employee 8.18 Feeling valued and that they are making a difference is important to employees. Yet, many employers still make the error of not finding the time to show their appreciation of an employee. This is often only done once a year at appraisal time or, worse still, only when the employee resigns. Invariably the employer’s excuse is that he was too busy with day-to-day problems and getting the work done, leaving no time for anything else and particularly not something that was working well. Such a reaction is understandable, but short-sighted in the extreme. The time necessary to speak to an employee and his line manager about his efforts, make a short telephone call, send a text or short email, dictate (or even write by hand) a congratulatory note, is minimal and yet the satisfaction it can give to the employee is significant. More tangible signs of appreciation, such as time off in lieu when the employee has been working excessive hours or performance-related bonus schemes, are also of key importance. 400

Ensuring that the employee is motivated and properly rewarded during employment 8.22

1(c)(iii)  Recognise the employee’s need for leisure time 8.19  ‘All work and no play makes Jack a dull boy’. It also makes him ineffective and can present a danger to his physical and mental health. Difficult economic conditions, pressures on businesses to operate leaner, more cost-effective teams and intense competition for roles, can all lead to employees pushing themselves to extremes. Employees often cite the hours they work and pressure they are under as one of the main reasons they are unhappy with their job. 8.20  The employer should ensure that each employee has adequate leisure time and, where possible, avoid repeated short deadlines on tasks which result in the employee working long hours continuously. The employer should allocate work considerately, spreading the load evenly amongst the workforce. The constant allocation of urgent work to a particular employee will result in that employee becoming exhausted and, ironically, other employees feeling resentful at not being given the opportunity to show their skills and commitment. It may also lead to breaches of the Working Time Regulations 1998 (SI  1998/1833), as amended, or cause those employees who have signed agreements (under regulation 4(1) of those Regulations) ‘opting-out’ of the 48-hour limit on their weekly working time, to exercise their rights to terminate that opt-out agreement. The use of working time opt-out agreements has been under review at the European level for many years. No conclusion has yet been reached as to the future of their use and it is also unclear what the post-‘Brexit’ position will be. The employer should also be mindful of his common law and statutory duties (eg  under the Health and Safety at Work etc Act 1974 and related regulations and codes of practice) to ensure the health, safety and welfare of his employees (and certain workers) and provide them with a safe place and system of work. 1(c)(iv)  Recognise the employee’s outside business/quasi business interests 8.21 The employer can also engender trust, and loyalty, by appreciating that employees may have outside business/quasi business interests which they wish to continue during employment, for example, an interest in a family member’s business or a role as a charity trustee. More senior employees may be looking to build a portfolio of non-executive directorships as a path to semi-retirement. More junior and less well-paid employees may need to supplement their income from the employer by taking a second job. Sometimes the additional income is needed to support an expensive hobby or holidays, but commonly it is necessary for day-to-day living costs. 8.22  With appropriate safeguards in place often these outside interests can be accommodated. These safeguards may, for example, include a requirement for the employer’s prior written permission for the particular, or any, outside activities and/or a general restriction on activities that may damage the employer’s business or reputation or adversely affect the employee’s performance for the employer. See further at 5.24–5.34. 401

8.23  Practical steps to protect the employer’s interests during employment

1(c)(v)  Recognise the employee’s family commitments 8.23  The majority of employees have family commitments of one sort or another. The good employer will ensure, without being intrusive, that he is aware of those commitments and the demands they make on the employee. For example, on a relocation of office premises, employees with school-age children will have to consider what is in the best interests of those children. Similarly, many employees have responsibilities as carers for elderly or disabled family members and will have to balance those responsibilities with their obligations to their employer. 8.24  Where an employee is having problems reconciling his work and family commitments, the employer should not automatically adopt the stance that the employee’s work is more important. To do so will only put the employee in the difficult position of having to decide between his family and his job. In some cases, the employee will have a statutory right to request a change in his hours, times or locations of work, or request a period of statutory leave to care for a child. In particular: (a) Right to request flexible working: Since 30  June 2014, all employees with 26 weeks’ continuous service have had the right to request flexible working arrangements. Previously, the right was limited to those who were requesting flexible working to enable them to look after a child or fulfil responsibilities as a carer, but that restriction was removed. The statutory right is to request flexible working arrangements; it is not a right to be given flexible working arrangements, but employers are obliged to consider these requests in a ‘reasonable manner’. The relevant statutory regime is set out in sections 80F to 80I Employment Rights Act 1996 (as amended), together with the Flexible Working Regulations 2014 (SI  2014/1398). The statutory provisions are supplemented by the ACAS  Statutory Code of Practice 5: Handling in a reasonable manner requests to work flexibly (2014) and the ACAS guide entitled The right to request flexible working: an ACAS guide (June 2014). (b) Shared parental leave: The parents of any baby due (or child due to be placed for adoption) on or after 5 April 2015, are also entitled to ‘shared parental leave’. The relevant statutory regime is set out in sections 75E to 75K Employment Rights Act 1996 (as amended) and related regulations, including the Shared Parental Leave Regulations 2014 (SI 2014/3050). Again, the statutory provisions are supplemented by ACAS guidance – Shared Parental Leave: a good practice guide for employers and employees (2014). This allows parents to share up to 50 weeks leave between them in order to care for their child in the first year after the birth/adoption. Essentially this replaced the statutory right to take additional paternity leave (for which the uptake amongst working fathers was very low). In October 2015, the UK government announced its plan to consult on extending shared parental leave to working grandparents; it is not yet known when this consultation might be issued. However, with an increasingly aged workforce we can expect the UK government to consider further rights along these lines in 402

Ensuring that the employee is motivated and properly rewarded during employment 8.26

the future. Progressive employers may want to consider offering additional leave, eg to grandparents, in any event as a contractual benefit. 8.25 In every case, the employer should talk to an employee struggling to balance work and family commitments and see if there is a compromise that would assist and which is reasonable as far as the business, the employee and his colleagues are concerned. Even if no compromise can be achieved, the willingness to look for one should earn some measure of gratitude from the employee. A willingness on the part of the employer to recognise an employee’s family commitments is also consistent with the right to respect for private and family life, home and correspondence under Article 8 European Convention on Human Rights, which was introduced into English law by the Human Rights Act 1998. Whilst that right is not directly enforceable against private employers, under section 3 Human Rights Act 1998 all primary and subordinate legislation ‘must be read and given effect in a way which is compatible with the Convention rights’. Whether this will change in the post-‘Brexit’ world, or as part of the present UK government’s plan to replace the Human Rights Act with a British Bill of Rights, remains to be seen. Consequently, for now at least, in determining eg a claim for unfair dismissal for family-related absences, employment tribunals must construe the test of ‘reasonableness’ consistently with the Article 8 right to respect for family life. In some instances this could result in a finding of unfair dismissal as a means of recognising those rights. However, that does not entail the employment tribunals applying a radically different test to the British Home Stores Ltd v Burchell [1980] ICR 303 (EAT) ‘range of reasonable responses’ test that many employers will be familiar with. In Turner v East Midlands Trains Ltd [2013] IRLR 107 (CA), the Court of Appeal (Elias LJ) rejected a submission that, by reference to Article 8, the ‘Burchell test’ should be abandoned in favour of, effectively, allowing employment tribunals to substitute their view for that of the reasonable employer (a view recently cited with approval by the Court of Appeal in Georgina O’Brien v Bolton St Catherine’s Academy [2017] IRLR 547 (CA)). Similarly, Elias LJ in Turner rejected the submission that, where Article 8 is engaged, the employment tribunals should apply a test of ‘proportionality’, rather than the ‘range of reasonable responses’ test. The Court of Appeal was satisfied that, even where Article 8 is engaged, the domestic ‘band of reasonable responses’ test is already a ‘sufficiently robust, flexible and objective analysis of all aspects of the decision to dismiss to ensure compliance with Article  8’ without the need for any modification (Elias LJ at paragraph 56). 8.26  Finally on this issue, a note of caution for the employer. It will always be important to strike a sensible balance between accommodating the family commitments of certain employees but, at the same time, taking into account the additional burdens thereby imposed on other employees. The inability to reorganise work among existing staff, or to recruit additional staff, are expressly recognised as potentially legitimate business reasons for rejecting a flexible working request in the ACAS  Statutory Code of Practice 5: Handling in a reasonable manner requests to work flexibly (2014), but are often overlooked in practice. Clearly there is little value in motivating one key employee at the cost of seriously demotivating another equally valuable employee. As with all of the practical steps available to the employer, there is a balance to be struck. 403

8.27  Practical steps to protect the employer’s interests during employment

1(c)(vi)  Keep the employee challenged 8.27  Most employees perform better when they are given interesting and challenging work to do. Employees generally tend to raise their standards to meet the challenge. The employee who is constantly overlooked when good quality work is being allocated may eventually become bored and look elsewhere for job satisfaction. The employer should bear this in mind when allocating work and avoid, within reason, the tendency to give the ‘plum jobs’ to tried and tested employees. If certain employees are being overlooked, the employer should take steps to identify why and then work with those employees to address any issues. 1(c)(vii)  Provide a proper career structure, including adequate learning and training 8.28 Many employees will be looking for promotion at appropriate times in their careers and it is important that the employer provides a proper career structure, where possible. Obviously, not all employees can ‘make the grade’ for promotion and the more senior the employee the more difficult it can become to provide a career structure that is to their liking. At that stage, promotion may depend on another employee leaving or being redeployed. However, the employer should try to be inventive – traditional pyramid structures, although tried and tested, are not always the best. 8.29  The employer should also consider dividing responsibilities and reorganising corporate structures. For key employees, particularly groups of employees operating in a discreet line of business, the creation of a new subsidiary in which they have a share (albeit a minority stake) may be an option. This is most likely to be appropriate where the objective is to grow the business with a view to its sale or an initial public offering (‘IPO’) over the short to medium term, at which time employees will be able to realise value for their shares. Owning shares provides employees with a sense of control, however limited that control is in practice, and is a way of aligning their interests with the future strategy of the business. This option also has the added advantage that more stringent restrictive covenants, with greater prospects of enforceability, can usually be attached to the employee’s shareholding – see 10.17, 10.45–10.54 and 11.78–11.90. 8.30  Finally, the employer should provide suitable learning and development programmes that are designed to help the employee learn the skills he needs to advance to the next stage in his career. Even if it is not possible for the employee to achieve promotion with the employer, there will be an expectation that the employer will nonetheless encourage the employee to develop and learn new skills during his employment. 1(c)(viii)  Review the employee’s terms of employment and performance regularly 8.31  The terms of employment of all employees should be reviewed regularly. With what regularity depends on the size and administrative resources of the business, the role of the employee and other factors such as promotions, mergers 404

Ensuring that the employee is motivated and properly rewarded during employment 8.32

and employee departures. In most cases, reviews should be at least annual and, for more senior employees or those in certain sectors (such as financial services), more frequent reviews may be appropriate. The employer should not delay a review because he is too busy, except in a genuine emergency. To do so is a missed opportunity, bad time management and will give the employee the impression that he ranks low in the employer’s priorities. Regular reviews are important for the following reasons: (a) They remind the employer to check that the employee is being properly rewarded for his efforts. Is he receiving the market rate for the job? As noted at 8.13–8.16, ‘pay’ is still an important consideration for many employees. In difficult economic conditions, some employees may find themselves needing to supplement the income they receive from the employer by taking a second job (see 8.21–8.22). (b) They provide an opportunity to review the structure of the remuneration package to ensure that the split between cash and non-cash benefits is appropriate and that non-cash benefits of actual value to the employee are being delivered (see further at 8.17). Using the review to discuss the remuneration package with the employee affords the employer the opportunity to become aware of any issues and the ability to make, sometimes fairly minor, adjustments to the significant satisfaction of the employee. (c) They mean that the employee knows that his position is being looked at and that his work is not being taken for granted. (d) They provide an opportunity for a formal discussion between the employer and the employee, at which the expectations of both can be addressed. Prior exchanges of views in writing may make the process more productive. (e) They operate as a reminder to the employer to check that the terms of the contract, and in particular the restrictive covenants, are still appropriate and reflect the current facts. A common problem with restrictive covenants is that the underlying facts have changed but the covenants and related provisions (such as the role description, confidentiality, intellectual property and notice provisions) have not been altered and therefore they provide either limited or, worse still, no protection to the employer. See Chapter 13 for consideration of the difficulties that arise when introducing or varying restrictive covenants. 1(c)(ix)  Consider the use of long-term incentives for the employee 8.32  It has become commonplace for senior and key employees to be awarded a long-term incentive, frequently referred to as an ‘LTIP’, in addition to their basic salary and annual bonus. Such arrangements are seen as a means of incentivising employees to remain with the business whilst, at the same time, aligning their interests with the employer’s business strategy and the expectations of shareholders. See Appendix 1 to this chapter for further details on the use of long-term incentives as a means of incentivising staff in the financial services sector. 405

8.33  Practical steps to protect the employer’s interests during employment

8.33  Long-term incentives can be share- or cash-based. Typically, awards cannot be exercised or vest before the third anniversary of grant, although this may be longer. They will also often be subject to the employee satisfying performance conditions that are linked to individual or corporate performance, or a combination of the two. Where shares are to be used, there are various ways in which these incentives may be structured, including: share options; conditional share awards; restricted shares (which are shares that can be forfeited if the employee leaves or performance conditions are not satisfied); or restricted share units (which are similar to conditional share awards). Once awards have vested or been exercised, a holding period may apply, so that the shares acquired cannot be disposed of for a fixed period of time. 8.34  Long-term incentive awards are usually structured as ‘free’ or ‘nil cost’ awards. This type of award has become more popular than share options with an exercise price set at the prevailing market value of a share at grant. This is because, in the case of share options, where the share price goes down before the options can be exercised, the option has no value and therefore provides no incentive to the employee. Where awards are to be satisfied in cash, they will often mirror the terms of a share award. These awards are commonly known as ‘phantom’ or ‘shadow equity’ awards. 8.35  Awards will usually be subject to one or more of the following conditions: (a) the employee remaining employed, and not having given or received notice of termination of employment as at the award vesting or payment dates; and (b) the employee not being suspended or subject to any: (i) disciplinary sanctions or actions; (ii) performance improvement procedures; or (iii) other proceedings (such as investigatory or regulatory proceedings) relating to his position as at those dates. A final decision regarding any entitlement to the grant, vesting or payment of any award is often delayed until the conclusion of any such procedures or proceedings. 8.36 Where cash awards are made, often such awards (or a portion of such awards) are deferred and delivered in shares in the employing company or its holding company, which are then paid out in a number of tranches over a specified period. For certain entities in the financial services sector, deferral is required to comply with applicable remuneration regulations. The deferred element may also be subject to additional performance conditions being met, which may be linked to the overall performance of the employer’s business or the performance of the particular part of the business in which the employee works. Payment is also often expressed to be conditional on the employer’s ability to pay at the relevant time. Performance adjustment has become commonplace for financial services institutions and listed companies, where it generally takes one of two forms: ‘malus’, which is the reduction of awards that have not yet vested; and ‘clawback’, which is the recovery of awards that have already been delivered – see further in Appendix 1 to this chapter. It is generally easier to operate performance adjustment in relation to unvested deferred awards than in relation to vested awards. 8.37  For companies with a standard or premium listing on the London Stock Exchange, the Investment Association (which is the body that represents UK investment managers) publishes its Principles of Remuneration annually 406

Ensuring that the employee is motivated and properly rewarded during employment 8.42

outlining its position on remuneration structures. In its latest Principles (published in November 2017), it continues to advocate that companies should have the flexibility to adopt the remuneration structure which is most appropriate for the implementation of their business strategy. With less prescription as to the type and design of long-term incentive arrangements, we may in the future see a wider range of tailored incentive structures. 8.38  Long-term incentives will usually be governed by a set of rules. These will set out: (i) who is eligible to participate; (ii) how any award will be delivered ie shares or cash; (iii) when the award will normally vest; (iv) whether performance conditions apply; (v) good and bad leaver terms; (vii) malus and clawback provisions (see 8.36); and (viii) tax withholding. 8.39 In addition, it is typical for awards made to employees in the financial services sector, and also regulated sectors like the pharmaceutical sector, to be forfeited (or not vest) where an ex-employee engages in activities competitive with those of the ex-employer. Ex-employees are usually required to certify, for each year in which tranches of their award vest, that they have not engaged in competitive activities. The likely enforceability of these types of provisions, which in effect can operate as an indirect restraint on the employee’s activities or an unlawful contractual penalty, is considered in detail at 11.252–11.262. 8.40  Where the employer introduces a long-term incentive plan, he should review it regularly to ensure that it continues to provide a real incentive to employees, that it remains competitive within the marketplace and that it complies, as appropriate, with applicable legislation, regulation and relevant institutional investor guidelines. 1(c)(x)  Involve the employee in management 8.41 Where appropriate, this is a useful step to show the employee that they are valued. Greater involvement in management can also significantly enhance employee engagement and loyalty, which may help guard against them becoming disenchanted and considering leaving the employer. 8.42 As a manager, the employee faces a much greater dilemma in reaching a decision to compete with his employer than an employee of non-managerial status. As we saw in Chapter 3, the implied duty of fidelity imposes more onerous requirements on the employee of managerial status than other employees. Consequently, this duty can act as a deterrent to managerial staff who are thinking of competing with their employers. Similarly, a managerial role can be a relevant factor in determining whether an employee is a fiduciary, with the additional obligations imposed by that status, including obligations to disclose to the employer his own (and his colleagues’) wrongdoing and any potential competitive threats to the employer’s business. See 4.5–4.86 as to when an employee who is not a director can owe fiduciary duties. It has also become common practice to include certain aspects of the duty of fidelity/fiduciary duties as express terms of the employment contract (see further in Chapter 5). 407

8.43  Practical steps to protect the employer’s interests during employment

8.43  Normally the only disadvantage of giving an employee managerial status, apart perhaps from his demanding higher pay, is that it may necessitate his having greater access to trade secrets and confidential information, with the attendant risk of misuse of that information. A managerial employee is also likely to be in a position to exert more influence over customers and colleagues.

2. MAXIMISING THE POSSIBILITY OF DETECTING COMPETITIVE ACTIVITIES DURING EMPLOYMENT 8.44  In this section we will consider: (a) some general principles for the employer to be aware of regarding taking practical steps to detect competitive activities during employment, including: (i) the challenges of detecting competitive activities during employment (8.45–8.47); (ii) factors impacting on the practical steps that can/should be taken to detect competitive activities during employment (8.48–8.49); (iii) some of the key legal principles relevant to implementing practical steps to detect competitive activities during employment (8.50–8.55); and (b) twelve practical steps that are designed to help the employer detect competitive activities during employment (8.56–8.130).

2(a) General principles regarding taking practical steps to detect competitive activities during employment 2(a)(i) What are the challenges of detecting competitive activities during employment? 8.45  Frequently, the employer is the last to know that an employee is competing with him while still employed, or is making preparations to do so once employment has ended. The employee has an obvious interest in concealing his activities and may go to considerable lengths to do so, thereby making detection difficult. However, detection will usually be possible if the employer is vigilant and has taken the time to implement some basic safeguards. 8.46  We do not suggest that the employer spies on his employees, nor that he implements procedures which are unduly onerous or time-consuming. What we do suggest is that the employer assesses the risk of competitive activity (including the likely degree of damage it will cause) and then takes a sensible commercial decision as to the time, energy and money he is prepared to spend on limiting that risk. In every case, there will be a happy medium between doing nothing (the 408

Maximising the possibility of detecting competitive activities during employment 8.50

course often taken until the employer becomes a victim of competition) and taking steps that are reasonable and which will either deter competitive activity (such as those considered at 8.12–8.43) or, at the very least, provide reliable evidence that it has occurred. Obtaining proof that competitive activities have taken place can be extremely difficult; any safeguards that can be built into the employer’s daily operations to assist in providing reliable evidence will be very useful. 8.47 Two features of modern workplaces have exacerbated the employer’s difficulties with detecting competitive threats: (a) advances in employees’ use of technology (eg  email, the internet, social media sites, online data-storage platforms and a vast number of portable electronic devices – including their own personal ones) to carry out their duties and access proprietary and confidential information (see 8.10); and (b) increasingly flexible working practices (eg  remote-working and hot-desking) (see 8.9). However, on a more positive note, these developments also mean that today’s employees have a bigger ‘electronic footprint’ than ever before. Advances in the field of forensic information technology investigations mean that a wide range of evidence can be sourced, albeit with some effort and cost. 2(a)(ii) What factors can impact the practical steps that can/should be taken to detect competitive activities during employment? 8.48  Once the employer has made the decision in principle to take practical steps to maximise the chances of detecting competitive activities during employment, precisely what steps he takes will be governed by four factors: (a) The nature of the business. (b) How the business operates. (c) The nature of the likely competitive activities. (d) The time, money and resources the employer has decided to invest. 8.49  These four variables make it impossible to provide an exhaustive list of the practical steps each employer can take. However, at 8.56–8.130, we have identified twelve such practical steps that are available to the employer during employment. Most of them are applicable to all types of business and grades of staff (with the exception of manual workers and some support staff, who will not usually be a significant competitive threat). In the main, the steps are simply a means of ensuring that the employer is aware of what is happening in his business and can therefore exercise proper controls. 2(a)(iii) What are some of the key legal principles relevant to implementing practical steps to detect competitive activities during employment? 8.50 Before considering the practical steps the employer might take during employment to detect competitive activities, it is important to be aware of the 409

8.51  Practical steps to protect the employer’s interests during employment

employee’s legal rights, in particular in relation to wrongful dismissal, unfair dismissal and data protection/privacy in the workplace. Wrongful dismissal, unfair dismissal 8.51  In implementing the steps he decides to take, the employer should never appear unduly distrustful. To do so may deter some would-be competitors; but those whom it does not deter may simply become more furtive in their activities, thereby reducing the prospects of detection. It can also create an unpleasant working atmosphere and, in a very extreme case, it may even be argued that the employer’s activities amount to a breach of the implied duty of trust and confidence, with the associated risks of wrongful dismissal or unfair dismissal claims. In essence the employee’s argument will be that the employment contract has been repudiated by the employer and that the employee has accepted that breach as terminating the contract. As a result the employee could be discharged from all future obligations including any restrictive covenants: General Billposting Co Ltd v Atkinson [1909] AC 118 (HL). See 9.49–9.58 for a fuller discussion of the effect of a repudiatory breach on contractual obligations. Data protection/privacy 8.52  The issue of workplace ‘privacy’ is complex and frequently gives rise to issues between employers and employees. There is an inherent tension between an employee’s data protection/privacy rights and the employer’s interest in discovering competitive activities during employment. It is important, therefore, to identify the key sources of an employee’s data protection/privacy rights (in England and Wales) and to provide a broad outline of how they operate in the context of employee monitoring. 8.53  The key statutory sources of data protection/privacy rights in England and Wales are currently: (a) the Data Protection Act 1998, as supported by the Employment Practices Code (particularly Part 3: Monitoring at Work) and the Employment Practices Code Supplementary Guidance issued by the Information Commissioner’s Office; (b) the Regulation of Investigatory Powers Act 2000; (c) the Telecommunications (Lawful Business Practice) (Interception of Communications) Regulations 2000 (SI 2000/2699); and (d) the Human Rights Act 1998. 8.54 As mentioned at 8.25, the present UK government has plans to replace the Human Rights Act 1998 with a British Bill of Rights. In addition, from 25 May 2018 the Data Protection Act 1998 will be replaced by the EU General Data Protection Regulation (EU) 2016/679 which will have direct effect in all EU member states. It will replace both the existing EU  Directive (95/46/EU) 410

Maximising the possibility of detecting competitive activities during employment 8.56

and all national implementing laws, including the Data Protection Act 1998 (although some national implementing legislation will be required in certain key areas, eg data processing to safeguard national security, taxation and public health). The UK government and the Information Commissioner’s Office have made it clear that the EU General Data Protection Regulation will apply in the UK notwithstanding ‘Brexit’ and it (or equivalent provisions) are expected to be enshrined in English law following the UK’s withdrawal from the EU. The UK Data Protection Bill has been introduced to Parliament to achieve this as well as legislate, prior to ‘Brexit’, those areas where national law is required to supplement the EU General Data Protection Regulation. The EU  General Data Protection Regulation significantly increases the level of fines that may be imposed for data protection breaches – up to the greater of 4% of worldwide turnover of an organisation or Euro 20 million for the worst breaches. It also makes certain requirements more onerous, such as the threshold for valid consent and information that must be provided to individuals. Otherwise, the principles of proportionality and transparency which apply with respect to monitoring under the existing Data Protection Act 1998 are substantively replicated. 8.55  The extent of an employee’s right to privacy in the workplace, and the extent to which the employer can legitimately monitor the employee’s behaviour are considered further at 8.57–8.65 (monitoring employee behaviour), 8.90–8.104 (email etc procedures and telephone protocols), 8.108–8.127 (monitoring/controlling the use of equipment and removal of property from business premises) and in Appendix 2.

2(b) Practical steps to detect competitive activities during employment 8.56  As noted at 8.49, it is not possible to provide an exhaustive list of the practical steps that the employer can take to maximise the possibility of detecting competitive activities during employment. However, we have identified twelve such steps that are available to the employer (many of which can, and should, be set out in non-contractual policies and procedures that are clear, well-publicised and enforced). Those steps are as follows: (i) monitoring employee behaviour (8.57–8.65); (ii) instituting proper reporting procedures (8.66–8.72); (iii) ensuring that proper controls are kept on which employees have access to confidential information, in particular: what information needs to be subject to controls; who is to have access to the information; and how is access to be limited to those entitled to the information (8.73–8.83); (iv) instituting procedures regarding correspondence and other hard copy documents (8.84–8.89); (v) instituting procedures regarding email and other electronic messaging platforms (8.90–8.98); 411

8.57  Practical steps to protect the employer’s interests during employment

(vi) instituting telephone protocols (8.99–8.104); (vii) instituting expenses policies (8.105–8.107); (viii) monitoring the use of printers and photocopiers on business premises, in particular: the number, types and positioning of printers and photocopiers; and records of use of printers and photocopiers (8.108–8.117); (ix) monitoring the removal of the employer’s physical property from business premises (8.118–8.121); (x) controlling the use of computers away from the workplace (8.122–8.127); (xi) ensuring that employees take proper holidays (8.128) and (xii) ensuring that customers deal regularly with a number of employees (8.129– 8.130). 2(b)(i)  Monitoring employee behaviour 8.57  Monitoring employee behaviour is a key weapon in the employer’s armoury against unlawful competitive activities during employment. Some of the early warning signs that an employee is thinking of leaving, or may already be preparing to compete or engage in competitive activities, can be obvious (particularly with hindsight, for example: requests from employees for a copy of their contract of employment; increased or unusual expenses claims (see 8.105–8.107)); or other changes in working patterns (such as starting earlier or staying later, or unusual requests for time off). It is also possible that work colleagues, even customers, may pass on information suggesting that something is not right. Do employees have a general right to privacy in the workplace? 8.58  Currently, employees in England and Wales do not have an unequivocal right to privacy in the workplace. A detailed examination of the statutory and common law principles regarding expectations of privacy is beyond the scope of this book but, in broad terms, employees need to establish that they have an ‘expectation of privacy’. The relevant cases demonstrate the highly fact-specific nature of privacy issues, and how easily decisions could have gone either way in some instances. Those cases where the court/employment tribunal held that there was no expectation of privacy do not, as was erroneously reported by some journalists, provide a carte blanche for the employer to ‘snoop’ on his employees’ personal email accounts, WhatsApp messages etc. However, the cases do underline a number of important factors for the employer to keep in mind: (a) the importance of having an employee monitoring policy in place and communicating clearly the circumstances in which employees may, or may not, use work email and internet sites for private communications; (b) the broad scope of the concept of ‘private life’ for the purposes of Article 8 European Convention on Human Rights and that it can include: (i) the right to lead a private social life; 412

Maximising the possibility of detecting competitive activities during employment 8.59

(ii) emails sent at work; and (iii) the carrying out of professional activities; (c) the mere fact that emails are sent/received on the employer’s internal IT network/systems does not mean that those emails (or their content) are automatically considered to be the property of the employer; and (d) that surveillance (covert or otherwise) will always be regarded as a considerable intrusion into the employee’s private life. These factors are considered in more detail in the following paragraphs and in Appendix 2 to this chapter. To what extent can the employer monitor his employees? 8.59  Monitoring can take many forms, and a long list of examples is set out in the introduction to Part 3: Monitoring at Work of the Employment Practices Code published by the Information Commissioner’s Office in relation to the Data Protection Act. The following examples are dealt with in this chapter and in Appendix 2: monitoring of emails and other electronic messaging platforms (8.90–8.98); recording or monitoring of telephone calls (8.99–8.104); and video surveillance (8.112, 8.120–8.121). All of the ‘privacy’ sources identified at 8.53–8.54 seek to strike a balance between the interests of the employer and the employee. As it is put in the introduction to Part 3: Monitoring at Work of the Employment Practices Code, ‘In broad terms, what the Act requires is that any adverse impact on workers is justified by the benefits to the employer and others.’ In this regard the Employment Practices Code goes on to suggest that, as a first step prior to the introduction of any monitoring system, in all but the most straightforward cases, ‘employers are likely to find it helpful to carry out a formal or informal “impact assessment” to decide if and how to carry out monitoring’. That impact assessment involves: (a) ‘identifying clearly the purpose(s) behind the monitoring arrangement and the benefits it is likely to deliver’; (b) ‘identifying any likely adverse impact of the monitoring arrangement’ on workers, eg  what intrusion there will be into their private lives, whether the monitoring is oppressive or demeaning, what impact it will have on the relationship of mutual trust and confidence; (c) ‘considering alternatives to monitoring or different ways in which it might be carried out’, including the use of automated monitoring (which is generally regarded as less intrusive), using spot checks rather than constant monitoring, targeting the monitoring at high-risk areas of the business only, or monitoring only when investigating misconduct; (d) ‘taking into account the obligations that arise from monitoring’, eg notifying workers about the monitoring arrangements and security issues regarding the storage of, and access to, information gathered through monitoring; and 413

8.60  Practical steps to protect the employer’s interests during employment

(e) ‘judging whether monitoring is justified’, eg weighing the benefits against any adverse impact and ensuring that the intrusion is no more than absolutely necessary. 8.60  As the Employment Practices Code does not have legal effect, compliance is not mandatory but it does reflect the view of the Information Commissioner’s Office on how to implement the data protection laws in England and Wales. The Information Commissioner’s Office can cite provisions of the Employment Practices Code in data protection enforcement actions, and as it has been issued under section 51 Data Protection Act 1998, any enforcement action for failing to follow its guidance on good practice would be based on a failure to meet the requirements of the Act itself. See also 18.118–18.119 regarding the criminal prosecutions that can be brought under section 55 Data Protection Act 1998 against employees who misuse/misappropriate their employer’s confidential data. Further guidance on the factors to keep in mind when implementing monitoring policies was provided by the Grand Chamber of the European Court of Human Rights in Barbulescu v Romania [2017] IRLR 1032 (see paragraph 121 of its judgment, which is set out in Appendix 2). 8.61 Where monitoring is to be undertaken, there are common requirements that run through the legislation relating to privacy. Knowledge on the part of the employee that the monitoring is, or at least may be, taking place is a key requirement as, in most cases, is his consent. 8.62 Since the rules relating to monitoring have been in existence for some time, most employers will by now have well-developed policies and procedures in place relating to monitoring, which comply with the relevant legislation. To satisfy the knowledge aspect of monitoring, the employer’s policies/procedures need to be properly communicated to employees and the content explained so that they are fully aware, in advance, of: the fact that they will be monitored; the extent of the monitoring (in particular the possibility that the employer might have access to the actual contents of the employee’s messages); the purpose of the monitoring; and how and when any monitoring will take place; by whom the information gathered through monitoring will be kept/processed; how the results of that monitoring will be used and the potential consequences for the employee. It is good practice to ask employees to confirm in writing that they have read and understood the policies/procedures. 8.63  Wherever possible, the employer should comply with and enforce his policies and procedures consistently, not least because (as set out in paragraph 3.2.1 of the Employment Practices Code Supplementary Guidance) an employee’s expectation of workplace privacy is based ‘not only on the employer’s stated policy but also on its practice’. If the employer fails to enforce the policy/procedure, he could be precluded from later relying on it to justify any monitoring. Failure to comply with the policy/procedure could render the employer in breach of one or more of the legislative provisions identified at 8.53–8.54. It could also result in a constructive dismissal claim, and potentially render the evidence obtained inadmissible in any proceedings. That said, in practice, courts 414

Maximising the possibility of detecting competitive activities during employment 8.65

and employment tribunals have been extremely reluctant to exclude unlawfully gathered evidence which proves to be relevant, and it would be unwise for any employee to rely on their doing so. See, for example, Garamukanwa v Solent NHS  Trust [2016]  IRLR  476 (1  March 2016) (EAT), which is considered in Appendix 2. 8.64 Where consent is required, it must be informed consent in the sense that the employee should be aware of the details referred to at 8.62, including the fact of, purpose and extent of the monitoring, when and how it will take place, by whom information gathered during the monitoring will be kept/processed, how the results of that monitoring will be used and the potential consequences for the employee. Consent must also be specific, freely given and capable of being withdrawn to be valid for the purposes of the data protection legislation in England and Wales. According to the Employment Practices Code published by the Information Commissioner’s Office, this means that a worker must be able to say ‘no’ without penalty and must be able to withdraw consent once it has been given. Obtaining ‘freely given’ consent in the employment context can be difficult on the basis of the assumed inequality of bargaining position as between the employer and the employee. As far as the Data Protection Act 1998 and the EU General Data Protection Regulation (EU) 2016/679 are concerned, the Information Commissioner’s Office has made it clear that there are limits on the extent to which ‘blanket consent’ can be relied upon (lacking the requisite specificity). However, as one would expect, there are exceptional circumstances in which monitoring can occur without advance notice/consent. These circumstances are considered at 18.74, since they would apply in circumstances where the employer is on notice that some competitive activity may be afoot, as distinct from the situation envisaged by this chapter, where the employer is merely seeking to put arrangements in place which may give advance warning of that type of activity. The Employment Practices Code and the Employment Practices Code Supplementary Guidance do give employers some comfort, suggesting that the employer who can justify monitoring on the basis of an impact assessment will not generally need consent in any event. Even where consent has been given, the monitoring must nonetheless be proportionate and reasonable. 8.65  One practical issue that arises in relation to the monitoring of computer equipment is where the activities are undertaken on the employer’s equipment but not via the employer’s server, eg an employee working from home or using a webbased email run from a third party’s server (see further on this point at 8.96–8.98). To address this point, the employer is advised to provide expressly (in his policy/ procedure) that any account(s) accessed using the employer’s equipment, whether using the employer’s hosted mail server or not, may be monitored, and to set out the details referred to at 8.62, including the extent of the monitoring, how the results of that monitoring will be used and the potential consequences for the employee (see, eg, Barbulescu v Romania [2017] IRLR 1032 (Grand Chamber of the European Court of Human Rights), which is considered in Appendix 2). Additional challenges for the employer arise from the increasingly common practice of permitting (even encouraging) employees to use their personal devices to access the employer’s systems and carry out their duties (a practice known as ‘bring-your-own-device’ or 415

8.66  Practical steps to protect the employer’s interests during employment

‘BYOD’, see further at 8.126–8.127). Also, where staff travel regularly on business or spend periods working in foreign jurisdictions, very different rules may apply regarding the extent to which data can be accessed, processed and monitored in those jurisdictions. Germany, for example, allows the employer to access employee data, even work emails, only in very limited circumstances. An analysis of international privacy rules is outside the scope of this book, but employers would be well-advised to seek foreign law advice when implementing or trying to enforce data protection and monitoring policies and procedures in other jurisdictions. The position should be simplified to an extent, at least for EU jurisdictions, when the EU General Data Protection Regulation (EU) 2016/679 replaces the Data Protection Act 1998 from 25 May 2018 (see further at 8.54). 2(b)(ii)  Instituting proper reporting procedures 8.66  It is good management practice for the employer to have proper reporting procedures in place and to ensure that they are followed. This is essential to ensuring that potential issues can be spotted, notified, escalated and dealt with quickly and efficiently. Such procedures are particularly important where much of the employer’s business is conducted away from the business premises, eg where the employee spends considerable periods working remotely from home, or travelling to customers. 8.67  The employee should know to whom he reports, and the employer needs sufficient flexibility (ideally built into the employment contract itself) to make changes to that reporting line as and when required. Without that flexibility, the employer who wants to change a reporting line, for example, by inserting an additional layer of management between the employee and his original line manager, may face an argument that this amounts to a demotion and a repudiatory breach of contract. For the effect of repudiatory breach on restrictive covenants contained in the employment contract, see 9.49–9.58. 8.68  The employee should also know what the reporting requirement entails. Usually the best formula is to have a general requirement to report on a day-today basis, with an express obligation to report matters of consequence immediately and to make more formal reports at regular intervals. 8.69  The employer needs to consider what information he requires in writing. In reaching his decision the employer should bear in mind that, evidentially, a written report is likely to be more valuable. If the employee has been dishonest in that report, or if the report is misleading, that, in itself, will be misconduct. There may be disputes about the interpretation of a written report but, unlike an oral report, it is difficult for the employee to deny what he has written. 8.70  Reporting requirements should always include progress reports on the matters on which the employee is working and the way in which he has spent his time since the last report (unless this is available from another source eg through time sheets or other similar records). 416

Maximising the possibility of detecting competitive activities during employment 8.74

8.71  Under English law, certain degrees of reporting obligations are implied into the employment relationship through the duty of fidelity (see Chapter 3), with more stringent reporting requirements imposed on more senior employees who are also fiduciaries (see Chapter 4). However, it is far better to seek to put the extent of the reporting obligation beyond doubt for each individual employee by including express provisions in the employment contract requiring employees to report – see Chapter 5, in particular 5.37–5.42. Where the reportable information concerns wrongdoing by a colleague (including actual/threatened competitive activities), employees may feel more comfortable reporting the matter on an anonymous basis, eg to a confidential ‘whistleblowing’ hotline of the type that many larger employers will have in place, particularly in regulated sectors. 8.72  Nowadays, as well as having physical records of the matters on which an employee is working, many employers maintain electronic databases on which employees log up-to-date customer details or other business information on a regular basis, for example after any key meeting. The employer should ensure that all employees make entries on a timely basis. Not only will this mean that the employer has an up-to-date and (it is to be hoped) accurate record of information relating to the customer, but the absence of entries from a particular employee will alert the employer that actual or threatened competitive activities may be afoot. If certain criteria are met then the database should also attract additional protection under the Copyright and Rights in Database Regulations 1997 (SI 1997/3032). Broadly speaking, to be protected the data needs to be arranged systematically/ methodically, individually accessible electronically and have involved a ‘substantial investment in obtaining, verifying or presenting the contents’ (see further at Chapter 7 for a more detailed consideration of database rights). In appropriate cases a claim under these Regulations can offer a more effective remedy for the employer than a claim for breach of confidentiality obligations (including injunctions against further use, damages and an account of profits). 2(b)(iii)  Ensuring that proper controls are kept on which employees have access to confidential information 8.73  In some businesses there are virtually no controls over which employees have access to trade secrets and confidential information. In others, matters are taken to the opposite extreme and unnecessary and cumbersome procedures are adopted which impede the efficient operation of the business. Neither of these situations is ideal, and the employer is well-advised to spend time devising the correct system of controls for his business. 8.74  The employer should devise his system of controls by reference to three questions: (a) What information needs to be subject to control? (b) Who is to have access to the information? (c) How is that access to be limited to those entitled to the information? 417

8.75  Practical steps to protect the employer’s interests during employment

What information needs to be subject to control? 8.75  The main categories of information which should be subject to control are trade secrets and confidential information. Identifying what amounts to a trade secret or confidential information is by no means straightforward and is considered in detail in Chapter 6. The best advice that can be given to the employer is to identify and clearly mark those pieces of information which he regards as confidential, valuable and which are not publicly available, to treat those as confidential consistently and to impress upon the employees who have access to them their confidential nature. As seen in Chapter 6, these are important factors that the courts will take into account when determining whether information is truly confidential and warrants protection from misuse by the employee. Who is to have access to the information? 8.76  Deciding who has access to each trade secret and piece of confidential information on his list can be a difficult and time-consuming task for the employer and it is often at this stage that the employer goes wrong. Some employers, fearful of the information being leaked to a competitor, restrict access to such an extent that even those who would benefit from having access to the information to do their work properly are not allowed access. Just as with employee monitoring, putting in place controls that are excessively restrictive can engender feelings of distrust or exclusion amongst the workforce (the exact opposite of the loyalty and engagement which the employer has worked hard to create through the measures discussed earlier in this chapter – see 8.4–8.43). Others, and this is often true of larger organisations or those with high levels of employee turnover, find the exercise of identifying who will have access to what particular trade secrets and confidential information falls into the ‘too difficult’ category. Often, by default rather than design, they simply permit access to all employees of a particular status and above, irrespective of whether or not they really need the information. 8.77  Who is to have access to any trade secret or piece of confidential information is primarily a commercial decision. However, the employer should always ensure that, apart from exceptional circumstances, access is only given to those who genuinely need the information to do their work efficiently, and that he can justify the inclusion of every person, not just every category of person, given access. Problems often arise when the employer has, simply by failing to give the matter due consideration, granted access to a wider range of employees than was ever intended or necessary. 8.78 Sometimes the result will be that virtually all the workforce will have access to the information. This does not automatically mean that the information is not properly confidential, merely that many employees need access to it to do their jobs. 8.79  The employer also needs to make it clear what is to happen if an employee with access to trade secrets or confidential information is absent: for example, does his deputy thereby become entitled to access the information? What of the 418

Maximising the possibility of detecting competitive activities during employment 8.82

secretaries/personal assistants who have access to their boss’s emails? Are they automatically given access to confidential information or trade secrets to which their bosses are privy? The access list should be reviewed regularly and always when there are changes in circumstances, such as a group re-organisation, a redefining of roles within the employer’s organisation, promotions, new hires or changes in team personnel working on a particular matter. How is access to be limited to those entitled to the information? 8.80  The answer to this question will depend very much on how the information is stored and the number of employees who are to have access to the information. As to the former, many modern offices are now ‘paperless’ (or endeavouring to be so) which means that most, if not all, confidential materials are stored electronically. This means that they are potentially accessible to the entire workforce. There are a number of ways of controlling and monitoring access to electronic materials (see further at 8.90–8.98). Obvious examples include password protecting online accounts or the documents themselves, or fitting computers and mobile devices (eg tablets or smartphones) with privacy screens to stop an unauthorised passer-by seeing what an authorised employee has open on their screen (an issue of particular importance where there is an open plan office or employees who travel a lot and need to access confidential information in public places, eg on public transport). It is also possible to set privacy restrictions on electronic access and/or information barriers (sometimes referred to as ‘ethical’ or ‘Chinese’ walls) where only named personnel have access to, for example, a particular customer file. The employer can, and should, impose tight controls on the use of personal devices in the workplace, such as USB memory sticks/flash drives and camera phones, to prevent copies of electronic data being removed with relative ease. Many employers disable completely the USB ports on work computers for this very reason, or ban the use of camera phones (which is particularly common in high-tech industries). See also 8.122–8.127 regarding the controls the employer can impose on the use of computers etc away from business premises. 8.81  For hard copies of trade secrets or confidential information, examples of the practical measures that the employer can adopt include requiring that physical copies are kept to a minimum and stored in secured, locked filing cabinets or cupboards when not being used by authorised employees. Restrictions can, and should, also be placed on what materials (if any) can be removed from the employer’s premises and the circumstances in which this is permitted (see further at 8.118–8.121). 8.82  Where only a very few employees are to be given access to trade secrets and confidential information, stringent and detailed procedures will need to be put in place – the employer is protecting the information not only from third parties but also from other employees working side by side with those who have access. Where virtually all of the workforce is to have access, it may be necessary to issue a more general memorandum setting out the steps to be taken by employees to avoid unauthorised disclosure. In any event, we strongly advise 419

8.83  Practical steps to protect the employer’s interests during employment

that, in addition to including a comprehensive trade secret and confidentiality provision in the contract (see 5.44–5.53), employers include specific provisions addressing the handling of confidential information in the contractual section of the employee handbook. 8.83  Employers wishing to limit access often seek guidance on how best to do it. In Appendix 3 to this chapter we have therefore included some basic guidelines which can be adapted to meet most situations. 2(b)(iv)  Instituting procedures regarding correspondence and other hard copy documents 8.84 Well-advised employees (or poaching employers) engaging in unlawful competitive activities will generally try to limit as far as possible what is committed to writing – for obvious reasons. ‘Writing’ for present purposes means traditional correspondence (eg letters or memoranda) and other hard copy documents that may be created (eg presentations, diary or daybook entries, pitches, fee proposals, contact lists, business plans or board papers). However, despite endless media coverage of employee competition disputes, it is still astonishing how many employees create a ‘paper trail’ of their unlawful activities, particularly in the form of business plans or their curriculum vitae. This is perhaps borne out of an assumption that today’s employer will be so focussed on what evidence can be recovered electronically, that he will overlook more old-fashioned means of communicating. Putting in place procedures for the review and control of traditional correspondence and other hard copy documents is, therefore, something the employer must consider. It can deter employees from competitive activities, and for those it does not deter and who do resort to traditional correspondence or other hard copy documents, the chances of being caught are high. 8.85  The usual procedure is to require that: (a) all incoming letters and other hard copy documents (such as pitch requests, draft agreements etc) are seen by at least two employees; and (b) all outgoing materials are either seen by an employee other than the author before despatch, or a copy is sent to that other employee simultaneously or on the same day. 8.86 The employer should also keep records of all documents created on his computer system, recording the author, the identity of the sender/recipient, the time of despatch/receipt and the number of pages. Nowadays, most employers have sophisticated document management systems on which customer projects are allocated a specific ‘file’ and/or ‘matter’ number and to which all correspondence and other documents must be saved. Generally, anyone with the relevant file/ matter number can access those items from any authorised access point, including desktops, laptops and mobile devices. Although this does facilitate access by a wider range of employees than the employer may ideally like, these document management systems have two particularly useful safety mechanisms: first, they allow the employer to restrict access to named members of a customer team, or their personal assistants/secretaries through the use of passwords and information 420

Maximising the possibility of detecting competitive activities during employment 8.90

barriers (also known as ‘ethical’ or ‘Chinese’ walls); secondly, they include a ‘history’ functionality, which provides a complete audit trail of each item saved to that particular file/matter number, including who has accessed, edited or printed individual items. 8.87  Employees who work entirely or partly from home should be limited, wherever possible, to creating correspondence and other documents on the employer’s system only through an authorised remote-access link. Those employees should be required to use the same document management systems and keep the same records as the employer requires all office-based employees to use and keep. Ideally the employee should also be restricted to using only the employer’s physical equipment, eg a company-owned laptop rather than a personal device (see further at 8.122–8.127 on restricting the use of computers etc away from the office). These systems/records allow the employer to cross-check that any file is complete and are a useful early warning system for detecting unusual or unauthorised access to confidential data. 8.88 The benefits of requiring employees to use document management systems to maintain complete customer records, and restricting the use of personal devices, apply equally to emails and other electronic messaging platforms (for which see 8.90–8.98). 8.89  Another key advantage to the employer of implementing the system outlined above, is that he should always have a second employee with knowledge of each customer matter who is ready to take over if the employee with primary responsibility is unable to continue. This can be particularly useful where an employee leaves to set up in competition or is suspected of engaging in competitive activities. Unless the second employee also leaves, the employer has someone in a position to help the customer immediately. Consequently, the customer is not faced with the alternative of starting from scratch with an employee ignorant of his business or a particular transaction or, worse still for the employer, transferring his business to a competitor. In matters where speed is vital, this can mean the difference between the employer retaining the customer and losing him (see also 8.129–8.130 regarding the use of customer teams). 2(b)(v)  Instituting procedures regarding email and other electronic messaging platforms 8.90  As noted at 8.10, today’s employees use a vast array of technology in the performance of their duties. For example, the vast majority of communication with customers and other business contacts is conducted via emails sent/received on the employer’s internal IT network/systems. It is also increasingly common for employees to communicate with customers, and store customer and other business contacts, using social media sites or email accounts that sit outside the employer’s internal IT network/systems and on accounts that may be personal to the employee. Examples include text messages, instant messaging, WhatsApp messages and ‘posts’, ‘tweets’, messages and contact lists on LinkedIn, Twitter 421

8.91  Practical steps to protect the employer’s interests during employment

and Facebook (indeed, some customers specifically request that businesses use platforms such as WhatsApp to communicate with them). Employees conduct such e-activities using a wide range of portable electronic devices, either provided by the employer or, as is increasingly common, which belong to them personally. These practices present significant challenges for the employer in terms of controlling and monitoring access to, and the creation, use and dissemination of, confidential information. These problems are compounded by the fact that the employer cannot assume that emails (and/or their contents) sent/received on his internal IT network/systems are considered to be his property (see Capita plc and another v Darch and others [2017] IRLR 718 (Ch), which is considered in Appendix 2 to this chapter and at 18.171 and 18.175). As discussed at 8.96–8.98, the ownership of communications sent/received via, or information stored on, external systems is even less certain. 8.91  However, as noted at 8.47, on a more positive note the increased use of technology also means that employees have a bigger ‘electronic footprint’ than ever before. As with traditional, hard copy correspondence (see 8.84), welladvised (or unscrupulous) employees engaging in unlawful competitive activities will generally try to avoid creating an electronic evidence trail (eg emails, WhatsApp messages, social media ‘posts’). The same is true for poaching employers. Both will also try to avoid using electronic devices, or will use disposable ones that can easily be ‘lost’. Astonishingly, however, despite having become sophisticated users of e-technology, and endless media coverage of employee competition disputes, many employees still labour under the misapprehension that deleted emails etc cannot be recovered. As a result, evidence of competitive activity is frequently found in electronic data. It is vital, therefore, to put in place procedures for controlling and monitoring access to and the use of the employer’s electronic systems and, to the extent possible, external sites (like LinkedIn etc). Again this can deter employees from competitive activities, and for those it does not deter and who do resort to emails etc, the chances of being caught are high. 8.92  In relation to emails sent and received via the employer’s internal IT network/systems, most employers will already have policies in place which will permit appropriate email monitoring in specified circumstances and which address the practical recommendations made at 8.93–8.95. For the reasons discussed at 8.57–8.65 (monitoring employee behaviour), these policies must be properly communicated to employees and the content explained so that they are fully aware, in advance, of the details set out at 8.62, including the fact that they will be monitored, the extent of the monitoring (in particular the possibility that the employer might have access to the actual contents of the employee’s messages), the purpose of the monitoring, when and how any monitoring will take place, how the results of the monitoring will be used and the potential consequences for the employee. It is good practice to ask employees to confirm in writing that they have read and understood the policies. These policies must be complied with and enforced consistently by the employer, and reviewed regularly, not least to keep pace with the speed at which new forms of electronic communication and devices are developed. 422

Maximising the possibility of detecting competitive activities during employment 8.95

8.93  From a commercial perspective, there are two main steps the employer can legitimately adopt. First, where possible, the employer should require that proxy access to each employee’s work email, text or instant message etc account is given to at least one colleague. This ensures that incoming business emails/messages can be checked and responded to appropriately when the employee is away from the office. To avoid falling foul of the Data Protection Act 1998 (and, potentially, the right to respect for private and family life, home and correspondence under Article 8 European Convention on Human Rights), emails etc that appear to be obviously private or personal should not normally be opened and the content reviewed – see paragraph  3.2.8 Employment Practices Code published by the Information Commissioner’s Office. Employers are further advised to confine the monitoring of such emails to the addresses/headings ‘unless it is essential for a valid and defined reason’ (paragraph 3.2.8 Employment Practices Code) eg investigating criminal conduct or potential gross misconduct. In our view, the volume of personal email ‘traffic’ to or from that particular sender/recipient can also be monitored legitimately. Where employees are allowed to access personal emails at work, the Employment Practices Code (at paragraph 3.2.8) suggests that these should only be monitored ‘in exceptional circumstances’. Because of the potential problems related to emails that might be said to be personal, some employers now specifically ban any personal use on their systems and equipment. Given the 2017 decisions of the High Court in Capita plc and another v Darch and others [2017]  IRLR  718 (Ch), and the Grand Chamber of the European Court of Human Rights in Barbulescu v Romania [2017] IRLR 1032 (both of which concerned the infringement of Article 8 rights in the context of emails sent on the employer’s internal IT network/systems – see further in Appendix 2), we may see more employers adopting this approach. 8.94 Secondly, it should be standard practice that emails etc sent to and by customers or other business contacts are copied to at least one other employee, especially where it has not been possible to arrange proxy access to the relevant account. Alternatively, such messages should be forwarded onto a colleague quickly after they are sent or received. Not only does such a system potentially improve the level of service provided to a customer, it also ensures that there is more than one employee up to speed with the customer’s business. In theory, this reduces the risk of the customer being lost if the lead employee leaves, and increases the chances of detecting attempts to poach that customer. It is, of course, fair to say that such an approach does run the risk of making it more attractive for both employees to leave together. However, provided the employer ensures that employees are not allocated to customers always in exactly the same pairs, then that risk is at least spread (see further on customer teams at 8.129–8.130). 8.95 As with traditional correspondence and other hard copy documents, the employer should insist that all work-related electronic communications sent, or received, via the employer’s systems are printed/scanned or otherwise saved into the relevant customer file on any document management system or other internal system/database that the employer operates. Employees’ use of personal devices should also be restricted, particularly for those who work remotely. As to the benefits to employers of taking these steps, see further 8.86–8.89 and 8.122–8.127. 423

8.96  Practical steps to protect the employer’s interests during employment

8.96 The position is even more complex regarding the sending/receiving of work-related electronic communications, or the storing of business contacts, on sites or in accounts that sit outside of the employer’s internal IT network/systems (and, therefore, his control) and which are usually personal to the individual employee (eg a WhatsApp, Hotmail or LinkedIn account). 8.97  In particular, it is not always clear who owns any content stored on these accounts (eg business contacts or messages) and when the employer can gain access to, or request the return or deletion of that content. WhatsApp, LinkedIn, Facebook and other social networking accounts are usually owned by the individual employee and so, generally, the employer does not have an automatic right to access those accounts, even if they are used on the employer’s systems or a device provided by the employer. The position may be different where, for example, the account was opened at the direction of the employer, purely for work purposes and for which the employer pays or is otherwise responsible (for example, a company Twitter account or Facebook/LinkedIn page). The ‘personal’ nature of these accounts makes monitoring and control much more difficult in addition to the uncertainty as to who owns any content on the account. There have been few reported cases directly on these points. By way of an example, Hays Specialist Recruitment (Holdings) Ltd & anor v Ions & anor [2008] IRLR 904 (Ch) was the first reported case involving LinkedIn. In that case, the High Court ordered limited disclosure of (a) certain emails/other communications sent to/from Mr Ions’ LinkedIn account from his Hays’ account, and (b) documents showing any use made, or business won, by Mr Ions/his new employer from business contacts that were saved to that LinkedIn account during his employment with Hays. 8.98  Clear rules regarding the use of any external account must be established (and clearly communicated) from the outset of the employment relationship. We recommend that the employer insists in any policies that employees add any new business contacts to the employer’s database at the same time as they add them to LinkedIn etc, and that they must delete such entries from their external account on termination of their employment; see 5.74 for a precedent clause to this effect. Similarly, the requirements considered at 8.93–8.95 and 8.86–8.89 regarding proxy access to email etc accounts, ensuring that sent/received messages are copied or forwarded to more than one employee and stored on the employer’s document management system, and restrictions on the use of personal devices (8.122–8.127) apply equally to external accounts. 2(b)(vi)  Instituting telephone protocols 8.99  In the same way that the data protection/privacy rights referred to at 8.53– 8.54 resulted in employers introducing policies for monitoring the use of email, internet etc, so they marked the advent of policies and practices relating to the monitoring of telephone use. These policies should alert the employee to the type and extent of monitoring that may be undertaken, when it may be undertaken, and require the employee’s consent to the monitoring. 424

Maximising the possibility of detecting competitive activities during employment 8.102

8.100  In some businesses, the recording of all telephone calls has been commonplace, and in certain instances obligatory, for some time. Typical examples would be customer service organisations, businesses where goods are ordered over the telephone, and parts of the financial services sector where business is conducted largely by telephone, instructions require immediate action, and considerable sums of money may be at stake. In such businesses most land lines, and in some instances mobile devices, are routinely recorded save for those used by the most senior executive management within the organisation. The Information Commissioner's Office’s Employment Practices Code Supplementary Guidance makes it clear (at paragraph 3.2.4) that if the recording of telephone calls is undertaken purely for the purpose of evidencing business transactions, and is ‘limited to those calls involving, or likely to involve, transactions’ then it would not be considered as ‘monitoring’ for the purpose of the Employment Practices Code. Aside from these types of exceptions, the recording of telephone calls is rarely necessary and is not encouraged by the legislation. 8.101 The sort of telephone monitoring that is, however, common in many organisations is the automatic monitoring of the numbers to which calls are made and received, their duration and cost. In some businesses, typically those in the professional services sector, the function of this monitoring is to identify costs that are to be re-charged to the customer. It is also commonplace for employers to receive invoices for land lines and mobile telephones that are provided to employees for work purposes, which include an itemised call list that may be used for similar purposes. Many modern telephone systems also send received voicemails by email to the recipient, which gives the employer the opportunity to monitor them without having to access the physical land line/mobile telephone or related invoices. 8.102  In principle, such monitoring is legitimate (although see further at 8.103), provided the employees are aware that it is being undertaken (and its extent), the purpose for which it is being undertaken and been given advance notice that monitoring will occur. As monitoring will necessarily involve processing an employee’s personal data, when the EU General Data Protection Regulation comes into force, an employer will also need to communicate to the employee the legitimate reasons or other legal basis relied upon to conduct monitoring; one such basis being that the employee has given their consent (although see further on the validity of consent at 8.64). Failure to give a warning about monitoring was the key reason why the UK government was found to be in breach of Article 8 European Convention on Human Rights in the case of Halford v the United Kingdom [1997]  IRLR  471 (ECtHR), even though the purpose of the monitoring had been legitimate. Failure to warn an employee that her telephone usage, email and internet access was being monitored and the information gathered being stored also led to the UK government being found to have fallen foul of Article 8 in the decision of the European Court of Human Rights in Copland v United Kingdom [2007] ECHR 253 (Application No 62617/00) (ECtHR). See, in contrast, the EAT decision in Atkinson v Community Gateway Association [2014] IRLR 834 (EAT), where knowledge that monitoring would take place and the existence of a monitoring policy were key factors in finding that there had been no Article 8 failings (see Appendix 2 for further details of this case). 425

8.103  Practical steps to protect the employer’s interests during employment

8.103 There are a number of practical issues regarding the monitoring of employee telephone use. For example, many employees use personal mobile telephones or home land lines for work purposes and the employer pays for, or towards, the costs of doing so. Inevitably, if the employer receives invoices related to those accounts directly, they are likely to contain data about work-related and personal calls. The Employment Practices Code (at paragraph  3.2.6) notes that employees’ expectations of privacy are likely to be greater at home or outside the workplace than within it. Just as with the monitoring of emails etc, to avoid falling foul of the statutory privacy framework, and the Data Protection Act 1998 and the EU General Data Protection Regulation (EU) 2016/679 in particular, the employer should ‘not make use of information about private calls for monitoring, unless they reveal activity that no reasonable employer could be expected to ignore’ (Employment Practices Code paragraph  3.2.6). The Employment Practices Code Supplementary Guidance confirms (at paragraph 3.2.6) that, exceptionally, information about private calls can be used for monitoring where there is evidence of criminal activity at work. In our view, such monitoring would also be permissible where there is evidence of gross misconduct. It is fair to assume that data suggesting that unlawful competitive activities are being undertaken should fall within this exemption. Indeed, where an employee is already suspected of disclosing trade secrets, the Employment Practices Code expressly excludes from its ambit looking through telephone logs kept for billing purposes to establish whether that worker has been contacting a competitor (see the introduction to Part 3: Monitoring at Work). 8.104  Finally, it has become common for departing employees to ask to keep their work mobile device, or at the very least the mobile telephone number. Ideally the employer will resist this request and have a contractual term and/ or policy that the device is returned. Of course the main reason for this is that transferring the mobile number to a departing employee simply facilitates continued contact with former colleagues and customers. In addition, simply handing over a device (such as a mobile telephone) and any associated storage device (such as the SIM card) has the potential to ‘gift’ to the departing employee any valuable confidential and proprietary data (including business contacts) stored on it. Where for commercial reasons the employer is prepared to agree the request (eg  perhaps the departing employee brought the number from a previous employer and therefore claims it as his property), the device should always be professionally ‘cleaned’ by the employer’s (internal or external) IT team/advisers before it is handed over. The employer should be cautious, however, before permanently deleting all such data from the device, whether he does this so that the employee can retain the handset or for the purposes of re-issuing it to another employee. Unless an ‘image’ of the device is taken first by the employer’s internal IT team or external forensic IT advisers before it is wiped, any evidence of unlawful competitive activity that might have been on the handset/storage device can be lost and difficult, if not impossible, to recover at a later stage (see further on this subject at 18.61(d) and 18.144). 426

Maximising the possibility of detecting competitive activities during employment 8.108

2(b)(vii)  Instituting expenses policies 8.105  The employer should have a clear expenses policy and proper procedures for accounting for expenses incurred. Employees should be made aware that expense claims will be carefully checked and only those that conform to the requirements of the policy will be repaid. The policy should require employees to submit expense claims in a timely manner and, in any event, within a calendar month of their being incurred. Claims for expenses should always identify the amounts spent and on what they were spent. Scribbled claims on scraps of paper and descriptions such as ‘business lunch’ should be rejected automatically. Where the expenses were incurred in entertaining a customer, it is now common practice to require the employee to file a report detailing the identity of the customer and the information obtained, opportunities identified and the follow-up actions required, as a pre-condition of the expenses being repaid. That information should also be saved onto any customer relationship management system operated by the employer and to which other relevant personnel will have access. 8.106 Employers should look carefully at the expenses being incurred by their employees. Money advanced to employees for expenses, although that is now comparatively rare, should be properly accounted for and expense claims checked before being authorised. The use of company credit cards should also be controlled. Employers who pay an employee’s home telephone bill, or make a contribution to it, or provide a mobile telephone for the employee, should insist on itemised telephone bills (see 8.101–8.103 regarding the use of information contained in those bills). 8.107  Apart from being good practice, the steps outlined above can help in the detection of competitive activities. For example, sudden changes or ‘spikes’ in the employee’s usual expenses regime can be an early warning signal that something is not right. An employee may suddenly start taking customers out to lunch when he had never previously done so, or may arrange an overseas trip with an unusual itinerary, or make an inordinate number of telephone calls to suppliers. In other cases, two or more employees may start submitting similar expense claims, or claims for the same customer regardless of whether they are on the official customer team or not. While there may be a perfectly innocent explanation for any of these occurrences, there may also be a sinister one. A  vigilant employer will detect the change in behaviour patterns and thereby either avoid the illicit activities altogether or ‘nip them in the bud’. 2(b)(viii)  Monitoring the use of printers and photocopiers on business premises 8.108 Traditionally, in virtually every case of competitive activity by an employee, the employer’s photocopiers or printers will have been misused. For a time, before employees became aware of how easily deleted emails etc could be retrieved and their other electronic activities traced, it was common practice for employees leaving to join a competitor to email customer lists and other confidential information to a private email address or occasionally direct to the 427

8.109  Practical steps to protect the employer’s interests during employment

competitor employer, or to download it onto a portable data storage device. It is surprising how many employees still do just this: some are genuinely oblivious to the ‘electronic footprint’ that their actions leave behind; others operate under the mistaken (sometimes arrogant) belief that the data they are taking (eg customer contact details) belongs to them or that they simply will not get caught. However, for those who are alive to the dangers of leaving behind an electronic evidence trail, printing or photocopying the employer’s confidential information for use in a rival business are back in vogue. Whether the employee is already engaged in that rival business or merely has plans to join it once his employment has ended, he frequently cannot resist the temptation of printing or photocopying significant amounts of his employer’s confidential information, which he then uses to his advantage in his competitive activities. Other examples include employees already engaged in a rival business, who find it convenient to print or photocopy documents relating to that business, and employees preparing to set up in competition who economise on their ‘start-up’ expenses by producing their new business’s introductory leaflets and circulars using their employer’s equipment. Often they will also have had documents typed on the employer’s word processing system by a ‘loyal’ secretary! 8.109  The cost to the employer of these types of misuse normally far exceeds the secretarial time or price per sheet of the printing or photocopying. This is particularly so where the employee is printing or photocopying the employer’s confidential or proprietary information (eg templates, precedents, presentations, product details, pricing and marketing plans or materials and strategic or financial reports) for use in a rival business. The information the employee prints or photocopies may often have taken his employer many working days to compile, and yet the employee obtains it at no personal cost at all, not even the price of the printing or photocopying. 8.110  The employer cannot, unless he has only a very few employees and a relatively small or self-contained workplace, realistically hope to prevent completely the misuse of his equipment by his employees engaged in competitive activities. The more devious would-be competitor employees will often carry out any printing or photocopying etc outside of normal working hours (eg at the start or end of the working day), making the chances of catching them in the act very low. What the employer can do, however, is deter the potential competitor employee by adopting certain safeguards to increase the chance of detecting misuse of his equipment. The safeguards will vary from business to business, and some employers may decide it is not commercially viable to adopt any of them, but each employer should consider three basic issues, as follows. Number and types of printers and photocopiers 8.111 The more printing and photocopying devices an employer has and the more reliable and sophisticated they are, the greater the temptation for the potential competitor employee. Most businesses use sophisticated multi-functional devices which are capable of printing, copying and scanning large volumes of 428

Maximising the possibility of detecting competitive activities during employment 8.114

materials at high speed. The employer should therefore consider carefully the number and types of devices he really needs. If the normal demand for photocopying is not high, it may be practical to have only fairly basic, single purpose devices (that is, separate printers or photocopiers) generally available throughout the premises, eg  one per floor, with the more sophisticated photocopiers in a self-contained room, possibly with one or more designated members of staff to operate them (although this may be an unaffordable luxury). Positioning of printers and photocopiers 8.112  Printers and photocopiers that are available for general use should, where possible, be positioned in a place where there are likely to be other employees around to observe what is happening. Frequently, because of the noise they make, these devices are tucked away in side rooms without windows, so that only other employees in the room at the same time as the would-be competitor employee can see what he is doing. Such employees will doubtless wait until colleagues are unlikely to be around before printing or photocopying vast swathes of their employer’s confidential information. Depending on the nature of the business, and the perceived risk to the employer’s confidential information, CCTV cameras might be placed near these devices (although see 8.58, 8.120–8.121 and Appendix 2 regarding the privacy/data protection implications and requirements of using video surveillance). Records of use of printers and photocopiers 8.113  There are various ways in which the employer can have available a record of the use being made of his printers and photocopiers. Some employers use devices which operate on a ‘pass card’ system, under which the machine can only be activated by inserting or scanning the employee’s security pass or specially designed cards (similar to the card keys for hotel rooms). The employer issues each authorised user with a card which that person uses when printing or taking copies, and the number of copies etc is logged on the machine against the card. Another common system is where the user has to key in his own individual password or code to activate the machine. The employee is then also required to enter a code to designate to what customer or account the copies are to be charged. 8.114 Unfortunately, pass card or passcode operated systems can easily be circumvented. For example, a would-be competitor employee may simply ‘borrow’ a colleague’s card/code, or use a personal device (eg a smartphone) to take photographs of confidential information (see 8.122–8.127 regarding the use of personal devices for work purposes). Many printers and photocopiers also permit the use of ‘non-billable’ or generic codes for printing and copying eg for customer matters that do not yet have an assigned file/matter number, or for general business development or administration purposes. Although such generic codes are open to abuse by a would-be competitor employee, a complete ban may not be practical or commercially viable. The employer should at least restrict the number or type of employees who are permitted to use them and/or have a cap 429

8.115  Practical steps to protect the employer’s interests during employment

on the amount of printing or copying that can be done by each employee on a generic code. 8.115  The ‘document history’ functionality built into most document and email matter management systems also provides a useful audit trail of who has accessed, edited or printed individual items saved to a particular file/matter number (see further at 8.86). 8.116  Less sophisticated are manual records (now comparatively rare except in very small businesses) where, on each occasion, the user writes his name, the number of prints or copies taken and, in some cases, the customer or account to which the prints or copies are attributable. 8.117  Whatever record-keeping system the employer chooses, abuse is always possible, but the employer should not discount the idea on that basis alone. Even a manual record with only minor cost implications may be a sufficient deterrent. 2(b)(ix)  Monitoring the removal of the employer’s physical property from business premises 8.118 As discussed at 8.108, for some employees, particularly those who are anxious not to leave an electronic evidence trail of their unlawful competitive activities, removing physical items of the employer’s property or copies of the employer’s confidential information, which can be harder to trace, is an attractive option. The employer should always consider carefully what controls, if any, he keeps on the removal of physical property from his premises. Sometimes a complete ban is appropriate, but often that is not commercially viable, either because the employee needs particular items of property to do his work away from the employer’s premises, or it is convenient for him to have that property, for example, so he can work at home in the evening. This is particularly true where the employer who is concerned about the security of his IT systems has also imposed a complete ban on remote-access to the employer’s internal IT network/systems. 8.119  Controlling the removal of property can be extremely difficult. In practice, the employer has only two options. The first option is simply to identify any property which is never to be removed (eg highly sensitive confidential information, such as unpublished plans of new products), and to inform the employees who have access to that property accordingly. At the very least, the employer should adopt this option, even if it is difficult to enforce. The second option is to go one stage further and identify a second category of property which can be removed subject to certain procedures. The procedures might include prior authorisation and the employee signing to say what property he has removed, when and for what purpose. Such procedures can be very laborious, and often the employer, quite justifiably, discounts this second option on the basis that it is too time-consuming and impossible to police. Alternatively, he adopts a watereddown version, eg  through a general statement in the employee handbook that 430

Maximising the possibility of detecting competitive activities during employment 8.122

property should only be removed where to do so is necessary for the employee’s work. Such statements obviously do no harm but it has to be recognised that they are of limited value unless there is some mechanism in place for policing compliance with the policy. 8.120  A third, more extreme, option for the employer is to deploy some form of video surveillance to capture footage of any employees removing materials from the office without authorisation. However, as the European Court of Human Rights re-iterated in a decision handed down on 28 November 2017, the Article 8 notion of ‘private life’ may include professional activities at work. Covert (and non-covert) video surveillance of an employee at his or her workplace is therefore ‘a considerable intrusion into the employee’s private life’ which can only be justified if it pursues a legitimate aim provided for by domestic law (Antović and another v Montenegro [2017] ECHR 70838/13, which is considered in more detail in Appendix 2). Guidance on the extent to which video surveillance can be used comes primarily in the form of the Information Commissioner’s Office’s Employment Practices Code. Covert monitoring is expressly permitted by the Employment Practices Code (Part 3: Monitoring at Work) where: (i) there are grounds for suspecting criminal activity or equivalent malpractice, and (ii) notifying the individuals about the monitoring would prejudice its prevention or detection, or the apprehension or prosecution of the offenders (see further at 18.74). However, paragraph 3.3.1 suggests that constant video surveillance will be hard to justify and that: (a) it should be targeted at particular areas of risk; (b) it should be confined to areas where employees’ expectations of privacy are low (eg where members of the public are also permitted); and (c) prominent signage should be displayed explaining that video monitoring is taking place and the purpose for it. Further guidance on the use of video surveillance can be found in the Information Commissioner’s Office’s CCTV code of practice (In the picture: A data p­ rotection code of practice for surveillance cameras and personal information). 8.121  It may therefore be possible, and appropriate, for the employer to position CCTV cameras where the employer’s printers and photocopiers are positioned, or at other key areas within the business, eg at the entrance to or exit from certain departments (such as restricted access research and development areas in a high-tech businesses to capture the unauthorised removal of product prototypes). Ultimately employers, particularly those involved in research and development, may reserve the right to stop and search employees. 2(b)(x)  Controlling the use of computers away from the workplace 8.122  The vast majority of employees have access to a personal computer at home, are provided with smartphones, laptops etc by their employer, or are 431

8.123  Practical steps to protect the employer’s interests during employment

allowed to use their own devices to enable them to carry out their duties. These facts, combined with the increasing demand for (and use of) flexible working practices and the convenience of providing employees with remote access to the employer’s computer systems, create a significant headache for the employer. On the one hand, it allows the employee to leave work at a reasonable hour but be able to continue working at home without having to carry around significant amounts of physical property. There are clear commercial advantages to this, including increased coverage for customers and less reason for employees to remove physical confidential materials from the workplace (see 8.118–8.121). On the other hand, however, depending on what safeguards are built into the employer’s internal IT network/systems (eg password protected documents and information barriers – also known as ‘ethical’ or ‘Chinese’ walls), it means an employee may have relatively uncontrolled access to the employer’s electronic records. As more businesses move towards ‘paperless’ offices, coupled with the ever-increasing sophistication and use of portable electronic devices and physical/online data storage tools, the risks increase. While the employee is working for the benefit of the employer, extensive and relatively uncontrolled access may not be a problem. However, the situation becomes rather different where the employee is engaged, or about to be engaged, in competitive activities. 8.123 To reduce these risks, the employer has one of two options. Where feasible, the best course is to provide the employee with a personal computer and to do so on the basis that the computer is the only one the employee may use offsite for the employer’s business, and that it must be used exclusively for the employer’s business and for no other purpose. As an extra safeguard, facilities by which information can be downloaded from the equipment, eg  onto a USB memory stick/flash drive should be disabled. In addition, remote access to the employer’s electronic records should be limited to the maximum extent feasible. 8.124 Whilst it is, of course, possible to have contractual provisions banning the use of anything other than employer-provided computers or other devices, policing that restriction can be very difficult in practice. Employers can at least take some comfort from the fact that the courts are showing an increased willingness to intervene where personal devices have been used, albeit only where there is some evidence that inappropriate activity has already taken place. See, for example, Warm Zones v Thurley and another [2014] IRLR 791 (QB), where Simler J  granted Warm Zones mandatory interim relief in the form of an order allowing it to instruct an independent computer expert to inspect and take images from the personal computers of two former employees accused of misusing Warm Zones’ customer database (and information contained within that database) during their employment. When considering the balance of convenience, Simler J  took into account the fact that the order sought was ‘a focused one, designed simply to secure the return, protection and security of its confidential information’ (paragraph 36), and Warm Zones’ commitment to ‘provide safeguards in respect of any client confidential or third party data on the defendants’ computers’ that did not belong to Warm Zones (paragraph 37). See also Arthur J. Gallagher (UK) Ltd and others v Skriptchenko and others 432

Maximising the possibility of detecting competitive activities during employment 8.127

[2016] EWHC 603 (QB) where the High Court went a step further and granted Arthur J. Gallagher interim relief by way of an order not only for the inspection of devices belonging to the ex-employees and their new employer by an expert appointed by the defendants, but also for the deletion of any of its confidential information found to be on those devices. It was material in this case that the defendants had, in their draft defence, admitted to taking the confidential information, and that the court was ‘not satisfied that the defendants can be trusted to seek out and delete such material themselves’ (per Slade J at paragraph 60). 8.125  A complete ban on the use of personal devices may not be commercially viable either. For example, where remote access links are unreliable, employees may be forced to circumvent the system eg by sending materials to a personal email address or device, or using home printers to ensure that customer service is not unduly interrupted. 8.126 Where employees are permitted to use their own equipment, ideally it should only be in cases of emergency and the employer needs to put in place a clear policy setting out what work can be done on an employee’s personal equipment, and on what conditions. As with the employer’s equipment provided for use offsite, remote access to the employer’s electronic records should be limited to the maximum extent feasible. Increasingly today, however, the use of personal devices is not confined to use at home – a large number of employers allow, even encourage, employees to use their own devices in the workplace too (the practice known as ‘bring your own device’ or ‘BYOD’). 8.127  Whether in the home or the workplace, the use of personal devices for work purposes presents privacy/data protection challenges for the employer. Personal devices may be used by family members as well as by the employee. This means that those family members potentially have access to the employer’s confidential information. It also means that private data relating to those family members is likely to be accessed or stored on the device. The employer needs to bear this in mind when implementing a policy for the use of personal computer equipment, and ensure that he adheres to the requirements of the Information Commissioner’s Office’s Employment Practices Code (and the Employment Practices Code Supplementary Guidance), along with its specific Bring your own device (BYOD) guidance booklet. Each policy will invariably need to be tailored to the particular employer but the following points should be considered as a minimum: (a) The employer should, wherever practical, forbid the employee from copying or downloading information onto a portable data storage device, eg CDs, hard drives or USB memory sticks, or from using public cloudbased storage/sharing and public back-up services (many of which are automatic on modern devices like smartphones and tablets). If it is not possible to isolate and disengage any automated backup systems purely for the employer’s confidential or proprietary data, the employer should ensure that the policy is very clear on the steps employees are expected to take to delete any work-related automated back-ups from their device or cloudbased storage/sharing system. 433

8.128  Practical steps to protect the employer’s interests during employment

(b) The policy should expressly permit the employer rights of access to any personal computer equipment used by the employee on the employer’s business, including rights of access to the physical premises where the equipment is held to audit information held on the equipment, together with the right to have a computer expert irrevocably delete the employer’s information from the equipment. These rights should apply at any time during the employment and on termination of employment. (c) For the policy to be effective, the employer obviously needs to know what equipment the employee uses (and should consider restrictions on the type and number of personal devices that employees are permitted to use) and when they will use it. Appropriate disclosure obligations should be included in the policy. (d) To maintain confidentiality, particularly in the event of suspected unlawful activities, loss or theft, the employer should ensure that there is a process in place for disconnecting a device from the work systems, register devices with remote location/tracking/access systems and install remote-deletion software. The employer should always beware of inadvertently deleting valuable evidence of wrongdoing. (e) The employer should require employees to ensure that the equipment is kept secure at all times (both physically and in terms of any anti-virus software that needs to be installed) and to inform the employer immediately if the equipment is lost or stolen, or he is proposing to dispose of the equipment. The employee should also be required to afford the employer the opportunity to irrevocably delete his information (remotely in the case of lost or stolen devices, or in person if it is being disposed of and before the disposal takes place). (f) The employer should ensure that employees keep the employer updated as to any passwords or other encryption security they use on their personal device to ensure that the employer’s ability to access/monitor the device is not impeded. (g) The employer should consider restrictions on the type and volume of confidential or proprietary information that can be accessed using personal devices. The employer must also inform the employee that their use of the device will be monitored (drawing their attention to the employer’s monitoring policy). As discussed at 8.57–8.65 and in Appendix 2, this is important in terms of displacing any expectations of privacy and avoiding breaching the employee’s privacy/data protection rights. 2(b)(xi)  Ensuring that employees take proper holidays 8.128  The employer should consider requiring each employee to take at least one unbroken period of ten working days holiday each calendar year, and include this as a contractual provision in the employment documentation. As well as 434

Maximising the possibility of detecting competitive activities during employment 8.130

ensuring that the employee has one (at least theoretically) decent break per year, this allows the opportunity for illicit competition to come to light. Surprisingly, it is not unusual for illicit competition, particularly the operation of a rival business during employment, to be uncovered in the employee’s absence. Often discovery is through a telephone call or voicemail, email or other message from a customer or supplier normally used to dealing with the employee. Colleagues taking over matters and speaking to the employee’s customers may also discover competition, for example, that the absent employee has been soliciting custom for himself. Requiring employees to take a minimum period of holiday is common in some sectors, for example, the financial services sector where the practice is endorsed by regulators as a means of protecting financial institutions against rogue traders, such as Jerome Kerviel. Kerviel, a former Societe Generale trader, was sentenced to three years in prison in 2010 for having amassed over Euro 50 billion of hidden trades before the 2007/2008 financial crash. Kerviel was reported as having told police that he had not taken a single day of holiday in 2007 to avoid any colleagues gaining access to his trading books. 2(b)(xii)  Ensuring that customers deal regularly with a number of employees 8.129  Where practical, and we recognise that there are circumstances when it is not, it is a good idea that more than one employee deals regularly with each customer, particularly the most important ones. There are two reasons for this (in addition to ensuring that customers receive a seamless service). First, it can limit the risk of an employee being able to solicit the customer away to a rival business. Customers who deal with only one employee with whom they have a good working relationship have a tendency to transfer their business with the employee when he moves. For them, their businesses are better served by staying with the ‘tried and tested’ employee than building up a relationship with an unknown employee. This is less likely to be the case in more product-focussed industries; however it will be particularly relevant in service sectors like law, recruitment, insurance, stockbroking and hairdressing. These are all industries where customers tend to instruct individuals, based on their personal relationship with them, rather than the firm or company for which they work. Given the focus on close/personal customer relationships in those service sectors, they also tend to generate the most employee competition cases. 8.130  Secondly, and more importantly in the context of this chapter, it minimises the chances of solicitation by the employee going undetected. A customer is unlikely to make the effort to report an employee’s attempt to solicit his custom if he knows no one else at the business, but he may well mention it in passing to another employee with whom he deals. Having two employees looking after a customer is not without danger, however, since it may increase the likelihood of the employer losing two employees to a competitive business, and not just one. Usually the more senior employee decides to leave, but acts effectively as the ‘recruiting sergeant’, taking the second employee and possibly others with him to maximise the chances of securing ‘his customer base’ for the competitive business. For this reason, it is inadvisable for the employer to let employees work 435

8.130  Practical steps to protect the employer’s interests during employment

consistently in the same pairs or teams, particularly where the one employee recruited the other originally, or both employees were recruited by the employer as a team. Where it is unavoidable, and employees indicate their intention to leave, particularly in the context of a ‘team move’, the employer should think carefully about the prospects of retaining at least one of the employees. In return for staying (usually for an improved salary/benefits package and a waiver of claims against the employee arising out of the unlawful competition), the employee may turn ‘Queen’s evidence’ and be willing to provide valuable information about the unlawful actions of their cohorts. See further in Chapters 18 and 19.

436

APPENDIX 1 TO CHAPTER 8

Remuneration in the financial services sector and corporate governance requirements for executive pay in listed companies

A1.1 As explained at 8.16, a detailed analysis of the regulations that govern remuneration structures in the financial services sector, and the corporate governance requirements for executive pay in listed companies, is outside the scope of this book but the basic position is set out below.

1. VARIABLE PAY (‘BONUSES’) IN THE FINANCIAL SERVICES SECTOR A1.2  Almost all banks, building societies, investment firms, corporate finance and venture capital firms, and many fund/asset managers and insurance firms under Prudential Regulatory Authority or Financial Conduct Authority governance are subject (to some degree, depending on their size) to one of the ‘remuneration codes’ currently in force. These remuneration codes impose strict rules on variable pay (primarily bonuses) awarded to certain risk-taking employees. The various codes can be found in the Prudential Regulatory Authority Handbook and the Financial Conduct Authority Handbook. The remuneration codes should be read together with the supervisory statements, policy statements, and opinions issued by the Prudential Regulatory Authority, the Financial Conduct Authority and the guidelines issued by the European Banking Authority. The remuneration codes themselves and related guidelines have evolved and are likely to continue to do so. A1.3  Certain requirements under the codes apply to all employees and other requirements apply to ‘material risk takers’. There are concessions for individuals earning below specified thresholds, where the requirements under the remuneration codes can be relaxed. A1.4 The main requirements for variable pay exceeding certain de minimis levels are as follows: (a) significant percentages (usually between 40% and 60%) of variable pay must be deferred for minimum periods (ranging between three and 10 years depending on the seniority of the individual); 437

A1.5  Remuneration in the financial services sector and corporate governance requirements

(b) at least 50% of variable pay must be paid in shares or their equivalent instruments (with minimum retention periods); (c) variable pay must be subject to mandatory performance-adjustment, including both ‘malus’ (where deferred pay is adjusted downwards prior to vesting) and ‘clawback’ (where vested awards have to be repaid); and (d) variable pay awarded to employees of affected firms in respect of performance periods commencing on or after 1  January 2014 cannot exceed 100% of fixed pay (the now infamous ‘bonus cap’), unless shareholders approve increasing the cap to 200% (the UK eventually abandoned its legal challenge to the EU-driven bonus cap – whilst it remains to be seen what approach the UK may adopt in the post-‘Brexit’ world, speaking at an industry event in November 2017, the Governor of the Bank of England (Mark Carney) indicated the bonus cap could be scrapped in the UK post-‘Brexit’.) A1.5  Whilst pay within financial services still remains at very healthy levels compared to many sectors, the mandatory deferral and performance adjustment rules, coupled with the common market practice of ‘buying-out’ a new recruit’s deferred awards (which would otherwise be forfeited by the employee when leaving his current employer), means that pay (particularly deferred awards, whether in cash or shares) may no longer be the great retention and engagement tool it once was.

2. LONG-TERM INCENTIVE PROGRAMMES (‘LTIPS’) IN THE FINANCIAL SERVICES SECTOR A1.6  In the context of financial services, the use of long-term incentives has become increasingly regulated. In December 2015 the European Banking Authority published its final revised Guidelines on Sound Remuneration Policies, and an opinion on the application of proportionality (following a consultation which closed in June 2015). The Guidelines are intended to achieve a higher level of harmonisation of remuneration requirements across EU member states. In May 2017, the Prudential Regulatory Authority and Financial Conduct Authority issued supervisory and policy statements, respectively, containing updated remuneration guidance. These statements confirm that they require all UK firms subject to ‘CRD IV’ (and this includes the firms regulated by the Prudential Regulatory Authority and Financial Conduct Authority such as banks, building societies and a small number of large investment firms) to comply with all aspects of the Guidelines (save for the requirement to impose the bonus cap for smaller and non-complex firms, classed as Level 3 by the Prudential Regulatory Authority or Financial Conduct Authority. Those smaller firms are expected to set an appropriate ratio between fixed and variable remuneration). ‘CRD IV’ is the EU legislative package of reforms on prudential rules for banks, building societies and investment firms. A1.7  The main points to note in relation to long-term incentives are as follows: long-term incentives awards are counted as variable pay when calculating the 438

Long-term incentive programmes (‘LTIPs’) in the financial services sector A1.10

bonus cap (ie the principle that variable pay cannot exceed 100% of fixed pay, or 200% with shareholder approval); and the Guidelines contain detailed rules (beyond the scope of this book) in relation to the year in which long-term incentives awards are taken into account to determine the bonus cap calculation and the value of the awards for that purpose. In broad terms: (i) long-term incentives based solely on future performance conditions will be valued and taken into account for the purposes of the bonus cap at the point at which the performance conditions have been satisfied; and (ii) those based on an element of future performance, but also an element of past performance that is greater than 12 months, will be valued and taken into account for the purpose of the bonus cap at the date the award is made. The European Banking Authority also proposes amending CRD IV to allow listed companies to use share-linked instruments (eg phantom awards or share appreciation rights) instead of shares, provided these instruments track the value of the shares. A1.8  In the financial services sector, there is the added complication that it has become common practice for new employers to ‘buy-out’ awards that are being forfeited on termination of the employee’s employment and the taking up of new employment. To some extent, this practice has significantly undermined the power of a long-term or deferred incentive as a retention tool. A1.9  The Prudential Regulatory Authority has sought to address this. It recognised that the culture of buying-out awards undermined the effectiveness of malus and clawback on the original awards and so introduced new rules for ‘level 1’ and ‘level 2’ regulated firms which apply to buy-out awards for ‘code staff’ entered into after 1 January 2017. The new rules provide that the boughtout awards continue to be linked with risk and conduct issues identified by the previous employer (that is, during the employee’s previous employment). The new employer’s contract with the employee needs to provide for the possibility of malus and clawback to be applied in respect of bought-out awards based on a determination by the former employer. The grounds for applying malus and clawback have to include, as a minimum, misconduct or failures of risk management. The former employer is under a duty to act fairly and reasonably in making any determination and is required to provide the employee with details and reasons for applying any proposed malus or clawback. The employee can explain why malus or clawback should not apply and the former employer must take this explanation into account when determining whether malus or clawback should apply. In addition, the new employer is entitled to apply for a waiver where it believes the former employer’s decision to apply malus or clawback has been manifestly unfair or unreasonable. Assuming no waiver is sought, the new employer must operate malus or clawback to the extent determined by the former employer. A1.10  With extended clawback periods, it is easy to see the attraction in the new rules as a means of maintaining the effect and impact of malus and clawback provisions on employees. However, there are a few practical difficulties with them. First, it remains to be seen whether new employers would use the waiver process to the benefit of their new employees. In particular, it is not clear how 439

A1.11  Remuneration in the financial services sector and corporate governance requirements

a new employer would be able to judge whether a decision by the old employer that malus or clawback should apply is unfair or unreasonable, given that the new employer is likely to have limited information on the former employer’s reasoning. The consultation on the new rules made it clear that it was unlikely that waivers would, in practice, be necessary. It is also not clear what, if any, information the former employer would be required to disclose either to the employee or the new employer in explaining his decision, and whether confidential or sensitive information would need to be shared, which may not be desirable or possible. Finally, given that clawback could apply for up to ten years, where a bought out award is again bought out, the position will undoubtedly be complicated.

3. CORPORATE GOVERNANCE AND EXECUTIVE PAY A1.11  In general terms, the remuneration of senior executives and directors in private companies will be set by the board of the company, subject to any restrictions set out in the company’s articles of association, or the terms of any shareholder or similar agreement. A1.12  The requirements imposed on companies with a premium listing of shares in the UK are far more stringent and there is a plethora of legislation and guidance to be adhered to, including the Companies Act 2006 and the UK Corporate Governance Code. In summary, such companies are required to: (a) have a remuneration committee; (b) have a remuneration policy governing the setting of executive/director remuneration packages; and (c) disclose certain information about executive/director pay in an ‘implementation report’ which forms part of the annual remuneration report (see: Companies Act 2006 and the Large & Medium-Sized Companies and Groups (Accounts & Reports) Regulations 2008, Schedule 8, as amended by the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2013). The Regulations themselves require a variety of information to be made public, and the GC100 (the association for the general counsel and company secretaries of companies in the UK FTSE 100) has published guidance on how to comply with these requirements. A1.13  As a minimum, shareholders have the right to vote on the remuneration policy every three years. There are significant consequences if a company makes, or promises to make, payments to directors that are not in line with the shareholder-approved remuneration policy: any promise made has no effect; the director will have to return any cash or non-cash instruments (and, until then, holds them on trust for the company); and, perhaps most significantly, any director of

440

Corporate governance and executive pay A1.14

the company who authorised the payment may have to indemnify the company for any losses resulting from the non-compliant payment. A1.14  Broadly speaking, in terms of the structure of director/executive remuneration, the various guidelines encourage remuneration committees to ensure an appropriate balance between fixed and variable pay, with appropriate levels of deferral and performance adjustment (whether by way of malus or clawback).

441

APPENDIX 2 TO CHAPTER 8

Is there a general right to privacy in the workplace? A2.1  We discussed at 8.25 how, by virtue of section 3 Human Rights Act 1998, domestic legislation must be interpreted in a manner that is consistent with the European Convention of Human Rights. This includes Article 8 of that Convention, which enshrines the right to respect for private and family life, home and correspondence. However, does this mean that employees have an automatic and unequivocal right to privacy in the workplace? The short answer is ‘no’. A2.2  Article 8 does not grant an absolute right. Interference with the right can, in certain circumstances, be justified (Article 8(2)). A2.3  The relevant case law also makes it clear that the aspects of private life that are capable of falling within Article  8 are wide, and can include emails sent by employees at work and video surveillance of employees carrying out professional activities at work. The existence of a ‘reasonable expectation of privacy’ on the part of the employee is also a significant (albeit not conclusive) factor for Article  8 rights to be engaged. Whether that ‘reasonable expectation’ exists is a fact-sensitive question which depends on the circumstances of each case. A2.4  For example, there was an expectation of privacy where there was no relevant policy in place and the employee had not been informed that monitoring of emails, telephones or internet use may occur (see: Copland v United Kingdom [2007] ECHR 253 (ECtHR) and Halford v the United Kingdom [1997] IRLR 471, (ECtHR) both of which are considered at 8.102. A2.5  Similarly, in a decision handed down on 5  September 2017, the Grand Chamber of the European Court of Human Rights held that, in monitoring an employee’s personal emails (even though they were sent via a work email account), the employer had breached the employee’s right to respect for private life and correspondence under Article 8 European Convention on Human Rights: Barbulescu v Romania [2017] IRLR 1032. A2.6  The facts in Barbulescu were as follows. Mr Barbulescu had, at his employer’s request, created a Yahoo Messenger email account in order to respond to customer queries. He then used that account for personal communications with his fiancée and brother in breach of his employer’s blanket ban on using 442

Is there a general right to privacy in the workplace? A2.8

the employer’s computers and resources for personal purposes. That ban was set out in the employer’s internal regulations, which Mr Barbulescu had signed but which made no specific reference to monitoring electronic communications. However, Mr Barbulescu had also received and signed a notice from his employer explaining that work time should not be used for personal purposes and that work activities would be monitored. The employer monitored communications in the account and, after an investigation, dismissed Mr Barbulescu. Mr Barbulescu first filed a complaint with the Romanian courts claiming that his employer’s practices violated Romanian constitutional and criminal rules and his Article 8 right to private life and correspondence. After the Romanian Court of Appeal dismissed his appeal, Mr Barbulescu complained to the European Court of Human Rights that his dismissal had been based on his employer’s breach of Article 8. A2.7  At first instance, although the European Court of Human Rights found that Article 8 was engaged, it ruled that there had been no violation: the employer had acted within its remit and in a proportionate manner by monitoring Mr Barbulescu’s emails in the reasonable belief that the account contained workrelated messages; it was not unreasonable that an employer would want to verify that employees were completing their professional tasks during work hours; and the content of the emails was not the employer’s reason for dismissal, but the fact that Mr Barbulescu’s communications from the work account were of a personal nature in breach of the company’s internal regulations. It was pertinent here that the employer did not substantively review the content of any personal message, but had merely accessed it to determine that it was of a personal nature in order to enforce its policy against personal use. Mr Barbulescu appealed. A2.8  The Grand Chamber of the European Court of Human Rights took a different view and overturned the lower court’s decision: in monitoring Mr Barbulescu’s personal emails on the Yahoo Messenger account, the employer had breached his right to respect for private life and correspondence under Article 8. The judgment refers to a number of factors that the Grand Chamber took into account when reaching its decision, including the fact that: (a) Mr Barbulescu ‘did not appear to have been informed in advance of the extent and nature of his employer’s monitoring activities, or of the possibility that the employer might have access to the actual content of his messages’ (paragraph 133); and (b) that the domestic courts had failed to: (i) examine the ‘scope of the monitoring and the degree of intrusion’ (paragraph 134); (ii) carry out a ‘sufficient assessment of whether there were legitimate reasons to justify monitoring’ (paragraph 135); or (iii) sufficiently examine ‘whether the aim pursued by the employer could have been achieved by less intrusive methods than accessing the actual contents of the … communications’ (paragraph 136). 443

A2.9  Is there a general right to privacy in the workplace?

A2.9  UK judges are not bound by decisions of the Grand Chamber but they can be, and are, taken into account by the domestic courts. This position will be unaffected by ‘Brexit’, since the UK’s status as a signatory to the European Convention on Human Rights is separate from its membership of the EU. In any event, the Grand Chamber’s decision is not all bad news for employers. The judgment does not mean that it will never be reasonable to monitor employees’ personal electronic communications – but it does place significant emphasis on the information provided to employees about the extent of such monitoring and the safeguards put in place to avoid abuse. The Grand Chamber also usefully set out (at paragraph 121) six key factors to keep in mind when implementing monitoring policies, including: (a) whether the employee has been properly notified of the monitoring; (b) the extent of the monitoring and the degree of intrusion into the employee’s privacy; (c) whether the employer has legitimate reasons justifying the monitoring (and/ or accessing the content of communications); (d) whether less intrusive monitoring methods can be used (eg not accessing the full content of communications); (e) the use made by the employer of the results of monitoring and the consequences for the employee; and (f) whether the employee has been provided with adequate safeguards (eg restrictions on accessing the content of communications). A2.10  The European Court of Human Rights reached a similar conclusion – this time in the context of video surveillance at work – in a decision handed down on 28 November 2017: Antović and another v Montenegro [2017] ECHR 70838/13. The facts in Antović were as follows: the University of Montenegro’s School of Mathematics introduced video surveillance in front of the Dean’s office and in auditoriums where two of its professors held classes. The stated aim of the surveillance was to ensure the safety of property and people, including students, and the surveillance of teaching. The data collected was to be protected by codes known only to the Dean, and to be stored for one year. Two professors, Antović and Mirković, complained to the Montenegro Personal Data Protection Agency (‘the Agency’) about the surveillance and collection of data about them without their consent, submitting that they knew of no reason to fear for the safety of any persons or property and that there were other methods of protection and monitoring teaching. A2.11  Initially, the Agency issued a report confirming that the video surveillance was in accordance with the domestic data protection law based on certain factual findings (such as examples of destruction of University property and the presence of non-students). The professors filed an objection to that report, challenging some of the factual findings and submitting that employees had not been notified in writing about the introduction of the video surveillance before it started. Eventually, the Agency issued a decision that the video surveillance was not in accordance with the domestic law and that the cameras had to be removed (and eventually they were). 444

Is there a general right to privacy in the workplace? A2.13

A2.12  The professors then brought civil claims for compensation against the University of Montenegro, the Agency and the State of Montenegro for violation of their Article  8 rights to private lives. They maintained that the surveillance had not pursued any legitimate aim. The Court of First Instance accepted that the notion of ‘private life’ included activities in the business and professional spheres. However, as the University was a public institution performing activities of public interest (including teaching), it was not possible for video surveillance of public auditoriums (which it regarded as akin to public courtrooms), where the professors were never alone, to violate the right to private life, or for the data collected to amount to personal data. The professors appealed. The domestic High Court upheld the Court of First Instance’s decision. A2.13  The European Court of Human Rights re-iterated and held that (citing the decision in Barbulescu and other relevant authorities): (a) ‘private life’ was a broad concept, and that Article 8 guarantees a right to ‘private life’ in the broad sense, including the right to lead a ‘private social life’ (paragraph 41); (b) the notion of ‘private life’ may include ‘professional activities or activities taking place in a public context’. As it was not always possible to distinguish clearly which activities form part of an individual’s professional/business life and which do not, there was a ‘zone of interaction’ of a person with others, even in a public context, which may fall within the scope of ‘private life’ (paragraph 42); (c) a reasonable expectation of privacy was a ‘significant though not necessarily conclusive factor’ (paragraph 43); and (d) covert – and non-covert – video surveillance of an employee at his or her workplace is ‘a considerable intrusion into the employee’s private life’. That intrusion could only be justified, therefore, if it pursued a legitimate aim provided for by the domestic law which, on the facts of this case, it did not. In particular, there was no evidence that persons or property had been in jeopardy, ‘the surveillance of teaching’ was not a legitimate aim for surveillance under the domestic law, and no evidence had been produced that alternatives to surveillance had been considered (paragraphs 44, 55 and 59). The professors were awarded compensation and costs. It is interesting to note that the decision was very finely balanced, with three of the seven judges dissenting and finding that there had been no Article 8 infringement. See also the recent decision of the European Court of Human Rights in López Ribalda and others v Spain (App. Nos. 1874/13 and 8567/13) [2018] ECHR 1874/13. There the court held that the Article 8 right to a ‘private life’ of five Spanish nationals had been infringed when their employer put them under video surveillance without notifying them. The employees all worked as cashiers in one of Spain’s supermarket chains. They were placed under video surveillance after the store manager identified significant stock discrepancies and suspicions of theft arose. 445

A2.14  Is there a general right to privacy in the workplace?

The store already had in place – visibly – video cameras designed to capture customer thefts; however, the devices to monitor staff were concealed and the employees were not notified that they were in place. When they were dismissed, largely based on the video surveillance evidence, they alleged that the evidence had been obtained in breach of their Article 8 rights. Nonetheless, the Spanish courts allowed the recordings to stand in evidence and upheld the employer’s decision to dismiss. The European Court of Human Rights disagreed and held that the covert surveillance had violated the employees’ Article 8 rights to a ‘private life’. The Spanish courts had ‘failed to strike a fair balance between the applicants’ right to respect for their private life under Article 8 of the Convention and their employer’s interest in the protection of its property rights’ (paragraph 70 of the judgment). Whilst the measures adopted by the employer were for the legitimate aim of protecting its ‘interest in the protection of its property rights’, those measures were disproportionate to the infringement on the employees’ Article 8 rights. In particular, the court noted that: ‘... the video surveillance carried out by the employer, which took place over a prolonged period, did not comply with the requirements stipulated in Section 5 of the Personal Data Protection Act [the domestic Spanish data protection laws], and, in particular, with the obligation to previously, explicitly, precisely and unambiguously inform those concerned about the existence and particular characteristics of a system collecting personal data. The Court observes that the rights of the employer could have been safeguarded, at least to a degree, by other means, notably by previously informing the applicants, even in a general manner, of the installation of a system of video surveillance and providing them with the information prescribed in the Personal Data Protection Act.’ (paragraph 69 of the judgment).

A2.14  Finally, the UK High Court also considered the application of Article 8 in 2017, albeit in the slightly different context of an application for an interim order to enforce an express contractual term requiring delivery up of confidential information on termination of employment: Capita plc and another v Darch and others [2017] IRLR 718 (Ch). Part of Capita’s request was for the defendants to forward to their solicitors copies of ‘all emails that they have received into any non-Capita email account from any email account at Capita (including their own)’ (paragraph 53). In May 2017, the deputy judge refused to grant that order (primarily on the grounds that the requests were framed far too broadly), and in June 2017 refused to grant Capita leave to appeal against his decision ([2017] IRLR 718, and [2017] EWHC 1401 (Ch) respectively). A2.15  One of the (many) reasons the deputy judge refused to grant the order was because Capita’s proposition that the emails and/or their contents were their property conflicted with the prior decisions of the Court of Appeal in Fairstar Heavy Transport NV v Adkins [2013] EWCA Civ 886 (CA), Khouj v Acropolis Capital Partners Ltd & Anor [2016]  EWHC  2120 (Comm), Your Response Limited v Data Team Business Media Limited [2014] EWCA Civ 281 (CA) and Environment Agency v Churngold Recycling Ltd [2014] EWCA Civ 909 (CA). In particular, Capita’s argument failed to take into account the: 446

Is there a general right to privacy in the workplace? A2.18

‘… “sharp distinctions” explained in the judgment of Floyd LJ at [42] in Your Response Limited v Data Team Business Media Limited [2014] EWCA Civ 281 between (a) the physical medium on which the information is recorded, which is treated as property, but which is of no material application in the case of email attachments, and (b) the informational content of emails, which … [Capita] argued to be property, but which the law has never treated as property, and (c) the rights to which the information gives rise, which are treated as property, but upon which … Capita chose not to rely. Neither the Particulars of Claim nor any other aspect of Capita’s case before me placed reliance on any intellectual property right other than the Database Right. In principle, a claim for ownership and infringement of copyright might have been available to Capita, but, for reasons known only to them, Capita …did not assert the same’ (paragraph 10(4) of the June 2017 judgment [2017] EWHC 1401 (Ch) – see also paragraph 71 of the May 2017 judgment [2017] IRLR 718).

A2.16  The deputy judge also refused the order in the broad terms in which it was drafted because it would require the defendants to forward emails regardless of the information they contained and, in particular, including if they contained the defendants’ private or confidential information. This, the judge held, would have infringed the defendants’ rights to respect for their private and family life pursuant to Article  8 European Convention on Human Rights (see paragraphs 62–66 of the May 2017 judgment [2017] IRLR 718, and paragraph 10(6) of the June 2017 judgment [2017] EWHC 1401 (Ch)). A2.17  Other aspects of the deputy judge’s decision are considered at 18.171 and 18.175. A2.18  In contrast to the above cases, there was no expectation of privacy in the following cases: (a) Atkinson v Community Gateway Association [2014]  UKEAT/0457/12 (EAT): The EAT held that there was no expectation of privacy where the employee had breached the employer’s email policy (which he himself had written) by sending overtly sexual email messages (which were not marked ‘private’ or ‘personal’) from his work email account to a female employee at another housing association, and sought to help her obtain a position with his employer. The EAT also held that, even if there was such an expectation, it did not follow that the material obtained by the employer as part of his investigation could never be looked at or distributed if, as was the case here, any interference with the Article 8 rights was a proportionate means of pursuing a legitimate aim. (b) Garamukanwa v Solent NHS  Trust [2016]  IRLR  476 (1  March 2016) (EAT): On the facts of the case, the Employment Tribunal and the EAT (Simler J) found that there was no reasonable expectation of privacy in materials that had been seized by the police from Mr Garamukanwa’s personal smartphone and which the police then handed over to his employer for use in an internal disciplinary process. Whilst the relevant emails were sent from a private device and related to a personal relationship with a 447

A2.19  Is there a general right to privacy in the workplace?

workplace colleague, the Employment Tribunal found (and the EAT held that they were entitled to find) that: (a) their content touched on both personal and workplace matters; (b) they were brought into the workplace by Mr Garamukanwa himself as giving rise to workplace issues; (c) they were sent to workplace email addresses; (d) they had adverse consequences for the other employees involved to whom the employer owed a duty of care; and (e) they raised issues regarding the employer’s working relationship with Mr Garamukanwa or the person responsible for sending the emails. Mr Garamukanwa could also have had no reasonable expectation of privacy in respect of emails he continued to send to his workplace colleague after being told by his employer that she had expressed her distress and said she felt threatened. It was also material that Mr Garamukanwa had not objected to the employer using the materials during the disciplinary process, and that the police had advised the employer that it was free to use the materials (although the EAT did not consider whether the police was actually entitled to hand over the materials or if they should have been returned to Mr Garamukanwa when the decision was taken not to charge him). (c) Simpkin v The Berkeley Group Holdings plc [2017] 4 WLR 116 (QB): In this case, Mr Simpkin (the Group Finance Director) sought to claim privilege (as against his employer) over certain documents (relating to his divorce proceedings) that he had created on the employer’s IT system and emailed to his personal email account. The documents were not clearly marked ‘privileged’, nor were they password protected or stored in a separate sub-folder from work-related materials. On the facts, the High Court was satisfied that Mr Simpkin had no reasonable expectation of privacy in the documents where he had ‘… signed a copy of the company’s IT policy which made clear that emails sent and received on its IT system were the property of Berkeley. Berkeley’s IT department had access to all the company’s computers and email accounts and did not need authorisation before accessing their computers or accounts. The claimant’s employment contract makes clear that his emails were subject to monitoring by Berkeley without his consent’ (per Graham J, paragraph 32). A2.19  These cases demonstrate the highly fact-specific nature of privacy issues, and how easily decisions could have gone either way in some instances. Those cases where there was found to be no expectation of privacy do not, as was erroneously reported by certain members of the press, provide a carte blanche for employers to ‘snoop’ on employees’ personal email accounts, WhatsApp messages etc. However, the cases do underline: the importance of having an employee monitoring policy in place, and communicating clearly the circumstances in which employees may or may not use work email and internet sites for private communications (which is considered at 8.59–8.65); the broad scope of the Article 8 concept of ‘private life’; the mere fact that emails are sent/received on the employer’s internal IT network/systems does not mean that those emails (or their content) are considered to be his property; and that surveillance (covert or otherwise) will always be regarded as a considerable intrusion into the employee’s private life. 448

APPENDIX 3 TO CHAPTER 8

Guidelines for maintaining confidentiality

A3.1  These guidelines assume the information is in written form, either in hard copy or on a computer/word processing system, since that will usually be the case. However, they are easily adaptable for oral information. A3.2  As discussed in 8.7–8.11 there have been significant developments in the way in which employees carry out their day-to-day duties. In particular, today’s employers find themselves grappling with: (a) an array of flexible working practices, including part-time working, hotdesking, remote/home-working, job-shares and flexible hours; and (b) the ‘paperless office’ and employees using email, the internet, social media sites and online data-storage platforms (such as ‘Dropbox’ or the ‘Cloud’) to carry out their roles, and accessing these from a multitude of employerprovided or personal devices. A3.3  Enabling employees to work flexibly/remotely and to access information quickly and easily from a wide variety of sources or locations has clear advantages for the employer in terms of customer service delivery and employee engagement. However, it also means that monitoring access to and use of confidential information (and detecting misuse) is inevitably a far more complex issue for the employer. A3.4  With this in mind, we recommend the following basic steps be taken: (1) Impress on all employees including any secretaries/personal assistants or other support staff engaged in producing or handling the information that it is confidential. It should be made clear to them that: (a) they should not disclose the information to, or discuss it with, anyone other than the employee who has asked them to produce the information, or for whom they are handling the information, or other employees who they have been told are entitled to be aware of the information; and (b) they should keep the information secure at all times. Keeping the information secure includes: 449

A3.4  Guidelines for maintaining confidentiality

(i) ensuring that electronic copies of materials are passwordprotected where relevant/possible, and filed securely into the relevant customer workspace on the employer’s document management system. They should not, for example, be saved into ‘open’ or personal workspaces that are accessible by unauthorised personnel; (ii) not leaving dictating machine tapes or digital dictation ‘tasks’ containing the information, nor drafts of it, open on their computers or out on their desks in hard copy. When they are not working on it: the electronic copy should be saved and closed (into the relevant customer workspace on the employer’s document management system); desks should, where possible, be cleared of any hard copies of confidential information at the end of each working day and the materials stored in locked filing cabinets or drawers, or restricted access areas of the office; (iii) not leaving computers unattended when the information is on the screen, even if the screen automatically goes into hibernation mode after a short period. Where possible, privacy screens should be used on workplace computers and all portable devices (such screens allow the direct user to view the screen normally but prevent those eg working at the next workstation or standing behind/looking over the shoulder of the main user from viewing what is on screen); (iv) where the information is very sensitive but it is necessary, for example, for a number of reports containing it to be produced, the employer might consider using an outside agency. A typical example of this would be where there was a proposed takeover of the business. If this step is taken, necessary confidentiality undertakings should be obtained from the outside agency in advance of the information being provided to them; and (v) not loading any software onto the employer’s systems, whether from the internet or otherwise, without prior authorisation, or disabling or tampering with any anti-virus or firewall software on the system which may result in it being vulnerable to ‘hacking’. (2) Production of the information on a computer or other device should be done in such a way that unauthorised employees cannot gain access to it, eg by the use of security settings such as information barriers (also known as ‘ethical’ or ‘Chinese’ walls), data encryption, firewalls, placing a password on documents. In addition, the information should be clearly marked ‘Private & Confidential’ and circulation should normally be by paper copy rather than in electronic format. (3) Passwords etc should not be shared amongst employees without express authorisation; nor should they be written down and displayed prominently near the relevant device or document. If password protected documents need to be sent by email, the password should be sent in a separate, 450

Guidelines for maintaining confidentiality A3.4

follow-up email. If employees know or suspect that passwords have been compromised, they should be changed immediately. (4) In the case of especially confidential and sensitive documents, only the number of paper copies required for circulation should be made, and no extras. All paper copies should be numbered and the number attributed to an identified recipient. Any spare copies should be shredded or otherwise securely disposed of. They should not be put in a non-confidential waste paper bin from which they can simply be picked out. Similarly, such documents should not be distributed widely by email or other electronic messaging system. If they must be circulated electronically, they must be password protected. (5) Where information is in hard copy form, it should be circulated in sealed envelopes marked ‘Strictly Private & Confidential Addressee Only’. Re-usable internal envelopes or, worse still, ‘window’ envelopes or opaque plastic folders should not be used. Ideally, the envelope should only be opened by the employee who has been given access to the information. However, frequently secretaries/personal assistants open all mail (whether sent in hard copy or electronically eg by email) for their bosses and, if that is to be permitted, the confidentiality of the information should be impressed on the secretary/personal assistant also. (6) For highly confidential information, some businesses use special coloured paper reserved only for that purpose, so that anyone taking an additional copy of it is likely to be noticed. This does, however, have the disadvantage that it highlights that the contents are very sensitive. (7) Where information is to be circulated electronically, the cover email/other message should state clearly in both the subject line and body of the email that it is ‘Strictly Private & Confidential Addressee Only’. It should also be categorised as a ‘confidential’ or ‘private’ email, and/or marked as ‘high importance’ if the IT system has those particular functionalities. If the email/message recipient’s secretary/personal assistant is authorised to open their boss’s emails/messages the confidentiality of the information should be impressed on the secretary/personal assistant also. (8) Before disposing of old computers, smartphones etc, upgrading an employee’s device, or re-allocating a departed employee’s device to another member of staff, ensure that all confidential data has been retrieved, reviewed and where necessary permanently deleted using permanent deletion software. The employer without a sophisticated IT team should consider using external forensic IT advisers for the retrieval or deletion of material from the device. (9) The employees to whom access is given should be told: (a) that the information is confidential; (b) the identity of the other employees and third parties such as advisers, lawyers, accountants who have access to it (a circulation list on the document or word processor job will usually suffice); 451

A3.4  Guidelines for maintaining confidentiality

(c) that they are not at liberty to discuss it with, or disclose it to, anyone other than those named at (b), nor are they entitled to use it other than for the benefit of the employer; (d) that any discussions they have about the information with others on the circulation list should be out of earshot of anyone else and, where possible, the use of recorded telephone systems for discussion should be avoided; (e) that they should not make any additional copies, circulate copies etc; and (f) that the document or, where the information is on a disk or in electronic format, the disk/electronic document should be kept secure, away from prying eyes, when not being used. (10) Employees should also be warned against discussing or reading the information, either in paper copy or on a laptop, tablet, mobile telephone etc in public places (particularly on public transport), and leaving property containing the confidential information unattended outside business premises, eg in a pub or unattended vehicle. For very sensitive information, a ban on removing it from office premises or viewing it outside office premises is appropriate, although potentially difficult to enforce in the case of electronic information. Where information has to be viewed ‘on the go’, ensure that employees exercise due caution with physical copies and use privacy screens on any personal devices used. There are various ways in which employees can be advised of the points mentioned above, the most obvious being a well-drafted and well-communicated confidentiality and/or electronic communications policy. Sitting alongside and supporting the usual provisions in the contract of employment (or ancillary document, eg a non-disclosure agreement) relating to confidential information (see 5.44–5.53), some employers have, in addition, a special standard form covering memorandum which they circulate with key items of confidential information. Others simply have a general memorandum or non-disclosure agreement which they issue to the relevant employees on joining and/or at regular intervals. The employer who adopts the latter course should always make it clear to which pieces of confidential information the general memorandum applies.

452

CHAPTER 9

Termination of employment Kate Brearley Introduction  1. When does employment end?  1(a) Significance of the date of termination  1(b) Methods of termination  1(c) Notice: general principles  1(d) Date of termination: notice/termination by the employer  1(d)(i) Method of termination  1(d)(ii) How termination is effected  1(e) Date of termination: notice/termination by the employee  1(f) Date of termination: repudiatory breach  2. Repudiatory breach  2(a) Effect of a repudiatory breach  2(b) Repudiatory breach and collateral contracts  2(c) What amounts to a repudiatory breach?  2(c)(i) Definition of a repudiatory breach  2(c)(ii) Test for determining repudiatory breach  2(c)(iii) General principles  2(c)(iv) Common examples of repudiatory breach  2(d) Acceptance of repudiatory breach  2(d)(i) Clear and unequivocal acceptance  2(d)(ii) Express reliance on breach not essential  2(d)(iii) Waiver or acceptance of the breach?  2(d)(iv) The battle of the breaches 

9.1 9.4 9.4 9.6 9.8 9.9 9.10 9.18 9.39 9.42 9.49 9.49 9.59 9.63 9.65 9.67 9.73 9.83 9.123 9.127 9.128 9.130 9.156

Appendix to Chapter 9 – Flow chart; keeping the contract alive

INTRODUCTION 9.1  This chapter considers two critically important issues connected with termination of employment: •

when the contract of employment comes to an end; and

•

in what circumstances termination is the result of a repudiatory breach of the contract and the effect of termination upon repudiatory breach on restrictive covenants in the contract of employment (or in collateral contracts). The 453

9.2  Termination of employment

effect of a repudiatory breach is considered in detail in 9.49–9.58 but in summary an innocent party who accepts a repudiatory breach is discharged from his future obligations under the contract, including post-termination restrictive covenants. It is for this reason that the question of repudiatory breach is such a critical issue in the context of this book. Employees planning to engage in competitive activity frequently look to exploit the principle to minimise the constraints on their future activities. Employers too need to be keenly aware of the point to avoid inadvertently losing the protection against competition afforded by the covenants. 9.2  The question of when employment ends is looked at predominantly from the common law perspective. Because of the way in which section 97 Employment Rights Act 1996 defines the effective date of termination for statutory employment protection purposes and the courts’ interpretation of that definition it is possible that in some cases the date of termination at common law will be different from the effective date of termination in an unfair dismissal claim. Consideration of the statutory aspects of termination is beyond the scope of this book; the issue is well covered in most of the general texts including Harvey on Industrial Relations and Employment Law. 9.3 Within the two broad topics outlined above the specific issues we will consider are: When does employment end: •

The significance of the date of termination (9.4).

•

Methods of termination (9.6).

•

Notice – general principles (9.8).

•

Date of termination: notice/termination by the employer (9.9).

•

Date of termination: notice/termination by the employee (9.39).

•

Date of termination: repudiatory breach (9.42).

Repudiatory breach: •

Effect of a repudiatory breach (9.49).

•

Repudiatory breach and collateral contracts (9.59).

•

What amounts to a repudiatory breach? (9.63).

•

General principles re repudiatory breach (9.73).

•

Common examples of repudiatory breach (9.83).

•

Acceptance of repudiatory breach (9.123).

•

The battle of the breaches (9.156).

454

When does employment end? 9.4

1. WHEN DOES EMPLOYMENT END? 1(a)  Significance of the date of termination 9.4 This book focuses on the competing interests of employer and employee and of ex-employer and ex-employee. In this context it is important to define the precise date of termination of the employment relationship for the following reasons: •

The date of termination of employment marks the end of the duty of fidelity: J  A  Mont (UK) Ltd v Mills [1993]  IRLR  172 (CA). In cases where an employee is sent on garden leave, that does not accelerate the end of the duty of fidelity, as suggested by Scott V-C at first instance in Symbian v Christensen [2001] IRLR 77. The duty, especially the positive aspects of the duty to work, may be attenuated depending on the factual circumstances: Tullett Prebon PLC and others v BGC Brokers LP and others [2011] IRLR 420 (CA) (Maurice Kay LJ (obiter) at paragraph 41) but it is clear that key negative aspects of the duty, notably the duty not to compete with the employer, continue: Imam-Sadeque v Bluebay Asset Management (Services) Ltd [2013]  IRLR 344 at paragraphs 143–146. (See 3.76–3.79 for a fuller discussion on this point). From the moment of termination the now ex-employer is deprived of the protection from competition afforded by the duty of fidelity (see Chapter 3 for the scope of the duty). So, in Faccenda Chicken Ltd v Fowler [1986] 3 WLR 288 (CA), after termination of employment the ex-employee was free (absent an express covenant to the contrary) to use for the purposes of his new business mere confidential information (but not trade secrets) of the ex-employer which he had been prevented from using for his own benefit during employment. Similarly, in the absence of an express covenant prohibiting contact with clients, former employees of a firm of solicitors were free to seek the custom of those clients for a new firm they had established: Wallace Bogan v Cove [1997]  IRLR  453 (CA). Likewise where there had been no breach of a confidentiality clause and there were no covenants, a former employee could not (through an attempt to extend the information barrier principle in Prince Jefri Bolkiah v KPMG (a firm) [1999] 1 All ER 517 (HL), which the Court of Appeal did not accept (see 16.66) be excluded from involvement on behalf of her new employer with a contract between her new and former employers: Caterpillar Logistic Services (UK) Ltd v Huesca de la Crean [2012]  IRLR  410 (CA). Termination of employment does not, however, absolve the ex-employee from breaches of the duty of fidelity during employment, nor from breach of a fiduciary duty during employment (see 4.307 in relation to when fiduciary duties cease). The ex-employer retains all his remedies in relation to those breaches including the potentially powerful springboard injunction (see Chapter 15).

•

All contractual obligations cease on termination, other than those stated to operate after employment has ended, eg covenants restricting the freedom of the ex-employee to compete with his former employer. Unlike other contractual terms, these types of covenant are subjected to rigorous scrutiny 455

9.5  Termination of employment

by the courts and are only upheld in limited circumstances (see Chapters 10 and 11). •

Where there are express restrictive covenants operating after the termination of employment, with the exception of covenants prohibiting the use or disclosure of confidential information, they will run for a specified period from the date of termination of employment. To determine the period during which those covenants operate it is necessary to establish the date of termination of employment.

9.5  The question of the exact date of termination of employment often arises where the employer has dismissed the employee by paying him in lieu of the salary (and sometimes also benefits) he would have received during the contractual notice period. In Berkeley Administration Inc v McClelland [1990] FSR 505, the employer sought in these circumstances to argue that since McClelland had used confidential information (acquired by him in the course of his employment) during the period for which he received a payment in lieu, he had done so during employment. Wright J rejected this contention, on the basis of the evidence it was plain that Berkeley had wished to get rid of McClelland as soon as possible and that a payment was made in lieu of notice. In those circumstances, there was no question of McClelland having misused confidential information while he was still an employee.

1(b)  Methods of termination 9.6  The contract of employment may be terminated in various different ways including: •

By notice given by the employer.

•

By notice given by the employee.

•

On the occurrence of specific events identified in the contract. For example contracts of statutory directors, particularly managing directors, sometimes provide for automatic termination in the event the employee ceases to be a director. Similarly the contract may provide for automatic termination in the event of a change of control in ownership of the employer although often the arrangement will be for shorter notice to be given within a particular period of the change of control.

•

As a result of acceptance by either party of a repudiatory breach of the contract by the other party.

•

Consensually ie the parties agree to vary their earlier agreement and bring the contract to an end at a mutually agreed time.

•

By expiry of a fixed term. An employer or employee intending to rely on this method of termination should check carefully that the contract has not been converted into a permanent employment by virtue of regulation 8 Fixed-Term Employees (Prevention of Less Favourable Treatment)

456

When does employment end? 9.8

Regulations 2002. Where such a conversion has occurred the contract will be one of indefinite duration and either the contractually agreed notice, or if there is none reasonable notice, of termination will be required. Where the contact is a genuine fixed term and on expiry it is not renewed there will nonetheless be a dismissal for statutory employment protection purposes: Section 95(1)(b) Employment Rights Act 1996. •

Through frustration of the contract (eg  where some supervening event which was not reasonably foreseeable renders further performance under the contract impossible or something radically different from what was originally envisaged). See the decision of the Court of Appeal in F C Shepherd & Co Ltd v Jerrom [1986] IRLR 358 for the application of the doctrine of frustration to employment contracts.

•

By operation of law. A  key example of this category arises where an employee exercises his right to object to the transfer of his employment under the Transfer of Undertakings (Protection of Employment Regulations) 2006. Where he does so, regulation 4(8) provides that the transfer operates to terminate the contract of employment. Similarly, where the transfer involves or would involve a ‘substantial change in working conditions to the material detriment’ of an employee, subject to one exception regulation 4(9) gives that employee the right to treat the contract as terminated by a deemed dismissal by the employer. In effect regulation 4(9) puts on a statutory footing an employee’s right to accept a fundamental change to his terms and conditions as repudiatory of the contract. In doing so, however, the regulations make it clear that this does not in any sense curtail the common law right of any employee to accept his employer’s repudiatory breach. Regulation 4(11) expressly provides that the enhanced statutory protection afforded to employees by regulation 4 is without prejudice to that right.

•

Other supervening events, such as compulsory winding up of the employer.

9.7  Most contracts of employment are terminated by notice in some form or following breach and consequently it is in these cases that issues as to the precise date of termination arise. In contrast, where the contract of employment is terminated consensually or on expiry of a fixed term, the date of termination will normally be clearly agreed by the parties. Because it is in cases of termination by notice or following a repudiatory breach, that identification of the date of termination of employment is a subject of debate, the remainder of this chapter focuses on those methods of termination.

1(c)  Notice: general principles 9.8  Before looking in detail at precisely when notice brings employment to an end, it is worth drawing together the following key principles about notice: •

With the rare exception of contracts for life (McLelland v Northern Ireland General Health Services Board [1957] 2  All ER  129) and fixed term contracts, where no notice period is specified in the contract it is terminable 457

9.8  Termination of employment

on reasonable notice: Adams v Union Cinemas Ltd [1939] 3 All ER 136 (CA); Richardson v Koefod [1969] 1 WLR 1812 (CA). See also Reda v Flag [2002] IRLR 747 where the Privy Council whilst confirming the principle found there was no scope to imply an obligation to give reasonable notice where the contract included express terms relating to notice. See also 5.92 for a discussion of how reasonable notice is determined. For either party wishing to terminate a contract with no agreed notice period, deciding what notice to give is no simple task. For an employer, particularly one wishing to avoid an allegation of repudiatory breach, the best advice is to err on the side of generosity. In contrast, an employee, who wants to terminate his employment as soon as possible, eg to join a competitor, can risk giving a relatively short period of notice simply to test the employer’s reaction. In practice, the employer may well reject the period given by the employee but put forward an alternative period which the employee can accept or challenge. In many cases, provided the period proposed by the employer is sensible, taking into account the employee’s seniority and what is usual for the employer and within the particular sector, the parties tend to reach agreement on a termination date which is broadly in line with the employer’s proposal. For both parties the minimum notice periods prescribed by section 86 Employment Rights Act 1996 need to be borne in mind. In the remainder of this chapter we have assumed that there is no issue on the period of notice. •

Notice may be given orally unless the contract requires it to be given in writing. Nowadays for obvious evidential reasons contracts almost invariably require that notice be in writing.

•

Either party to the contract can agree to waive their right to receive notice from the other and can waive any requirement that the notice be given in writing. Latchford Premier Cinemas Ltd v Ennion [1931] 2 Ch  409. These rights are expressly preserved in the context of statutory minimum notice by section 86(3) Employment Rights Act 1996, which provides that the obligation by either party to give statutory minimum notice does not prevent either party ‘from waiving his right to notice on any occasion or from accepting a payment in lieu of notice’.

•

Notice must be unambiguous, and Morton Sundour Fabrics Ltd v Shaw [1966] 2 ITR 84 is authority for the proposition that notice by the employer must state the date of termination or provide sufficient information to enable it to be ascertained. Warnings of likely termination if the employee did not find a role elsewhere and resign did not constitute valid notice in Haseltine Lake & Co v Dowler [1981] IRLR 25 nor did a warning given to a security guard, who was removed from a client’s site, that if alternative employment could not be found within four weeks the employer would have no alternative but to give notice: Mitie Security (London) Ltd v Ibrahim UKEAT/0067/10. Similarly, a notice which gives the employee an option as to whether it takes effect is not valid notice. In Rai v Somerfield Stores [2004] IRLR 124 a letter to an employee absent without leave informing him he would be treated as having resigned, if he did not attend work on a specified date, was not valid notice.

458

When does employment end? 9.8

•

There is no requirement for notice to be accepted. Notice once given effectively cannot be unilaterally withdrawn: Riordan v War Office [1959] 3 All ER 552; [1961] 1 WLR 210 (CA) and Harris & Russell v Slingsby [1973]  IRLR  221 (NIRC). In both these cases it was the employee who gave notice, but there is no reason in principle why the position should be different where notice is given by the employer.

•

Although notice cannot be unilaterally withdrawn it can be extended or shortened during its operational period by agreement between the parties: Willetts v The Jennifer Trust for Spinal Muscular Atrophy UKEAT/0282/11/ SM; Harris & Russell v Slingsby [1973] 3 All ER 31; Mowlem Northern Ltd v Watson [1990] ICR 751 and Palfrey v Transco Plc [2004] IRLR 916.

•

Challenges by either an employee or employer to dismissals based on a lack of authority of the dismissing employee are rare and in the absence of breach of an express term limiting the power to dismiss to specified levels of employee, (a type of term rarely included in the contract) are unlikely to be successful: Warnes v The Trustees of Cheriton Oddfellows Social Club [1993] IRLR 58; Newman v Polytechnic of Wales Students Union [1995] IRLR 72 and Piroska v Total Support Services Ltd ET/2351123/10. In Piroska the employer’s argument that only directors had the authority to dismiss failed for want of supporting evidence. The employee was entitled to take the words ‘you’re fired’ spoken by a manager at face value. Similarly, albeit a case concerning a claim of constructive dismissal, in Gibbs v Leeds United Football Club [2016] IRLR 493 Langstaff J roundly rejected an argument of lack of authority in relation to an email from the club secretary significantly curtailing Gibbs’ role. At paragraph 41 Langstaff J commented ‘If a case were to be made that the email was sent without authority, I would expect the evidence of this to be called before me in the clearest terms. None has been.’

•

For unfair dismissal purposes at least, unambiguous words of dismissal or resignation spoken for example in anger in the heat of the moment may be withdrawn within a short cooling off period: Martin v Yeoman Aggregates Ltd [1983] ICR 314 and Kwik-Fit (GB) Ltd v Lineham [1992] IRLR 156. See also Barclay v City of Glasgow District Council [1983] IRLR 313 where the fact that Barclay had a ‘high grade mental deficiency’ was a relevant factor. These types of case where the courts have recognised what they have referred to as ‘special circumstances’ surrounding unambiguous language were reviewed by the Court of Appeal in Willoughby v CF Capital plc [2011] IRLR 985. In Willoughby Rimer LJ expressed a reluctance to characterise the exception as a unilateral withdrawal of a resignation or dismissal because that would be inconsistent with the principle that there can be no such withdrawal. He felt that the true nature of the exception was ‘one in which the giver of the notice is afforded the opportunity to satisfy the recipient that he never intended to give it in the first place – that in effect, his mind was not in tune with his words’ (paragraph 38). Whatever the characterisation of the exception, what is clear is that it will only operate in very limited circumstances. In Willoughby, CF  Capital could not rely on the exception to withdraw an unambiguous notice of dismissal, given in the mistaken expectation that Willoughby would continue to work for them but in a self-employed capacity. 459

9.9  Termination of employment

•

Where notice is given orally, the notice period runs from the day after the oral notice is given, if any work is done on that day: West v Kneels [1986] IRLR 430. Following the decision of the EAT in Wang v University of Keele [2011] IRLR 542, the same is now true for notice given in writing. In Wang the notice was given by letter sent to Dr Wang as an attachment to an email. HHJ Hand QC (at paragraph 44) could see ‘no reason in principle for distinguishing between oral and written notice’. In the absence of: (a) an express term saying when notice commences, or (b) an agreement that notice is to start immediately (eg where such agreement can be construed from the wording of the contract and the dismissal letter set in the factual matrix of the case), written notice takes effect from the day after it is given. In Wang both these factors were absent. In referring to written notice HHJ  Hand QC included in that concept ‘SMS text message, internet so called instant messaging and email’.

•

Where notice is sent by recorded delivery post and the Post Office is unable to deliver the letter and merely leaves a notification that delivery has been attempted that notification does not constitute delivery: Newcastle upon Tyne NHS Foundation Trust v Haywood [2017] IRLR 629 (CA) (at paragraph 82) applying Stephenson v Orca Properties Ltd [1989] 2 EGLR 129.

•

For email to be used as a means of communicating notice requires the employee to have given consent to its use either expressly or because it has been used as a course of conduct. So in Newcastle upon Tyne NHS Foundation Trust v Haywood [2017] IRLR 629 (CA) the mere fact that Haywood had sent one email from her husband’s account to her employer did not validate the use of that account as a means of delivery of notice (paragraph 88). In their appeal to the Supreme Court, unsurprisingly in our view, the Trust did not seek to rely on the email as effective service of notice ([2018] UKSC 22 paragraph 6).

•

Whilst delivery of notice can be effected on an agent, in Newcastle upon Tyne NHS Foundation Trust v Haywood [2017] IRLR 629 (CA) Arden LJ (at paragraph 133) gave the examples of a servant or housekeeper, a court will not lightly conclude that a third party is the agent of the employee for this purpose. In Haywood (at paragraph 134; Lewison LJ dissenting at paragraph 84) the employee’s father-in-law who was keeping an eye on her property whilst she was away was not her agent when he used his initiative and collected a recorded delivery letter giving notice from the Post Office. That decision was upheld unanimously when the case reached the Supreme Court ([2018] UKSC 22 at paragraph 11). In Gisda Cyf v Barratt [2010] ICR 1475 it does not appear to have been argued that Barratt’s boyfriend’s son who signed for the letter giving her notice was her agent for the purposes of delivery.

1(d)  Date of termination: notice/termination by the employer 9.9  In this section we look at two distinct issues, first the different ways in which the employer can terminate the employment and secondly how that method of termination is effected. 460

When does employment end? 9.14

1(d)(i)  Method of termination 9.10  There are a number of different ways in which an employer can terminate an employee’s contract. For example, he may give the employee notice and require him to work throughout the notice period or alternatively to work for part only of the notice period. At the other end of the spectrum, the employer may simply give the employee a lump sum payment in lieu of notice or dismiss him summarily. The date on which the employment comes to an end will depend, broadly speaking, on which method is chosen and whether it is a method contemplated by the contract and which is appropriate on the facts. 9.11  The date of termination may also depend on whether the employee has a right to give a shorter notice period than the employer. An employee who has such a right can validly advance the termination date simply by giving notice in accordance with the contract. In the following paragraphs under this heading we have assumed that the notice periods required from employer and employee are the same. Nowadays that will not always be so and it is vital to check the contractual position in each case. 9.12 Where the employer gives notice of termination in accordance with the contract, continues to pay salary at the normal intervals and the employee works during the notice period, the employment will terminate at the end of that notice. 9.13 Where the employer gives notice of termination in accordance with the contract, continues to pay salary at the normal intervals but the employee is told that he need not work during the notice period, ie  he is sent on garden leave the employment will terminate at the end of the notice: Brindle v H W  Smith (Cabinets) Ltd [1972] IRLR 125, except where the employer’s action amounts to a repudiatory breach which the employee accepts: see 9.49–9.58. Employers relying on a right to send an employee on garden leave should pay close attention to the extent of the right. Nowadays garden leave clauses are common in contracts and they come in varying degrees of sophistication including set time periods in which the right can be exercised eg within 14 days of the employer or the employee giving notice and either a one off right ie the employer has one chance only to make the election or a clause that permits the election to be made at more than one time during the notice period. For guidance on drafting garden leave provisions and a precedent see 5.129–5.134. 9.14 Where the employer dismisses the employee with a lump sum payment in lieu of notice, the House of Lords in Delaney v Staples [1992] 1 AC 687 (per Lord Browne-Wilkinson at page 692) identified a number of possibilities as to when the employment terminates. Those possibilities are as follows: •

The employer gives the employee proper notice, but tells him he need not work it out and makes a single lump-sum payment in lieu of notice. In this case the payment is an ‘advance of wages’ and the position is the same as seen at 9.12 – subject to any argument of repudiatory breach the employment terminates at the end of the notice period. In Delaney the House of Lords characterised this 461

9.15  Termination of employment

scenario as ‘garden leave’, but that characterisation was questioned, rightly in our view, by the EAT in Cerberus Software Ltd v Rowley [1999] IRLR 690 on two grounds (see Morison J at paragraph 13). First, the EAT pointed out that ‘… no employer would want to make a one-off payment in advance of garden leave; on the contrary the employer will wish to make monthly payments of wages in exactly the same way as when, and as if, the employee was working’. Secondly, the EAT found it difficult to understand how a payment could be expressed to be ‘in lieu of notice’ when notice was given and the employee still employed. Whilst technically it is possible for the employer to maintain that employment does not terminate until the end of the ‘notice period’, where he has paid ‘wages in advance’ relying on Delaney, in reality the argument is not strong and nowadays is rarely advanced. •

Payment is made pursuant to an express provision of the contract of employment entitling the employer to make a payment in lieu of notice. In this case the employment will end on the date the employee ceases working, rather than at the end of the notice period: Rex Stewart Jeffries Parker Ginsberg Ltd v Parker [1988] IRLR 483 (CA).

•

The contract of employment contains no right to make a payment in lieu of notice and the employer dismisses and tenders such a payment. In this case the payment will usually be seen as payment of damages for breach of contract: Dixon v Stenor Ltd [1973] IRLR 28 (but see 9.98). Where such a breach is repudiatory (as will almost invariably be the case but see 9.99 for a rare case to the contrary), the employment ends only if and when, the employee accepts the repudiatory breach as bringing the contract to an end (not, as stated in Delaney by Lord Browne-Wilkinson (at page 692) upon dismissal – a statement made of course before the decision of the Supreme Court in Société Générale London Branch v Geys [2013]  IRLR  122 in favour of the elective theory of termination (see 9.44).

•

The employer and employee agree that employment shall end on payment of a sum in lieu of notice. In this case employment ends on the agreed date.

9.15  There is a fine line between the positions in the first and third bullet points in 9.14. Where (in the absence of an express payment in lieu of notice clause) the employer terminates the contract of employment and pays the employee a sum to cover the notice period while dispensing with the employee’s services, it may be either: •

that the employee has been given notice with payment in lieu of working out the notice – in which case the contract terminates at the end of the notice period; or

•

that the employee has been dismissed in repudiatory breach of contract by the employer with a payment in lieu of damages – in which case the contract of employment terminates on acceptance of the breach by the employee.

It is a question of construction of the employer’s letter or oral intimation of termination in all the circumstances of the case as to the category into which 462

When does employment end? 9.20

the termination falls: Adams v GKN Sankey Ltd [1980] IRLR 416; Chapman v Letherby & Christopher Ltd [1981]  IRLR  440; and Leech v Preston Borough Council [1985] IRLR 337. The court is likely to lean towards finding the latter category of termination (Berkeley Administration Inc v McClelland [1990] FSR 505): see 9.5. 9.16  In practical terms, for the employer who wants to maintain that the contract remains in existence throughout the notice period there is no legal or commercial advantage to making a single lump sum payment. He would be best advised to continue to pay salary at the normal intervals and, in the absence of an express garden leave provision, afford the employee the opportunity to continue to work even if the employee declines to do so, thereby avoiding an argument of ‘premature’ termination. 9.17  Where the employer dismisses the employee summarily in accordance with the contract, the employment will terminate immediately. Where the summary dismissal is in repudiatory breach of the contract, the date on which the employment ends will be the date of acceptance by the employee of the employer’s repudiatory breach. This applies also to other forms of repudiatory breach by the employer which the employee accepts as bringing the contract to an end. For a discussion of when breach of notice provisions might constitute a repudiatory breach by the employer see 9.98–9.101. 1(d)(ii)  How termination is effected 9.18  In this section we consider the two most common ways in which termination is effected by the employer. Those two methods are by giving notice (including notice of summary termination) or by exercising the right to make a payment in lieu of notice. For guidance and precedents on the drafting of notice provisions including methods of service and on payment in lieu of notice clauses see 5.94–5.98 and 5.115–5.121, respectively. Notice 9.19  Employers who are well advised will generally give notice to an employee by physically meeting with the employee, giving the notice orally and at the same time, often at the very start of the meeting, handing the employee written confirmation of the notice. Following this course avoids the uncertainties associated with any of the alternative methods of giving notice such as using the post, a courier or email and is the approach urged by the courts, see for example McMaster v Manchester Airport plc [1998]  IRLR  112 (Morison J  at paragraph 12). However, at times this optimum method is not possible. In those circumstances it is important to understand how the tribunals and courts will approach the question of when the notice will be effective and when the employment will terminate. 9.20  In the context of notice given by post, two cases, one very recent, illustrate the approach which will be taken, the first from a statutory perspective in 463

9.21  Termination of employment

fixing the effective date of termination: Gisda Cyf v Barratt [2010] ICR 1475 and the second from a purely contractual perspective: Newcastle upon Tyne NHS Foundation Trust v Haywood [2017] IRLR 629 (CA). Whilst the contractual approach is of greater relevance in the context of this book presentation of an unfair dismissal claim may often be part of a former employee’s strategy and therefore it is helpful also to understand how the statutory ‘effective date of termination’ will be fixed. 9.21 In Gisda Cyf v Barratt [2010] ICR 1475 the Supreme Court had to determine the effective date of termination. Gisda involved the service of a notice of summary dismissal by recorded delivery post following a disciplinary hearing. The disciplinary hearing had taken place on 28 November 2006 and Barratt had been informed that she would be told of the outcome by letter the following day. The letter was sent on 29  November 2006 and arrived on 30  November 2006 by which time Barratt had left to visit her sister who had just had a baby. Barratt returned home late on 3 December 2006 but did not become aware of the letter until 4 December 2006. When she presented her unfair dismissal claim on 2 March 2007 her former employer argued it was out of time. 9.22  The approach urged by Gisda Cyf’s Counsel was to apply normal contractual principles which he argued involved merely delivering a notice of summary dismissal to Barratt’s address or, in the alternative, delivery plus a reasonable opportunity, objectively assessed, for Barratt to become aware of her dismissal. Both arguments were rejected by the Supreme Court. Approving the earlier EAT decisions in Brown v Southall & Knight [1980] ICR and McMaster v Manchester Airport plc [1998] IRLR 112 the Supreme Court held that the dismissal was not effective until Barratt either had knowledge of the dismissal or had a reasonable opportunity to find out she had been dismissed. On the facts that had not occurred until Barratt had personally received the letter of dismissal and consequently her unfair dismissal claim was not time barred. The Supreme Court regarded as fundamental ‘The need to segregate intellectually common law principles relating to contract law even in the field of employment from statutorily conferred rights’ (Lord Kerr paragraph 39). In the same vein the Supreme Court ruled that as part of a charter promoting employee rights ‘An interpretation that promotes those rights, as opposed to one that is consonant with traditional contract law principles, is to be preferred’ (Lord Kerr paragraph 37). 9.23  One further point to note from Gisda Cyf is that it gives no guidance on the contractual principles to be applied in ascertaining the timing of termination of employment. The judgment makes clear that having not heard argument on the common law contractual principles it is not to be taken as endorsing Gisda Cyf’s arguments as to the effect of those principles (Lord Kerr paragraph 38). 9.24  More recently in Newcastle upon Tyne NHS Foundation Trust v Haywood [2017]  IRLR  629 (CA) the contractual principles fell to be considered by the Court of Appeal. The issue in Haywood was whether the notice terminating her employment by reason of redundancy expired on or after her 50th birthday. If it did, Haywood became entitled to a significantly higher pension than would 464

When does employment end? 9.26

have been payable had she not reached 50 at the date of her dismissal. By a majority decision (Proudman J  and Arden LJ – Lewison LJ dissenting) albeit one based on different reasoning, the Court of Appeal ruled that in the absence of a contractual term specifying when the notice was to take effect it would take effect only when it was personally received by Haywood. Consequently, even though a recorded delivery letter was physically at Haywood’s home address in time for the required 12 weeks’ notice to expire before her 50th birthday, because she was away on pre-approved holiday and did not return, and did not receive the notice until the following day, Haywood was entitled to the higher pension. 9.25  In view of the different reasoning taken by the three Judges in Haywood it is worth looking briefly at how each approached the key issue and identifying where there was common ground. Proudman J  reached her conclusion on the basis that the effect of the Supreme Court decision in Société Générale London Branch v Geys [2013] IRLR 122 (considered on this point at 9.36–9.38) is that notice must be communicated to the recipient. Whilst accepting that Geys was a different case on its facts and therefore not directly relevant Proudman J (at paragraph 48) concluded that Lady Hale, who gave the lead judgment in Geys ‘appears to be laying down a more general rule in [57] that there is a requirement that employees need to know where they stand, that the date of notice carries some importance and that there is therefore a general requirement that all notices of all kinds in employment contracts need to be communicated’. Both Arden LJ and Lewison LJ disagreed with this reasoning. Lewison LJ pointed out (at paragraph 117) that all that Geys decided was that notice of exercise of a PILON had to be given. It was not in issue when that notice took effect, since an express term in Geys’ contract deemed the time of receipt and that could not be displaced by an implied term. Furthermore although, like Haywood, Geys was not at his address when the notice was delivered there was no suggestion in Geys that the notice was suspended for a period whilst he had an opportunity to read the notice. 9.26  Arden LJ disagreed with Proudman J’s reasoning on other grounds. There was, Arden LJ said, no implied term that to be effective a notice must have been communicated. Nor could the court imply a term that notice will be effective on a particular date because where notice is served by post there are many options as to when it may be said to be served. In Arden LJ’s view the notice had to be received, although not necessarily read, by Haywood and the issue of receipt fell to be determined by the ‘general law’. That, according to Arden LJ, provides that where a notice is delivered to a person’s last known address there is a presumption that the addressee will have received it but that presumption is rebuttable by the addressee. Since Haywood was able to demonstrate that she had not personally received the notice until she returned from holiday the presumption was rebutted and the notice took effect from the date of her return. Arden LJ also concluded (at paragraph 147) that the EAT decisions in Brown v Southall and Knight [1980] ICR 617 and Hindle Gears Limited v McGinty [1985] ICR 111, both cases of unfair dismissal, had applied the law applicable to contractual dismissal and supported her conclusions. 465

9.27  Termination of employment

9.27  Lewison LJ, in his dissenting judgment took a harder line, with which Arden LJ expressly disagreed. In his view normal contract law principles provide that there is a rebuttable presumption that a notice sent by post is delivered to the correct address. However, once physical delivery is established that is the end of the matter, it is irrelevant whether the individual is at the address to receive the notice. 9.28 As matters stood following the Court of Appeal's decision in the absence of express contractual terms the contractual approach was not dissimilar to the approach for determining the effective date of termination. Indeed, if (which we doubt), Arden LJ’s comment about Brown v Southall & Knight [1980] IRLR 130 is correct, the approaches were the same. As to Proudman J’s reasoning, we agree with the other members of the Court of Appeal that Geys does not bear the interpretation that Proudman J seeks to give the case. The Trust appealed to the Supreme Court and again judicial opinion was divided. However, by a majority decision (Lord Briggs and Lord Lloyd-Jones dissenting) the Supreme Court dismissed the appeal. Rejecting the Trust’s argument that the common law rule simply requires that to be effective notice need only be delivered to the employee’s address, the majority of the Supreme Court concluded that the common law rule was not ‘as clear and universal as the Trust suggests’ (Lady Hale (at paragraph 39(1)). The Supreme Court instead preferred the approach taken by the Employment Appeal Tribunal since 1980 and the case of Brown v Southall & Knight [1980] IRLR 130 (see paragraph 21) namely that the employee must have either read the letter giving notice or had a reasonable opportunity of doing so. Lady Hale concluded that ‘There is no reason to believe that that approach has caused any real difficulties in practice’ (paragraph 39 (4)) and in her view ‘it makes obvious common sense for the same rule to apply to all notices given by employers to employees’ (paragraph 38). Whilst ruling that this is the term to be implied into all contracts of employment as to when notice takes effect the Supreme Court clearly stated that it is open to employers to make express provision in their contracts both as to how notices are served and when notice is deemed to be received and this is a course we would recommend; for a precedent clause see 5.98. Exercising a contractual PILON 9.29  Notwithstanding the current adverse tax consequences, (although the disadvantage will now be short lived, see 5.105 for the tax changes taking effect for terminations on or after 6 April 2018), nowadays many employment contracts will expressly permit the employer to terminate the employment by paying in lieu of notice. The provision may allow for a single payment or a series of payments often on a monthly basis and in some cases subject to credit being given for monies earned. See 5.115–5.121 for guidance on drafting payment in lieu of notice provisions and suggested precedents. 9.30 Where an employer intends to rely on that right following the majority decision of the Supreme Court in Société Générale, London Branch v Geys [2013] IRLR 122, (Lord Sumption dissenting), it is not enough that the payment is made, the employer must also be notified in clear and unambiguous terms that such a payment has been made and that it is made in the exercise of the contractual right to terminate the employment with immediate effect. 466

When does employment end? 9.35

9.31 A  well drafted payment in lieu of notice provision will set out precisely how the provision is to be operated and will include a requirement for written notification to be given to the employee. In those circumstances all the employer will need to do is follow the provision to the letter and the requirements of Geys will be satisfied. 9.32 In Geys however the payment in lieu of notice provision was, to say the least skeletal. It was contained in the Staff Handbook and merely provided that Société Générale ‘reserves the right to terminate your employment at any time with immediate effect by making a payment to you in lieu of notice’. The provision permitted payment in lieu of any unexpired period of notice and provided for a payment based on salary and benefits. There was no requirement either in that provision or the remainder of Geys’ contract that required that he be given notice if the clause was exercised. 9.33  The background of Geys is complex. The key issue in the case was when did Geys’ employment terminate? That issue fell to be determined by answering two questions, first whether termination occurred automatically as a result of a repudiatory breach by Société Générale (on that point see 9.44–9.46) and secondly if it did not, whether the mere making of a payment in lieu of notice under a contractual provision was enough to terminate the contract. A summary of the background and salient facts to the exercise of the payment in lieu of notice provision are set out below. It is important to be familiar with these, first to understand how easily Société Générale’s downfall could have been avoided and secondly to illustrate the basis, and in our view, the correctness of the Supreme Court’s decision. 9.34 Geys was employed by Société Générale as a Managing Director. His employment was terminable by either party on three months’ notice. On 29 November 2007 he was summarily dismissed by Société Générale without cause. He was given a letter which simply stated ‘I am writing to notify you that [the bank] has decided to terminate your employment with immediate effect’. No mention was made of any payment in lieu of notice. Geys was then required to clear his desk and was escorted off the premises. His contract provided that in the event of his employment terminating, (other than in certain circumstances which did not apply), he would be entitled to a termination payment subject to signing a settlement agreement. Calculation of the payment differed depending on the precise date of termination and therein lay the rub for Société Générale. If Geys’ employment terminated after 1 January 2008, although the sums were not precisely quantified, his entitlement increased by several million Euros. 9.35 Unsurprisingly, Geys took advice. On 7  December 2007 his solicitors wrote to Société Générale reserving his rights and seeking information as to the payments Société Générale intended to make. On 10  December 2007 Société Générale sent a severance agreement together with details of the monies they said were due to Geys. Société Générale sought Geys’ agreement to their proposal which he declined. On 18  December 2007 Société Générale tried to retrieve the situation by making a payment into Geys’ bank account equivalent 467

9.36  Termination of employment

to his entitlement under the payment in lieu of notice provision. No doubt they hoped that even if the purported summary dismissal had not terminated Geys’ contract, nonetheless making this payment would do so. Société Générale also sent Geys a payslip and P45 which set out the various elements of the payments they had made on 18 December 2007 including the payment in lieu of notice. Unfortunately for Société Générale Geys did not see these documents until either 7 or 8 January 2008 when he returned to the UK from Belgium where he had spent the Christmas and New Year holidays. In the meantime on 21 December 2007 Geys’ solicitors had written to Société Générale seeking further information about the payments proposed by them on 10  December 2007 and again reserving Geys’ rights. On 2 January 2008, ie after the critical date of 1 January 2008, Geys’ solicitors wrote a further letter to Société Générale saying that Geys had decided to affirm the contract and reserving Geys’ position regarding the monies paid on 18 December 2007 until they understood what those monies constituted. Eventually on 4 January 2008, Société Générale’s HR Director wrote to Geys to confirm the details of the termination of his employment. Ironically in the circumstances, the HR Director apologised for the delay in sending his letter. The letter purported to record that Geys had been given notice to terminate his employment with immediate effect on 29  November 2007 and that Geys had been paid in lieu of notice. It went on to refer to the fact that the ‘notice payment’ had been credited to Geys’ bank account on 18 December 2007. In accordance with an express provision in Geys’ contract that letter was deemed to have been received on 6 January 2008 and that was the date on which the Supreme Court held that the right to terminate under the payment in lieu of notice provision was validly exercised and Geys’ employment terminated. As a result Geys became entitled to the significantly higher termination payment. 9.36 Lord Sumption in his dissenting judgment at paragraph  143 took the view that all that was required to validly terminate Geys’ employment was payment of the monies due under the payment in lieu provision. That was a view which he regarded as ‘more consistent with both the reality of the situation and the approach of the Court of Appeal in Abrahams v the Performing Rights Society [1995] IRLR 486 and the EAT in Cerberus Software Ltd v Rowley [1999]  IRLR  660’ (paragraph  143). Lord Sumption also placed some reliance on Geys’ knowledge of the payment having been credited to his bank account and the concession made by Geys in cross examination regarding the payment namely that he realised that ‘it had to be – thought would probably be, yes, compensation pay of – in lieu. That is the best guess one could have’. 9.37  None of those points, however, cut any ice with the majority of the Supreme Court. Giving the lead judgment on the issue and stressing the importance of the parties to a contract knowing where they stand, Lady Hale said (at paragraph 57) that it was an: ‘obviously and necessary incident of the employment relationship that the other party is notified in clear and unambiguous terms that the right to bring the contract to an end is being exercised and how and when it is intended to operate. These are the general requirements applicable to notices of all kinds, and there is every reason why they should be applicable to employment contracts.’ 468

When does employment end? 9.40

She added that given notice is a necessary incident a ‘wise employer’ would give it in writing although she acknowledged that it would be possible for an employer to hand over the correct money and clearly state at the same time that doing so brings the contract to an end. In practice, nowadays payments to employees are almost invariably paid by bank transfer. Lady Hale said that the bank was the agent of the employee for receipt of the monies but not, without more, agent for receipt of notification of what the payment is for. That notification, she said, must go to the employee. 9.38  The case is a salutary lesson in how not to terminate a contract of employment. A  little careful analysis at the outset coupled with some good practice housekeeping would have saved Société Générale significant sums. For employers, the clear message from the case is to have a properly drafted payment in lieu of notice provision, to exercise that provision transparently and in accordance with its terms and finally to ensure that notification that the provision has been exercised is received by the employee. Attempting to terminate a contract by simply (without explanation) making a payment in lieu of notice after an earlier and failed repudiatory breach was unlikely to find favour with the courts and manifestly did not do so.

1(e)  Date of termination: notice/termination by the employee 9.39 Where the employee gives notice in accordance with the contract, the employer may respond in any of the various ways already discussed when the employer is terminating, ie let the employee work out his notice, make a lump sum payment in lieu of notice and so on. In principle (subject to express contractual provisions), there is no reason why the analysis of when the employment ends should be any different simply because it is the employee who has taken the first step to termination. Consequently, determining when the employment ends involves the same process outlined at 9.13–9.17. 9.40  On a practical note, where the employee gives notice, it is not unusual for there to be discussions about the termination date and for a mutually satisfactory arrangement to be reached. For example, where the contract includes a lengthy notice period and no garden leave provision, the employer may agree to release the employee for part of the notice period in return for the employee agreeing to take garden leave until his employment ends. Where such arrangements are agreed, there is no need to resort to the analysis referred to above. However, employers embarking on this sort of discussion should exercise some caution for two reasons. First, it is by no means unknown for such discussions to ‘turn sour’ and to end in an allegation of repudiatory breach. Employers should, therefore, take care to make it clear that they will abide by the contract unless and until it is replaced by an alternative agreement. Secondly, employees have been known to give spurious reasons to secure an early release precisely for the purpose of taking up an opportunity for competitive activity, see, for example, Industrial Development Consultants v Cooley [1972] 2 All ER 162 where Cooley, the managing director of Industrial Development Consultants, secured his early release 469

9.41  Termination of employment

based on fictitious ill health in order to secure a business opportunity in breach of his fiduciary duty. 9.41  Where the employee purports to resign in breach of a notice provision, as frequently happens when the employee is planning to join a competitor, there are a number of options open to the employer. The date of termination of employment will be dictated by which option the employer elects. The employer can seek to hold the employee to his contractual obligations (albeit that he cannot force the employee to perform further services: section 236 Trade Union and Labour Relations (Consolidation) Act 1992), in which case employment ends when the contractually required notice would expire: Thomas Marshall (Exports) Ltd v Guinle [1979] 1 Ch  227 and Evening Standard Co Ltd v Henderson [1987] ICR 588 (CA). (For a fuller discussion on the effect and limitations of section 236 see 15.10–15.44.) Alternatively, the employer can release the employee early on a mutually agreed date which then becomes the termination date. Lastly, where the purported notice amounts to a repudiatory breach, the employer can accept the breach, terminating the contract from the date of acceptance. Whether the purported resignation amounts to a repudiatory breach needs to be considered very carefully by the employer. Not every resignation that departs from the strict terms of the contract will be a repudiatory breach: see 9.98–9.101 for further discussion on when breach of notice provisions constitute a repudiatory breach. An employer who treats a purported resignation as a repudiatory breach and accepts it as terminating the contract but does so wrongly, may himself have committed a repudiatory breach – with all the attendant consequences of having done so: see 9.49–9.58. In the context of limiting competition, the first option of holding the employee to his notice period is often the best course, particularly where the employer has reserved the right to send the employee on garden leave. For a summary of the options available to the employer to keep a contract alive where he knows or suspects the employee is planning to compete, see the flow chart at the Appendix to this Chapter.

1(f)  Date of termination: repudiatory breach 9.42  Because of the personal nature of employment, over the years there has been much debate whether a repudiatory breach of an employment contract should fall outside the normal rules of contract law. Under those rules where there is a repudiatory breach the innocent party has a choice, he can either elect to treat the contract as continuing (affirmation) or accept the breach and by doing so bring the contract to an end. In the case of employment contracts it was argued that this approach was neither realistic nor practical and that instead the rule should be that a repudiatory breach automatically terminates the contract. A review of cases from around the mid-1950s illustrates the debate between what are commonly referred to as the elective theory and the automatic theory. 9.43 In Gunton v Richmond upon Thames London Borough Council [1980] IRLR 321 (CA) (applied, albeit with some reluctance, in Boyo v Lambeth London Borough Council [1994]  ICR  727 (CA)) the Court of Appeal, recognising the 470

When does employment end? 9.47

potential injustice that automatic termination could cause the innocent party, held that contracts of employment should not be treated differently from any other contract and upheld the elective approach. Consequently, following Gunton a repudiatory breach of the contract of employment does not bring the contract of employment to an end automatically. Instead, the innocent party has the option either to waive the breach or to accept it. It is only where the breach is accepted that the contract ends. In reaching their decision the Court, did, however, somewhat dilute the effect of their ruling by saying that in the absence of special circumstances acceptance of the breach will be readily inferred from the conduct of the innocent party (Buckley LJ at paragraph 33). This was in the context of recognising that normally an employee will have little option other than to accept a repudiatory breach by an employer. To a more limited extent the same is also true for the employer. 9.44  More recently in Société Générale London Branch v Geys [2013] IRLR 122 the Supreme Court by a majority decision (Lord Sumption dissenting) settled the debate in favour of the elective approach. The Supreme Court rejected an argument that contracts of employment terminate automatically as a result of a repudiatory breach. In doing so, one crucial factor for the Supreme Court was the potential for an automatic termination to enable the wrongdoer to benefit from his wrong to the disadvantage of the innocent party. As Lord Hope summarised the issue at paragraph 18: ‘It is the objection that the party who is in the wrong should not be permitted to benefit from his own wrong that is determinative. The timing of the repudiation may be crucial, and if the automatic theory were to prevail, an employer may well be tempted to play this to his advantage – by getting in first before a rise in pay or pension entitlement takes place or, as in this case, a rise in the entitlement to bonuses.’

9.45 In Geys the repudiation by Société Générale was the summary dismissal of Geys without cause on 29 November 2007. Had Geys’ contract ended automatically on that date, rather than on or after 1 January 2008, a termination payment to which he was contractually entitled would have been lower by several million Euros. The Supreme Court held there was no automatic termination on 29 November 2007. Furthermore, since Geys had not accepted the repudiation and Société Générale had failed to exercise a contractual payment in lieu of notice clause effectively Geys remained employed until 6 January 2008 and therefore entitled to the higher termination payment. For a detailed summary of the facts and the Supreme Court’s analysis of the exercise of the payment in lieu of notice clause in Geys see 9.30–9.38. 9.46  In reaching its conclusion in Geys that a repudiatory breach of a contract of employment must, as with all other contracts, be accepted by the innocent party, the Supreme Court confirmed the decision of the Court of Appeal in Gunton which the Court noted ‘has stood for 30 years, apparently without evidence of practical difficulty or injustice’. 9.47  Until the decision in Geys it had been the case that acceptance of a repudiatory breach of a contract of employment would in normal circumstances be 471

9.48  Termination of employment

readily inferred – Buckley LJ in Gunton at paragraph 33 (see 9.43). In Boyo v Lambeth London Borough Council [1995]  IRLR  50, in a judgment generally critical of the conclusions in Gunton, albeit accepting they fell to be followed, Ralph Gibson LJ could not see why if acceptance was required it should not be ‘real acceptance’ (paragraph 34). That view was echoed by the Supreme Court in Geys. Whilst recognising that an employee may have little choice but to accept a repudiation, the Supreme Court pointed out that is not to say that at law the employee has no choice. Lord Wilson LJ expressed the view that Buckley LJ’s comments should be ‘treated cautiously’ (paragraph  92) and Lord Hope went further endorsing Ralph Gibson LJ’s criticisms in Boyo and commenting (at paragraph 17): ‘If the law requires acceptance of the repudiation, the requirement is for a real acceptance – a conscious intention to bring the contract to an end, or the doing of something that is inconsistent with its continuation.’ See also Lady Hale at (paragraph 92) where she expressed the view: ‘There is certainly no point in conferring upon a party an election to which some other principle of law is applied so as to deprive it of real value; and in my view Buckley LJ’s suggestion should be treated cautiously’. 9.48  It remains to be seen whether the shift away from readily inferring acceptance makes a practical difference in many cases. However, innocent parties wishing to rely on acceptance of a repudiatory breach should make the acceptance clear. In contrast, innocent parties wishing to keep the contract alive, eg an employee seeking to benefit from bonus or share rights, whilst taking some comfort from the Supreme Court’s views, should still proceed with caution.

2. REPUDIATORY BREACH 2(a)  Effect of a repudiatory breach 9.49  It is the effect of a termination as a result of repudiatory breach that makes the whole issue of repudiatory breach so critically important in the context of this book. In broad terms, that effect is to discharge the innocent party (normally the employee) who accepts the breach, from all his future obligations under the contract: General Billposting Co Ltd v Atkinson [1909] AC  118 (HL). So, for example, where the employee accepts the breach, from the moment of acceptance he is discharged from his obligations under the contract including any duty to serve garden leave and any post-termination restrictive covenants. Probably the only protection which remains for the now ex-employer is that afforded to him by the equitable duty of confidence owed by his ex-employee (and possibly in some instances, ongoing fiduciary duties: see 4.307). 9.50  An area over which there remains some doubt is the effect of a repudiatory breach on obligations of confidence assumed under a contract. This issue was considered in Campbell v Frisbee [2002] EWHC 328 (Ch), a case in which the well-known model, Naomi Campbell, was seeking damages or an account of profit for breach of confidence by her former assistant, Frisbee, arising out of disclosure of details of Campbell’s personal life to a national newspaper. Campbell 472

Repudiatory breach 9.52

had engaged Frisbee under a contract for services which included an express confidentiality provision. Frisbee alleged that Campbell had repudiated the contract and that as a result she was discharged from her obligation of confidence. Frisbee separately claimed that there was a public interest in the disclosure of details of Campbell’s personal life and that justified what would otherwise have been a breach of confidence. Lightman J granted Campbell summary judgment, regarding it as clear that a repudiatory breach of contract by the confider did not destroy a duty of confidence owed by the confidant. Lightman J relied on a passage by Morritt LJ in Rock Refrigeration Limited v Jones [1996] IRLR 675 at paragraph 48, in which he stated: ‘It has been suggested that the application of the principle of General Billposting Co Ltd v Atkinson [1909] AC 118, may enable an employee to retain for himself that which he should not when his employment has been terminated even by his acceptance of his employer’s repudiation. For my part I doubt it. The employer’s rights of property will remain unimpaired even if the employment terminated as a result of the employee’s acceptance of his wrongful repudiation. As the employment will be at an end the employee’s licence to use the company car, for example, will have come to an end too. Similar situations will arise with regard to the employer’s trade secrets and papers and access to his property.’

Lightman J stated that he had no doubt that at any trial the law would be laid down as Morritt LJ confidently stated it, concluding that: ‘… the employee’s acceptance of the employer’s repudiatory breach cannot displace the employer’s established property rights and these include his rights in respect of confidential information.’ (paragraph 21)

(This view of Lightman J probably holds good, notwithstanding the disapproval by the House of Lords in Douglas v Hello! [2008] 1 AC 1 (see Lord Walker at paragraph 275) of confidential information being a species of property right.) 9.51  The Court of Appeal ([2003] ICR 141) overturned the judgment of Lightman J, holding that the effect of a repudiatory breach on contractual obligations of confidence was not sufficiently clearly established to make the case appropriate for an order of summary judgment. However, the Court of Appeal also expressed the view that Frisbee faced an uphill struggle at trial in showing that as a matter of law those obligations were discharged by a repudiatory breach. It is our view that the indication given by the Court of Appeal that at trial the repudiatory breach would not discharge the duty of confidence is correct, whether this duty is to be seen as existing only in contract or existing alongside it in equity or (which now appears to be incorrect (see 9.50)) if confidential information were to be seen as a species of property. In our opinion, repudiation of a contract of employment does not destroy the duty of confidence, because it exists in equity alongside (and is not entirely subsumed by) the contractual duty of confidence. 9.52 In recent years some doubt has been raised as to whether General Billposting remains good law. In our view there is no legitimate basis for that doubt. However, because the point is raised quite frequently in the context of restrictive covenants it is a point which requires some consideration. The doubt 473

9.53  Termination of employment

arises from two House of Lords decisions in which provisions of commercial contracts were held to survive termination as a result of repudiatory breach. In Heyman v Darwins Ltd [1942] AC 356, the surviving provision was an arbitration clause. In Photo Productions Ltd v Securicor Ltd [1980] AC 827, the more significant case of the two, the relevant provision was an exclusion clause limiting the liability of Securicor for certain acts of its employees. 9.53 In Rock Refrigeration Ltd v Jones and Seward Refrigeration Ltd [1996] IRLR 675 Phillips LJ, obiter, (at paragraphs 63–68) sought to extend the categories of clause that survive termination as a result of a repudiatory breach. In his view ‘General Billposting accords neither with current legal principle nor with the requirements of business efficacy’ (paragraph 63) and, while not having to decide the point, he thought it ‘at least arguable’ that not every restrictive covenant would be discharged by a repudiatory breach (paragraph 68). Similarly, Simon Brown LJ, again obiter, questioned whether General Billposting was unaffected by Photo Productions. 9.54  In advancing his argument Phillips LJ referred for support in principle to Heyman and Photo Productions. However, he did not attempt to reconcile the concept of a restrictive covenant surviving a termination as a result of repudiatory breach with the analysis of the effect of such a breach in Heyman and Photo Productions. It is important to tackle this task because there are fundamental differences between the surviving clauses in those two cases and restrictive covenants. The surviving clauses in Photo Productions and Heyman related (respectively) to the responsibility for, or resolution of disputes arising from, previous breaches of the contract, that is matters that had already occurred at the time of termination. In contrast, restrictive covenants comprise future obligations at the time of termination. In both Heyman and Photo Productions the House of Lords drew a distinction between what Diplock LJ describes in Photo Productions Ltd at page 849 as the unperformed ‘primary obligations’ of the parties which do not survive a repudiatory breach and terms which address the resolution of the parties’ rights arising from the breach. As Macmillan LJ described the effect of an accepted repudiatory breach on the contract in Heyman at page 374: ‘The contract is not put out of existence, though all future performance of the obligations undertaken by each party in favour of the other may cease. It survives for the purpose of measuring the claims arising out of the breach, and the arbitration clause survives for determining the mode of their settlement.’

Similarly, in Photo Productions, as a matter of construction the exclusion clause on which Securicor sought to rely survived, since it was directly relevant to their liability for damages for the breach. In contrast, post-termination restrictive covenants fall squarely within the primary obligations of the parties which it was accepted in both Heyman and Photo Productions do not survive a repudiatory breach. In Heyman the justification advanced for this was the maxim that: ‘… a party cannot both “approbate and reprobate a contract” ie “a party cannot take the benefit of a contract without conforming to its onerous conditions.” ’

(Wright LJ at page 387) 474

Repudiatory breach 9.56

9.55  Based on the analysis above, we are of the view that General Billposting continues to be good law. That view is reinforced by the fact that, notwithstanding Phillips LJ’s propositions, the argument has advanced little in the years that have elapsed since the Rock decision. In Hurst v Bryk [1999] Ch 1 (CA) Simon Brown LJ, whilst acknowledging that the enforceability of restrictive covenants following a repudiatory breach was very different from the contractual term in issue in Hurst, felt that Phillips LJ’s comments in Rock afforded ‘some help’ to the court. In Hurst the issue in the Court of Appeal was whether following a repudiatory breach of the partnership agreement a partner’s obligation to contribute to future liabilities of the partnership was discharged. The Court of Appeal held that the obligation was not discharged, but this was primarily because the liabilities arose from commitments entered into by the partnership prior to the repudiatory breach, so that on a proper analysis the liabilities, although arising after the breach, were not strictly future obligations. The decision was upheld by the House of Lords on different grounds. In Croesus Financial Services Limited v Bradshaw [2013]  EWHC  3685 (paragraph  88) Simler J, referring to what she described as an ‘interesting argument’ about the correctness of the rule in General Billposting’ commented ‘The time may have come to revisit the rule in General Billposting Co Ltd v Atkinson [1909] AC 118 (HL)’. However, having found that there had been no repudiation she acknowledged that Croesus was not the case for that exercise. It is not immediately apparent from the case report why Simler J  made her comment but in any event it has not generally been pursued in other cases although in Société Générale London Branch v Geys [2013] IRLR 122 Lord Wilson at paragraph 68 referring to Rock Refrigeration v Jones [1996] IRLR 675 noted whilst not resolving the point that the enforceability of restrictive covenants by the repudiator ‘is now the subject of some debate’. See also Praxis Capital Limited v Burgess [2015] EWHC 2631 (Ch) where HHJ Hodge QC at first instance at paragraph 72 commented that he shared the reservations of Phillips LJ in Rock but nonetheless indicated obiter that had the allegation of repudiatory breach been made out, which on the facts it was not, he would have been bound to follow General Billposting. In short, whilst arguments may be run by those representing (ex-)employers whose repudiatory breach has been accepted until such time as the issue is addressed by the Supreme Court General Billposting remains good law. 9.56 A  contention which has gained some currency is that the indication in Campbell v Frisbee [2003] ICR 141 (considered at 9.50–9.51 that the duty of confidence probably survives a repudiatory breach supports the doubts expressed in Rock concerning the effect of General Billposting. It is argued that it is illogical for obligations of confidence to survive a repudiatory breach when a noncompetition covenant designed to protect the very same confidential information does not so survive. In our view, there is no inherent inconsistency between an employee’s duty of confidence (existing independently of the contract) remaining in place after a repudiatory breach while a non-competition covenant supporting such confidential information does not. The former exists outside or alongside the contract, the latter does not. Nor do we think that any attempt to curtail the effect of General Billposting will succeed, on the basis that it amounts to (a disproportionate) interference with rights in property (including confidential information 475

9.57  Termination of employment

and goodwill) under Article  1 of Protocol 1 of the European Convention on Human Rights. The all-or-nothing approach in General Billposting is mirrored by the longstanding principle of English law regarding restrictive covenants, that if unreasonable they are struck down (and not re-written so as to be reasonable): see 10.7 and 12.44. It is unlikely, short of a different conclusion by the Supreme Court, that these longstanding principles will be overruled. It is also clear that the rule cannot be circumvented by an express term in the contract to the effect that the post-termination restrictive covenants survive a wrongful termination. This was the conclusion of the Court of Appeal in Rock Refrigeration Ltd v Jones and Seward Refrigeration Ltd [1996] IRLR 675; (considered at 11.286) a case in which Phillips LJ concurred in the result but which prompted his obiter comments referred to in 9.53–9.54. 9.57 It is important to remember that it is only future obligations under the contract of employment that are discharged by a repudiatory breach, not arrangements which are clearly separate from that contract. So in Pearce v Roy T Ward (Consultants) Ltd EAT 11 October 1996 (180/96) IDS Brief 585/March 1997 an employer who had wrongfully summarily dismissed an employee was still able to recover interest-free loans made to the employee which the EAT found to be clearly separate from the contract of employment. While this case is understandable on its facts, it does not in our view open the floodgates to arguments that restrictive covenants contained in separate documents (eg deeds) survive a repudiatory breach. Such covenants will almost invariably form part of the contract of employment. For further analysis see 9.59–9.62. 9.58 Where the employee was in breach of contract before the employer’s fundamental breach, it will be open to the employer to pursue the employee in damages notwithstanding his own repudiatory breach. The victim of a repudiatory breach remains liable for his own breach committed before the contract is brought to an end: Gill & Duffs SA v Berger & Co Inc (No 2) [1984] AC 382. Difficult questions arise as to whether an employer who has committed a repudiatory breach can obtain injunctive relief against an (ex-)employee in respect of that (ex-)employee’s own conduct. While the court is unlikely to look with great favour on the (ex-)employer, there may be instances (eg for breach of property rights) where interim relief would be granted (see further Chapter 15). See further 9.156–9.159 regarding the ‘battle of the breaches’.

2(b)  Repudiatory breach and collateral contracts 9.59  In certain circumstances, the courts will treat statements made in the course of negotiations for a contract (which are intended to have contractual effect) as a collateral contract or warranty, distinct from the main contract. The consideration for the collateral contract is provided by entering into the main contract: see De Lassalle v Guildford [1901] 2 KB 215 and Hill v Harris [1965] 2 QB 601. A feature of a collateral contract is that it may be actionable even if the main contract is unenforceable: Strongman (1945) Ltd v Sincock [1955] 2 QB 525. However, compare Quickmaid Rental Services Ltd v Reece (1970) Times, 22 April (CA) 476

Repudiatory breach 9.61

and [1970] 114 SJ 372, which suggests that the connection between a contract and a collateral contract may be such that a repudiatory breach of one contract (in that case the collateral contract) would entitle the innocent party to treat himself as discharged from the other contract. 9.60  Is it possible, by use of a collateral contract, to overcome the difficulty posed by the principle enunciated in General Billposting Co Ltd v Atkinson [1909] AC 118 (HL)? In other words, if, as a result of a repudiatory breach by his employer, an employee would not be bound by the terms of his contract of employment, might the court nonetheless be persuaded to give effect to restrictive covenants if they formed part of a collateral contract? 9.61  In the case of very important employees, the practice of putting covenants in a separate document in the form of a collateral contract between the employer and the employee is not unusual. As far as is known there is no authority as to whether such a practice will be effective, but in our view and for the following reasons, the court would be unlikely to give effect to restrictive covenants in such a document where there had been a repudiatory breach of the contract of employment by the employer which was accepted by the employee: •

The claim that there is a collateral contract might arouse suspicion that it was nothing more than a ‘device’. If such a ‘device’ were effective, an employer could persuade a prospective employee to agree to restrictive covenants in a collateral contract and then quite deliberately flout the provisions of the main contract, knowing that the employee would remain bound by the restrictive covenants. Such conduct on the part of the employer would, in our view, be regarded as unconscionable and the court would be unlikely to exercise its discretion to grant equitable relief by way of injunction. See, however, the obiter comments of Phillips LJ in Rock Refrigeration Ltd v Jones and Seward Refrigeration Ltd [1996]  IRLR  675, which are considered at 9.53–9.55.

•

Restrictive covenants would not normally form the kind of statements which typify a collateral warranty or contract. Nor would they constitute representations which could afford the employee a right to bring a claim based on misrepresentation in the event that they were false. Looking at all the factual circumstances, a court is likely to conclude that the restrictive covenants form an integral part of a larger, single agreement. Indeed, in Duarte v Black and Decker [2007]  EWHC  2720  QB the High Court held that the restrictive covenants set out in a Long Term Incentive Plan (LTIP) agreement were part of the employee’s contract of employment, notwithstanding that the LTIP agreement was governed by the law of a different jurisdiction and entered into separately from the employment contract and did not require the employee to carry out any work. The Court in Duarte (at paragraph  52) found that the LTIP agreement was ‘part of an overall package’ of the employment terms offered to Duarte (see also, to similar effect, Samengo-Turner v J&H Marsh McLennan (Services) Ltd 477

9.62  Termination of employment

[2007] EWCA Civ 723) followed in Petter v EMC [2015] IRLR 847. The Court also rejected the notion that the employment contract provisions of the Rome Convention could be circumvented by ‘hiving off’ certain aspects of an employment agreement. 9.62  Even if the court were to conclude that a genuine collateral contract had come into existence, the employee may be able to show that there was an implied term of the collateral contract to the effect that the employer could not derogate from the rights granted to the employee under the main contract or terminate it unlawfully. In other words, the position of the employee would be no worse under the collateral contract than it would have been if there had been a single agreement embracing all relevant contractual terms. In this event, the employer’s reliance on a collateral contract would achieve nothing. Note, however, demonstrating that a term should be implied may now be more difficult in view of the greater reluctance of the courts to imply terms following the Supreme Court’s decision in Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2016]. Contrast the use of a collateral contract as a device with the situation where there is a good and genuine reason for the covenants being contained in a separate agreement. In Emersub XXXVI Inc and Control Techniques plc v Wheatley (18 July 1998, unreported) the covenants were in a deed entered into in connection with the sale of Wheatley’s shares in his employing company, Control Techniques plc. The deed was in favour of the purchaser of the shares, Emersub, and was to protect the goodwill being bought. After the sale Control Techniques plc dismissed Wheatley, allegedly wrongfully. Emersub sought an injunction to enforce the covenants. Granting the injunction, Wright J rejected an argument that the covenants did not survive the alleged repudiatory breach. As he pointed out, the covenants were not given to Wheatley’s employer, the alleged repudiator, in connection with his employment. Rather they were given in favour of Emersub in connection with the purchase of Wheatley’s shares, for which he received around £11 million. In such circumstances Wright J felt that: ‘I, for my part do not see how what happened to his [Wheatley’s] employment with Control Techniques PLC has any impact upon or relevance to that contractual undertaking’ (Transcript, page 14).

2(c) What amounts to a repudiatory breach? 9.63  Because of the potentially devastating effects of an accepted repudiatory breach discussed at 9.49–9.58, an employee seeking to escape the bonds of a restrictive covenant will often endeavour to find a repudiatory breach on which to rely, and may indeed indulge in tactics designed to invite such a breach. It is for this reason that it is vital for an employer to understand what conduct can amount to a repudiatory breach and to bear the risk of an allegation of repudiatory breach in mind at all times, not least when reacting to an employee’s resignation. 9.64  In this section we look at the following issues: • 478

The definition of a repudiatory breach.

Repudiatory breach 9.68

•

The test for determining whether a repudiatory breach has occurred.

•

General principles relevant to the concept of repudiatory breach.

•

Common examples of the types of repudiatory breach alleged by employees looking to escape their post-termination obligations.

2(c)(i)  Definition of a repudiatory breach 9.65  A repudiatory breach is a breach which is so serious that it entitles the innocent party to elect to treat himself as discharged from future obligations under the contract. According to Lord Denning MR in Western Excavating (ECC) Ltd v Sharp [1978] ICR 221 (CA) at page 226, the normal rules of contract apply, so that: ‘If the employer is guilty of conduct which is a significant breach going to the root of the contract of employment, or which shows that the employer no longer intends to be bound by one or more essential terms of the contract, then the employee is entitled to treat himself as discharged from any further performance If he does so, then he terminates the contract by reason of the employer’s conduct. He is constructively dismissed. The employee is entitled in those circumstances to leave at the instant without giving any notice at all or, alternatively, he may give notice and say he is leaving at the end of the notice. But the conduct must in either case be sufficiently serious to entitle him to leave at once. Moreover, he must make up his mind soon after the conduct of which he complains: for, if he continues for any length of time without leaving, he will lose his right to treat himself as discharged. He will be regarded as having elected to affirm the contract.’

9.66 Unreasonable conduct alone is insufficient to establish a repudiatory breach: Claridge v Daler Rowney [2008] IRLR 672 following Abbey National plc v Fairbrother [2007] IRLR 320. To be a repudiatory breach the unreasonable conduct must amount to a breach of contract which fundamentally undermines the employment relationship. In Claridge the handling of Claridge’s grievance, whilst not without fault, was ‘… not, overall so egregious that no reasonable employer could have acted in that way’. Consequently, the tribunal had correctly dismissed Claridge’s constructive dismissal claim. 2(c)(ii) Test for determining repudiatory breach 9.67  The test is objective: Malik v BCCI [1997] IRLR 462 (HL). The conduct relied on as constituting the breach must (in the words of Lord Nicholls at paragraph 14) ‘impinge on the relationship in the sense that, looked at objectively, it is likely to destroy or seriously damage the degree of trust and confidence the employee is reasonably entitled to have in his employer. See also Lord Steyn at paragraph 59. Lord Nicholls’ formulation was applied by the Court of Appeal in Waltham Forest v Omilaju [2005] IRLR 35, (per Dyson LJ at paragraph 14). 9.68 In Tullet Prebon PLC v BGC Brokers [2011] IRLR 420 (at paragraph 20) the Court of Appeal adopted the formulation of the test by Etherton LJ in Eminence Property Developments Ltd v Heaney [2010] 43 EG 99 (CS) at paragraph 61: 479

9.69  Termination of employment

‘[The legal test] is whether, looking at all the circumstances objectively, that is from the perspective of a reasonable person in the position of the innocent party, the alleged contract-breaker has clearly shown an intention to abandon and altogether to refuse to perform the contract.’

The Court of Appeal commented that whether there has been a repudiatory breach is a highly context specific question. Rejecting an argument that at first instance Jack J had applied the wrong test by taking into account Tullett’s subjective intentions, the Court of Appeal held it was permissible, and a correct application of the test, to consider objectively the intention of the contract breaker which in Tullett was to keep the contracts alive rather than to destroy them. In Tullett at first instance ([2010] IRLR 648), Jack J (at paragraph 108) also expressed the view that since the employer’s conduct is to be assessed objectively, the employee’s reaction may ‘in a sense be irrelevant … But I  think that the contemporaneous reaction of people to a party’s conduct may be of assistance in judging its seriousness’. 9.69 In The Leeds Dental Team Ltd v Rose [2014] IRLR 8 the EAT rejected an argument that the Court of Appeal’s decision in Tullett represents a departure from the objective test or that the decision requires a factual finding of the actual intention of the employer to be made. HHJ Burke QC (at paragraph 26) stated: ‘…there is no difference in practice between the test laid down by the authorities over 30 years since Woods and the test adopted in Tullett Prebon’. In Woods v WM Car Services (Peterborough) Ltd [1981] ICR 666 (EAT) at pages 670–671, Browne-Wilkinson J held that it was not necessary to show an intention to repudiate to establish a repudiatory breach: ‘.. the tribunal’s function is to look at the employer’s conduct as a whole and determine whether it is such that its effect, judged reasonably and sensibly, is such that the employee cannot be expected to put up with it… The conduct of the parties has to be looked at as a whole and its cumulative impact assessed’. 9.70  In the Privy Council’s decision in Grewals (Mauritius) Ltd v Koo Seen Lin [2016] IRLR 638 (at paragraph 15) Lord Hughes put the test in the following way: ‘When constructive dismissal is in question, the acid test is not whether the employer intended to dismiss; it is whether he has by his conduct, objectively judged, repudiated the contract. If he has the employee is entitled, by accepting the repudiation, to treat the conduct as constructive dismissal.’

On the issue of intention Lord Hughes added (at paragraph 17): ‘Although an intention to dismiss is not a necessary part of an employer’s repudiatory conduct before it can amount to constructive dismissal, if such intention exists it is plainly material to the question whether such repudiatory conduct has taken place.’

Lord Hughes’ additional comment, whilst perhaps understandable from a common sense perspective, is somewhat at odds with his confirmation that the test is an objective one. 480

Repudiatory breach 9.75

9.71  What emerges from these cases is that the test to be applied is an objective test as formulated in Eminence and approved by the Court of Appeal in Tullett. The actual intention of the employer judged subjectively is not relevant and it is not necessary to show an intention to dismiss. However, in making the objective assessment of the behaviour alleged to constitute the repudiatory breach the court will take into account the entire factual matrix to see if the objective test is satisfied and the reaction of the employees may (it seems) be some evidence of the seriousness of the behaviour. In Tullett this latter point did not help the Tullett employees whose reaction the Court of Appeal considered Jack J had regarded as ‘conditioned by considerations of tactics and timing’ ie their desire to escape their current contracts in order to be free to join BGC. 9.72 Finally, in determining whether a repudiatory breach has occurred it is not necessary to show, nor relevant, whether the employer’s conduct is outside the range of reasonable responses to the particular situation: Buckland v Bournemouth University Higher Education [2010] IRLR 445. Sedley LJ (at paragraph 28) accepted that reasonableness is one of the tools in what he described as the ‘employment tribunal’s factual analysis kit’ for determining repudiatory breach ‘But it cannot be a legal requirement’. Sedley LJ gave the example of an employer failing to pay wages following default by a major customer. That (he said) was arguably the most if not the only reasonable response ‘But to hold that it is not a fundamental breach would drive a coach and four through the law of contract of which this aspect of employment law is an integral part’. 2(c)(iii)  General principles 9.73 A  repudiatory breach can arise from a breach of an express term or an implied term or both. The implied term most commonly relied on is the implied term of trust and confidence: see 9.84–9.93. 9.74 Where the employer seeks to change important aspects of the contract of employment and seeks to justify its conduct by reference to express terms they must clearly permit the employer’s action, if a repudiatory breach is to be avoided. So, for example in Land Securities Trillium Ltd v Thornley [2005] IRLR 765 the EAT ruled that the term permitting a change in duties was insufficiently broad to cover the change in role of an architect from a ‘hands on’ role to a managerial role. Similarly, in Kellogg Brown & Root UK Ltd v Fitton & Another UKEAT/0205/16/ BA a mobility clause was too wide and uncertain to justify the dismissal of employees who declined to comply with an instruction to relocate when their workplace closed. Variation clauses generally and the question of when they can be effective to achieve change are considered at 5.56–5.59 and see 13.30–13.40. 9.75 Although an express term will always trump an implied term: Fish v Dresdner Kleinwort Benson Limited [2009]  IRLR  1035, an implied term may in a broad sense ‘qualify’ how the express term can be utilised. Consequently an employer who seeks to implement a change permitted by an express term can still find itself in repudiatory breach because of the process, or often lack of process, 481

9.76  Termination of employment

followed. See for example Prestwick Circuits Ltd v McAndrew [1990] IRLR 191 where the Court of Session found that a mobility clause was subject to an implied term that in addition to the new location being within a reasonable distance, the employer would give reasonable notice of the change. To similar effect see United Bank Ltd v Akhtar [1989] IRLR 507 and Aparau v Iceland Frozen Foods Plc [1996] IRLR 119. 9.76  A repudiatory breach may arise from a single act or from a course of conduct: Lewis v Motorworld Garages Limited [1985] IRLR 465 (CA). Since claims arising from a course of conduct commonly occur where the repudiatory breach is alleged to be a breach of the implied term of trust and confidence, we consider this question after considering that implied term. See 9.94–9.97 for what constitutes a course of conduct generally and more particularly the necessary quality of the final act, commonly referred to as the ‘last straw’. 9.77 An anticipatory repudiatory breach can be withdrawn: Norwest Holst Administration v Harrison [1985] IRLR 240 (CA). A threat to remove Harrison’s directorship was a repudiatory breach but because he failed to accept the repudiation unequivocally before Norwest withdrew their threat Harrison was not constructively dismissed. 9.78  In contrast to an anticipatory repudiatory breach, once a repudiatory breach has been committed it cannot be cured: Buckland v Bournemouth University Higher Education Corporation [2010]  IRLR  445. Commission of the breach involves what Sedley LJ described (at paragraph 40) as a crossing of the Rubicon: ‘From that point all the cards are in the hand of the wronged party: the defaulting party cannot choose to retreat. What it can do is invite affirmation by making amends’. 9.79  An employer can avert a repudiatory breach by stepping in at any point until the breach has been committed. In Assamoi v Spirit Pub Company (Services) Ltd UKEAT 0050/11 spurious disciplinary allegations made by a manager were not found to constitute a repudiatory breach where senior management had stepped in and vindicated Assamoi. 9.80  Although there remains some uncertainty on the point, it is probable that a genuine, but nonetheless incorrect, interpretation of the contract will not be a repudiatory breach where the employer has not taken up an entrenched position and where the time for performance of the term in dispute has not yet arisen: Financial Techniques (Planning Services) Ltd v Hughes [1981] IRLR 32 (CA); cf Frank Wright & Co (Holdings) Ltd v Punch [1980] IRLR 217 and Brigdens v Lancashire County Council [1987] IRLR 58 (CA). 9.81  It is irrelevant that the employer genuinely believes that his breach is not repudiatory: Milbrook Furnishing Industries Ltd v McIntosh [1981] IRLR 309. 9.82  The repudiatory breach must be by the employer, which includes any act for which the employer would be vicariously liable under normal principles: Hilton International Hotels (UK) Limited v Protopapa [1990] IRLR 316. Protapapa had 482

Repudiatory breach 9.84

been severely reprimanded by her supervisor in front of other employees for making a dental appointment without prior permission. The Tribunal found that the reprimand was unjustified, ‘officious and insensitive’, and upheld the claim of constructive dismissal. Dismissing Hilton’s appeal and rejecting an argument that for the breach to be the employer’s breach the supervisor had to have authority to dismiss, Knox J in the EAT (at paragraph 14) said: ‘in relation to repudiatory conduct by what I will call a supervisory employee of the employer, the question whether the conduct binds the employer is governed by the general law of contract. If the supervisory employee is doing what he or she is employed by the employer to do and in the course of doing it he or she behaves in a way which if done by the employer would constitute a fundamental breach of the contract between the employer and the applicant, then, in our judgment, the employer is bound by the supervisory employee’s misdeeds. We see no basis for drawing the line in any other place than that applied by the general law for vicarious liability of an employer.’

See Mohamud v WM Morrison Supermarkets plc [2016] IRLR 362 (Supreme Court) for the test to be applied in determining vicarious liability. For a recent example of a case in which the issue of whether the offending act was committed with the authority of the employer see Gibbs v Leeds United Football Club [2016]  IRLR  493. Rejecting an argument that an email from the Club Secretary changing Gibbs’ duties was made without authority Langstaff J said (at paragraph 41) ‘If a case were to be made that the email was sent without authority, I would expect the evidence of this to be called before me in the clearest terms. None has been.’ It follows that in the rare case in which there is any scope for argument about authority for the alleged repudiatory behaviour, those advising the employer will need to produce clear and compelling evidence of the lack of authority. 2(c)(iv)  Common examples of repudiatory breach 9.83  In the context of the subject matter of this book, certain types of conduct are regularly argued to constitute repudiatory breach by employees who have resigned to join a competitor and are seeking to escape from restrictive covenants. Common examples are breach of the implied term of trust and confidence, breach of notice provisions and sending employees on garden leave where there is no contractual right to do so. These, together with other examples, are considered below. However, it is important to bear in mind that the categories considered below are by no means exhaustive, any breach which meets the criteria outlined by Lord Denning MR in Western Excavating (ECC) Ltd v Sharp [1978] ICR 221 (CA) at page 226, will be a repudiatory breach. Breach of trust and confidence 9.84  Alleging breach of this implied term to found a claim of repudiatory breach has become commonplace and particularly so since the House of Lords decision in Malik v Bank of Credit and Commerce International SA [1997] IRLR 462. It is a relatively rare case in the context of this book where an argument of repudiatory breach is not based either solely or partly on this implied term. 483

9.85  Termination of employment

9.85  The implied term requires that the employer will not without reasonable and proper cause conduct itself in a manner calculated or likely to destroy or seriously damage the relationship of trust and confidence between employer and employee. In Malik, Steyn LJ (at paragraph  54) expressed the term as requiring that the conduct must be calculated and (our emphasis) likely to destroy confidence and trust, but it has since been clarified that satisfying either criterion is sufficient: see Baldwin v Brighton & Hove City Council [2007]  IRLR  232. In Baldwin the EAT pointed out that in formulating the test Steyn LJ was approving the formulation of Browne-Wilkinson J in Woods v WM Car Services (Peterborough) Limited [1981] IRLR 347 (at paragraph 17) and there the test was formulated disjunctively. 9.86  Because the implied term requires the employer not to ‘destroy or seriously damage trust and confidence’, a breach of the implied term will always be a repudiatory breach: Waltham Forest LB  v Omilaju [2005]  IRLR  35 (CA) (per Dyson LJ at paragraph 14). 9.87  Examples of cases in which employees have successfully argued breach of this implied term abound in employment law textbooks and the offending behaviour of the employer comes in many shapes and forms. Taking just a few examples, in Cantor Fitzgerald International v Bird [2002] IRLR 867, it was the tactics deployed by Cantor in seeking to introduce revised remuneration arrangements for some of the defendants that were found to breach the implied term. Amongst the conduct to which the court took exception were that the promotion of the terms was aggressive and explanations were both perfunctory and misleading. In addition, there was the use of erroneous threats that existing bonus entitlements could and would be withheld if the employees did not accept the new terms, followed by virtually unexplained large sums being credited to the employees’ bank accounts. The use of obscenities and swearing punctuated the process and the court found that on one particular occasion, even by what was described as the ‘robust standards of the industry’, the language and comments of the chief executive may well on its own have been repudiatory of the contract. 9.88  Subsequently, another Cantor Fitzgerald employee also succeeded in showing that he had been constructively dismissed as a result of a breach of the implied term of trust and confidence: see Horkulak v Cantor Fitzgerald International [2003]  IRLR  756. In Horkulak it was again the behaviour of Cantor’s chief executive that breached the implied term of trust and confidence, in particular the use of foul and abusive language, the undermining of Horkulak’s ability to manage his subordinates and the imposition of standards of performance that the chief executive had no grounds for believing that Horkulak could achieve. The fact that Horkulak had, on occasions, resorted to foul and abusive language in a stressful environment did not disentitle him from being treated properly under his contract. 9.89 In Buckland v Bournemouth University Higher Education Corporation [2010]  IRLR  445 (CA) breach of the implied term arose from the decision, without consulting Professor Buckland, to re-mark students’ examination papers 484

Repudiatory breach 9.92

which he had initially marked and where the marks he had awarded had been checked and confirmed by both a second marker and also by the University’s Board of examiners. Buckland successfully argued that this action impugned his integrity as an examiner and amounted to a repudiatory breach of his contract entitling him to resign. The breach was not capable of being cured by the subsequent actions of the University including the setting up of an inquiry which exonerated him. 9.90 In Ishaq v Royal Mail Group [2017] IRLR 208 breach of the implied term arose when Royal Mail, knowing of a postman’s disability which prevented him walking long distances or over difficult terrain, allocated him to unsuitable routes. In Rawlinson v Brightside Group UKEAT/0142/17 the EAT found the implied term had been breached when Rawlinson was given a false reason for his dismissal. Brightside had concerns over Rawlinson’s performance but wanted to retain his services during his three month notice period both to organise a replacement and to allow for an orderly handover. Brightside gave Rawlinson notice telling him, untruthfully, that following a review of legal services reporting lines were to be changed and greater use made of external providers. Rawlinson challenged that explanation on various grounds and resigned with immediate effect claiming constructive dismissal. In the EAT Rawlinson succeeded in his claim for his notice pay. HHJ Eady QC ruled that whilst Brightside had been under no obligation to give Rawlinson a reason for his dismissal, having chosen to do so they were under an implied duty not to deliberately mislead him. Whilst HHJ Eady QC accepted that part of Brightside’s approach had been to ‘soften the blow’ of termination that did not excuse their breach of the implied duty. 9.91  Claims of a breach of the implied term of trust and confidence can arise in the context of investigating suspected wrongdoing or during disciplinary proceedings. This is an area in which employers need to take care particularly when dealing with employees whom they may suspect of competing. Albeit a case on very specific facts, in Gogay v Hertfordshire County Council [2000] IRLR 703 (CA) the breach arose from the way in which the Council framed the basis of Gogay’s suspension. There was no allegation concerning Gogay that she had breached any express terms of her contract but the suspension was stated to be to investigate ‘an allegation of sexual abuse made by a young person in our care’. The Court of Appeal ruled that this put the matter ‘far too high’ and suspension was little more than an unjustified ‘knee-jerk reaction’. Whilst Gogay is an extreme case, (as Hale LJ commented (at paragraph 55) to be accused of sexual abuse is a serious matter). Nonetheless, it is an important reminder to employers of the need for caution in framing the basis for a suspension. Having an express right to suspend does not give the employer carte blanche in exercising that right. See also Working Mens Club and Institute Union Limited v Balls UKEAT /0119/11 where the initiation of disciplinary proceedings (alleging dishonesty without an adequate basis for doing so) and the manner in which the proceedings were conducted was held to be a breach of the implied term. 9.92  Care should also be taken in responding to a grievance raised by an employee. In Blackburn v Aldi Stores [2013] IRLR 846 failure by Aldi to adhere to its own 485

9.93  Termination of employment

non-contractual grievance procedure (construed in the light of the ACAS Code of Practice) and provide an impartial person to hear an appeal was, in view of the size and administrative resources of Aldi, capable of being a breach of the implied duty. In Blackburn the Tribunal had failed to make the necessary findings of fact and the case was remitted. It is not unusual for employees looking to provoke a repudiatory breach to lodge often quite detailed grievances in the hope of exhausting the patience of the employer, who then makes the very error the employee is hoping for. Employers need to be alive to this tactic and avoid falling into the employee’s trap. 9.93  Finally, whilst breach of the implied term of trust and confidence is commonly relied on by employees claiming repudiatory breach, and it is fair to say that the scope of the term is wide ranging, it is important to bear in mind that there are limitations on the term. So, for example, the implied term cannot ‘trump’ a clear express term: Reda v Flag [2002] IRLR 747. Nor does the implied term impose a positive obligation on the employer to act in a way that furthers mutual trust: Hill v General Accident Fire & Life Assurance Co plc [1998] IRLR 641 and University of Nottingham v Eyett [1999] IRLR 87. In Eyett the University was held not to have breached the implied term by failing to inform the employee that delaying his retirement for a short period would result in his receiving a higher pension. Solicitors advising clients to bring claims founded on breach of this implied term in an attempt to evade restrictive covenants should be mindful of these limitations and place reliance on the implied term only in appropriate cases. To do otherwise can sometimes undermine other far stronger arguments that are being advanced on behalf of the employee, for example about the reasonableness of the restrictive covenants. A course of conduct 9.94 Sometimes, rather than being a single act or omission, the repudiatory breach consists of a series of infringements which, taken together, can be accepted by the employee to terminate the contract. In the words of Neil LJ in Lewis v Motorworld Garages Limited [1985] IRLR 465 (CA) (at paragraph 26): ‘the repudiatory conduct may consist of a series of acts or incidents, some of them perhaps quite trivial, which cumulatively amount to a breach of the implied term’ of trust and confidence.’

and in the words of Glidewell LJ (at paragraph 36): ‘The breach of this implied obligation of trust and confidence may consist of a series of actions on the part of the employer which cumulatively amount to a breach of the term, though each individual incident may not do so. In particular in such a case the last action of the employer which leads to the employee leaving need not itself be a breach of contract; the question is, does the cumulative series of acts taken together amount to a breach of the implied term? (See Woods v W M Car Services (Peterborough). This is the “last straw” situation.’

9.95 In Waltham Forest London Borough Council v Omilaju [2005]  IRLR  35 (CA) the key issue the Court of Appeal had to address was whether the ‘last straw’ on which Omilaju sought to rely was sufficient. That last straw was the 486

Repudiatory breach 9.98

refusal of the Council to pay Omilaju whilst he was absent from work during the hearing of a tribunal claim he had brought against the Council alleging race discrimination and breach of contract. Following Lewis, Dillon LJ (at paragraph 19) outlined the necessary quality of the ‘final straw’ in the following way: ‘The quality that the final straw must have is that it should be an act in a series whose cumulative effect is to amount to a breach of the implied term. I do not use the phrase “an act in a series” in a precise or technical sense. The act does not have to be of the same character as the earlier acts. Its essential quality is that, when taken in conjunction with the earlier acts on which the employee relies, it amounts to a breach of the implied term of trust and confidence. It must contribute something to that breach although what it adds may be relatively insignificant.’

On the facts of the case the Court of Appeal found the Council’s refusal to pay Omilaju whilst absent at the tribunal hearing was reasonable and justifiable conduct. Consequently, and overturning the decision of the EAT, the Court of Appeal concluded that this act could not have undermined Omilaju’s trust and confidence in the Council, and he had therefore not been constructively dismissed. 9.96  In cases where the alleged repudiatory breach flows from a course of conduct there is obvious scope for tension with the principle of affirmation/waiver. By carrying on working without complaint, for example, has the employee not affirmed the contract and thereby lost the right to rely on the breach? In J V Strong & Co Ltd v Hamill EAT/1179/99 (unreported) precisely this point fell to be considered. The correct approach according to HHJ Altman (at paragraphs 13 and 14) is that a tribunal: ‘must look and see if the final incident is sufficient of a trigger to revive the earlier ones. This will, it seems to us, involve looking at the quality of the incidents themselves, the length of time both overall and between the incidents, and it will also involve looking at any balancing factors which may have, at any point, been taken to constitute a waiver of earlier breaches.’

In addition, the nature of the waiver has to be considered, was it an express or implied waiver and was it ‘a once and for all waiver’ or a conditional waiver for example on the basis that there would be no repetition of similar conduct, or as in Hamill’s case his employers would discontinue their lack of support. Finally, any finding of waiver has to be ‘identified and based on clear facts’ or inferences from established facts. In Hamill the EAT upheld the majority decision of the Tribunal that Hamill had been constructively dismissed, on the basis that the earlier incidents on which he relied to found his claim had not been waived. 9.97  Whilst our primary focus in this book is on repudiatory breaches by the employer it is worth noting that the principle of a repudiatory breach arising from a course of conduct applies equally to the conduct of an employee: Kearns v Glencore [2013] EWHC 3698 (QB). Breach of notice provisions 9.98 The wrongful summary dismissal of an employee is a repudiatory breach: General Billposting Co Ltd v Atkinson [1909] AC 118 (HL)); payment in lieu of 487

9.99  Termination of employment

notice in accordance with the terms of the contract is not: Rex Stewart Jeffries Parker Ginsberg Ltd v Parker [1988] IRLR 483. Within these two extremes the position is not entirely settled. For example, compare the decisions of the National Industrial Relations Court in Dixon v Stenor Ltd [1973] ICR 157 with the first instance decision of Neville J in Konski v Peet [1915] 1 Ch 530. In both cases the employees were dismissed with payments in lieu of notice where there was no contractual right to make such a payment. In Dixon the court found that the payment amounted to damages for breach of contract and that by accepting it the employee was discharged from his obligations. In Konski the payment was held to be consistent with the contract on the basis that the employer was not obliged to find work for the employee, merely to pay her. Nowadays, with the increasing trend towards employees having a right to work (see William Hill Organisation Ltd v Tucker [1998] IRLR 313 (CA) discussed at 15.28–15.29), it is doubtful whether the result in Konski would be the same; Dixon is generally to be preferred. (See also 9.14.) 9.99 The Court of Appeal has made it clear that not every dismissal of an employee without proper notice will amount to a repudiatory breach: Lawrence David Ltd v Ashton [1989] IRLR 22. Ashton’s contract provided that he was entitled to one month’s notice in writing. On 2 March 1988 he was informed orally that his contract was being terminated at the end of March, but that he would be paid and could keep the company’s car until the end of April. The main substance of what Ashton had been told was confirmed by letter dated 7 March handed to him on 9 March. In an action by the company to enforce the restrictive covenants in the contract of employment it was conceded by the company that they were in breach of contract in that the notice was not written nor was the necessary period of one month given. However, at first instance Whitford J concluded that the case was not one ‘in which one can come to the conclusion that this quite plainly was a repudiatory breach’. In confirming that there was a serious question to be tried, the Court of Appeal referred to the first instance decision of W Dennis & Sons Ltd v Tunnard Bros & Moore (1911) 56 Sol Jo 162 as suggesting that there are cases where failure to give proper notice may not be a repudiatory breach. 9.100  Where an employer considers it necessary to breach the employee’s notice provisions, other than by wrongful summary dismissal, the best advice that can be given is that all available steps should be taken to minimise the effect of the breach. In Lawrence David Ltd v Ashton the net effect of the company’s actions was that Ashton had 29 days’ actual notice of the termination of his employment and received an additional 30 days’ salary and benefits for which he did not have to work. Overall, it was arguable that Ashton benefited rather than suffered from the company’s breach, a fact clearly taken into account by both courts in concluding that the company’s application to enforce the restrictive covenants in the contract of employment did not automatically fail on Ashton’s argument of repudiatory breach. 9.101 What if the employer merely threatens to give notice? Could that be a repudiatory breach? In Greenaway Harrison Ltd v Wiles [1994] IRLR 380 (EAT) a threat to give lawful notice under a contract of employment to an employee if she refused to accept changes to her hours of work was held to be a repudiatory 488

Repudiatory breach 9.103

breach. In our view, the correctness of this decision is doubtful and that is a view shared by the EAT in Kerry Foods Ltd v Lynch [2005] IRLR 680, in which HHJ  Peter Clark refers to having ‘some difficulty’ with the EAT’s decision in Greenaway, albeit that the EAT found it unnecessary on the facts of Kerry to reach a conclusion on the correctness of Greenaway. In Kerry the EAT found that the giving of notice coupled with an offer of continued employment on revised terms did not amount to a repudiatory breach. Sending the employee on garden leave 9.102  In this scenario the contract of employment is not terminated immediately. Instead, the employee, while continuing to receive his salary and benefits (except benefits expressly disapplied, of which the most common is bonus), is required not to perform any duties or have contact with clients and business connections and to remain in the garden ie away from business activities and his employer's premises until his employment terminates. Garden leave is considered in detail in Chapter 15 at 15.3–15.36. It is a course commonly adopted where the employee has resigned to join a competitor business. Can such an instruction amount to a repudiatory breach? The answer is clearly yes, where there is no garden leave clause and the employee can show he has a right to work and the garden leave proposed represents a sufficient infringement of that right. As to when a right to work arises see the Court of Appeal’s decision in William Hill Organisation Ltd v Tucker [1998] IRLR 313 which we consider at 15.28–15.29. 9.103 The vast majority of contracts drafted since William Hill will include an express garden leave clause exercisable at the employer’s discretion and an employer acting in reliance on and in accordance with the terms of such a clause will generally not be repudiating the contract. However, there are two notes of caution to be sounded, firstly in Faieta v ICAP Management Services Ltd [2018] IRLR 227 the employer’s right to exercise its discretion to send the employee on garden leave in accordance with an express garden leave clause was held to be subject to an implied term that the right would not be exercised irrationally or perversely. Following the Supreme Court decision in Braganza v BP Shipping Ltd [2015] ICR 449, Moulder J at paragraph 28 said: ‘I take from the judgments of the Supreme Court in Braganza that the question for the court is not whether the outcome for the claimant is objectively reasonable but whether the decision-making process is lawful and rational in the public law sense, that the decision is made rationally (as well as in good faith) and consistently with its contractual purpose. Further it seems to me following Braganza that the court needs to consider the two limbs of the test: whether the right matters have been taken into account in reaching the decision and secondly, whether, even though the right things have been taken into account, the result is so outrageous that no reasonable decision-maker could have reached it.’

If Moulder J is correct that such a term is to be implied, a question currently the subject of some debate, of some comfort to employers is the fact that she acknowledged (at paragraph 40) that establishing irrationality is a ‘high hurdle’ and following Lord Hodge in Braganza that in a garden leave case ‘there is little 489

9.104  Termination of employment

scope for intensive scrutiny of the decision making process’. However, nonetheless it would be prudent for employers to be mindful of the possibility there is such an implied term. Faieta was somewhat unusual on its facts in that the reason for sending the employee on garden leave was not to keep him out of the market because he was intending to join a competitor. Instead it was a means of saving money whilst a negotiated settlement could be reached. Faieta was employed as an inter-dealer broker on a five year fixed term contract with an entitlement whilst actively employed ie not on garden leave to a guaranteed minimum bonus of £200,000 and to other bonuses based on revenues. Following a significant reduction in the revenues of his desk Faieta was offered the alternatives of a reduction in his remuneration or being placed on garden leave when his contract expressly provided that he would have no entitlement to bonuses. The implied duty was not found to be breached when Faieta was placed and kept on garden leave for 15 months prior to being dismissed. His claim for bonuses during the garden leave period also, and unsurprisingly on the clear terms of the contract, failed. In practice, we think that where an employer exercises a discretion to send an employee leaving to join a competitor on garden leave any implied duty will rarely, if ever, cause a problem but nonetheless it will be important for the employer to bear in mind the possibility that the exercise of his discretion may be subject to an implied duty not to act irrationally or perversely. 9.104  The second note of caution is where the employee suffers a significant decrease in remuneration during garden leave, because for example the express term limits his remuneration to a low base salary only, the employer runs the not insignificant risk that the court may decline to enforce the garden leave provision for any significant period. Unlike restrictive covenants, courts have the power to narrow the scope of a garden leave clause: Provident Financial Group v Hayward [1989]  IRLR  84 including its length: GFI  v Group Inc v Eaglestone [1994] IRLR 119; Credit Suisse Asset Management Ltd v Armstrong [1996] IRLR 450 (CA) and where the employee will suffer significant financial hardship that is a factor that a court will take into account (on financial hardship generally, albeit not in the context of garden leave see Sunrise Brokers Ltd v Rodgers [2015] IRLR 57 considered in 15.37–15.44). Because of the issue of financial hardship, where a very high percentage of an employee’s remuneration package derives for example from bonus or commission, and especially where even the total remuneration is not particularly high, an employer planning to rely on a garden leave clause should think carefully before limiting remuneration during garden leave to salary only. Whilst doing so may contain the cost of garden leave, persuading a court to grant a garden leave injunction in appropriately protective terms (including duration) may be more difficult. Employers must, of course, bear in mind the constraints of their remuneration policies and particularly those subject to a shareholder vote. For guidance on drafting a garden leave clause and a precedent see 5.129–5.132. 9.105  Where the employee can establish that he has a right to work, there comes a point at which depriving him of that right is a repudiatory breach. In Spencer v Marchington [1988] IRLR 392 (where there was no garden leave clause) the court held that asking the manager of a recruitment agency to spend the last 490

Repudiatory breach 9.107

two months of her 12-month fixed-term contract on garden leave ‘was not quite important enough’ to amount to a repudiatory breach, notwithstanding that part of her remuneration was a 50% share of profits. In our view this decision seems a little harsh, but can be explained by the fact that the parties reached agreement on the amount to be paid for the balance of the contract and because the court was unable to find any evidence that the employee had accepted the repudiation. Since acceptance of the breach is a necessary pre-condition, the argument was doomed from the outset. 9.106  It is important to remember that the right to work is not an unqualified right and there can therefore be scope to send an employee on garden leave even if there is no express garden leave clause and the employee might previously have had a right to work. In SG & R Valuation Service Co v Boudrais [2008] IRLR 770 (also considered at 15.34–15.35) Cranston J (at paragraph 24) relying on dicta in Miles v Wakefield Metropolitan Borough Council [1987] AC 539 (HL) described the qualification in the following way: ‘Employees who have a right to work have that right subject to the qualification that they have not, as a result of some prior breach of contract or other duty, demonstrated in a serious way that they are not ready or willing to work, or, to put it another way, that they have not rendered it impossible or reasonably impracticable for the employer to provide work. The breach of contract or other duty must constitute wrongdoing, by reason of which they will profit or potentially profit. In such circumstances there is no obligation on the employer to provide work, although the contract of employment is ongoing. This is not an implied term in the employment contract but is a qualification to the legal construct, the right to work.’

9.107 In, SG & R Valuation two senior employees had resigned to join a competitor. There was evidence that they had misused confidential information, were planning to divert business opportunities and were seeking to poach colleagues. One other employee had also resigned at the same time. Whilst both were found to have had a right to work they effectively lost that right as a result of their conduct. Consequently, SG & R Valuation’s instruction that they serve out their notice periods on garden leave did not constitute a breach of their contracts. See also Standard Life Health Care Ltd v Gorman [2010]  IRLR  233 (CA) a case involving independent agents, rather than employees. In that case, rejecting an appeal against the grant of an interim injunction, the Court of Appeal held that it was strongly arguable that the employer’s duty to provide work was interdependent on the agent’s duty to act loyally ie a similar approach to that in SG & R Valuation. The Court also considered it strongly arguable that a clause permitting suspension without pay ‘for such period as SGR considers necessary in order to carry out a full investigation’ justified Standard Life’s action in suspending the individuals without pay for the duration of their notice periods, where they had breached their contracts. Waller LJ preferred what he described as the ‘broader interpretation’ of the clause namely that it gave Standard Life a general power of suspension not limited by the period of the investigation. He explained his reasoning in the following way (paragraph 24): ‘In my view it is difficult to see that the provision makes good commercial sense if it only applies for the period of carrying out a full investigation; since 491

9.108  Termination of employment

if, on the carrying out of a full investigation, it was discovered that there was a serious breach of the agreement, it seems to me that it would be an unnatural construction of the agreement that at that stage the employer was effectively left with no choice; he either had to accept a repudiation, which under the ordinary law he would not have to do, or otherwise he must affirm and bring the employee back despite the finding of the investigation. So in my view it is strongly arguable that the clause allows for a general suspension.’

In the alternative, Waller LJ said that in any event the concept of the full investigation encompassed disclosure and the full trial (which had not occurred) and therefore the suspension was still within the terms of the clause. Standard Life is an unusual case on its facts. The interpretation of the suspension clause, certainly the ‘broader version’ might be considered to be somewhat generous to Standard Life. In any event clauses permitting suspension without pay will be few and far between. The importance of the case lies more in the similarity of the Court of Appeal’s approach to that in SG & R Valuation. In similar vein, see Sunrise Brokers LLP v Rodgers (2014) IRLR 780 considered at 9.112–9.114. 9.108  The qualified nature of the right to work is undoubtedly important and provides the opportunity, which might not otherwise be available to send an employee on garden leave. However, an employer wishing to rely on the right to work being lost needs to be very sure of their ground before taking this path. Having a clear and reliable grasp of the facts supported by credible evidence that can be presented to a court is vital as is taking advice early and before any irretrievable steps are taken. The danger of not doing so is to gift the employee the very repudiatory breach for which they may be angling. Pay related issues 9.109  A small unilateral reduction in pay can amount to a repudiatory breach: Industrial Rubber Products v Gillon [1977] IRLR 389, as can a failure to pay the tax element associated with a promise to provide tax free loans, even though the sums in dispute were not a significant part of the overall remuneration package: Cantor Fitzgerald International v Callaghan [1999]  IRLR  234. However, the Court of Appeal in Callaghan made it clear that not every delay or failure to pay sums due under the contract will amount to a repudiatory breach. As Judge LJ put the point (at paragraph 41), the matter ‘… depends on the critical distinction to be drawn between an employer’s failure to pay, or delay in paying, agreed remuneration and his deliberate refusal to do so.’ Whereas refusal will usually amount to a repudiatory breach, mere failure or delay may or may not be sufficiently serious to go to the root of the contract, depending on the underlying facts. So, in Adams v Charles Zub Associates Ltd [1978] IRLR 551 (referred to in Cantor Fitzgerald v Callaghan), Zub Associates’ delays in paying salary were held not to be a repudiatory breach where the employee had been warned the delay would occur and the reason for it, he had raised no objections initially and he knew Zub Associates were anxious to pay him as soon as money arrived. 9.110 Where an employer acts within the terms of the contract of employment the fact the employee suffers a loss of income is not a breach of contract: 492

Repudiatory breach 9.112

Spafax Ltd v Harrison [1980] IRLR 443 and White v Reflecting Roadstuds [1991] IRLR 331. Compare the situation in IBM United Kingdom Holdings Ltd and another v Dalgleish and others [2014] EWHC 980 where the High Court found that presenting pension scheme members with the choice of signing nonpensionable agreements or receiving no pay increases was clearly inconsistent with the reasonable expectations which were established and constituted both a repudiatory breach and a breach of the ‘Imperial duty’. The Imperial duty derives from the case of Imperial Group Pension Trusts Ltd v Imperial Tobacco Limited [1990]  PLR  263. The essence of the duty as explained by Browne-Wilkinson V-C is an obligation in relation to pension schemes for an employer to exercise its rights with a view to the efficient running of the pension scheme and not for a collateral purpose. 9.111 What of the situation where the employee, who is fit to do so, fails to perform the work for which he is employed or indicates he is not ready and willing to do that work and the employer stops pay? In that case, although it can be a high risk strategy and the employer needs to be very sure of their facts, the employer does not breach the contract by stopping the employee’s pay: Sunrise Brokers LLP  v Rodgers [2014]  IRLR  780 applying Miles v Wakefield Metropolitan District Council [1987] IRLR 193 HL. 9.112  Sunrise is an unusual case on its facts and one which has attracted much attention, particularly from employers faced with the unpalatable option of releasing a departing employee or paying him to be idle. At the heart of Sunrise are two key facts, first that Sunrise consistently refused to exercise its right to send Rodgers on garden leave and secondly that Rodgers equally consistently refused to work. The facts were these, Sunrise employed Rodgers as an inter-dealer broker. Rodgers could terminate his employment by giving 12 months’ notice at any time from 22  September 2014. His contract included a garden leave provision exercisable at the option of Sunrise once notice had been given, together with a series of restrictive covenants. In early March 2014 Rodgers accepted an offer of employment with one of Sunrise’s competitors to commence on 1 January 2015. On 27 March 2014 he purported to resign with immediate effect from his employment with Sunrise. Rodgers did not allege any prior breach by Sunrise to justify his actions. Following his purported resignation Rodgers refused to perform any further duties for Sunrise. Rodgers said he did not want to work for Sunrise anymore and that he would not return to the office. That message was reiterated in a letter from his solicitors of 27 April 2014 in which they stated that Rodgers had resigned with immediate effect on 27  March 2014 and he would not be returning to work. Whilst Sunrise were keen to retain Rodgers, faced with his refusal to carry out his duties (some would say boldly) they decided to stop his pay. At the same time, albeit that the cessation of pay appears not to have been mentioned, Sunrise’s solicitors wrote to Rodgers’ solicitors confirming that Rodgers’ purported resignation was not accepted. The letter went on to say that no notice having been given a suggestion by Rodgers that he was willing to go on garden leave was ‘misconceived’, that his employment was continuing and that he was required to return to work by 30 April 2014. Perhaps unsurprisingly 493

9.113  Termination of employment

Rodgers saw the cessation of pay as an opportunity to claim his employment had ended. In the alternative he argued that the cessation of pay amounted to Sunrise accepting his repudiatory breach in failing to give proper notice or that the cessation was a repudiatory breach by Sunrise which he was entitled to accept to terminate the contract. Before the High Court, in a ruling which was not challenged on appeal, both arguments failed. Mr Salter QC (sitting as a Deputy Judge) held that following the Supreme Court’s judgment in Geys (see 9.44–9.47) it was Sunrise’s right to affirm the contract and in wishing to keep Rodgers as long as possible they had a good reason for doing so. In addition, he ruled that the obligations to be ready and willing to work and the right to be paid are mutual obligations. Consequently, the Deputy Judge put the issue (at paragraph  59) as follows: ‘The employee must be ready and willing to do the work in exchange for the wages and the employer must be ready and willing to pay the wages in return for the work. The fact that the non-performance of one obligation excuses performance of the other does not mean that the contract of which those obligations form part automatically ceases to exist if neither is performed. It merely means that the particular obligation is suspended until the other mutual obligation is performed.’

9.113  Having rejected Rodgers’ arguments the High Court granted an injunction: (i) prohibiting Rodgers joining a competitor or contacting his clients until 16  October 2014, which was a shortened notice period voluntarily agreed by Sunrise and (ii) enforcing the restrictive covenants until 26  January 2015. In granting the injunctions the High Court rejected an argument that by analogy with garden leave cases the injunction in respect of the notice period should only be granted if Sunrise paid Rodgers. The deputy Judge did, however, say that it was implicit in his order that if Rodgers chose to return to work out his notice Sunrise must keep its promise to pay. The High Court rejected an argument that the injunctions would have the effect of forcing Rodgers to work for Sunrise or starve or be idle. For a full analysis of the rejections of these arguments, which were unsuccessfully challenged in the Court of Appeal ([2015]  IRLR  57) see 15.37–15.44. 9.114  Whilst Sunrise is correctly decided on its facts, it is a case that needs to be treated with some caution. It certainly should not be read as permitting employers in the vast majority of cases to hold a departing employee to his notice period without pay. As Underhill LJ pointed out when the case reached the Court of Appeal ([2015] IRLR 57 at paragraph 43): ‘Cases of this kind are fact sensitive and for employees with important client contacts or access to confidential information who are leaving to join a competitor in practice the employer will have little choice but to invoke a garden leave clause’. In future it is likely that well advised departing employees will be a little less dogmatic about their unwillingness to work than Rodgers, thereby putting the employer in the position of having to allow the employee to continue to work – generally an unpalatable option for both parties – or to invoke a garden leave clause. The alternative will be to call the employee’s bluff and as Sunrise did, make it clear that they are willing for the employee to continue to work, putting the ball back in the employee’s court 494

Repudiatory breach 9.117

to test their reaction. Unless the employer has the clearest evidence that it is the employee who is refusing to work stopping pay will give the employee the very repudiatory breach which he has sought to provoke. 9.115  Not infrequently disputes arise as to the precise status of employees who have resigned. This is most common in cases where, as in Sunrise, the resignation purports to be with immediate effect or where the resignation is silent as to when the employment will end. It is imperative for the employer to be clear what the position is, ie in accordance with their rights under the contract and to document matters accordingly. Failure to get these basic points right can give the departing employee the ammunition they are looking for to argue repudiatory breach. In Sunrise the employer was very careful in making their position clear. Had they been less diligent the outcome could well have been rather different. Changes to terms and conditions 9.116 A  repudiatory breach can arise from fundamental and unwelcome changes in the employee’s duties: Pedersen v London Borough of Camden [1981] IRLR 173 and Coleman v Baldwin [1977] IRLR 342. However, simply implementing a change permitted by the contract will not of itself amount to a repudiatory breach, or even indeed a breach of contract. See Rossiter v Pendragon [2002]  IRLR  483 (CA), where the alteration of a commission scheme, which could be withdrawn or amended at any time, so that it operated less favourably for the employee, was held not to amount to a repudiatory breach of contract. 9.117 Comparatively recently there have been a spate of cases in the same vein involving football clubs. In Keegan v Newcastle United Football Company Limited [2010] IRLR 94 an arbitration tribunal found that Newcastle repudiated Keegan’s contract as manager when they sought to impose on him a player whom he did not want. Ruling that duties usually associated with the position of a manager of a Premier League football team included the ‘right, indeed the duty, to have the final say as to the transfers into the club’, the arbitrators concluded that Keegan had been constructively dismissed and was entitled to receive the payment provided for in the contract, subject to the restrictive covenant also provided for in the event of termination by Newcastle. The payment was £2 million and the covenant that Keegan would not be involved with any other Premier League club for a period of six months. In McBride v Falkirk Football and Athletic Club [2012] IRLR 22 the repudiation was the removal of McBride’s right to select the under-19 team of which he was the manager and head coach together with the manner in which this change had been communicated to him. Lady Smith giving the judgment of the EAT was unimpressed by the argument that because an autocratic style of management is the norm in football, that precluded a finding of repudiatory breach in the manner of the communication to McBride. At paragraph 61 she said ‘… that is not a good reason at all. An employer cannot pray in aid that he and others in his industry treat all employees badly and therefore treating an employee badly cannot amount to a breach of the duty to maintain trust and confidence’. 495

9.118  Termination of employment

9.118  Lastly in Gibbs v Leeds United Football Club Limited [2016] IRLR 493 Gibbs was the assistant manager of the Club, the repudiation in his case was his removal from involvement in the selection, tactics and training of the first team which had been part of his previous duties. Instead Gibbs was to work only with the under 18s and under 21s under the direction of another. In the view of Langstaff J ‘The loss of status would have been plain’. An interesting feature of Gibbs was that the fact that he had previously intimated that he would be willing to leave Leeds, if terms could be agreed, did not preclude the conduct of Leeds being a repudiatory breach. 9.119 A  repudiatory breach can arise from the manner in which a restructuring permitted by the contract is handled: Dairy Crest v Wise 24  September 1993  IRLB  491 at page 14. See also Birmingham City Council v Wetherill [2007] IRLR 781, where the Court of Appeal ruled that the Council had a contractual right to vary (and reduce) the level of car allowances paid to employees. That right was, however, ruled to be subject to an obligation to make appropriate transitional arrangements for any employee who had purchased a car, relying on the Council’s former practices to give them ‘sufficient opportunity to adjust their commitments without loss’. Even though the Council were found to have failed to make the required transitional arrangements, that did not constitute a breach of the implied term of trust and confidence and was not a repudiatory breach of contract. Chadwick LJ at paragraph 47 was not persuaded that the Council’s conduct ‘comes within measurable distance of the sort of conduct which the House of Lords had in mind in Malik v Bank of Credit and Commerce International SA [1997] IRLR 462 when it affirmed the existence of an implied term that the employer would not “without reasonable and proper cause, conduct itself in a manner calculated to or likely to destroy or seriously damage the relationship of trust and confidence between employer and employee” (ibid 463, 467).’ 9.120  Whilst the Birmingham City Council case involved a damages claim for underpayment of car allowance, and not a repudiatory breach claim, the observations of Chadwick LJ are of interest for employers planning to exercise contractual rights to vary employees’ terms. Other breaches Dissolution of a partnership 9.121  The dissolution of a partnership amounts to the repudiatory breach of the contracts of employment with the partnership, except where there is an express or implied agreement that it will not do so: Brace v Calder [1895] 2 QB 253, applied in Briggs v Oates [1991] 1 All ER 407. Compulsory winding up 9.122  The compulsory winding up of a company (employer) is a repudiatory breach: Measures Brothers v Measures [1910] 2 Ch 248. 496

Repudiatory breach 9.127

2(d)  Acceptance of repudiatory breach 9.123  A repudiatory breach does not in itself terminate the contract of employment. The contract will only come to an end on the acceptance of the repudiatory breach by the innocent party: Société Générale, London Branch v Geys [2013] IRLR 122 (SC) considered in detail at 9.44–9.47, affirming the approach in Gunton v London Borough of Richmond upon Thames [1980] ICR 755 (HL) which in turn was followed in London Transport Executive v Clarke [1981] IRLR 166 (CA) and Boyo v Lambeth London Borough Council [1994] ICR 727 (CA). 9.124 Post Geys it is clear that the courts will look for a ‘real acceptance’ and a party seeking to rely on a repudiatory breach as discharging them from future obligations under the contract should make their acceptance of that breach very clear: see 9.47. However, for an exceptional case where acceptance was, in effect, implied see the Court of Appeal’s decision in Mruke v Khan [2018] EWCA Civ 280. In Mruke, in breach of the National Minimum Wage legislation the employer (Khan) had paid wages equivalent to 33 pence per hour. The Court of Appeal held that Khan was not entitled to rely on Mruke’s ignorance of her rights under English law for an assertion that she could not have resigned her employment because of what was, otherwise, a fundamental and repudiatory breach of contract by Khan. In the words of Singh LJ (at paragraph 84) ‘This was a case in which there was an “egregious breach” and the circumstances were such that the termination of the contract by the Appellant must have been because of a repudiatory breach, notwithstanding the lack of express reasons. That was simply quite obvious.’ 9.125 It is only where the contract of employment terminates as a result of acceptance of the repudiatory breach that the innocent party is discharged from future contractual obligations. An employee who continues, without protest, to act in accordance with the terms of the contract following his employer’s repudiatory breach is likely to be found to have waived the breach and either affirmed the contract or, in appropriate cases, accepted a variation to the contract. As a result, the employee will have lost his chance to free himself of future obligations under the contract by accepting the repudiatory breach. 9.126  Much of the case law on whether a contract has terminated as a result of acceptance of a repudiatory breach derives from claims of constructive dismissal by employees under the Employment Rights Act 1996 and its predecessors. Nonetheless, in general terms the authorities are equally applicable in the common law context and provide useful general guidance on the strength of an argument of discharge by repudiatory breach. Finally, the party wishing to accept a repudiatory breach will usually be the employee, but in broad terms, and where appropriate on the facts, the principles will also apply to an employer accepting a repudiatory breach of an employee. In the remaining paragraphs of this chapter we look at the broad principles that can be gathered from the authorities. 2(d)(i)  Clear and unequivocal acceptance 9.127  Acceptance of the repudiatory breach must be clear and unequivocal. In Harrison v Norwest Holt Group Administration Ltd [1985]  IRLR  240 (CA) a 497

9.128  Termination of employment

response to a repudiatory breach which was contained in a letter marked ‘without prejudice’ was found not to be sufficiently unequivocal. In contrast, the letter from the employee’s solicitors in El Hoshi v Pizza Express Restaurants Ltd EAT/0857/03 was held by the EAT to be an unequivocal acceptance of the employer’s repudiation. The letter in question was open and was not written on a without prejudice basis in an attempt to negotiate a settlement. In Mr Clutch Auto Centres v Blakemore UKEAT/0509/13/LA the lodging of a claim for unfair and wrongful dismissal amounted to an acceptance of the employer’s purported repudiatory breach. Mr Clutch contended Blakemore had resigned in October and Blakemore asserted that he was dismissed in the following November but it was common ground that by the termination date given in Blakemore’s claim the employment had ended. See also Atlantic Air Ltd v Hoff UKEAT/0602/07 in which the EAT found that neither Hoff’s parting comment following a heated exchange with his employer: ‘I am not taking this shit’ nor his undertaking one day’s work for a third party was sufficient. The employer’s repudiatory breach was only accepted by Hoff when Atlantic Air received a letter from Hoff’s solicitors accepting the repudiation. 2(d)(ii)  Express reliance on breach not essential 9.128  An employee need not expressly state that he is resigning because of the repudiatory breach. Whether there has been acceptance of a repudiation of a contract of employment is a matter to be determined on the facts and evidence of each case: Weathersfield Ltd t/a Van & Truck Rentals v Sargent [1999] IRLR 94 (CA) overruling Holland v Glendale Industries Ltd [1998] ICR 493 (EAT). However, the Court of Appeal in Weathersfield recognised that if, at the time of leaving, the employee does not indicate he is relying on the repudiation, there is a greater likelihood that the repudiation will not be found to be the cause of the resignation. As Pill LJ expressed the proposition in Weathersfield (at paragraph 20): ‘I reject as a proposition of law the notion that there can be no acceptance of a repudiation unless the employee tells the employer, at the time, that he is leaving because of the employer’s repudiatory conduct. Each case will turn on its own facts and, where no reason is communicated to the employer at the time, the fact-finding tribunal may more readily conclude that the repudiatory conduct was not the reason for the employee leaving. In each case it will, however, be for the fact-finding tribunal, considering all the evidence, to decide whether there has been an acceptance.’

9.129  On a practical note, a party seeking to rely on his acceptance of a repudiatory breach as terminating the contract is well advised to make his position crystal clear in writing as soon as practically possible, and ideally at the time of resignation. Where a solicitor is first instructed by an employee after he has resigned, it is vital to establish quickly precisely what reasons, if any, the employee has given to the employer for the resignation. Where no or inadequate reasons have been given, then the employer should be informed of the reasons as a matter of urgency to minimise the risk of a finding that the repudiatory conduct of the employer was not the reason for the employee leaving. 498

Repudiatory breach 9.133

2(d)(iii) Waiver or acceptance of the breach? 9.130 Once it has been established that a repudiatory breach has occurred, the key question for the court or tribunal will be whether that breach has been accepted or waived. Waiver can occur simply because the innocent party (usually the employee): (a) delays too long in responding to the breach, and/or (b) behaves (by act or omission) in a way that is inconsistent with accepting the breach. 9.131 In W E Cox & Toner (International) Ltd v Crook [1981] IRLR 443 (EAT) Browne-Wilkinson J (at paragraph 13) summarised the position in the following way: ‘Mere delay by itself (unaccompanied by any express or implied affirmation of the contract) does not constitute affirmation of the contract; but if it is prolonged it may be evidence of an implied affirmation: Allen v Robles (1969) 1 WLR 1193. Affirmation of the contract can be implied. Thus, if the innocent party calls on the guilty party for further performance of the contract, he will normally be taken to have affirmed the contract since his conduct is only consistent with the continued existence of the contractual obligation. Moreover, if the innocent party himself does acts which are only consistent with the continued existence of the contract, such acts will normally show affirmation of the contract. However, if the innocent party further performs the contract to a limited extent but at the same time makes it clear that he is reserving his rights to accept the repudiation or is only continuing so as to allow the guilty party to remedy the breach, such further performance does not prejudice his right subsequently to accept the repudiation: Farnworth Finance Facilities Ltd v Attryde (1970) 1 WLR 1053.’

Delay 9.132  The timing of the employee’s resignation will be critical. In some instances – and this is common where the employee is leaving to join a competitor – the employee may want to accept the repudiatory breach immediately, sometimes even before it can be said there is a crystallised breach to accept. In other cases, the employee faces more of a dilemma and it is in those cases that the issue of timing is difficult. There are no hard and fast rules how long an employee has to accept a repudiatory breach, but time is undoubtedly limited: Marriott v Oxford and District Co-operative Society Ltd (No 2) [1970] 1 QB 186. As Lord Denning MR explained in Western Excavating (ECC) Ltd v Sharp [1978] ICR 221 (CA) (at page 226): the employee ‘must make up his mind soon after the conduct of which he complains; for, if he continues for any length of time without leaving, he will lose his right to treat himself as discharged’. The right may be lost on the basis that the employee has simply waived the breach, or in some cases because he has expressly or impliedly accepted a variation to the contract which the employer had been seeking to impose. To avoid any suggestion of this sort the employee should always register a fairly immediate written protest about the breach, making clear the basis on which he is continuing to work. 9.133  The length of time which an employee has to accept his employer’s repudiatory breach and resign will depend on the particular facts, including length of 499

9.134  Termination of employment

service, nature of the breach and whether the employee has objected to the breach. Where the breach has an immediate and significant impact on the employment, (eg a reduction in pay or a change in status), the time frame may be fairly short. In contrast, where, for example, the breach involves failure to remedy working conditions, the time the employee has to decide may be longer: see Waltons & Morse v Dorrington [1997] IRLR 488 (EAT), where the delay was approximately two months. Similarly, where the repudiatory breach arises from a course of conduct by the employer (see 9.94–9.96), the events may take place over a significant period. So, for example, in Logan v Commissioners of Customs & Excise [2004] IRLR 63 (CA), whilst not deciding the point, the Court of Appeal did not consider a time period of 18 months necessarily fatal to Logan’s claim of constructive dismissal. As a general point, there has been recognition by the courts of an employee’s dilemma in having to choose between waiving the breach or accepting a variation and having no job. At least from an employee’s perspective, this has been reflected in slightly more generous time frames: see Jones v F Sirl & Son (Furnishers) Ltd [1997] IRLR 493 (EAT) considered at 9.145; Waltons & Morse (above) and Cantor Fitzgerald v Bird & others [2002] IRLR 867, where a delay of more than two months when coupled with a clear indication of discontent by the employees and clear signs of an intent to leave were held not to constitute affirmation. For further examples of authorities on the issue of timing see Air Canada v Lee [1978] IRLR 392; Marriott v Oxford and District Co-operative Society Ltd (No 2) [1970] 1 QB 186; G W Stephens & Co v Fish [1989] ICR 324 (EAT); Bashir v Brillo Manufacturing Co [1979] IRLR 295 (EAT); Sheet Metal Components Ltd v Plumridge [1974] IRLR 86; Munchkins Ltd v Karmazyn and Others EAT/0359/09; El-Hoshi v Pizza Express Restaurants Ltd EAT/085/03 and Colomar Mari v Reuters Ltd EAT/0539/13. 9.134  For an employee looking to buy a little more time before having to decide whether to accept a repudiatory breach, one tactic is to challenge the offending behaviour. Where the breach is already repudiatory, it cannot be cured by the employer: Buckland v Bournemouth University Higher Education [2010] IRLR 44 (CA), so the tactic is relatively low risk. However, as Sedley LJ put the point in Buckland the employer can invite affirmation by making amends. Where the employer does so, or even if it does not, there is likely to come a point because of the passage of time at which the balance tips in the employer’s favour and continued delay by the employee runs the risk of his being found to have waived the breach. In W E Cox & Toner (International) Ltd v Crook [1981] IRLR 443 the breach consisted of the issuing of a letter of censure to the employee, Crook. He responded by inviting the employer to withdraw the letter, an invitation which was declined. Although not finally deciding the point, the EAT intimated that there could be no affirmation of the contract until Crook’s invitation had been declined. Unfortunately for Crook he ultimately lost because the EAT found that by waiting a further four weeks before resigning, Crook had forfeited his right to rely on the breach. 9.135  A similar course to that taken in W E Cox & Toner is for the employee to register a formal grievance. An employee planning to bring an unfair dismissal claim, to avoid any risk of the tribunal reducing their compensatory award by up to 25% for failure to follow the ACAS Code of Practice on Disciplinary and 500

Repudiatory breach 9.137

Grievance Procedure, should lodge a grievance. However, in the context of the subject matter of this book an unfair dismissal claim, whilst not irrelevant, is unlikely to be a significant factor in the employee’s strategy. Furthermore, section 207A Trade Union and Labour Relations (Consolidation) Act 1992, merely provides that the tribunal may reduce a compensatory award if it finds there has been an unreasonable failure to follow the Code of Practice and then only if it considers it is ‘just and equitable to do so in all the circumstances’. Whilst solicitors should be aware of the issue, and warn their client accordingly, an employee seeking to evade their restrictive covenants is more likely to lodge a grievance as a means of buying time, or possibly provoking a repudiatory breach often whilst the arrangements with their new competitor employer are finalised. Where the employee has another role lined up any compensatory award for unfair dismissal will be either nil or at best minimal. Acts/omissions inconsistent with accepting the breach 9.136  In the same way that there is no set time frame within which the innocent party must accept a repudiatory breach, there is no exhaustive list of what acts or omissions of the innocent party will result in his having waived the repudiatory breach. The principles the court will apply are those summarised by BrowneWilkinson J in W E Cox & Toner (International) Ltd v Crook [1981] IRLR 443 (set out at 9.131) approved and applied by the Court of Appeal in Henry v London General Transport Services Ltd [2002] IRLR 472 Pill LJ (at paragraphs 22 and 23). An employee who, without protest, works in accordance with a significantly revised shift pattern unilaterally imposed by his employer is likely to be found to have agreed to a variation to his contract and have waived the employer’s breach. Contrast with that situation, the employee who expressly protests in writing against a proposed change to his terms of employment which has immediate effect and continues to perform the contract. The employee in that position is unlikely to be found to have waived the employer’s breach, at least in the short to medium term: In Rigby v Ferodo Ltd [1988] ICR 29 (HL) an employee who had continued to work under protest following a unilaterally imposed pay reduction of 5% had not affirmed the contract and could sue for the balance of his pay. Similarly, where the breach is unacceptable conduct on the part of the other party, and the protest records the fact of the behaviour in question and makes it very clear that exception is taken to the behaviour, that too is unlikely to amount to waiver of the breach at least for a limited period: Marriott v Oxford and District Co-operative Society Ltd (No  2) [1970] 1  QB  186; Buckland v Bournemouth University Higher Education [2010] IRLR 445. 9.137  Where the repudiation is a change in terms and conditions a clear distinction is drawn between cases where the changes have immediate practical effect and those where they do not: see the obiter comments of Browne-Wilkinson J  in Jones v Associated Tunnelling Co Ltd [1981]  IRLR  477(at paragraph  22) followed in Solectron Scotland Ltd v Roper [2004] IRLR 4 and Harlow v Artemis International Corporation Limited [2008] IRLR 629. Where there is an immediate practical effect continued work without protest may often amount to affirmation (the effect of continuing to work generally is considered at 13.48–13.55) of 501

9.138  Termination of employment

the contract on the varied terms. In contrast where there is no immediate effect no affirmation will arise. In Harlow the term in question, as it was in Solectron, related to enhanced redundancy payments. McCombe J (at paragraph 29) upholding Harlow’s right to the (original) enhanced payment said: ‘… where an employer purports unilaterally to change the terms of the contract which do not immediately impinge on the employee at all (and changes in redundancy terms do not impinge until an employee is in fact made redundant) then the fact that an employee continues to work, knowing that the employer is asserting that a change has been effected, does not mean that the employee can be taken to have accepted the variation.’

9.138 In Wess v Science Museum Group UKEAT/0120/14/DM the changes entailed a new role and a new contract including a reduction in notice period from six months to 12 weeks. Wess had protested about the grading of her role but had not otherwise objected to the new contract. She worked under the new contract for nine years prior to being made redundant. The relevant issue before the EAT was whether Wess had accepted the reduced notice period. Perhaps a little surprisingly HHJ Eady QC felt that a notice period could have an immediate impact. In her view (paragraph 54) ‘It impacts on job security, which can in turn, have a real and practical importance for the employee (for example in terms of a mortgage application etc).’ However, she ruled that in any event the new role and terms were a package and Wess could not ‘cherry pick’ between the old and the new contracts. Wess had affirmed the new terms in their entirety. HHJ Eady QC’s analysis regarding the notice period raises the question whether revised restrictive covenants could also be said to be terms that have immediate impact with the consequent opening up of an argument of implied affirmation of a contract including the revised covenants. Whilst it has been suggested that there is merit in such an argument, in our view there is a real distinction between a notice period, which, as HHJ Eady QC said, affects current job security, and covenants (particularly a non-competition covenant) albeit that potentially covenants have a limited impact on future earning capability. Where the facts permit, we think that the better course would be for the employer to rely on the ‘no cherry picking’ point in support of their argument that a repudiatory breach has been waived and the new terms have been accepted. 9.139 In Bashir v Brillo Manufacturing [1979] IRLR 295 (EAT), Bashir’s delay in resigning and his acceptance of sick pay during a period when his employer was seeking to demote him to a more junior position, which Bashir consistently refused to accept, did not amount to affirmation of the contract. 9.140  One situation where there is a stark contrast between the contractual and statutory positions is in the context of notice. Must the employee resign with immediate effect, thereby cutting off his income stream straightaway or can he say he is resigning with effect from a future date? On the basis of the principles in W E Cox & Toner the giving of any period of notice would be an act only consistent with the continued existence of the contract. The answer is that for the purposes of bringing a claim of constructive unfair dismissal under section 95(1)(c) Employment Rights Act 1996 the employee can give a period of notice. The section expressly includes the words ‘with or without notice’. In contrast, 502

Repudiatory breach 9.142

under normal contractual principles the employee must resign with immediate effect. In Cockram v Air Products [2014] IRLR 672, a case involving a claim of unfair constructive dismissal under section 95(1)(c) Employment Rights Act 1996, Simler J (obiter) having referred to an observation by Sir Denys Buckley in Norwest Holst Group Administration Limited v Harrison [1995]  IRLR  240 (at page 246 also obiter) summarised the common law contractual approach (at paragraph 13) as follows: ‘an employee wishing to resign and successfully claim constructive dismissal would have to resign without notice. To do otherwise would be to affirm that part of the contract covered by the period of notice, whilst disaffirming the rest in the sense of accepting the employer’s repudiatory conduct as entitling the employee to bring the contract to an immediate end’. In contrast, she ruled that section 95(1)(c) provides ‘an express statutory exception’ to normal contractual principles, a proposition accepted by both counsel in the case. In Cockram the issue was whether an employee, who had resigned giving notice in excess of his contractual obligation, seven months rather than three, could nonetheless still succeed in a constructive unfair dismissal claim. The answer was that he could not. By giving and serving notice in excess of his contractual obligations, solely for his own financial reasons Cockram had affirmed the contract. Compare Buckland v Bournemouth University Higher Education [2010] IRLR 445, (an unfair dismissal case), where the giving of notice to expire at the end of an academic year when Professor Buckland’s obligations to his students would be fulfilled did not amount to affirmation. In contrast to the financial reasons in Cockram, Buckland’s actions were for ‘altruistic reasons’. 9.141  The common law contractual principles set out in Cockram were applied by Warby J in Elsevier Ltd v Munro [2014] IRLR 766: see paragraphs 29, 30 and 49. Elsevier were seeking a garden leave injunction to enforce a 12 month notice period, Munro alleged that Elsevier had repudiated the contract and that he had accepted that repudiation by his resignation. Munro’s letter of resignation said that he was giving the ‘required written notice of my resignation’ but also set out a seven-week transition plan after which he proposed he would leave. That, Warby J  found, amounted to an affirmation of the contract. Warby J  (at paragraph  49) found that by the date of the resignation Munro had been well aware of the matters which he alleged constituted the repudiatory breach ‘and yet the letter he sent that day was not one of immediate resignation. Rather he gave the required notice to terminate his employment. So far from accepting a repudiation he thereby affirmed the contract’. 9.142 In practical terms in the context of the subject matter of this book, employees resigning to join a competitor or set up in competition whose priority is to escape from restrictive covenants will normally accept the employer’s repudiatory breach by resigning with immediate effect. Occasionally, however, the employee faces a timing dilemma. For example, on the one hand delaying too long in acting may result in his being taken to have affirmed the contract but equally negotiations with his prospective employer may not be complete so he runs the risk of having no employment. What is clear is that the employee cannot ‘buy time’ in this situation by seeking to terminate his employment from a future date. Doing so will not affect any unfair dismissal claim where the notice given 503

9.143  Termination of employment

is no longer than his contractual notice but will, it seems, be fatal to a claim that he is discharged from his restrictive covenants. 9.143  For an unusual case on whether a contract has been affirmed and repudiatory breach on the part of the employee (as opposed to the employer) had been accepted, see White v Bristol Rugby Limited [2002] IRLR 204. In that case, the employer’s refusal to pay White for a period in which he failed to attend for work was found to be neither an acceptance of White’s repudiatory breach nor a repudiatory breach by the employer. Whilst recognising that a contract may be drafted so as to require the employer to pay the employee where the employee simply refused to work through no fault of the employer, White’s contract was not so drafted. White was a professional rugby player who entered into a threeyear contract with Bristol Rugby Limited to play for Bristol Shoguns. The contract was to commence on 1 July 2001. Before that date White changed his mind about joining Bristol Shoguns. Initially he sought to exercise an alleged oral opt out agreement under which he claimed that by returning an advance of salary of £15,000 he was free to walk away from the contract. Bristol Rugby argued there was no such arrangement and returned White’s cheque. Bristol Rugby was very keen to have White join the Bristol Shoguns and offered White an increase in the agreed remuneration, which he refused. When the time came for the contract to commence, White failed to attend the club’s premises or to make any contact with Bristol Rugby. In response, although still making it clear they wished White to join them, Bristol Rugby declined to pay White. White applied for a declaration that he was not bound by the contract or, if he was, that Bristol Rugby were in repudiatory breach which he, White, had accepted. White’s claim failed on all counts. The court ruled that the contract contained no opt out provision. Any alleged oral term was precluded by an entire agreement clause. Furthermore, any alleged representation on which White sought to rely, although the court found as a fact none was made, was also irrelevant; the contract included an express term that neither party had relied on any written or oral representation in entering into the contract. More importantly for the purposes of this chapter, the court found that there was nothing in the conduct of Bristol Rugby that amounted to either an acceptance of White’s repudiatory breach or a repudiatory breach which White could have accepted. Bristol Rugby had consistently made it clear that they wanted White to join the club, that his contract was being held open and they had done nothing inconsistent with that position. Had Bristol Rugby engaged another player as a replacement for White, the position would have been different, but they had not done so. Whilst White was not referred to in Sunrise Brokers Ltd v Rodgers [2015] IRLR 57 (considered at 9.111–9.114) the conclusions of the courts in the two cases are the same. Causal connection between repudiatory breach and termination 9.144 Some cases (especially those involving statutory claims of unfair dismissal) raise the issue whether the repudiatory breach was the cause, or nowadays a cause, of the employee’s resignation. In our view, however, those cases simply express, in different terminology, the key requirement that to bring the contract to an end the repudiatory breach must have been accepted. 504

Repudiatory breach 9.147

9.145  By way of illustration, the cases on constructive unfair dismissal provide that the employee’s resignation must be in response to the repudiatory breach: Western Excavating (ECC) Ltd v Sharp [1978] IRLR 27 (CA). As Glidewell LJ put it in Lewis v Motorworld Garages [1985] IRLR 465 at page 469, the employee must show he left ‘as a result of a breach of contract by his employer’. The repudiatory breach need not be the only reason for the employee leaving, although in Jones v F Sirl & Son (Furnishers) Ltd [1997] IRLR 493 (EAT) it was thought it had to be the ‘effective reason’ for the resignation. Jones had been an employee of F Sirl & Son for nearly 30 years. Over several months in 1990 the employer made a series of adverse unilateral changes to her contract. Within one month of the final change Jones was approached by another furnishing company and offered a position with them, which she accepted. She resigned from F Sirl & Son and brought unfair dismissal proceedings. Jones’ claim failed in the tribunal, who found that notwithstanding the serious breaches, her resignation had been ‘prompted’ by the alternative employment. Allowing the appeal, the EAT recognised that ‘in today’s labour market’ there may well be concurrent causes of a resignation – presumably an oblique recognition of the fact that many individuals cannot afford to be out of work. In those cases the effective cause could be determined. In Jones the EAT had no hesitation in finding that the effective cause of Jones’s resignation ‘was the very serious and fundamental breaches of her contract by the employers’. 9.146 The approach in Jones was disapproved by the Court of Appeal in Nottinghamshire County Council v Meikle [2004] IRLR 703, which adopted a less stringent test. In Meikle the Court of Appeal held that it is sufficient that the employee’s resignation is partially in response to the employer’s repudiatory breach of contract; simultaneous objection to other non-repudiatory acts or omissions does not undermine the acceptance of the repudiation. Commenting on the EAT’s approach in Jones, and setting out a different test, Keene LJ (with whose judgment Thorpe LJ and Bennett J agreed) said at paragraph 33: ‘It suggested that the test to be applied was whether the breach or breaches were the “effective cause” of the resignation. I see the attractions of that approach, but there are dangers in getting drawn too far in to the question about the employee’s motives. It must be remembered that we are dealing here with a contractual relationship, and constructive dismissal is a form of termination of contract by a repudiation by one party which is accepted by the other: see the Western Excavating case. The proper approach, therefore, once a repudiation of the contract by the employer has been established, is to ask whether the employee has accepted that repudiation by treating the contract of employment as at an end. It must be in response to the repudiation, but the fact that the employee has also objected to the other actions or inactions of the employer, not amounting to a breach contract, would not vitiate the acceptance of the repudiation. It follows that in the present case it was enough that the employee resigned in response, at least in part, to fundamental breaches by NCC.’

9.147  Meikle is a case which involved a long-running campaign by a school teacher to secure reasonable adjustments to her working arrangements to enable her to continue to work notwithstanding her disability. Whilst employed by Nottinghamshire County Council Meikle developed a visual impairment. The 505

9.148  Termination of employment

impairment involved the loss of sight in one eye and the partial loss of sight in the other eye. Over a number of years Meikle sought adjustment to her working arrangements to accommodate her disability. In the main the adjustments sought were not complex; for example, they included the provision of documents in large print, the selection of classrooms where she was to teach, and adjustment to her teaching schedule. However, the Council failed to implement these adjustments. Eventually Meikle went on sick leave, due both to her disability and what the Occupational Health Physician’s report described as her ‘distress’ as a result of continuing delays and difficulties in implementing the advice given to facilitate her continuing duties. Meikle brought a disability discrimination claim. She remained on sick leave while negotiations took place between her solicitors and the Council regarding adjustment to her working arrangements and other terms on which she would agree to return to work. During this period the Council first suspended her, purportedly in accordance with a policy which was subsequently found to be out of date. Subsequently, the Council reduced her pay by 50% in accordance with her contract. The terms which Meikle’s solicitors proposed for her return to work included compensation for lost pay whilst on sick leave. Following a partial response by the Council to Meikle’s terms, in which the judgment records the Council made ‘some observations’ on her terms, Meikle resigned. Her letter of resignation referred to the Council’s ‘actions’ as amounting to both a breach of the duty of trust and confidence and disability discrimination. Meikle’s letter was followed by a more detailed letter from her solicitors which included a reference to the fact that, because the Council had not agreed Meikle’s terms for her return to work, she had no alternative but to conclude that there had been a breakdown of trust and confidence. It was argued for the Council that they were not obliged to agree Meikle’s proposed terms and therefore there was no breach of contract, fundamental or otherwise, in the Council’s failure to do so. At first instance, Meikle’s constructive dismissal claim failed. The tribunal ruled that her resignation following the Council’s failure to agree her proposed terms for her return to work was not in response to a fundamental breach of contract. Both the EAT and the Court of Appeal disagreed with the tribunal. The continued failure of the Council to implement reasonable adjustments for Meikle was, said the Court of Appeal, a fundamental breach of contract in response to which Meikle resigned. Furthermore, on a proper analysis of the tribunal’s findings of fact, it was clear that Meikle had resigned in response to the repudiatory breach. The mere fact that Meikle had complained about other matters which did not amount to breaches of contract did not ‘vitiate’ her acceptance of the council’s repudiatory breach. 9.148  Subsequently, both Jones and Meikle were considered, albeit obiter, by the EAT in Abbycars (West Horndon) Ltd v Ford UKEAT/0472/07/DA. Agreeing with the Court of Appeal’s reasoning in Meikle, the EAT found (at paragraph 35) that even though an employee may resign for a ‘whole host of reasons’, if a repudiatory breach has been established, the employee can claim constructive dismissal as long as that repudiatory breach is one of the factors relied upon. The EAT expressed the view that it would be ‘invidious for tribunals to have to speculate what would have occurred had the employee been faced with the more legitimate grounds of complaint than he had perceived to be the case.’ In the EAT’s opinion there could be no justification for the employer being allowed to escape 506

Repudiatory breach 9.151

the consequences of his repudiatory breach merely because the employee also relies on ‘other, perhaps unjustified or unsubstantiated reasons’ (paragraph 36). It follows from this that, provided the employee can show: (a) that there was a repudiatory breach by the employer; and (b) he resigned partially in response to that breach; that will be sufficient. The greater hurdle required by the EAT’s decision in Jones no longer applies. 9.149 In Wright v North Ayrshire Council [2014] IRLR 4 in which the employee claimed unfair constructive dismissal, the EAT (following Meikle and endorsing the comments in Abbycars), reiterated that all that is required is that the repudiatory breach played a part in the resignation. As Langstaff J said (at paragraph 20): ‘Where there is more than one reason why an employee leaves a job the correct approach is to examine whether any of them is a response to the breach, not to see which amongst them is the effective cause.’ This in our view correctly reflects a more objective approach towards the question of acceptance of repudiatory breach – focusing more on the correspondence between breach and acceptance than the subjective intention of the innocent party. See also United First Partners Research v Carreras [2018] EWCA Civ 323 in which Meikle was followed. 9.150  In our last edition we expressed the opinion that the courts would, however, continue to scrutinise closely the arguments of employees (particularly highly paid individuals and teams moving to a competitor of their employer) who have already secured alternative employment prior to resigning, and who construct arguments of repudiatory breach as a means of avoiding notice periods and irksome covenants. In such cases the argument will fail: (a) often at the first hurdle of whether there has been a repudiatory breach at all; or (b) sometimes, because any such breaches have been waived. This view was quoted with approval by Jack J  in Tullett Prebon PLC and others v BGC  Brokers LP and others [2010] IRLR 648 (at paragraph 86). 9.151  In practice the cases in which a court will find that a genuine repudiatory breach by an employer played no part in an employee’s resignation may be relatively few. However, for a recent example see Ishaq v Royal Mail Group Ltd [2017] IRLR 208. Ishaq was a disabled postman and the repudiatory breach was that he had been allocated to unsuitable routes. He resigned purportedly in response to that breach and other complaints but he did so the very day he was due to attend a meeting to view footage of a scuffle in which he had been involved with a customer. He had been informed that the footage indicated abusive behaviour and dishonesty on his part. The dishonesty arose from the fact that Ishaq had reported the incident but omitted to mention that he had karate kicked the customer. Upholding the Tribunal’s decision that Ishaq had not been constructively dismissed the EAT held that the Tribunal had been entitled to look behind Ishaq’s letter of resignation and conclude that the true reason for his resignation was to avoid what the Tribunal described as the inevitable disciplinary action that would follow in relation to the scuffle. On the facts the Tribunal’s decision is perhaps unsurprising bearing in mind the repudiatory breach had been ongoing for some time and the coincidence of timing with the meeting to view the footage of the scuffle. The Tribunal felt that Ishaq’s explanation that the timing 507

9.152  Termination of employment

of his resignation was merely a coincidence ‘stretches the tribunal’s credulity to the limits’. It is not unrealistic to suppose that the Tribunal’s scepticism may be echoed by the courts in dealing with similar arguments from employees leaving to join competitors where the coincidence of timing may be equally as stark. 9.152  Where the employee is claiming (statutory) constructive unfair dismissal (under section 98 Employment Rights Act 1996), the resignation has to be (at least in part) responsive to the breach. That is obvious given that under section 96(1)(c) of that Act ‘dismissal’ in such a case occurs where ‘the employee terminates the contract … in circumstances in which he is entitled to terminate it without notice by reason of [our emphasis] the employer’s conduct and section 98(1)(a) of that Act (unfair dismissal) focusses on ‘the reason (or, if more than one, the principal reason) for the dismissal’. Accordingly (as the cases referred to above in this section make clear) there must be a causal link between the repudiatory act(s) of the employer and the employee’s resignation. 9.153  The position is different, however, under the common law. A prime example is where the employee in defiance of his obligation to give notice walks out of his employment and later seeks to justify his conduct in order to secure release from his obligation to give notice and his restrictive covenants. In that scenario does the employee have to show that he resigned in response to the employer’s repudiatory breach? The question arose for consideration by Jack J  in Tullett Prebon PLC and others v BGC  Brokers LP and others [2010]  IRLR  648. In Tullett the defendant brokers had signed contracts to take up employment with Tullett’s arch–competitor BGC. Having done so they claimed to have been constructively dismissed by Tullett and therefore were free to join BGC immediately. Rejecting the defendant brokers’ argument of constructive dismissal Jack J drew a distinction between: (a) claims of unfair or wrongful dismissal where he held it is necessary to establish causation to recover compensation/damages, and (b) the situation where the defendant is simply seeking to resist a claim for enforcement of restrictive covenants. According to Jack J (at paragraph 80) where the defendant brokers were solely seeking to justify their reason for leaving and to resist the claims made against them by Tullett it was not necessary for the brokers to resign in response to the breach. Jack J described the situation as the converse of Boston Deep Sea Fishing v Ansell (1888) 39 Ch D 339 and held that an employee who left his employment without justification could justify his refusal to perform his contractual obligations on any grounds which existed at the time of his leaving. In other words just as an employer who summarily dismisses an employee without cause can rely on subsequently discovered misconduct of the employee to successfully resist a wrongful dismissal claim (Boston) so too can an employee retrospectively justify their departure in breach of contract and secure release from their restrictive covenants relying on repudiatory conduct of the employer on which they had not previously relied. By way of illustration Jack J outlined a scenario where an employee leaves without any justification but later discovers that the employer was fraudulently deducting from his pay more money on account of tax than he should. In that situation, said Jack J ‘his employer would fail in any action brought against him, whether for damages or for an injunction to restrain him on the basis the employment was continuing’ (paragraph 79). 508

Repudiatory breach 9.156

9.154  Whilst it is not entirely clear from the judgment in Tullett, it seems that in addition to the requirement that the relevant facts must have existed at the date the employee left in apparent breach of contract, there is possibly a further requirement that the employee must have been unaware of the ‘good’ grounds for leaving without notice. Given the objective nature of the enquiry (ie  were there grounds justifying the acceptance of a repudiatory breach?) this additional requirement seems inappropriate (unless on the facts of a given case it appears that the employee has waived (or is estopped from relying on) his entitlement to rely on the ‘good’ grounds (of which he was aware) by not relying on them. In the normal case the employee is only too aware of the employer’s behaviour constituting the breach and indeed may have gone to some lengths to provoke the behaviour. 9.155  Finally before leaving Tullett it is worth making two points: First, (as Jack J pointed out in Tullett (at paragraph 77) where the employee is seeking to rely on an (accepted) repudiatory breach of the employer in order to claim consequential loss flowing from his departure, the employee must of course, applying normal compensation principles, show that he walked out in response to that breach. He can hardly claim, for example, losses representing salary and bonuses over his notice period, when the only reason for his departure was to join a competitor, in defiance of his contract of employment, the Boston Deep Sea Fishing principle does not apply in this regard. Secondly, some commentators have suggested that Jack J’s decision is sufficiently widely cast to allow any departing employee to escape their restrictive covenants provided they can find some pre-existing repudiatory breach by the employer. In our view that is incorrect. The judgment is clearly limited only to those cases where the employee has terminated the contract of employment upon an alleged repudiatory breach of contract by the employer, hence the description of the scenario being the converse of that in Boston Deep Sea. 2(d)(iv) The battle of the breaches 9.156  One interesting twist on the question of whether termination has occurred as a result of the (ex-)employee’s acceptance of a repudiatory breach arises in the context of what is sometimes referred to as the battle of the breaches. In this scenario, which is not uncommon, both parties have committed repudiatory breaches of the contract. The question for the court is whether a party themselves in fundamental breach can rely on the repudiatory breach of the other to terminate the contract or have they forfeited that right by their own breach? In RDF Media Group plc v Clements [2008] IRLR 207 Bernard Livesey QC (sitting as a deputy judge of the High Court) had to tackle this issue. He found the behaviour of both parties to be in breach of the implied term of trust and confidence. Clements’ breach preceded that of RDF, but was unknown to RDF at the time of their breach. Clements’ breach consisted of wholly inappropriate discussions with a competitor he intended to join, including the disclosure of confidential information. RDF’s breach was an inappropriate off-the-record briefing to the press following Clements’ initial resignation, which Clements then purported to 509

9.157  Termination of employment

accept as terminating the contract. The judge acknowledged (at paragraph 139) that the issue was ‘not easy to resolve’, but found in favour of RDF on two alternative grounds. The first was that, in reliance on the House of Lords decisions in Bremer Vulkan Schiffbau und Maschinenfabrik v South India Shipping Company [1981] AC 909 and Paal Wilson v Partenreederei Hannah Blumenthal [1983] AC 854, Clements as a party in breach of the mutual term of trust and confidence was not permitted to accept a breach of that same obligation by RDF. Alternatively, the judge held that, as a result of Clements’ own behaviour at the time he purported to accept the repudiation by RDF Media, the relationship had already been seriously damaged or destroyed by Clements’ own behaviour. In the last edition of this book we took the view that both grounds were highly questionable: Bremer Vulkan and Paal Wilson were cases where parties to arbitration agreements sought to avoid the agreements by alleging repudiatory breach by the other in the form of delaying the progress of arbitration. However, both parties were equally to blame for the delay. It was plainly not open to one party to ‘sit back’ while the other party delayed and then seek to rely on that delay as a repudiatory breach of the contract when he too had been guilty of the very same breach. It is not possible to equate that obvious proposition with cases of breaches by employer and employee of different aspects of the duty of trust and confidence towards each other. The fact that a number of reciprocal duties of employer and employee are bundled together under one concept of ‘trust and confidence’ does not change the position. Until a repudiatory breach is accepted as terminating the contract, the (reciprocal) obligations under the contract remain in force. Similarly, the second conclusion is highly dubious. It is difficult to see how RDF’s trust and confidence in Clements had been destroyed by Clements’ prior breach when RDF were unaware of that breach at the material time – and until the breach had been accepted the employment contract and its duties of trust and confidence continued. In RDF the judge undoubtedly faced a major dilemma. However, in our view, the correct analysis was that it was open to Clements to accept as terminating the contract RDF’s repudiatory breach (committed when it was unaware of Clements’ activities). That would leave RDF with the usual remedies for Clements’ breach (damages or an account of profit or, possibly, a springboard injunction to cancel any unlawful headstart by Clements resulting from his breach of contract). 9.157  Inevitably since RDF the issues have been canvassed in a number of cases. None are appellate decisions so the decision in RDF has not been overruled but the trend has been clearly against endorsing that decision on either basis. 9.158 In Tullett Prebon Plc and Others v BGC  Brokers LP and others [2010] IRLR 648 Jack J considered the decision in RDF (at paragraphs 83–85). Jack J regarded the two House of Lords decisions relied on by Bernard Livesey QC as not helpful in the employment context dealing as they did with ‘the very different and difficult situation which arises where no progress has been made in an arbitration for many years’. Jack J  also thought that the second ground relied on in RDF ‘broke down on analysis’ going on to say that: ‘I accept that the relationship is a mutual one but that means only that the employer is entitled to have trust and confidence in his employee, and the employee is entitled to have 510

Repudiatory breach 9.159

trust and confidence in his employer. If the one is damaged it does not follow that the other is damaged. Nor does damage to one party’s trust and confidence in the other entitle him to damage the others trust and confidence in him’. Drawing on the general contract principles Jack J  referred to the ‘ordinary position’ as being that an unaccepted repudiatory breach by one party does not affect the ongoing nature of the contract; the perpetrator of the unaccepted breach is not precluded from accepting a repudiatory breach by the other party: State Trading Corporation of India v Golodetz [1989] 2 Lloyds Rep 277 Kerr lJ at 286. 9.159 In Brandeaux Advisers (UK) Ltd v Chadwick [2011] IRLR 224 Jack J following his own decision in Tullett concluded that Brandeaux were entitled to summarily dismiss Chadwick whose roles had encompassed compliance when she was discovered to have sent confidential information to her private email address apparently for her own protection rather than for the usual reason of use in another business. Rejecting an argument that dismissal was precluded by earlier alleged repudiatory breaches by Brandeaux Jack J (at paragraph 32) said that even if Brandeaux were in breach of the mutual obligation of trust and confidence that would not bar them from dismissing Chadwick for good cause. ‘For the relationship was continuing, and for that purpose an unaccepted repudiation is a “thing writ in water”’. Where Jack J did consider the behaviour of Brandeaux could be relevant was in the context of assessing the seriousness of Chadwick’s behaviour. Following his earlier comment in Tullett (paragraph 85) Jack J said (at paragraph 32) that where the conduct, in this case of the employer, impacts or explains the conduct of the employee then it is a factor to be taken into account in the objective assessment in all the circumstances of the seriousness of the employee’s conduct. However, it is only in those specific circumstances the behaviour will be relevant. Jack J gave the example of an employee swearing at their employer in response to the employer swearing at the employee. In that situation the seriousness of the employee’s behaviour may be affected by the fact that it was a response to the employer’s behaviour. Most recently the issue came before the EAT in Atkinson v Community Gateway Association [2014]  IRLR  834. Having conducted a useful review of the authorities (paragraphs 25–34) and following the decision of the Court of Session in Aberdeen City Council v McNeill [2014] IRLR 113 the EAT held that Atkinson was not barred by his own antecedent breaches of contract from accepting his employer’s repudiatory breach and bringing a constructive dismissal claim. As the basis for their decision HHJ Jeffrey Burke QC said: ‘It is a trite observation that an unaccepted repudiation is a “thing writ in water”. If the party which had the right to bring the contract to an end did not do so (whether or not he knew of that right) and was themselves in fundamental breach of contract, simultaneously or subsequently, it would then be open to the originally offending party to accept that repudiation and bring the contract to an end.’

511

 

A undertakes full duties and is paid in accordance with contract





A required to work full notice

Employer rejects A’s position and insists on full notice

A gives short notice



Employment ends on expiry of notice

A declines to work pay is halted pending compliance









Payment required in accordance with contract



Garden leave in accordance with express term in contract

A gives full contractual notice



Employment ends on agreed date

Compromise reached agreed early release with/without garden leave to early release date



A purports to accept alleged repudiatory breach claims immediate termination



Date of termination – termination by employee A to join competitor – keeping the contract alive APPENDIX TO CHAPTER 9

CHAPTER 10

Legitimate protection for the ex-employer Selwyn Bloch QC and Craig Rajgopaul Introduction

10.1

1. Implied duties after termination of employment: trade secrets/ confidential information

10.2

2. Express covenants in the contract of employment of the ex-employee  10.7 2(a) General statement of the doctrine of restraint of trade 10.7 2(a)(i) Public interest 10.9 2(a)(ii) Interests of the ex-employee 10.15 2(a)(iii) Employment contracts versus commercial agreements 10.17 2(a)(iv) Historical trends 10.18 2(b) Legitimate interests of the ex-employer 10.19 2(b)(i) Meaning of legitimate interest 10.19 2(b)(ii) The main types of legitimate interest 10.20 2(b)(iii) ‘Disappearance’ of legitimate interest 10.32 2(b)(iv) Protection for subsidiaries/group companies/related entities10.34 2(c) Reasonable protection of legitimate interests: introduction 10.42 2(c)(i) No more than adequate protection 10.42 2(c)(ii) Different kinds of restrictive covenant 10.43 2(c)(iii) Which type of covenant is appropriate? 10.44 2(d) The special position of the vendor-employee 10.45 3. Competition law

10.55

Appendix to Chapter 10

INTRODUCTION 10.1  In this chapter we consider: •

The implied duties which exist after termination of employment, ie those relating to trade secrets/confidential information (10.2–10.5).

•

(In outline) express covenants in the contract of employment of the ex-employee: 513

10.2  Legitimate protection for the ex-employer

>

setting out a general statement of the doctrine of restraint of trade, including consideration of the public interest, the interests of the ex-employee and the differences between covenants in an employment contract compared with commercial agreements (10.7–10.18);

>

focusing in particular on legitimate interests of the ex-employer which may be protected by express post-termination restraints (10.19–10.21), specifically: (i) Trade connections (10.22–10.26). (ii) Trade secrets/confidential information (10.27). (iii) Stability of the workforce (10.28). (iv) Other legitimate interests (10.29–10.31). (v) The disappearance of legitimate interests (10.32–10.33). (vi) Protection for subsidiaries, group companies and related entities (10.34–10.41).

>

•

outlining the concept of reasonable protection of legitimate interests and the kinds of express covenants that are used for this purpose (as a prelude to a detailed discussion in the next chapter on the requirement of reasonableness) and referring to the special position of the vendoremployee who remains employed after sale (10.42–10.54);

(Briefly) the potential impact of competition law, setting out an outline in the Appendix (10.55 and the Appendix).

1. IMPLIED DUTIES AFTER TERMINATION OF EMPLOYMENT: TRADE SECRETS/CONFIDENTIAL INFORMATION 10.2  After the duty of fidelity has come to an end on termination of the contract of employment, the only restrictions on competition by the ex-employee (in the absence of express restrictive covenants) are as follows: •

The ex-employee may not use or disclose trade secrets (or information of equivalent confidentiality to trade secrets) of the ex-employer gained by the ex-employee in the course of his employment: Faccenda Chicken Ltd v Fowler [1987] 1 Ch  117 (CA); Roger Bullivant Ltd v Ellis [1987] IRLR 491 (CA); Johnson & Bloy (Holdings) Ltd v Wolstenholme Rink plc [1987] IRLR 499 (CA); (possibly) the ex-employee may not use or disclose even ‘mere’ confidential information of the ex-employer where the ex-employee intends to sell or use or disclose the information otherwise than for the purpose of his business or new employment: Faccenda at pages 138–9.

•

Where the employee in the course of his employment takes or makes extracts from the employer’s documents or copies them with a view to competing

514

Implied duties after termination of employment: trade secrets/confidential information 10.5

with his employer after the end of his employment, or deliberately memorises his employer’s confidential information for this purpose, the employee may not use such information after termination of employment: Robb v Green [1895] 2  QB  315 (CA); Universal Thermosensors Ltd v Hibben [1992] 1 WLR 840; this is so even though: >

the ex-employee would have been free after employment to use the information, had he not copied, extracted or memorised it as described;

>

the ex-employee may (for a limited period) be placed under a special disability in relation to the use of such information: Roger Bullivant v Ellis [1987]  IRLR  491 (CA) and see further the discussion on springboard injunctions at 15.78–15.152.

The above paragraph is by way of summary of points which have already been covered in some detail in Chapters 3 and 6. 10.3  The position is potentially stricter in relation to employees (usually senior employees) who have fiduciary duties (and company directors) since their respective fiduciary duties may, at least arguably, continue after employment so as to limit certain types of competitive activity by them: see 4.307. 10.4 An ex-employer who does not have the benefit of an express restrictive covenant will often seek to show that for some reason he falls outside the rules referred to at 10.2. For example, in Wallace Bogan & Co v Cove [1997] IRLR 453 the Court of Appeal rejected an attempt by a firm of solicitors to prevent four of its former assistant solicitors from canvassing or soliciting its clients when there was no express restrictive covenant preventing such activity. The Court of Appeal overturned the finding by the judge that there was arguably an implied term in the contract of service between solicitors and their employer restricting soliciting or canvassing of clients after the end of their employment. The Court of Appeal held that there was no distinction in this regard between solicitors taking advantage of their professional connections and any other trade or profession. 10.5 In somewhat different circumstances in Caterpillar Logistics Services v Huesca de Crean [2012]  IRLR  410, the Court of Appeal rejected an attempt to obtain ‘barring out relief’ (ie an injunction preventing the former employee from undertaking tasks for her new employer related to matters about which she had confidential and privileged information). The former employee was a qualified accountant and she had information relevant to her new employer – a client of Caterpillar – as a result of her duties for Caterpillar. In Bolkiah v KPMG  [1999] 2 AC  222 the House of Lords had granted barring out relief preventing KPMG (the accountancy firm) from acting against its former client in connection with a matter in which it had previously acted for him. The Court of Appeal in Caterpillar held that there was nothing to justify the extension of the relief granted in Bolkiah to ‘the ordinary relationship of employer and employee’. A significant factor in the Court’s decision was that Caterpillar had not entered into an express covenant preventing the ex-employee from taking 515

10.6  Legitimate protection for the ex-employer

up employment with a customer (or competitor). The Court held that barring out relief in the absence of an enforceable express covenant could only be available ‘in the most exceptional circumstances’. The Court did not discuss what ‘exceptional circumstances’ meant in the judgment. However, there was ‘nothing exceptional’ in one of Caterpillar’s employees going to work for a client of Caterpillar’s with whom there was a serious dispute, (perhaps surprisingly) notwithstanding the fact that the employee had attended meetings at which legal advice in relation to the very dispute between the defendant’s old and new employers had been given coupled with the fact that the employee had other confidential information regarding Caterpillar’s relationship with the client. The Court of Appeal was plainly anxious not to extend the Bolkiah principle beyond confidential professional relationships. 10.6  We now turn to consider express covenants in the contract of employment which restrict competitive activity by the ex-employee with the ex-employer.

2. EXPRESS COVENANTS IN THE CONTRACT OF EMPLOYMENT OF THE EX-EMPLOYEE 2(a)  General statement of the doctrine of restraint of trade 10.7 The starting point is that covenants restricting the freedom of the exemployee to compete with his ex-employer are unenforceable. However, the covenants will be upheld if the employer can show that the covenants: •

are designed to protect his legitimate interests; and

•

extend no further than is reasonably necessary to protect those interests: Mason v Provident Clothing & Supply Co Ltd [1913]  AC  724 (HL); Herbert Morris Ltd v Saxelby [1916] AC 688 (HL); Stenhouse Australia Ltd v Phillips [1974] 1  All ER  117 (PC). The question is whether the covenants extend no further than reasonably necessary to protect: (i) the interests of the parties (which includes the employee); and (ii) the public interest.

The reasonableness of the restriction is to be judged at the date the contract was made: Rex Stewart Jeffries Parker Ginsberg Ltd v Parker [1988] IRLR 483 (CA) at page 486, and see further (12.11–12.16). 10.8  In the case of an employer/employee covenant, the employer is not entitled to protect himself against competition in itself (a post-termination covenant with that effect sometimes being referred to as a ‘covenant in gross’), but only against unfair exploitation of the ex-employer’s trade secrets or trade connections (Stenhouse Australia Ltd v Phillips [1974] 1 All ER 117) – and also to protect the stability of its workforce: see 10.28. 516

Express covenants in the contract of employment of the ex-employee 10.11

2(a)(i)  Public interest 10.9  In considering the enforceability (or potential enforcement) of restrictive covenants the public interest may be engaged in a number of different ways, sometimes pointing in contrary directions: •

first, it may be of relevance to the question of whether there is a legitimate interest to protect or one that it is reasonable to protect in the manner of the particular restrictive covenant or whether it is appropriate to order interim enforcement pending trial;

•

secondly, it may support enforcement ie there is a public interest in parties being held to their contracts (especially settlement agreements entered into in order to end an employment dispute);

•

thirdly, it may indicate a wider public interest in not enforcing a covenant which is reasonable between the parties or which might be enforceable according to the proper law of the contract, but not under English law.

10.10 In the first category, in Proactive Sports Management v Rooney [2012] IRLR 241, the Court of Appeal considered the extent to which the public interest and the restraint of trade doctrine was engaged in relation to an image rights contract between the claimant and the well-known footballer Wayne Rooney, giving the claimant exclusive rights to exploit Rooney’s image rights (but not restricting his primary occupation as a footballer). The Court of Appeal held that a person’s ancillary activity of exploiting his image rights is just as capable of protection under the restraint of trade doctrine as any other occupation because: ‘Public policy is concerned with the manner in which a person may properly realise his potential, not only for the good of that individual but for the economic benefit of society generally.’

Whilst the fact that an activity is ancillary to a person’s main activity may make a restriction on trading insubstantial and thus more easily justifiable, the Court of Appeal held that an eight year exclusivity agreement entered into when Rooney was 17 years old, without the benefit of legal advice, was unenforceable because it was in unreasonable restraint of trade. 10.11  Also in the first category above, public interest considerations may impact by way of relevant context in considering whether a covenant extends further than reasonably necessary in protecting the employer’s legitimate interest, and also in considering the balance of convenience at the interim stage. So, in Basic Solutions Ltd v Sands [2008] EWHC 1388 (QB) (Eady J) an interim injunction was not granted where the injunction would have restrained the defendant from competing to provide a solution to the problem of leaves on train lines. The judge found that the covenants in the employee’s contract went further than reasonably necessary between the parties, but also said that: ‘Both Counsel accept that it is legitimate to take into account public interest considerations. That is especially appropriate here, given the problems caused 517

10.12  Legitimate protection for the ex-employer

over the years by “leaves on the line” with regard both to cost and inconvenience. This public interest dimension is appropriate to be taken into account as part of the background. There may be circumstances in which such considerations would have to take second place to the protection of a party’s legitimate interest in protecting its trade secrets or confidential information. This is not such a case. The strategy of the Claimant at the moment would appear to be simply to prevent competition from the Defendant rather than his taking an improper or unfair advantage’. (Paragraph 37)

10.12  As to the second category, the public interest may in certain circumstances work in the other direction ie as supporting enforcement of the restrictive covenant. The policy considerations behind requiring an employer to justify its covenants as going no further than reasonably necessary to protect legitimate business interests may come up against (and be weakened by) the competing public policy interests in holding individuals to their bargains, particularly where the bargain was entered into in order to settle a dispute: see for example Capgemini India v Krishnan [2014]  EWHC  1092 (HHJ  Robert Owen QC). Capgemini involved a claim for interim enforcement of a customer non-dealing covenant, in circumstances where there were serious questions about the enforceability of the underlying covenants, but the employee had given written undertakings to comply with those covenants in order to avoid an application for injunctive relief (which the employee later sought to withdraw). The court held that while undertakings were to be encouraged (see 11.273–11.275), exceptional circumstances might justify setting them aside. However, the injunction was ultimately refused, as a matter of the balance of convenience: (as to which see further 14.11–14.27). 10.13  As to the third category (indicating a wider public interest in not enforcing a covenant), it is often said that the covenant must not be unreasonable with regard to the public interest (but that it is for the employee to show that a covenant which is reasonable as between the parties is unreasonable with regard to the public interest): see, for example, Mason v Provident Clothing & Supply Co Ltd [1913] AC 724 at page 733; Herbert Morris Ltd v Saxelby [1916] AC 688 at pages 693, 700, 707, 708 and 715; and Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co [1894] AC 535 at page 565. However, except in the case of a monopoly, a restraint which is reasonably necessary to protect the legitimate interests of the ex-employer will very rarely be regarded as unreasonable with regard to the public interest. Once it is established that a covenant is reasonable as between the parties, the court will not normally look further. It is for this reason that in some of the more modern decisions on the subject, reference to the public interest requirement is absent: see, for example, Rex Stewart Jeffries Parker Ginsberg v Parker [1988] IRLR 483, at page 486. However, in rare cases public policy may still rear its head: in Dranez Anstalt v Hayek [2003] 1 BCLC 278 (CA) an inventor and original patentee of a mechanical ventilator entered into a non-competition covenant for the benefit of certain investors, who were entitled to participate in the commercial exploitation of the apparatus. The Court of Appeal struck down the covenant, primarily on the basis that it was not in the interests of the public at large that the inventor should be restricted from applying his inventive skills in a field of medical science in which he was an 518

Express covenants in the contract of employment of the ex-employee 10.15

expert, and in the development of which there was an obvious public benefit. The balance between the benefits which would accrue to the public from permitting monopolies in order to encourage invention and the detriment which might be suffered by the public from monopolistic practices was struck by the patent legislation (see Patents Act 1977 (as amended)). A case in which it could be justified as reasonable in the public interest to superimpose further contractual restraints on invention, going beyond what Parliament had thought necessary, had to be regarded as exceptional. In particular (said the Court of Appeal), it would have to be a wholly exceptional case in which the imposition of such restraints on a pioneer field of medical science, in the development of which there was, at least prima facie, such an obvious public benefit, could be justified. 10.14  Further, (still within the third category above) public policy may be engaged where an English court is requested to enforce a covenant which is subject to foreign law. In Duarte v Black and Decker Corporation [2007]  EWHC  2720 (QB) Field J held that the public policy of England was directly engaged where the question of enforceability of covenants was being tried in the English court under Maryland, USA law, with the effect that even if the covenants had been enforceable under that legal system, they would not be enforced if incompatible with the public policy of the forum. Significantly, the employer was seeking to enforce in England covenants in relation to an employee who had been and was intending to be employed here. The same approach was adopted by Jack J  in BGC Capital Markets Switzerland LLC v Rees [2011] EWHC 2009 in respect of restrictive covenants in a Swiss law agreement with an employee who had worked in Switzerland but was intending to be employed by a competitor in England. 2(a)(ii)  Interests of the ex-employee 10.15  It is also said that regard must be had to the interests of the ex-employee: for example Herbert Morris Ltd v Saxelby [1916] AC  688 (HL) at page 716 (where the interests of the covenantee were equated with the public interest); Attwood v Lamont [1920] 3 KB 571 (CA) at page 589; Fitch v Dewes [1921] 2 AC 158 (HL) at page 163. That may be one of the reasons why, for example, it is rather unusual to see a non-competition covenant being upheld against more junior employees, although it is quite possible that a secretary or personal assistant may have access to the same confidential information as the managing director. It would, however, be an unusual case where, while the protection offered by the restraint went no further than was necessary to protect the legitimate interests of the ex-employer, the restraint was nonetheless to be struck down as being unreasonable having regard to the interests of the ex-employee. This is of course not to say that the interests of the ex-employee are irrelevant: when it comes to deciding whether or not to grant an injunction (both at the interim and the trial stage) the effect of enforcement of the covenant on the ex-employee (for example whether he will thereby be precluded from earning a living) is of fundamental importance. Further, the law will not allow the ex-employer to protect himself against competition as such by the ex-employee. The position is set out in the 519

10.16  Legitimate protection for the ex-employer

classic statement by Lord Wilberforce in Stenhouse Australia Ltd v Phillips [1974] 1 All ER 117 at page 122: ‘… the employee is entitled to use to the full any personal skill and experience even if this has been acquired in the service of his employer: it is this freedom to use to the full a man’s improving ability and talents which lies at the root of the policy of the law regarding this type of restraint.’

10.16  The law will prevent the ex-employer from seeking, by way of a confidentiality covenant or otherwise, to expand the categories of confidential information so as to restrict the ex-employee’s use of his skill or know-how: Triplex Safety Glass Co Ltd v Scorah [1938] Ch  211 at page 216 (per Farwell J). See also, FSS Travel & Leisure Systems Ltd v Johnson [1998] IRLR 382 (CA), referred to at 6.75. As we have seen (at 6.7–6.9 and 6.21–6.73), there are considerable practical difficulties in distinguishing proprietary information of the employer from information which is to be regarded as the general skill or knowledge of the employee: see, for example, the judgment of Farwell LJ in Sir WC Leng & Co Ltd v Andrews [1909] 1 Ch 763 (CA) at page 773. 2(a)(iii)  Employment contracts versus commercial agreements 10.17  The courts are more likely to strike down covenants which restrict competition contained in employment contracts than in business sale agreements. In business or share sale agreements (and other types of business agreements, for example joint ventures and partnership agreements) the court will regard these covenants more favourably. That is primarily because: (i) of an assumed equality of bargaining power of the parties; (ii) covenants in a business sale agreement can be said to facilitate trade (rather than restrain trade) because they enable the sale of the business property; and (iii) in the case of partnerships and similar agreements, because of the mutuality of restraints: Mason v Provident Clothing & Supply Co Ltd [1913]  AC  724 and Attwood v Lamont [1920] 3  KB  571. See also Allied Dunbar (Frank Weisinger) Ltd v Weisinger [1980]  IRLR  60; Systems Reliability Holdings plc v Smith [1990]  IRLR  377; Alliance Paper Group plc v Prestwich [1996] IRLR 25; Dawnay Day v De Braconier D’Alphen [1997] IRLR 442; TSC Europe (UK) Ltd v Massey [1999] IRLR 22; and Buchanan v Alba Diagnostics Ltd [2004] SLT 255 (HL). Although the distinction between commercial and employment contracts continues to be drawn, it is true to say that in modern employment contracts the idea of inequality of bargaining power of employees can be something of a fiction. Employees are often highly sought after and can command huge benefit packages. Although the better view is not to weigh the amount of consideration for the covenant in the balance, judges are in practice influenced by this factor – and are likely to be less sympathetic to the very highly paid employee than one who really suffers from inequality of bargaining power. Accordingly, in cases of highly paid employees the court’s approach towards enforceability may not be very different from a covenant in a commercial agreement. Sometimes, a covenantor covenants in more than one capacity. For example, the vendor of a business may contract to remain as an employee in the business he has sold, with restrictive covenants appearing in 520

Express covenants in the contract of employment of the ex-employee 10.21

both the share sale agreement and the contract of employment. The position of the vendor-employee is discussed at 10.45–10.54. 2(a)(iv)  Historical trends 10.18  Prior to 1913 the courts had tended to favour the principle of freedom of contract (and hence the enforceability of restrictive covenants) above the principle of freedom of trade (see Attwood v Lamont [1920] 3 KB 571 and in particular the judgment of Younger LJ at pages 588ff). In our view, (very broadly speaking) we are (and have for some time been) in a pro-contract era: see 11.3–11.4.

2(b)  Legitimate interests of the ex-employer 2(b)(i)  Meaning of legitimate interest 10.19  ‘Legitimate interests’ means some interest of a proprietary nature – not merely an interest in avoiding competition. In the words of Lord Wilberforce in Stenhouse Australia Ltd v Phillips [1974] 1 All ER 117 at page 122: ‘The employer’s claim for protection is based on the identification of some advantage or asset inherent in the business which can properly be regarded as, in a general sense, his property, and which it would be unjust to allow the employee to appropriate for his own purposes, even though he, the employee, may have contributed to its creation. For while it may be true that an employee is to be entitled – and is to be encouraged – to build up his own qualities of skill and experience, it is equally his duty to develop and improve his employer’s business for the benefit of his employer. These two obligations interlock during his employment: after its termination they diverge and mark the boundary between what the employee may take with him and what he may legitimately be asked to leave behind with his employers.’

2(b)(ii) The main types of legitimate interest 10.20 The categories of legitimate interest are not closed (see for example Dawnay Day v D’Alphen [1998] ICR 106). Accordingly, covenants in restraint may be enforced when the covenantee has a legitimate interest of whatever kind to protect: see 10.29–10.31. That said, there are three principal types of business interest which the employer is entitled to seek to protect: •

his trade connection or goodwill;

•

his business secrets or confidential information; and

•

stability of the workforce.

10.21 The position was explained by Lord Parker in his seminal speech in Herbert Morris v Saxelby [1916] 1 AC 688 at page 709: 521

10.22  Legitimate protection for the ex-employer

‘Wherever [restrictive] covenants have been upheld it has been on the ground, not that the servant or apprentice would,  by reason of his employment or training, obtain the skill and knowledge necessary to equip him as a possible competitor in the trade, but that he might obtain such personal knowledge of and influence over the customers of his employer, or such an acquaintance with his employer’s trade secrets as would enable him, if competition were allowed, to take advantage of his employer’s trade connection or utilise information confidentially obtained’ (per Lord Parker in Herbert Morris v Saxelby [1916] 1 AC 688 at page 709).

See also Spafax v Harrison [1980] IRLR 442 at page 446. Trade connections 10.22  Where trade connection is relied on to justify a covenant in restraint of trade, the ex-employer must show: •

The existence of the trade connection of the ex-employer – usually customers and prospective customers and sometimes suppliers or intermediaries/introducers of business. Often, it is not difficult to identify who is a customer: essential to the concept is the recurrence or likelihood of recurrence of the purchase or use of the ex-employer’s goods or services. In other cases the question may be quite complex (for example where the connection is through intermediaries and not directly with the ‘customer’ or where dealings are so irregular that it is not clear whether the description of ‘customer’ is accurate). It may be necessary in drafting the covenant to define who is a customer (and those drafting covenants should always consider whether this is appropriate). The question of who is a customer is more fully dealt with at 11.135–11.139. As to trade connections with suppliers, see Brake Brothers Ltd v Ungless [2004] EWHC 2799 (QB), in particular at paragraph  48; and Thomas Marshall (Exports) Ltd v Guinie [1979] 1 Ch 227.

•

That the ex-employee is likely to be able to take advantage of his ex-employer’s trade connection by means of the ex-employee’s influence over customers or suppliers, which enables him to persuade them to follow him to his new employment. The question of the required quality and degree of connection between the employee and the customer is dealt with more fully at 11.140–11.143.

10.23  The court approached the question of customer connection incorrectly in Cantor Fitzgerald (UK) Ltd v Wallace [1992] IRLR 215. HHJ Prosser QC, sitting as a deputy High Court judge, held that an ex-employer could not protect a customer connection which rested solely on the personality, temperament and ability of the employees to get on with people. The ex-employer was a firm of Eurobond brokers operating in the inter-dealer market. The employees were 15 brokers whose jobs did not require them to have technical or financial skills. Their success depended on their personality and ability to get on with traders. However, this is exactly the kind of case in which in numerous decisions the 522

Express covenants in the contract of employment of the ex-employee 10.26

courts (including the House of Lords and Court of Appeal) have repeatedly held that the ex-employer may seek protection. Thus, in Mason v Provident Clothing & Supply Co Ltd [1913]  AC  724 (HL) (a case of a travelling salesman) the House of Lords referred to the employer’s right to protect himself against the employee’s obtaining personal knowledge of and influence over the customers of his employer during employment. Indeed, Viscount Haldane LC said (at page 731) that: ‘The capacity of the servant must obviously, from the character of the business as I have described it, be due mainly to natural gifts as a canvasser, and only in a secondary degree to special training.’

10.24  Insofar as Cantor Fitzgerald (UK) Ltd v Wallace suggested that the exemployer may only protect himself against the ex-employee whose influence over customers arises from his general skill and knowledge, it is plainly wrong. Indeed, in the very cases referred to in Cantor, namely Marion White Ltd v Francis [1972] 1 WLR 1423 (CA) (a case of a hairdresser) and Home Counties Dairies Ltd v Skilton [1970] 1 WLR  526 (CA) (a case of a milk roundsman) the Court of Appeal emphasised that the ex-employer was entitled to protect his customer connection against the ex-employee who may by virtue of his personality acquire influence over customers with whom his employment brings him into contact. Unsurprisingly, Cantor was doubted by Robert Walker J in the first instance decision in Dawnay Day v de Braconier d’Alphen [1997]  IRLR  285 (at paragraph 34). The judge pointed to its inconsistency with the decisions in GFI Group Inc v Eaglestone [1994] IRLR 119 (at page 120) and Euro Brokers Ltd v Rabey [1995] IRLR 206. See also Scorer v Seymour-Johns [1966] 3 All ER 347 (at pages 350–1) and London & Solent Ltd v Brooks (IDS  Brief 389  January 1989, unreported) (CA). Indeed, in the inter-dealer broker field covenants are regularly upheld by reason of the need to protect the ex-employer’s customer connection – see for example Tullett Prebon v BGC Brokers LP [2010] IRLR 648 (at paragraph 238). 10.25  In some businesses there is limited recurrence of customers: in Bowler v Lovegrove [1921] 1 Ch 642 at 653 a non-competition/area covenant given by an employee of an estate agent was struck down. Customers were such for only one transaction, and there was therefore no client connection to protect. Note also that the legitimate business interest does not have to be that of the company with which the employee contracted; it may be the legitimate business interest of another company within a group: see 10.34–10.41. 10.26 In East England Schools v Palmer [2014]  IRLR  191 the Deputy Judge (Richard Salter QC) considered whether the increasing use by teachers and schools of social media and the internet meant that a recruitment consultancy no longer had a protectable connection with its customers such as to justify nonsolicitation and non-dealing covenants in Ms Palmer’s contract of employment. The Court found that the market is candidate-driven, that much of the relevant information is publicly available, and that there is little loyalty owed either by schools or by teachers to any particular consultant or any particular agency. Notwithstanding all of that, the agency had a sufficient proprietary interest to 523

10.27  Legitimate protection for the ex-employer

seek to protect in the connections Ms Palmer made with schools and teachers, because: (i) the building of relationships with schools and teachers was an integral part of Ms Palmer’s role; (ii) the relationship with a consultant may in some cases be the deciding factor in a school or teacher choosing an agency; and (iii) Ms Palmer would have valuable information about, for example, the likes, dislikes, foibles and special requirements of schools and candidates. The Court held that the fact that the relationship between schools and teachers on the one hand and the agency on the other was known to be a fragile one made it more rather than less necessary and legitimate for the employer to seek to protect it, because the prospect of a successful solicitation by the ex-employee was more likely. This can be contrasted with the Scottish decision in Douglas LLambias Associates Ltd v Napier (31 October 1990, Lexis, unreported). LLambias was a recruitment agency specialising in recruiting legal staff. The clients were firms of Edinburgh solicitors who were accustomed to contacting all three legal recruitment agencies in the city. A  non-solicitation/dealing covenant was struck down on the basis that there was no legitimate interest to protect. In particular, there could, in the circumstances, be no confidential list of customers. In our view, the approach taken in East England was the correct one, while the decision in Llambias is to be seen as a case based on rather unusual facts where due to the ‘promiscuity’ of clients there was no relationship as such to protect (or a case where a more detailed review of facts such as in East England might have resulted in some interest being found to exist, notwithstanding the absence of loyalty on the part of clients). Trade secrets/confidential information 10.27  The second main type of protectable interest is trade secrets/confidential information. At 6.21–6.77 we distinguish between: •

trade secrets;

•

confidential information in the nature of a trade secret;

•

(mere) confidential information; and

•

general skill and knowledge

It is uncontroversial that the first two categories comprise legitimate interests protectable by (properly drafted) restrictive covenants. It is also uncontroversial that the last category, general skill and knowledge, is not: see 6.4. The third category, ie mere confidential information (not in the nature of a trade secret) is controversial: in our view this kind of information is protectable by a restrictive covenant: see 6.80–6.96. Stability of the workforce 10.28 An employer also has a legitimate interest in protecting the stability of his workforce (which he may seek to protect by a covenant preventing the enticement by the ex-employee of his former colleagues). In Dawnay Day v de 524

Express covenants in the contract of employment of the ex-employee 10.30

Braconier d’Alphen [1997] IRLR 285 the Court of Appeal settled the differing views expressed in two earlier Court of Appeal decisions (Hanover Insurance Brokers Ltd v Shapiro [1994]  IRLR  82 and Ingham v ABC  Contract Services Ltd (12  December 1993, unreported) as to whether covenants covering nonpoaching of employees could be justified on the basis of a legitimate interest of the employer in maintaining the stability of his workforce. In principle it may; see also TSC Europe (UK) Ltd v Massey [1999] IRLR 22 and SBJ Stephenson Ltd v Mandy [2000] IRLR 233. The employer is entitled to seek to protect himself against the personal influence which the employee may (while on the employer’s payroll) gain over other employees. The position may arguably be different where the interest in maintaining a stable workforce is sought to be protected by contract between prospective employers. In Kores Manufacturing Co Ltd v Kolok Manufacturing Co Ltd [1959] Ch 108 a non-poaching agreement between two rivals was struck down on the basis that the maintenance of the stability of the workforce was not an interest which could justify such an agreement. This basis for the decision is probably wrong in the light of the Dawnay Day decision. The question of the reasonableness of non-poaching of employee and non-employment covenants is dealt with at 11.207–11.223. Other legitimate interests 10.29  The established categories of legitimate interest are not rigid, and they are not closed or exclusive: Bridge v Deacons [1984] AC 705 (PC) at page 714. (As we explain at 12.122–12.124, when drafting it is important to exercise caution in using preambles or introductory words setting out the legitimate interests which justify restrictive covenants.) 10.30 In Dawnay Day & Co v De Braconier D ‘Alphen [1997] IRLR 442 (CA) the claimant investment bank sought to enforce non-competition covenants and non-solicitation covenants in the heads of agreement setting up a joint venture business with the defendant managers. The business was developed and carried on by a jointly owned limited company which employed the managers as interdealer brokers in the Eurobond market and owned the goodwill of the business. The Court of Appeal held that the fact that the claimant was neither the purchaser of the business from the defendants, nor their employer, did not mean that it did not have a legitimate or lawful interest in enforcing the covenants. The Court of Appeal emphasised that covenants in restraint of trade may be enforced when the covenantee has a legitimate interest of whatever kind to protect, and enforcement was not restricted as a matter of law to established categories of vendor/ purchaser of a business or employer/employee cases. The established categories are not rigid or exclusive. The approach of the courts has developed away from such rigidity. In Dawnay Day the claimant’s undertaking to contribute the capital for the joint business, and the contribution after it was made, gave it a clear commercial interest in safeguarding itself against competition from the managers. Likewise, in Office Angels Ltd v Rainer-Thomas and O’Connor [1991] IRLR 214 the Court of Appeal recognised as a protectable interest an employment agent’s connection with its pool of temporary workers. 525

10.31  Legitimate protection for the ex-employer

10.31 In Legends v Harrison [2017]  IRLR  59, the High Court considered a restrictive covenant which prevented the defendant (a Michael Jackson tribute artist) from performing in any multi-tribute variety show in Blackpool that competed with the claimant’s show, for a period of 12 months. Edis J found that the claimant had invested time and effort in producing the defendant’s show, and that the defendant’s professional reputation had been extended and burnished by the claimant’s activities. At paragraph  73 he concluded that ‘… there is a legitimate interest which the claimant was entitled to protect by effectively seeking to restrict the ability of a performer taking its preparatory work and the extent to which its reputation had been burnished by the performer to the only direct competitor’. The covenant was found to be valid and enforceable (although final injunctive relief was refused in the Judge’s discretion, primarily because of the claimant’s delay in bringing the proceedings and the damage that would be caused to others if injunctive relief were granted at that stage). Whilst unusual and fact-specific, the case is a salient reminder that the categories of legitimate interests are not closed. 2(b)(iii)  ‘Disappearance’ of legitimate interest 10.32 An injunction was refused in Phoenix Partners Group LLP  v Asoyag [2010] IRLR 594 on the basis that the ex-employer had ceased conducting the specific business which the ex-employee had conducted for the employer and was now conducting for another business. There was no real prospect that the ex-employee’s broking on behalf of his new employer in the Eurostoxx market would at trial be held to amount to competing with any part of the business carried on by the ex-employer (at the time of those trades) on the part of the new employer. There is, however, no free-standing principle that a restrictive covenant only remains enforceable for as long as the employer continues to have a legitimate business interest to protect: Towry EJ  Limited v Bennett [2012]  EWHC  226 (paragraphs 394–404), a case involving financial advisers who had gone to work for a new company after the sale of the business they had worked in to a new owner. The new owner restructured the business, such that Towry ceased to have any employees or customers or to provide any services. The claim was for damages (not injunctive relief). The fact that Towry no longer had any customers did not prevent non-solicitation of customer covenants from being valid and enforceable. This is logical – a binding restrictive covenant cannot be rendered unenforceable through later events, but those events may affect the discretion to grant injunctive relief. 10.33 In Sendo Holdings Plc (in administration) v Brogan [2005] EWHC 2040, the claimant, a company in administration, obtained a garden leave injunction. The defendant argued that there was no legitimate interest to protect, because the business of the company had been sold, so there was ‘no business, no customers or employees’. The High Court (Dobbs J) rejected that submission (at paragraphs 22–24) noting that the categories of legitimate interest are not closed, and holding that: (i) ‘Whilst the company may not be trading it still has a duty to realise its position as a creditor and maximise value for its own creditors and ensure 526

Express covenants in the contract of employment of the ex-employee 10.36

that the company is wound down in as efficient a manner as possible’, and that the defendant’s assistance in that regard might be important; and (ii) there was a legitimate interest in the claimant honouring the contract it had entered into with the purchaser of its business, which stipulated that Mr Brogan should be placed on garden leave for his six month notice period and not compete with the business. 2(b)(iv)  Protection for subsidiaries/group companies/related entities 10.34  The restrictive covenant must be for the protection of a business in which the employer has a commercial interest. It has been held that a group company is ordinarily entitled to protect its own business and not the separate interests of other group companies: see Henry Leetham & Sons Ltd v Johnstone-White [1907] 1 Ch 322, where each company carried on a separate business. The decision in Henry Leetham may be justified also on the basis that the employee was a commercial traveller who by a non-competition covenant would have been restricted from the whole of the UK, whereas he had been active in only a small part of the UK. 10.35  It will, however, often be possible to show that one company in a group has a legitimate interest in the business of another in the same group: see Stenhouse Ltd v Phillips [1974] AC 391 (PC) and Beckett Investment Management Group Ltd v Hall [2007] ICR 1539. 10.36 In Stenhouse a non-solicitation covenant extended not only to clients of the ex-employer (a holding company) but also to clients of the subsidiaries of the ex-employer. It was accordingly submitted on behalf of the ex-employee that the interests to be protected were the interests of the subsidiaries as independent legal entities, and therefore there was no legitimate interest of the ex-employer to protect. The evidence was that the business of the group was controlled and co-ordinated by the ex-employer company and all funds generated by each of the companies were received by the ex-employer. The subsidiaries were mere agencies through which the ex-employer directed its integrated business. Not only did the ex-employer have a real interest in protecting the business of the subsidiaries, but the real interest of so doing was that of the ex-employer. Its business was simply to some extent handled by subsidiaries. The Privy Council accordingly upheld the covenant, distinguishing Henry Leetham & Sons Ltd v Johnstone-White [1907] 1 Ch 322. Further, in Dyson Technology Ltd v Pellerey [2015] EWHC 3000 Snowden J distinguished Henry Leetham on the facts before him because the businesses of the Dyson group companies were intimately linked, and the non-competition covenant which prevented competition with the business of group companies included limitations such as that Mr Pellerey must have been involved with or materially informed about the relevant group company. Snowden J held at paragraphs 91–92 that: ‘the law on restraint of trade generally respects the concept of separate corporate personalities, and that a restraint of trade clause by which an employer seeks to protect the business of another company which is separate and distinct from 527

10.37  Legitimate protection for the ex-employer

the employer’s own business, and in which the ex-employee in question has not been involved, will be invalid. However, I consider that the position is very likely to be different where the business of the employer is not commercially separate and distinct from the business of an associated company, and where it is envisaged that, during the employment, the employer will make its trade secrets or confidential information (or the services of an employee possessed of such trade secrets or confidential information), available to that associated company for use in its business.’

10.37 The decision (referred to immediately below) in Beckett Investment Management Group Ltd v Hall [2007] ICR 1539 supports the view that the courts will not readily allow issues of corporate personality within a group to render an otherwise enforceable covenant unenforceable – the Court of Appeal at paragraph 23 (having referred to Stenhouse) regarded the decision of the judge below as being ‘too inhibited by considerations of corporate personality’. 10.38  Beckett Investment Management Group Ltd (‘BIMG’) was the holding company within a group of companies (the ‘Beckett Group’) which provided financial services. Beckett Financial Services Ltd (‘BFS’) was a subsidiary which provided advice and services to clients. The defendants were independent financial advisers who had been employed within the Beckett Group for some years before entering into contracts with BIMG (the first defendant was a sales director). BIMG had no dealings with clients and provided no direct financial advice; all of this was done by BFS. The contracts between the defendants and BIMG contained identical non-dealing covenants prohibiting the supply of ‘prohibited services’ to clients. The term ‘prohibited services’ was defined by reference to financial advice of a type provided by the company in the ordinary course of its business. The key point of construction related to the definition of ‘prohibited services’. The judge at first instance found that, as ‘the company’ (which was defined as BIMG) did not provide advice about anything to anybody, but acted simply as a holding company, the restriction on dealing was of no practical utility whatsoever. None of the clients had ever been advised by BIMG. Their dealings had been with BFS. He held that the individual personality of a limited liability company was not to be disregarded if the company in question was a member of a group of companies. On that basis the judge held that neither of the defendants was in breach of covenant, because neither of them supplied or sought to supply advice of a type provided by BIMG in the ordinary course of its business at the date of termination of his employment. On that basis, the judge dismissed the claim. 10.39  The Court of Appeal, however, held that the only sensible construction of the covenant was a wider one which enabled it to apply to advice of the kind in fact provided by BFS. The judge’s construction of the covenant ascribed to the parties (and to the reasonable man having all the background knowledge which would have been available to the parties in the situation in which they were at the time of the contract) an intention which was uncommercial. It ascribed to the parties an intention to agree a pointless provision. Moreover, in the view of the Court of Appeal the judge below had felt unnecessarily constrained by a purist 528

Express covenants in the contract of employment of the ex-employee 10.42

approach to legal personality. Referring to a dictum of Lord Denning MR in Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472 (CA) at page 1481, the Court of Appeal stated that the law had regard to the realities of big business. The fact that the clients dealt with BFS rather than BIMG was not fatal to the reliance which the employer sought to place on the covenant. 10.40  Similar principles should apply in relation to service companies, ie companies which are merely the administrative tools of other companies in a group of companies. A service company, although employing all or most of the employees of the group who are ‘seconded’ to the particular associate company for whom they are ‘working’, will normally have no clients or confidential information of its own. The service company should be entitled to reasonable protection over the interests of the associate company or companies for whom the employee is ‘working’, because the employment is in fact on behalf of the associate company or companies. There are, however, drafting traps for the unwary. Cases such as Beckett cannot be treated as a panacea for all such problems. For example, sometimes a covenant will be drafted in such a way that even benign interpretation or severance cannot save it. 10.41  It is an entirely different question, however, whether, in the circumstances of the particular case, a covenant in relation to associated companies is necessary: such (parts of) covenants in restraint of trade are often severed (for the doctrine of severance see 12.46–12.61) on the basis (for example) that the employee had no contact with customers of the associated companies. In Hinton & Higgs (UK) Ltd v Murphy and Valentine [1989] IRLR 519 (at page 521) the Court of Session held that the covenant was too wide because it sought to restrict the employee from working, not only for clients of the company, but also those of other companies in the group; that in the absence of special circumstances it was not necessary for the protection of the interests of an employer that ex-employees be restricted from working for any client of any other company in the group. See also Business Seating (Renovations) Ltd v Broad [1989]  ICR  729 (where Millett J  had ‘no difficulty’ in severing references to associated companies) and Continental Tyre and Rubber (Great Britain) Co Ltd v Heath (1913) 29 TLR 308 (at page 310).

2(c)  Reasonable protection of legitimate interests: introduction 2(c)(i)  No more than adequate protection 10.42  For any covenant in restraint to be treated as reasonable in the interests of the parties it must ‘… afford no more than adequate protection to the party in whose favour it is imposed’ (per Lord Parker in Herbert Morris Ltd v Saxelby [1916] AC  688 at page 707). It is for the court to decide as a matter of law whether a contract is in restraint of trade and, if so, whether it is reasonable. Whether a particular provision is or is not reasonable to protect the employer’s legitimate interests is a matter of impression (per Glidewell LJ in Rex Stewart Jeffries Parker Ginsberg Ltd v Parker [1988] IRLR 483 (at page 486), stated in the context of an interim injunction hearing rather than a trial). 529

10.43  Legitimate protection for the ex-employer

2(c)(ii)  Different kinds of restrictive covenant 10.43  The principal types of covenants taken to protect the three main kinds of legitimate interest (business secrets, trade connections and stability of the workforce) after employment are: •

Non-competition or area covenants: preventing the ex-employee from carrying on or being engaged in a competing business, sometimes within a defined area (for example a certain radius of the relevant premises of the ex-employer); a similar type of clause is where an ex-employee is prevented from being employed by or engaged in a competing business activity of named competitors of the ex-employer: for example Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472 (CA). In this book we have referred to ‘noncompetition’ covenants as encompassing both types of covenants.

•

Non-dealing covenants: preventing the ex-employee from dealing with the customers (or suppliers) of the ex-employer.

•

Non-solicitation covenants: preventing the ex-employee from soliciting the business of customers (or suppliers) of the ex-employer.

•

Non-poaching covenants: preventing the ex-employee from enticing away his former colleagues. In modern contracts of employment, covenants sometimes extend further to prevent (mere) employment of ex-colleagues (even without solicitation), or of being employed in the same business as them; these kinds of covenants are of dubious validity. The reasonableness of non-poaching and similar covenants is dealt with at 11.207–11.226.

•

Confidentiality covenants: preventing the ex-employee from using or disclosing trade secrets or confidential information of the ex-employer.

2(c)(iii) Which type of covenant is appropriate? 10.44 As we have seen, the law will only uphold covenants which extend no further than is reasonably necessary to protect the legitimate interests of the exemployer. The first question which will often arise is whether the particular type of covenant used is suitable to protect the type of legitimate interest sought to be protected. For instance, a non-competition covenant may well be too blunt an instrument to protect customer connection, because the ex-employee is thereby prevented from dealing with not only customers of the ex-employer, but those who are not customers or in any sense part of his trade connection: therefore, a non-solicitation/dealing covenant might be more apt to protect this sort of interest (illustrating the danger of including only a non-competition covenant in the contract of employment). This point is discussed in greater detail at 11.50–11.51).

2(d) The special position of the vendor-employee 10.45  It is well established that the court draws a distinction between: (a) a covenant against competition entered into by a vendor with the purchaser of goodwill 530

Express covenants in the contract of employment of the ex-employee 10.46

of a business, which will be upheld as necessary to protect the subject-matter of the sale, provided that it is confined to the area within which competition on the part of the vendor would be likely to injure the purchaser in the enjoyment of the goodwill he has purchased; and (b) a covenant between employer and employee: see Office Angels v Rainer-Thomas [1991] IRLR 214 (at paragraph 22). However, it is not uncommon for the vendor of a business to remain in the business (often for a minimum fixed term) and so to enter into two sets of contractual obligations with the employer – those pertaining to the sale of the business (or the shares in the company) and those relating to employment. Often there will be a sale contract and an employment contract, each containing covenants against competition and solicitation in substantially the same (and in some cases identical) terms. In these circumstances, the covenants will be less strictly tested for reasonableness – the court being more concerned to uphold commercial bargains freely entered into, since it is assumed that there is greater equality of bargaining power than in a straightforward employment contract. (See, however, 10.17 as to the lack of reality of the inequality of bargaining power point in relation to highly paid employees.) This may be so even if the only covenants entered into are in the service agreement: Alliance Paper Group plc v Prestwich [1996] IRLR 25; and compare Dawnay, Day & Co v De Braconier D’Alphen [1997] IRLR 442 (CA) and TSC Europe (UK) Ltd v Massey [1999] IRLR 22. 10.46 In TSC  Europe (UK) Ltd v Massey [1999]  IRLR  22 the Deputy Judge Peter Whiteman QC set out the principles at paragraphs 24–36, referring to the differential (less stringent) treatment by the courts of business sale cases (as compared with employment covenants) as being traced back to the speech of Lord Macnaghten in Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co [1894] AC 535 (at pages 559–74). The principles to be distilled from TSC are: •

Often, covenants cannot be placed neatly in one category or another, as where the purchaser of a business retains the services of the vendor as an employee after the sale – the question is one of substance, not of form.

•

It is wrong to look at the contract of employment in isolation.

•

The court should consider the validity of the covenant in the context of the overall commercial bargain (for example the court should be alert to the fact that some or all of the employees may be crucial to the maintenance of the goodwill of that business – see paragraph 49 of the Judgment).

•

Regard should be had to the interests of the company and the purchaser, as being at one.

•

Covenants may be given by and enforced against the vendor of all or some of the shares in the company.

Massey had sold his business to TSC in May 1996 for £1 million. At the time of the sale, he entered into an employment contract which contained a prohibition on soliciting TSC’s employees for a period of three years from the date of the agreement or one year following the effective date of termination of his 531

10.47  Legitimate protection for the ex-employer

employment, whichever was the later. Massey’s employment was terminated on 5 August 1997. Notwithstanding the fact that the judge assessed the validity of the clause in the context of the overall commercial bargain, it was found to be unenforceable in that it prohibited solicitation of any employee without reference to his or her importance in the business or technical knowledge or experience, and it applied to any employee who joined the company during the prohibited period, including those whose employment began after the defendant had ceased to be an employee. 10.47  A good example of the application of the principles referred to above is the case of Alliance Paper Group plc v Prestwich [1996] IRLR 25. The defendant, Prestwich, who was the managing director and major shareholder of the plaintiff company, sold the majority of the shares of the company. Under the sale agreement, as a vendor, he was subject to a restrictive covenant for a period of three years from completion. It was a condition of the sale that Prestwich would continue as managing director. Accordingly, he entered into a service agreement for a period of five years from 28  June 1990. That agreement included client non-solicitation/dealing covenants. HHJ Levy QC held: ‘… the proper approach here is to look at the legitimate interest of the [claimant] which in the context of Mr Prestwich’s background and the three agreements were the proper subject of protection. In that regard, I derive assistance from the approach of the Canadian judges and the Privy Council in the case of Connors [Connors Bros Ltd v Connors [1940] 4 All ER  189 (PC)] who all held that the purchasers of the shares in question were entitled to covenants from the vendors who had been controlling and managing the business being sold from depreciating the values of stockholdings purchased at a full price. It seems appropriate to me to consider the covenants here on the basis that the defendant was the managing director and negotiator of the sale and it was his business which was being sold, and the covenants into which he entered should be viewed not only as those of an employee entering into a service contract, but also as those of the person who negotiated the sale of the shares sold on his own behalf and on behalf of other interested parties, including the trustees of his family trusts, from some of which he himself benefited.’

10.48  TSC and Alliance Paper Group show that the court is unlikely to regard the covenants in the share sale agreement as being exhaustive of the contractual protection of the goodwill. Even where there are share sale covenants, the covenants in the employment contract are not to be taken as ordinary employment covenants, providing no extra protection in respect of the goodwill sold. The court will be more likely to have regard to the sale context of the employment covenants (even after expiry of the sale covenants) where the employee continues to play a significant role in the business after sale. In such a case, the customer connection remains vulnerable to the employee’s departure for a period after the end of termination of his employment, which may be long after the covenant period in the sale agreement (which is normally geared to the date of completion of the sale transaction) has expired. Where, however, the vendor-employee is not intended to continue to play a substantial front line role in the business, there may be an argument that customer non-solicitation/dealing covenants in 532

Express covenants in the contract of employment of the ex-employee 10.50

the employment contract should be seen purely in the employment context, particularly if it is contemplated that employment may continue long after expiry of the business sale restrictive covenants. In addition, it is perhaps worth pointing out that, if the vendor-employee already has restrictive covenants in his contract of employment before the business sale, and these are left intact (without amendment) when the sale is entered into, there would be no reason to regard the context of these covenants as being changed by the subsequent sale – ie they should continue to be seen as ‘pure’ employment covenants. 10.49  Further illustration of these points is provided by the decision in Allied Dunbar (Frank Weisinger) Ltd v Weisinger [1988] IRLR 60. In this case a selfemployed sales associate of the claimant, Weisinger, sold his practice including goodwill to Allied Dunbar for £386,000. He agreed to act as consultant to the claimant (‘Dunbar’) for a minimum period and to be bound by a non-solicitation covenant (that is, not to solicit any existing customer for the purpose of selling a product competing with a product of Dunbar) and a non-competition covenant (that for two years after termination of the consultancy he would not be involved in a business which competed with Dunbar or its parent company). The effect of the restraints was that, after termination of the consultancy, Weisinger would have to retire from the financial services industries for the agreed period. Millett J succinctly summarised the kinds of issues which arise in this type of case as follows: ‘It is well settled that, in considering the validity of covenants in restraint of trade, very different principles apply where the covenant is taken for the protection of the goodwill of a business sold by the covenantor to the covenantee from those that apply where it is taken by an employer from an employee. In the former case (though not in the latter) it may be legitimate to protect the covenantee from any competition by the covenantor; and the Courts adopt a much less stringent approach to the covenant, recognising that the parties who negotiated it are the best judges of what is reasonable between them. The inclusion of such a covenant may be necessary to enable the covenantor to realise a proper price for the goodwill of his business; and by upholding the validity of the covenant the Courts may well facilitate trade rather than fetter it. The [claimants] submit, and I agree, that the reasonableness of the covenant in the present case is to be tested by the principles applicable as between vendor and purchaser rather than by the stricter principles applicable as between employer and employee. If it were a question of categorisation, I would have no hesitation in categorising these covenants as taken for the protection of the goodwill of the business sold to the [claimants] by the Defendant, rather than for the protection of the plaintiffs’ present and future business as employer under the consultancy agreement. The covenants are to be found in the sale contract, not in the consultancy agreement; but that fact is of very little weight, and cannot be determinative. The question is one of substance, not form.’

10.50  Since the purpose (or main purpose) of the consultancy agreement was to facilitate the transfer of the client connection which Weisinger had sold to Dunbar (Dunbar having no other business and Weisinger not being required to acquire any independent client connections apart from the practice), Millett J had no difficulty in deciding that the validity of the covenant fell to be determined by 533

10.51  Legitimate protection for the ex-employer

the less stringent approach adopted by the courts where the covenant is taken for the protection of a business sold by the covenanter to the covenantee, rather than where it is taken by the employer from an employee. He accordingly upheld the covenants. 10.51  Similar considerations may arise in the case of employees who obtain what may be only a small shareholding in their company, which on termination of their employment they sell to another. In some circumstances there may be difficulty in deciding which test (employer/employee or vendor/purchaser) is more appropriate. In Systems Reliability Holdings plc v Smith [1990] IRLR 377 the ex-employee who had during his employment acquired a total of 1.6% of the shares in the company sold these shares to Systems Reliability for £247,000. The share sale agreement contained covenants preventing competition (effectively for 17 months from the date of sale) with the company and its subsidiaries and the use of its confidential information. Harman J held that where a purchaser buys the whole of a business from a number of vendors, some of whom have only a small participation in the goodwill and business which is being sold but who are paid a price for their shares no different from that paid to other vendors, and who thereby receive a substantial sum of money, this is a true vendor and purchaser situation (although he accepted (at page 382) that too much store ought not to be set by categorisation, the question being rather ‘What is reasonable in this particular deal?’). Since there was no public policy which would prevent the ex-employee taking himself out of competition for the relatively short period of 17 months (which was on the evidence entirely reasonable) or to prevent the imposition of a worldwide restriction (which also was reasonable given that the business was completely international), the covenant was enforced. 10.52  Also in Kynixa Ltd v Hynes [2008] All ER (D) the court, applying the less stringent test applicable to commercial transactions, upheld against ex-employees widely drawn non-competition covenants (and non-solicitation of customers/ non-poaching of employees’ covenants) contained in a shareholders’ agreement (the court having found that there were no applicable covenants in their employment contracts). These covenants were for 12 months from the termination of employment of the respective employees. 10.53  Ultimately, the Courts take into account all the specific facts of each case. Thus, in Cyrus Energy Ltd v Stewart [2009] CSOH 53 the Inner House of the Court of Session considered contracts of employment (which contained restrictive covenants) entered into at the same time as a shareholding agreement (which did not contain restrictive covenants), and held that the transaction was ‘closer to the end of the spectrum occupied by the sale of a business’. Since the employees each owned 25% of the shares in the business as well as being directors of the parent company it would be ‘inapt to bracket the [defendants] with normal employees’, inclining the Court ‘to give primacy to freedom of contract over freedom of trade’. 10.54  Similarly, in Invideous Ltd v Thorogood [2013] EWHC 3015, Rose J held that the defendant, who was an employee of and shareholder in the claimant, 534

Competition law 10.55

was in a ‘hybrid’ position, between a true employee and the seller of a business: the defendant effectively transferred part of the business he formerly operated in return for substantial investment, but the investment monies were not actually paid to the defendant (although the investors paid the defendant’s salary as well as the salaries of other employees). The judge found that this hybrid position supported the claimant’s case that covenants in the shareholder agreement which lasted for at least four years from signature were enforceable.

3. COMPETITION LAW 10.55  In practice, competition law issues will rarely arise in the employment context, not least because employees are not regarded as a separate ‘undertaking’ from their employers for the purposes of competition law. However, because assertions are sometimes, and usually wrongly, made of infringements of competition law, in the employment context it is useful to have a basic understanding of the principles of competition law. A short treatment of the subject is, therefore, set out in the Appendix to this chapter.

535

APPENDIX TO CHAPTER 10 INTRODUCTION 10.56  As we have already indicated, because employees are not regarded as a separate undertaking from their employers for the purposes of competition law, principles of competition law are rarely applicable in the context of employee competition. 10.57  The principles of competition law are essentially the same from an EU and UK perspective, apart from the jurisdictional requirements as to whether EU or UK law applies. The focus below is on the main provisions of UK and EU law. 10.58  Broadly speaking, competition law prohibits two types of activities: (i) anti-competitive agreements or other arrangements between undertakings (Article 101 Treaty on the Functioning of the European Union (the ‘TFEU’) and its UK equivalent, Chapter 1, Competition Act 1998 (the ‘CA’)); and (ii) abuses of dominant positions (Article 102, the TFEU and its UK equivalent, Chapter 2, the CA). (References to EU provisions below should be read as including the equivalent UK provisions, unless otherwise indicated.)

ARTICLE 101/CHAPTER 1 10.59 Article  101(1) sets out the prohibition on anti-competitive agreements. Agreements prohibited by Article  101(1) are void, unless they fall within the exemption provided by Article 101(3). Article 101(1) provides that: ‘The following shall be prohibited as incompatible with the internal market; all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which: (a)

directly or indirectly fix purchase or selling prices or any other trading conditions;

(b) limit or control production, markets, technical development, or investment; (c)

share markets or sources of supply;

(d)

apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

(e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which by their nature or according to commercial usage, have no connection with the subject of such contracts.’ 536

Article 101/Chapter 1 10.65

10.60 Agreements in an employment context (ie between an employer and employee), for reasons we will consider below, would not normally fall within the prohibition. Any restrictions in an employment law context in the UK would be more likely to be considered under the common law restraint of trade doctrine than under Article 101 (see 10.7–10.8). 10.61 Subject to the as yet uncertain outcome of Brexit, because of the supremacy of EU law (Article 3, Regulation 1/2003 of 16 December 2002, on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty, OJ L 1, 04.01.2003) (‘Regulation 1/2003’) to the extent that there is a conflict between the application of the restraint of trade doctrine and the application of Article 101, EU law takes precedence and a UK court is ‘precluded … from applying the restraint of trade doctrine’: Days Medical Aids v Pihsiang [2004] EWHC 44 (Comm) (Langley J).

Agreements and concerted practices between undertakings 10.62  In order to be caught by Article 101, there must be an agreement, concerted practice or some type of arrangement between undertakings. 10.63 Agreement has a wide meaning (OFT-401: Agreements and concerted practices, (‘OFT-401’), paragraph 2.7),1 as does the term ‘concerted practice’. In this Appendix we generally refer to agreements, concerted practices and arrangements to cover the breadth of activities caught. To be caught by the prohibition, an agreement does not have to be a formal legally-binding or written agreement, but can cover anything from a formal agreement to an informal arrangement, or a so-called ‘gentleman’s agreement’ between undertakings. Concerted practices generally fall short of an agreement but consist of direct or indirect contacts between undertakings which influence the conduct of the undertakings on the market (ie a form of meeting of the minds). It is not necessary that the agreement, concerted practice or arrangement be implemented for the prohibition to apply. 10.64  The prohibition applies to both horizontal (between undertakings at the same level of the market) and vertical (between undertakings at different levels of the market – typically, for example, supplier and distributor) agreements and arrangements. 10.65  ‘Undertaking’ is the generic term used to refer to companies and other entities. The main consideration is whether the entity in question is engaged in economic activity: OFT-401, paragraph 2.5. Individuals can be undertakings if they are carrying on a commercial activity, for example, as a trader, consultant or licensor of intellectual property rights. However, an employee in the course of his employment will not constitute an undertaking. 1 Please note that OFT-401 was originally issued by the Office of Fair Trading in 2004 and was readopted unchanged by its successor body, the Competition & Markets Authority, following its creation in 2014. See https://www.gov.uk/government/publications/agreements-and-concerted-practices-understanding-competition-law.

537

10.66  Legitimate protection for the ex-employer

10.66  There is authority where it has been held that employees are not undertakings during the employment relationship: ‘It must be concluded … that the employment relationship which [workers] have with the undertakings for which they perform [their work] is characterised by the fact that they perform the work in question for and under the direction of each of those undertakings … Since they are, for the duration of that relationship, incorporated into the undertakings concerned and thus form an economic unit with each of them, [the workers] do not therefore in themselves constitute “undertakings” within the meaning of Community competition law’: Case C-22/98: Jean Claude Becu [1999] ECR I-5665 (at paragraph 26).

10.67  Therefore, as there needs to be an agreement or arrangement between two or more undertakings, an agreement or arrangement between an employer and an employee, as such, is not covered by the Article 101(1) prohibition. 10.68  Even taken collectively, a group of employees will not be an undertaking: Jean Claude Becu (at paragraph 27). It has also been held that collective bargaining in the context of the employment relationship is not an agreement between undertakings: Case C-67/96: Albany International BV  v Stichting Bedrifspensioenfonds Textielindustrie [1999] ECR I-5751, where the European Court of Justice held (at paragraph 59) that while: ‘[i]t is beyond question that certain restrictions of competition are inherent in collective agreements between organisations representing employers and workers. However, the social policy objectives pursued by such agreements would be seriously undermined if management and labour were subject to Article 85(1) [now Article 81(1)] of the Treaty when seeking jointly to adopt measures to improve conditions of work and employment.’

10.69 An ex-employee who carries on an independent economic activity can be an undertaking, because the employment relationship would no longer exist. 10.70  Undertakings which form part of the same single economic entity (for example a parent and subsidiary) will not normally be treated as separate undertakings for the purposes of the prohibition. Furthermore, agreements between an agent and principal, and a subcontractor and contractor may also fall outside the prohibition.

Decisions by associations of undertakings 10.71  Trade associations are the most common form of association of undertakings, but the provision is not limited to them: OFT-401, paragraph 2.9. 10.72 Again, what can constitute a decision of a trade association has been widely defined and can cover anything from its constitution to the decisions themselves, and even to recommendations. 10.73  The activities of trade associations and their constituent members come under the competition law spotlight all too often. In particular, any gathering 538

Article 101/Chapter 1 10.76

where competitors are present, and particularly if there is occasion for socialising, will normally need to be very carefully reviewed in the competition law context to ensure that the gathering and any interactions that take place there will not breach the prohibition. In an employment law context, examples of trade associations do not readily spring to mind. 10.74 However, if, for example, a forum existed where competing companies were discussing their employees’ terms and conditions, and in particular remuneration packages and/or any decisions reached, then this could either – if officially sanctioned by a trade association – be a decision of an association of undertakings, or an agreement between undertakings, or both. In practice, the European Commission will seek to fine the association and/or its corporate members where possible. The consequences of such exchanges and any agreements or arrangements could be very serious for those concerned.

Object or effect the prevention, restriction or distortion of competition 10.75  It had been held that these are not cumulative but alternative requirements, ie only when the object of an agreement is unclear does it become necessary to consider whether it might have the effect of being anti-competitive: Case 56/65: Société Technique Minière v Machinenbau ULM [1966] ECR 235 at page 249. In practice agreements which contain ‘hard-core’ restrictions (for example, fixing prices, sharing markets or customers, bid-rigging – otherwise referred to as cartels) are by their nature considered such serious restrictions as to breach competition law and have the object of preventing, restricting or distorting competition. In other cases some analysis of the effect on the market will be required unless the restriction of competition is one by object (see paragraphs 24 and 25 of the European Commission’s Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements (OJ C 11, 14.1.2011) (the ‘Horizontal Guidelines’)). Where there is a detailed analysis of the effect of an agreement required, it is of necessity a complicated matter of law, fact and economics. It is also noteworthy that the more detailed any such analysis in any infringement decision, the greater the assistance to an applicant in a third party action for damages. 10.76 The prohibition covers actual and potential competition. Nothing much turns on whether the agreement prevents, restricts or distorts competition. The three terms are often used interchangeably to signify an anti-competitive object or effect. There must, however, be an appreciable effect on competition. In most cases this will exclude de minimis agreements – for instance, where competitors’ combined shares do not exceed 10% or, where they are non competitors, the market shares of each of the parties to the agreement do not exceed 15%. This is provided that the agreements do not contain certain ‘hard-core’ restrictions. Shares above these thresholds are not necessarily appreciable, but will depend on an assessment of the undertaking’s market power: OFT-401, paragraphs 2.14–2.21; paragraph 8(a) and (b), European Commission’s Notice on agreements of minor 539

10.77  Legitimate protection for the ex-employer

importance which do not appreciably restrict competition under Article 101(1) of the Treaty on the Functioning of the European Union), OJ C 291, 30.8.2014.

Effect on trade between Member States 10.77  This requirement represents the jurisdictional element of the application of EU competition rules, and it is common to Articles 101 and 102. In principle, certainly up until the ‘Modernisation’ of European competition law in May 2004 (pursuant to Regulation 1/2003), this requirement was generally easily met for the purposes of the European Commission and the European courts. Clearly an agreement or arrangement involving a number of Member States will be covered. A State-wide effect in one Member State will also meet the requirement. There has been some debate as to whether an agreement involving a smaller geographical area could have an appreciable effect on trade between member states. The equivalent test under the UK legislation is whether the agreement or arrangement has an effect on trade within the UK, or a substantial part of it.

Exchanges of information 10.78 Exchanges of competitively sensitive information between competitors can fall within the Article 101(1) prohibition. In particular, information exchanges between competitors of individualised public data regarding intended future prices or quantities can constitute a restriction of competition by object and be fined in and of themselves (paragraphs 59 and 74 of the Horizontal Guidelines). Information exchanges may also facilitate the implementation of a cartel as competitors will inevitably exchange sensitive information and/or monitor compliance with the agreed terms (paragraphs 59 and 67 of the Horizontal Guidelines). Specifically, information exchange can reduce or remove the degree of uncertainty as to the operation of the market in question, with the result that competition between undertakings is restricted.

Voidness and exemptions 10.79 Subject to an individual exception available under Article  101(3) or a block exemption, an agreement which infringes Article  101(1) is void and unenforceable: OFT-401, paragraph 7.1. (For consequences of breach/finding of infringement of Article 101(1), see 10.83–10.86). 10.80  To qualify for an individual exception, parties must meet the four cumulative requirements under Article 101(3) or they may qualify for a block exemption. Block Exemptions are general exemption Regulations issued by the European Commission creating ‘safe harbours’ from the prohibitions of Article 101(1) where certain categories of agreements satisfy various conditions, including the criteria set out at Article 101(3). Individual exceptions require the parties to selfassess their agreements and consider whether Article 101(3) applies. 540

Consequences of breach/finding of infringement 10.84

10.81  The requirements set out in Article 101(3) are that the agreement: •

should contribute to improving the production or distribution of goods or promoting technical or economic progress (ie lead to efficiency gains);

•

allows customers a fair share of the efficiency gains or resulting benefits;

•

includes only those restrictions which are indispensable to the attainment of those efficiency gains; and

•

should not afford the parties the possibility of eliminating competition.

ARTICLE 102/CHAPTER 2 10.82  Article 102 prohibits conduct by one or more undertakings which amounts to an abuse of a dominant position: OFT-402, paragraphs 1.1. It is not readily apparent how this would arise in an employment situation, therefore it is not further addressed in this Appendix.

CONSEQUENCES OF BREACH/FINDING OF INFRINGEMENT Fines 10.83  A fine of up to 10% of the worldwide turnover of the (group) undertaking can be imposed for a breach of the prohibition: OFT-401, paragraph 7.2. There is detailed guidance on the calculation of the appropriate fine, both at EU and UK level.

Third party actions 10.84  Third parties adversely affected by an agreement which they believe is prohibited by Article  101 may take action in the courts to stop the behaviour (eg injunctive relief) and/or to seek damages: OFT-401, paragraph  7.6. The damages regime has been streamlined by the European Directive 2014/104/ EU on antitrust damages actions, issued on 26 November 2014. That Directive came into force in the UK on 9 March 2017, pursuant to the Claims in respect of Loss or Damage arising from Competition Infringements (Competition Act 1998 and Other Enactments (Amendment)) Regulations 2017. Under sections 47A and 47B CA, where an infringement decision already exists, third parties who consider they have suffered loss as a result may bring an action for damages in the Competition Appeals Tribunal or the High Court (ie  ‘follow-on’ actions). Third parties may also bring ‘stand-alone’ actions without any prior infringement decision before either the Competition Appeals Tribunal or the High Court. 541

10.85  Legitimate protection for the ex-employer

Criminal sanctions 10.85 The UK also has penalties of up to five years’ imprisonment and/ or criminal fines for individuals who breach the cartel offence. Section 188 Enterprise Act 2002 created the cartel offence where a person ‘dishonestly agrees with one or more other persons’ to engage in direct or indirect pricefixing; the limitation of production or supply; the sharing of customers or markets; or bid-rigging, where that conduct related to the supply or production of a product or service in the UK. Section 190 Enterprise Act 2002 set out the penalties for those guilty of the cartel offence. The Enterprise and Regulatory Reform Act 2013 amended the cartel offence in April 2014 to remove the ‘dishonesty’ element in order to lower the thresholds in bringing successful criminal prosecutions in the UK.

Director disqualification orders 10.86 Section 204 Enterprise Act 2002 amended the Company Directors Disqualification Act 1986 to provide for the disqualification of directors in the event of UK or EU competition law being breached. As a result, directors of an undertaking in the UK may therefore be disqualified from serving as directors of any UK company for up to 15 years.

MERGER CONTROL 10.87  Competition law also regulates mergers, acquisitions and joint ventures. In some transactions, certain restrictions on the vendor of a business can be justified from a competition law perspective. In general, a non-competition obligation which is imposed on a vendor in the context of the transfer of an undertaking may be justifiable in order to obtain the full value of the assets transferred, in particular, in respect of goodwill accumulated and know-how. However, such restrictions are generally only enforceable if they are reasonable in terms of product, geographic and temporal scope. For instance, non-competition clauses are justified for periods of up to three years when the transfer of the undertaking includes the transfer of customer loyalty in the form of both goodwill and know-how; when only goodwill is included, they are justified for periods of up to two years: Commission Notice on restrictions directly related and necessary to concentrations, OJ C56, 5 March 2005, (‘Ancillary Restraints Notice’) paragraphs 13, 18 and following. Non-solicitation and confidentiality clauses may have a comparable effect and are therefore evaluated in a similar way to non-compete clauses (paragraph  26 of the European Commission’s Ancillary Restraints Notice), with the caveat that in general non-solicitation clauses may only extend up to 12 months in duration. Outside of this context, non-solicitation agreements would generally need to be assessed to determine whether they fall within Article 101(1) and, if so, whether their pro-competitive benefits may outweigh any restrictive effects, pursuant to Article 101(3). 542

Interplay between the Competition Act 1998 and post-termination restrictive covenants 10.88

INTERPLAY BETWEEN THE COMPETITION ACT 1998 AND POSTTERMINATION RESTRICTIVE COVENANTS 10.88  As set out above, case law has held that employees are not undertakings during the employment relationship. Specifically however, the rules on noncompetition and non-solicitation clauses might be relevant where an employee leaves to set up a rival business competing with the former employer. In this way, there is an interplay between the above prohibitions on anti-competitive agreements and the use of post-termination restrictive covenants, which has been considered by the English courts in a number of cases, eg concerning franchise agreements. In Case 161/84 Pronuptia de Paris GmbH  v Pronuptia de Paris Irmgard Schillgallis [1986]  ECR  353 the court held that Article  101 does not apply to obligations in the agreement (such as post-termination restrictive covenants) where those are strictly necessary to prevent know-how and assistance given by a franchisor to a franchisee being subsequently shared with other competitors. Nor does Article 101 apply to provisions which are strictly necessary to protect the reputation of a franchise network in terms of its trade name and business image. These principles have been applied in English courts in a number of cases such as Carewatch Care Services Limited v Focus Caring Services Limited and others [2014] EWHC 2313 (Ch), in which the High Court upheld the posttermination restrictive covenants imposed by Carewatch on Focus. In reaching that decision, the High Court also relied on Pirtek (UK) Ltd v Joinplace Ltd (t/a Pirtek Darlington) [2010] EWHC 1641 (Ch); [2010] UKCLR 1297.

543

CHAPTER 11

Reasonableness of express covenants Selwyn Bloch QC and Jeremy Lewis 1. Introduction 1(a) Overview 1(b) Current trends 1(c) Ambit of this chapter

11.1 11.1 11.3 11.5

2. Criteria relevant to reasonableness of all covenants 2(a) Requirement to focus on the time the contract was entered into 2(b) Position of the employee 2(c) Nature of the business of employer (including where a business activity has ceased) 2(d) Nature of the employee’s work 2(e) ‘Mere shareholding’ by ex-employee in new business 2(f) Competition by ex-employee as principal only or also as agent for a company in which he has an interest? 2(g) Duration 2(h) Whether covenant usual or unusual 2(i) Period of notice 2(j) Consideration for the covenants 2(k) Equality or inequality of bargaining power 2(l) Reasonableness to be assessed excluding improbabilities

11.6 11.7 11.8 11.10 11.14 11.17 11.24 11.28 11.38 11.40 11.42 11.43 11.47

3. Criteria relevant to reasonableness of non-competition covenants 11.48 3(a) Overview of the approach to non-competition covenants 11.48 3(b) Whether a non-competition covenant is appropriate 11.50 3(b)(i) Is a non-competition covenant justifiable in principle? 11.50 3(b)(ii) Normal justification of non-competition covenant: confidential information11.52 3(b)(iii) Alternative/additional justification for non-competition covenant: policing 11.68 3(b)(iv) Cases involving transfer of goodwill 11.78 3(b)(v) Appropriateness of non-competition covenant where there is a garden leave clause 11.91 3(c) Considerations relevant to geographical scope 11.93 3(c)(i) Extent of the area 11.93 3(c)(ii) The type of interest sought to be protected 11.95 3(c)(iii) Functional correspondence between restricted area and location of customers 11.96 3(c)(iv) Nature of the area 11.97 545

Reasonableness of express covenants

3(c)(v) Nature of business and the manner in which it is conducted11.98 3(c)(vi) Geographical area of activities of the employee 11.99 3(c)(vii) Certainty of the area 11.100 3(d) Scope of restriction on business activity and role 11.101 3(d)(i) Preliminary construction issues 11.101 3(d)(ii) Correspondence between businesses covered by the restriction and protectable interest 11.102 3(d)(iii) Role in which the former employee was employed 11.110 3(d)(iv) Capacity in which the former employee may be involved with a competing business 11.112 4. Covenants against soliciting/dealing with customers/ prospective customers 11.118 4(a) Meaning of ‘solicitation’ (by an ex-employee) and similar phrases 11.118 4(b) The preferred type of covenant to protect customer  connection11.130 4(c) Criteria relevant to reasonableness of non-solicitation/ dealing covenants: generally (including personal dealings limitations)11.131 4(d) Who is a customer/client? 11.135 4(e) Quality of contact 11.140 4(f) Knowledge of customers absent contact 11.142 4(g) Problem of loyalty 11.146 4(h) Problems with ‘large’ clients 11.150 4(i) Former customers and customer backstop periods 11.152 4(i)(i) Customer and personal backstops 11.152 4(i)(ii) Problem regarding former customers 11.155 4(i)(iii) Excluding ex-customer from ambit of non-solicitation/dealing injunction? 11.159 4(j) Usual need for personal connection limitation/personal backstop periods 11.161 4(k) Cases where the courts do not insist on personal contact/ connection limitation 11.172 4(l) Future customers 11.180 4(m) Potential customers 11.181 4(n) Limitation of customers by area 11.190 4(o) ‘The employee’s customers’ – brought with him to the  employer11.191 4(p) Non-solicitation of persons who are not customers 11.197 4(q) Period of non-solicitation/non-dealing covenants 11.198 5. Non-dealing covenants

546

11.202

Reasonableness of express covenants

6. Covenants against enticing/employing/arranging employment for fellow employees/consultants and anti-team moves and related covenants 11.207 6(a) Meaning of solicitation 11.207 6(b) Permissibility in principle of non-poaching obligations 11.208 6(c) Application to working relationships other than employees 11.209 6(d) Scope of the restriction 11.210 6(d)(i) Restriction to employees during the period of employment11.211 6(d)(ii) Personal contact requirement 11.213 6(d)(iii) Critical person requirement 11.214 6(e) Non-employment covenants 11.220 6(f) Team move clauses 11.224 7. Covenants requiring disclosure of job offers/disclosure of covenants to prospective employer

11.227

8. Covenants against the disclosure/use of trade secrets and confidential information

11.229

9. Supplier/non-interference covenants

11.230

10. Other types of post-termination clauses

11.233

11. Combining different types of covenant 11(a) Combining non-competition and non-solicitation/ dealing covenants 11(b) Combining covenants with ‘garden leave’

11.235

12. Indirect covenants and payments made under such  covenants 12(a) Generally 12(b) Forfeiture of benefits due to post-termination competitive activity 12(c) Payment/forfeiture linked to continued employment 12(d) Recovery of payments under an unenforceable covenant

11.235 11.238 11.248 11.248 11.252 11.263 11.270

13. Ancillary clauses seeking to strengthen or preserve restrictive covenants

11.272

14. Covenants in termination/settlement agreements/contractual or court undertakings

11.273

15. Covenants combined with forfeiture/liquidated damages or penalty clauses

11.278

16. Termination ‘howsoever caused’

11.286

Appendix to Chapter 11

547

11.1  Reasonableness of express covenants

1. INTRODUCTION 1(a) Overview 11.1  Assuming that a covenant is one in restraint of trade (see 11.248–11.269), the following four stages can be identified in assessing whether a restrictive covenant is reasonable, having regard to the interests of the parties: •

First, the meaning of the covenant needs to be ascertained – read against the background of the relevant knowledge reasonably available to the parties at the date of entering into the contract of employment: Beckett Investment Management Group Ltd and others v Hall [2007] IRLR 793 at paragraph 93 – this topic is covered in 12.17–12.43; 12.62–12.64.

•

Secondly, the (ex-)employer must demonstrate the existence of a legitimate interest – see Chapter 10.

•

Thirdly, the (ex-)employer must show that the covenant is reasonable, ie extends no further than reasonably necessary to protect that legitimate interest: Herbert Morris v Saxelby [1916]  AC  688 (HL) and Mason v Provident Clothing & Supply Co Ltd [1913] AC 724 (HL) at 733 and 741. Reasonableness is assessed by reference to the position of the parties and their expectations as at the time the contract is entered into: Patsystems v Neilly [2012] IRLR 979 at paragraphs 33–40.

•

Fourthly, both at the interim injunction stage and at trial the court considers a further question of whether it is just to grant relief at the time of the hearing (as a matter of its equitable discretion): this includes consideration of whether at the time of the relevant hearing the covenant is reasonable.

These different stages were conveniently summarised by Cox J in TFS Derivatives v Morgan [2005] IRLR 246 at paragraphs 36–39 and will arise in every restrictive covenant case (see also eg QBE Management Services (UK) Limited v Dymoke [2012] IRLR 458 at paragraphs 210–216. Occasionally an issue may arise as to whether there was consideration for the restrictive covenants (this is considered at 13.83–13.103). In some cases there may be an issue as to whether the restrictive covenants have been ‘destroyed’ as a result of a repudiatory breach by the employer which has been accepted by the employee (and this is considered in Chapter 9). 11.2  The interpretation of covenants and the doctrine of severance are dealt with in Chapter 12. The focus of Chapter 11 is on the assessment of reasonableness of the covenant. Where relevant we also cross-refer to Chapter 12, which is intended primarily to assist in the drafting process of restrictive covenants. In Chapter 10 we considered the types of interest of the ex-employer which the law regards as permissible for the ex-employer to seek to protect by restrictive covenant operating after the end of the employment relationship. We also considered the types of covenants typically entered into to protect such legitimate interests of the ex-employer. In this chapter we consider the reasonableness of such covenants on the assumption that there is a legitimate interest to protect. 548

Introduction 11.3

The focus in this chapter is on reasonableness as between the (ex-) employer and the (ex-) employee. However (although this rarely arises in practice), covenants should also be reasonable in the public interest: see 10.9–10.14. Public interest considerations may also be relevant by way of context in considering whether a covenant extends further than is reasonable in protecting the employer’s legitimate interest and also in considering the balance of convenience at the interim stage. See eg Basic Solutions Ltd v Sands [2008] EWHC 1388 (QB) at paragraph 37, where the injunction would have restrained the defendant from competing to provide a solution to the problem of leaves on train lines.

1(b)  Current trends 11.3  Historically, at various stages it has been possible to discern patterns of greater or lesser enthusiasm on the part of the courts towards the enforcement of restrictive covenants. It is our view that the current atmosphere is (put very generally) one of a willingness on the part of the courts to enforce rather than strike down restrictive covenants, ie giving precedence to freedom of contract over freedom of competition. As regards contracts of employment, this may be (at least in part) because those cases which come before the court often concern employees (in particular, senior employees) in receipt of a substantial remuneration package, so that the idea of the employee having a weaker bargaining position compared with the employer may in some cases be something of a fiction. The generally positive approach of the courts towards enforcement can be discerned in a number of different ways which are worth referring to at this stage for the benefit of the reader who is already familiar with restrictive covenant law (and to which other readers may wish to return after familiarisation with the rest of this chapter): •

The recognition of a wide range of protectable interests; eg Dawnay Day & Co v de Braconier d’Alphen and others [1997]  IRLR  442 (CA) and resistance to arguments that the employer in a group of companies (as opposed to some other company in the group) does not have a protectable interest: Beckett Investment Management.

•

A  readiness to enforce non-competition covenants to protect customer connection (and not only to protect confidential information); eg Thomas v Farr Plc [2007] IRLR 419 (CA); and see 11.48–11.117. That said, the courts continue to scrutinise non-competition covenants carefully: in Ashcourt Rowan Financial Planning Ltd v Hall [2013] IRLR 637 the court struck down a six-month non-competition covenant because (inter alia) the wording was wide enough to prohibit the defendant from being indirectly concerned in the business or activity of a direct competitor: see 11.75. See similarly White Digital Media Ltd v Weaver [2013] EWHC 1681: 11.17 and 11.167.

•

A  readiness to enforce non-competition covenants pending speedy trial by applying the low evidential test set out in Arbuthnot Fund Managers Ltd v Rawlings [2003] EWCA Civ 518 so that the covenant will (in many 549

11.4  Reasonableness of express covenants

cases) be regarded for interim purposes as enforceable, unless it is plain and obvious that the restraint of trade will fail after examination at trial: see eg Solutions Plc v Hughes 3 May 2016 (QB) unreported and Allfiled UK Ltd v Eltis [2016] FSR 11 in which cases interim enforcement of 12 month noncompetition covenants was granted (taking into account the inadequacy of damages as a remedy, balance of convenience and other factors). •

A  willingness in limited cases to enforce non-dealing covenants, even where there is no limitation in the covenant to only those customers with whom the employee had personal contact: eg Thurstan Hoskin v Jewill Hill & Bennett [2002] EWCA Civ 249; and see 11.161–11.171.

11.4  However, an opposite or counter-balancing trend can be discerned in certain cases. Notably this can be seen in a re-assertion of limits on the scope for a benign interpretation of covenants by restricting this to where there is ambiguity in the wording (albeit subject to the wording being read in context) and a reassertion of the limits on the circumstances in which severance is permissible, so that this applies only to separate covenants and not to parts of a single covenant. See Tillman v Egon Zehnder Limited [2017] IRLR 906 (CA), considered in detail at 12.50–12.51. The courts will also (in particular at trial) carefully scrutinise the periods of restraint of restrictive covenants, especially non-competition covenants: see eg Patsystems v Neilly [2012] IRLR 979 (see further 11.37).

1(c)  Ambit of this chapter 11.5  In this chapter we consider: •

Criteria relevant to reasonableness of all covenants (11.6–11.47).

•

Criteria of particular relevance to reasonableness of non-competition covenants only (11.48–11.117).

• (Generally) – covenants against soliciting/dealing with customers/ prospective customers (11.118–11.201). •

(Specifically) non-dealing covenants (11.202–11.206).

•

Covenants against enticing/employing/arranging employment for fellow employees/consultants and anti-team move covenants (11.207–11.226).

•

Covenants requiring disclosure of job offers/disclosure of covenants to prospective employer (11.227–11.228).

•

Covenants against the disclosure/use of trade secrets and confidential information (11.229).

•

Supplier covenants (11.230–11.232).

•

Other types of post-termination clauses (11.233–11.234).

•

Combining different types of covenants (11.235–11.247).

550

Criteria relevant to reasonableness of all covenants 11.6

•

Indirect covenants and payments made for such covenants (11.248–11.271). In addition, other types of ancillary clauses, which seek to strengthen or preserve restrictive covenants, are considered in Chapter 12 at 12.146–12.154.

•

Covenants in settlement/severance agreements (11.273–11.277).

•

Covenants combined with forfeiture/liquidated damages or penalty clauses (11.278–11.285).

•

Covenants which stipulate that they apply after termination, ‘howsoever caused’ (11.286–11.287).

2. CRITERIA RELEVANT TO REASONABLENESS OF ALL COVENANTS 11.6 As explained in Rex Stewart Jeffries Parker Ginsberg Ltd v Parker [1988] IRLR 483 (CA), per Glidewell LJ at paragraph 41, ‘In the end, whether a particular provision is or is not reasonable to protect the employer’s legitimate interests, is a matter of impression.’ That evaluation is to be approached ‘in a broad common sense way’: Tradition Financial Services Limited v Gamberoni [2017] IRLR 698 at paragraph 21 (following Stenhouse (Australia) Ltd v Phillips [1974] AC 391 (PC) at page 402). However, there are a number of considerations which (where they apply) are ordinarily relevant to the assessment of reasonableness of most covenants. As already discussed in Chapter 10 (at 10.19–10.41), it is necessary to identify the nature of the interests to be protected, and it is also relevant whether the covenant is part of a broader commercial bargain in addition to the employment relationship or involves or is akin to a vendor/purchaser agreement. We address first the need for assessment at the time the contract was entered into. We then address further potentially relevant considerations including the following: •

The position of the employee (11.8–11.9).

•

The nature of the employer’s business (11.10–11.13).

•

The nature of the employee’s role and of the employee’s activities whilst with the claimant employer (11.14–11.16).

•

‘Mere shareholding’ in a new business (11.17–11.23).

•

Competition by the ex-employee as principal only, or also as agent for a company in which he has an interest? (11.24–11.27).

•

Duration of the restriction (11.28–11.37 and Appendix).

•

Whether the covenant is unusual (11.38–11.39).

•

Period of notice required under the contract (11.40–11.41).

•

Inequality of bargaining power (11.43–11.46). (Whether the adequacy of consideration for the covenants is a relevant factor is considered at 13.94– 13.102.)

•

Reasonableness to be assessed excluding improbabilities (11.47). 551

11.7  Reasonableness of express covenants

2(a) Requirement to focus on the time the contract was entered into 11.7  The assessment of whether the restriction is reasonable is to be determined by reference to the position of the parties and what they could reasonably have contemplated at the time of entering into the contract: Patsystems v Neilly [2012] IRLR 979 at paragraphs 33–40. A key question may then arise as to what was in the parties’ reasonable contemplation. This issue is considered in detail in Chapter 12 at 12.11–12.16.

2(b)  Position of the employee 11.8  The seniority of the employee and the nature of the occupation are significant. Often (although not always) the senior employee will have more opportunity to learn the trade secrets or confidential information of the employer or to gain influence over customers. Where the employee is junior, and/or employed at a low wage, the court may be unwilling to enforce the covenant: Sir WC Leng & Co Ltd v Andrews [1909] 1 Ch  763 at 771; and see Spafax Ltd v Harrison [1988]  IRLR  442. The seniority or otherwise of the employee may also bear on whether there was inequality of bargaining power (see further 11.43–11.46). In M  &  S  Drapers (a firm) v Reynolds [1956] 3  All ER  814, in the context of considering a five year non-solicitation covenant, the court distinguished the position of a collector/salesman from the case of the managing director in Gilford Motor Co v Horne [1933] Ch  935 (CA). Denning LJ commented (at paragraph19) that a managing director could look after himself, whereas the salesman needed the protection of the law. The approach was followed in Hanover Insurance Brokers Ltd v Schapiro [1994]  IRLR  82 (CA) where, in upholding 12 month non-solicitation and non-poaching covenants, the court emphasised that the defendant, as chairman of the claimant, held a position that was at least as well placed to look after his own interests as the managing director in Gilford Motor Co v Horne. 11.9  There may be some debate as to whether a particular employee is in fact junior; this depends on the nature of the business and the role of the employee in the business. It is also necessary to consider any circumstances differentiating the case from the norm. In Croesus Financial Services Limited v Bradshaw [2013] EWHC 3685, the two defendant employees were father and son. The son was a relatively junior financial adviser who was not yet qualified, but had been recruited specifically as a successor to his father who had built up a loyal and stable client base over decades. The non-dealing and non-solicitation covenants were designed to protect that client connection and, as such, the case was distinguished from that of an ordinary junior employee and the covenants were therefore enforced. As noted in Tradition Financial Services Limited v Gamberoni [2017] IRLR 698, the court is not forced to place employees in any particular category, whether as analogous to the collector/salesman in M & S Drapers or the managing director in Gilford Motor Co. In Tradition, the employee, a junior broker in a highly paid industry, fell between those extremes. That said, in some businesses even lowly paid employees may build up a valuable client connection: 552

Criteria relevant to reasonableness of all covenants 11.13

see eg Adorn Spa Ltd v Amjad [2017] EWHC 1313 (QB) at paragraph 13 (beauty salon business).

2(c) Nature of the business of employer (including where a business activity has ceased) 11.10  The ex-employee should not be restrained from carrying on activities outside the area of business or practice of the ex-employer: see Routh v Jones [1947] 1 All ER 758 (a doctor in general practice could not be prevented from practising in the restricted area as a consultant – which the court held could not injure the practice of the ex-employers). In Scully UK Ltd v Lee [1998] IRLR 259 (CA) the covenant was struck down where it was held that the business embargoed was not limited to a business which was in competition with that of the claimant company. No intention to limit the restriction could be found in the words of the covenant, and there was no reason for such a limit to be implied. 11.11  However, an important distinction is to be drawn between the enforceability of the covenant and: (a) whether there is a breach, and (b) whether the court’s discretion should be exercised to grant relief, and indeed what relief should be granted. An injunction was refused in Phoenix Partners Group LLP  v Asoyag [2010] IRLR 594 on the basis that the claimant had ceased involvement in the specific business which the employee had conducted for the claimant and was now conducting for another business. On the proper construction of the noncompetition restriction, the question of whether there was a breach (as opposed to the enforceability of the covenant) had to be determined at the time of the relevant acts alleged to constitute the breach. As such, there was no real prospect that the ex-employee’s broking on behalf of his new employer in the Eurostoxx market would at trial be held to amount to competing with any part of the business carried on by the claimant. 11.12  Equally, there is no free-standing principle that a restrictive covenant only remains enforceable for as long as the employer continues to have a legitimate business interest to protect: see Towry EJ Limited v Bennett [2012] EWHC 226 (at paragraphs 394–404). A court might in its discretion refuse to grant injunctive relief in a case where the employer no longer has the requisite legitimate interest. However, this does not provide a defence to a claim for breach of contract, as arose in Towry where there had been a business transfer. The impact of TUPE on restrictive covenants is considered in Chapter 13 at 13.131–13.189. 11.13  Fact-sensitive questions may also arise as to the scope of business which is properly to be regarded as competitive with the employer’s business. In Polymasc Pharmaceuticals plc v Charles [1999] FSR 711, Laddie J granted an interim injunction in relation to a 12-month non-competition covenant where it extended more widely than competing businesses which infringed the claimant’s patents or confidential information. It covered also competitors using prior art techniques over which the claimant’s techniques were an improvement. Merely to limit the ambit of the worldwide non-competition covenant to competitors using the claimant’s confidential information and patents would have rendered 553

11.14  Reasonableness of express covenants

the covenant valueless. It was important that the ex-employee should not work for competitors in the same general field as the claimant, to ensure that there was no leakage of confidential information. That said, the ex-employee should not (over too wide an area or for too long a period) be prevented from carrying out too wide a range of activities where all his expertise and experience lies in a restricted field: Commercial Plastics [1964] 3 All ER 546 (CA (at page 554) and Herbert Morris Ltd v Saxelby [1916] AC 688.

2(d)  Nature of the employee’s work 11.14  Subject to arguments as to whether a wider restriction can be justified in order to be able to ‘police’ the restriction (see 11.68–11.77), the employee should only be restrained from carrying out the sort of business in which he was engaged as an employee: Attwood v Lamont [1920] 3  KB  571 (CA) and Commercial Plastics Ltd v Vincent [1964] 3 All ER 546 (CA). In Wincanton Ltd v Cranny [2000] IRLR (CA) a non-competition covenant was struck down on the basis that the prohibition against competing in any capacity ‘with any business carried on’ by Wincanton was plainly too wide. Wincanton’s business had a number of facets. It was concerned not merely with distribution, but also for example with logistics. The use of the standard restraint clauses was obviously designed to extend their restrictive effect on ex-employees beyond the particular field of activity in which Mr Cranny had been personally engaged. See by contrast Turner v Commonwealth & British Minerals Ltd [2000]  IRLR  114 (CA) where the court was able to construe the covenant as relating only to the business with which the defendant employees had been involved whilst employed (mining activities in Tajikstan) rather than extending to other areas where they merely had oversight as directors. On that basis the non-competition restriction was upheld. 11.15  There may also be fact-sensitive questions as to whether different facets of the business are in fact properly to be regarded as discrete. See eg Rogers v Maddocks [1892] 3 Ch 346 (CA), where selling wholesale and retail were held not to be two distinct businesses, but only different modes of carrying on one business, so that the covenant was upheld. However, the question is one of substance rather than form. See further 11.48–11.117 in relation to non-competition covenants. 11.16  Covenants which express imprecisely the prohibited type of employment may be struck down: Peris v Saalfeld [1892] 2 Ch 149 (ex-employee prevented from accepting ‘another situation as clerk or agent, or from establishing himself in the particular area’). It has repeatedly been emphasised that it is a ‘cardinal principle’ that there is certainty as to what is required in order to comply with the covenant: Lawrence David Ltd v Ashton [1989] ICR 123 (CA) at page 132D; CEF Holdings Limited v Mundey [2012] IRLR 912 (at paragraphs 43–44). However, in some circumstances the covenant may be saved by a purposive construction (see 12.35–12.40) or otherwise by resolving as a matter of construction apparent lack of clarity in the drafting as to the precise ambit of the prohibited activities: see eg Cullard v Taylor (1887) 3 TLR 698, in which a solicitor who was prohibited from operating in a certain area was held to be in breach when he 554

Criteria relevant to reasonableness of all covenants 11.18

sent letters to clients residing in that area. As to a prohibition against activities which are preparatory to competition (as distinct from actual competitive activities) see 11.35.

2(e)  ‘Mere shareholding’ by ex-employee in new business 11.17 In Scully v Lee [1998]  IRLR  259 at paragraph 33 one of the reasons for the failure of the non-competition covenant was that it extended to the ex-employee being ‘… otherwise interested … as shareholder …’ in various businesses. Again in Tillman v Egon Zehnder Ltd [2017]  IRLR  906 (CA) a non-competition covenant was struck down as too wide where it applied to being engaged, interested or concerned in any competing business, which was construed to cover the acquisition of a shareholding, however minor (it being admitted that if so construed, the covenant was invalid). In White Digital Media Ltd v Weaver [2013] EWHC 1681 the court (relying on Scully) refused to enforce a non-solicitation/dealing covenant because it restrained the defendant from soliciting or dealing with customers not only as an employee or director but also ‘whether as a shareholder … or otherwise’ (refusing to sever or ‘blue-pencil’ these words from the covenant (see paragraphs 23–27)). This was a seemingly unwarranted extension of Scully, given that the effect of the ‘shareholder’ wording was not to extend the scope of a non-competition embargo but rather to qualify the capacities in which solicitation or dealing by the ex-employee were not permissible. 11.18 The better view, we suggest, is that it is only in relation to non-competition covenants, or where on its true construction the covenant applies to the mere fact of having a shareholding in a business which seeks to solicit or deal with the relevant customers, that the fact that a restriction extends to the capacity as shareholder is likely to cause a covenant to be too wide. Thus in East England Schools v Palmer [2014] IRLR 191 the deputy judge (generously) sought to explain the decision in White Digital Media on the basis that the judge in that case must have thought that the non-solicitation/dealing covenants had ‘similar practical effect’ (paragraph 71) as the non-competition covenant in Scully ie that on their proper construction they would be contravened merely by holding a minority shareholding. In East England Schools a recruitment agency was granted an injunction and damages in respect of a former employee’s breaches of post-termination covenants in her contract of employment which prevented her from soliciting or dealing with its clients for a specified period. The restriction on solicitation in the capacity of shareholder was construed to mean that there would be a breach only in the event of a positive act of canvassing or soliciting by her. The non-dealing covenants provided that the employee would not ‘be concerned with the supply’ of the relevant services to any client, prospective client or candidate or prospective candidate ‘or otherwise deal with them’. This was construed as in effect containing two distinct obligations. The first part, relating to being concerned in supply of the services, could be breached merely by holding a minority shareholding. This was too wide but it was blue-pencilled. The second (non-dealing) part was construed such that it 555

11.19  Reasonableness of express covenants

would not be breached by mere shareholding, and was upheld. See also by contrast Berry Birch and Noble Financial Planning v Berwick [2005] EWHC 1803 (QB) where a non-solicitation/dealing covenant was construed as applying to holding a minority shareholding in a competing business and on that basis was regarded as being too wide. 11.19  In the light of these decisions, when drafting covenants it should be made clear that the restrictions do not apply merely to passive shareholding. At least if the covenant is intended to cover a shareholding, there should be included an exception for minor shareholdings below a specific level. The safer course is then to provide for this by way of an additional and separate restriction in the light of the narrow approach to severance adopted in Tillman (see 12.50–12.51). Particular care is needed when adopting the common drafting approach of including a definition of the capacity in which a former employee is restricted from acting post-termination. That approach has the attraction that the substantive covenants can be framed in more succinct terms. However, where as a result of this approach the definition of capacity applies to several different restrictions, a consequence is that any reference to mere shareholding is unlikely to be capable of being severed. The definition should therefore not include a restriction on being a shareholder or which could be construed as imposing such a restriction. 11.20  Following the decision in Tillman, unless the clause sets out an exception in relation to a mere shareholding, or there is any sufficiently clear indication from the context including any other provisions in the contract, a reference to being ‘concerned in’ or ‘interested in’ a competing business is likely to be construed as covering a mere shareholding. In Ashcourt Rowan Financial Planning Ltd v Hall [2013]  IRLR  637, which does not appear to have been cited in Tillman, the phrase ‘concerned in’ was construed as meaning working in and not merely having a financial interest in a competing business. However, in Tillman the Court of Appeal, reversing the first instance decision of Mann J, concluded that a reference to being ‘interested’ in a competing business unambiguously covered a mere shareholding, left no scope for a benign construction in favour of validity of the covenant, and that the same would apply even if the covenant simply referred to being ‘concerned in’ a competing business. As to the latter, the court agreed with the view expressed in UK  Power Reserve Ltd v Read [2014]  EWHC  66 that, but for the terms of a proviso in the noncompetition covenant, it would have regarded a restriction framed in terms of being ‘concerned’ in a competing business as covering a mere shareholding and as rendering the restriction too wide, unless it could be blue-pencilled. In Read the proviso was to the effect that nothing in the clause should restrain the employee from being employed, engaged or interested in any such business in so far as his duties or work related to services or goods of a kind with which he was not materially involved with the employer. In the light of the references to duties or work, the court construed the clause as not covering a mere shareholding. Similarly the Court of Appeal in Tillman (at paragraph 17) approved the approach in CEF  Holdings Limited v Mundey [2012]  IRLR  912 where a reference to being ‘interested in’ a competing business, without other wording pointing to being engaged or working in the business, was considered 556

Criteria relevant to reasonableness of all covenants 11.23

to denote a restriction as a shareholder and was one of the grounds on which the non-competition covenant was regarded as being too wide. 11.21  Notwithstanding the approach in Tillman, as indicated by the decision in UK Power Reserve Ltd v Read, it may still be that other wording in the contract serves to qualify and narrow the meaning of a restriction upon being interested or concerned in a competing business. That was achieved in TFS  Derivatives v Morgan [2005] IRLR 246 (not cited on appeal in Tillman) where the phrase ‘interested in any capacity’ in a competing business activity, when read together with other types of involvement identified in the preceding words (ie directly or indirectly undertaking, carrying on or being employed or engaged), were construed as referring narrowly to having a direct interest such as being a director of a company rather than a mere shareholding. That aspect of the reasoning is, however, at least questionable in the light of Tillman, though it might be argued that the slightly longer list of alternatives to being interested in the competing business enabled the eiusdem generis principle of construction to apply. 11.22  The reasoning in Tillman also now casts doubt on the conclusion reached in Tradition Financial Services Limited v Gamberoni [2017]  IRLR  698 when considering the meaning of a restriction in a non-competition covenant on being ‘interested in any capacity in’ a competing business activity. Foskett J construed this as not covering a mere passive shareholding. This was in part on the basis that it could not have been intended that the restriction would prohibit any shareholding post-termination given that there was a separate provision in the employment contract permitting a shareholding of up to 5% during employment. That line of argument was firmly rejected by the Court of Appeal in Tillman, though since the decision in Gamberoni was proceeding on appeal, it preferred to leave open whether there might be other circumstances that could be relied upon in that case to justify a narrower conclusion. Notably, whereas in Tillman the clause referred to being interested or concerned in a competing ‘business’, in Gamberoni the clause referred to a ‘business activity’. At first instance the court in Gamberoni accepted (at paragraph 128) that in the absence of other indicia in the contract the better view was that a mere shareholding did not constitute a business activity. Foskett J added in the alternative that there was at least an ambiguity as to whether a shareholding could be a ‘business activity’ and as such the clause could be construed in favour of validity. Both those conclusions may be regarded as open to question in the light of the reasoning in Tillman, and the fact that the clause extended to being directly or indirectly interested in a business activity. 11.23  However, in our view a clause is not likely to be construed as covering a mere shareholding where it applies to being directly or indirectly ‘engaged in any capacity’, but does not refer more broadly to being interested or concerned in that business: see eg  EG  Solutions v Hughes [2016]  EWHC  3206 (QB). In that case an area covenant containing a restriction on ‘in any capacity’ carrying on or being otherwise engaged in a competing business was construed as necessarily implying some active participation in the business rather than merely a passive shareholding. See also Adorn Spa Ltd v Amjad [2017] EWHC 1313 (QB) where the deputy Judge (Richard Salter QC) concluded (at paragraphs 557

11.24  Reasonableness of express covenants

21–23) that the reference to being 'directly or indirectly' concerned with a trade or business did not extend to a minority shareholding or a shareholding in a large company (which would have extended beyond the legitimate business interests of the employer).

2(f) Competition by ex-employee as principal only or also as agent for a company in which he has an interest? 11.24  A covenant not to do something will also operate to prevent an employee doing that thing through an agent, because the agent’s acts are those of the principal: Rush Hair Ltd v Hayley Gibson-Forbes and SJ Forbes Limited [2017] IRLR  48. A  question may also arise as to whether the covenant operates to prevent the employee doing something through a company which the employee has set up or of which the employee is a director or shareholder. A  director is the agent of the company, but the reverse does not ordinarily apply; the company is not ordinarily the agent of the director. The issue arose in Rush Hair. The defendant was a successful hairdresser and businesswoman. She entered into a share purchase agreement under which the claimant, Rush Hair, purchased from her the shares in two companies, including one which owned hair salons in Windsor and Maidenhead respectively. One of the covenants in the agreement was a two-year restriction on her not to ‘canvass, solicit, entice or employ’ a number of named employees of the salons. During the restraint period companies controlled by the defendant took on three of the individuals named in the covenant. It was argued that this did not involve any breach on the basis that they were employed not by the defendant, but by the companies through which she traded. The argument failed. On the facts the defendant had been involved in the recruitment of the employees. In one case she had signed the consultancy agreement, and in the other two cases the discussions about employing them had taken place through her and she had taken at least some of the steps necessary to employ them. A key question was therefore whether the restriction applied where she was acting not as principal, but as the agent of her companies. The deputy judge, Martin Chamberlain QC, concluded that it did. There was a genuine ambiguity on the face of the wording of the covenant as to whether it applied to her acting as agent, and as such it was to be given a commercially sensible meaning. Here this entailed construing the covenant so as to cover her conduct as agent since, against the context that the parties were aware that it was the defendant’s usual practice for her salons to be run through a trading company, any other construction would have meant that the non-poaching/employment covenant would have been toothless. Apparently no injunctive relief was sought against the relevant companies. 11.25  As the analysis in Rush Hair makes clear, there are four strands of reasoning which might be relevant in such a case: •

558

It may be that, as was the case in Rush Hair, the issue can be resolved as a matter of construction. Indeed in many cases the covenants will be widely drawn to cover acts of the ex-employee whether ‘directly or indirectly’

Criteria relevant to reasonableness of all covenants 11.26

and whether ‘as principal or agent’, and as such will extend to competitive acts by the ex-employee not only on his own behalf but also on behalf of another. Even without such express language, as was the case in Rush Hair, the covenant will often be capable of being interpreted to extend to such acts. •

Where a person who controls a company uses that company ‘as a cloak or sham’, ie ‘so as to conceal the identity of the real actors’, the application of the ‘concealment principle’ enables the court to conclude that the acts apparently done by the company are, in fact, acts of the person controlling it.

•

Where the controller interposes a company deliberately so as to seek to rely on the separate legal personality of the company to defeat a legal right which exists independently of the company’s involvement or frustrate its enforcement, the ‘evasion principle’ enables the court to pierce the corporate veil, ie to disregard the company’s separate legal personality so as to treat the company’s acts as, in law, those of the controller and vice-versa.

•

It may be possible to say that, contrary to the usual position where a director is the agent of the company, on the facts the company was acting as the agent of the controller for the purpose of carrying on the business.

11.26  The ‘concealment principle’ and ‘evasion principle’, referred to in the previous paragraph, were explained by Lord Sumption in Prest v Petrodel Resources Ltd [2013] 2 AC 415 by reference to the well-known restrictive covenant case of Gilford Motor Co v Horne [1933] Ch  935 (CA). In Gilford the managing director of a motor parts business, Mr Horne, covenanted that he would not, within five years of the determination of the agreement, ‘either solely or jointly with or as agent for any other person, firm or company, be engaged, directly or indirectly, in any business similar to that of the company within a radius of three miles from any premises wherein the business of the company shall for the time being be carried on’. Shortly after the termination of his appointment, Horne opened a new spare parts business. The business was initially operated by Horne as a sole trader. Later, having been informed of the terms of the covenants he had given, he caused a limited company to be incorporated and the business was then run through this company. As explained by Lord Sumption in Prest (at paragraph 35), as against Horne, the injunction in Gilford was granted on the basis of an application of the concealment principle. The attempt to use the company as a device to hide the real actors did not prevent the court identifying that the business was in fact carried on by Horne. That was sufficient because the covenant prevented Horne from competing with the former employer whether as principal or agent. It did not matter whether the business belonged to Horne or his company. Conversely the injunction against the company was on the basis of an application of the evasion principle. The company had been interposed as a device to seek to enable Horne to divert his former employer’s business for his own benefit. The injunction against his company was to deprive him of the benefit which he might otherwise have gained from the company’s separate legal personality. However, Lord Sumption noted (at paragraph 35) that the evasion principle was a limited one because in almost every case where it might apply, the facts would in practice disclose some relationship between the company and 559

11.27  Reasonableness of express covenants

the controller which makes it unnecessary to pierce the corporate veil. Indeed in Prest Lord Neuberger (at paragraph  71) justified the injunction against the company in Gilford on the basis that the company was Horne’s agent (contrary to the usual position that the director is the agent of the company). 11.27  Equally, the approach in Rush Hair illustrates that ordinarily where the concealment principle would apply, the same result could be reached without the need to rely upon it. Having carefully analysed the Prest and Gilford cases, the deputy judge in Rush Hair concluded that neither the concealment or evasion principles was applicable because, on the facts, there was nothing to indicate that the relevant trading companies were incorporated (or deployed) with the intention of concealing the claimant’s role in the business or to evade liability under the covenant. On the contrary she was following her usual practice, where she had over the years run a number of salons and in each case a limited company was incorporated for the purpose. This was contrasted in Rush Hair (at paragraph 44) with the position in Gilford, where the relevant company was incorporated shortly after Mr Horne had received a copy of the agreement containing the covenants, and the inference was drawn that it had been set up as a device to conceal his involvement and to evade liability.

2(g) Duration 11.28  The period of the restraint is an important factor in determining the reasonableness of the covenant: Sir WC Leng & Co Ltd v Andrews [1909] 1 Ch 763 at 771; Haynes Doman [1899] 2 Ch 13; Fitch v Dewes [1921] 2 AC 158 (HL). In Coppage and anor v Safety Net Security Ltd [2013] IRLR 970 (CA), Sir Bernard Rix (with whose reasons the other members of the Court of Appeal agreed) described the period of restriction as a fundamental consideration of reasonableness, stating (at paragraph 19) that the shortness of the six-month restriction in that case was a powerful factor in assessing the overall reasonableness of the covenant (which was upheld). 11.29  In practice, it will generally not be helpful to the court for witnesses to express their opinions on whether the length of the covenant is reasonable, as opposed to addressing the factors and circumstances which are relevant to the assessment of that issue. In Stenhouse (Australia) Ltd v Phillips [1974] AC 391 (PC) Lord Wilberforce said: ‘The question is not how long the employee could be expected to enjoy a competitive edge over others seeking the client’s business. It is, rather, what is a reasonable time during which the employer is entitled to protection against solicitation of clients with whom the employee had contact and influence during employment and who were not bound to the employer by contract or by stability of association. This question their Lordships do not consider can advantageously form the subject of direct evidence. It is for the judge, after informing himself as fully as he can of the facts and circumstances relating to the employer’s business, the nature of the employer’s interest to be protected, and the likely effect on this of solicitation, to decide whether the contractual 560

Criteria relevant to reasonableness of all covenants 11.30

period is reasonable or not. An opinion as to the reasonableness of the elements of it, particularly of the time during which it is to run, can seldom be precise, and can only be formed on a broad common sense view.’

11.30  The evidence required is likely to depend on the type of covenant and, related to this, the interest which is sought to be protected, together with an assessment of whether the restriction is proportionate having regard to the impact on the employee. In the case of covenants designed to protect customer connection, the question is what is the minimum time required to protect the customer connection. While (as set out in the above dictum of Lord Wilberforce) that does not necessarily equate with the period required to remove (entirely) the employee’s competitive edge, the assessment of the time this would require is nonetheless highly significant. Relevant considerations are likely to include: •

The nature and seniority of the employee’s role and extent of knowledge of and likely influence over customers: eg Monster Vision UK Ltd v McKie [2011] EWHC 3772; Coppage v Safety Net Security Ltd [2013] IRLR 970 (CA).

•

The frequency of contact with customers and the regularity with which they place orders or require services.

•

The length of time it would typically take to build up and consolidate customer relationships (see eg  Associated Foreign Exchange Ltd v International Foreign Exchange (UK) Ltd [2010]  IRLR  964 – where (at the interim stage) the 12-month period was held likely to be found to be excessive at trial as it did not usually take many months to build up customer relationships).

•

The time likely to be required to recruit and train a replacement and to establish relationships with customers. See eg WRN Ltd v Ayris [2008] IRLR 889, noting (at paragraph 70) that in the case of an employee employed to sell, the purpose of the period is to enable an employer to have the opportunity to replace the employee (taking into account the various elements of the process of engagement – advertising, considering applications, conducting interviews, making a decision and the possible need for the recruit to give notice to their current employer – and for the replacement to have the chance to seek to forge the contacts which the previous employee enjoyed). The notice required to be given by the defendant employee was also taken into account (presumably on the basis that it might indicate the notice that a replacement might have to give).

•

Whether it is possible to accelerate the process of building up relationships, industry norms and the likely impact on the employee of the covenant.

•

The fact that the particular business is cyclical. For example, in the insurance industry, where most policies are renewed annually, a one-year covenant may be more readily justifiable: see eg Romero Insurance Brokers Limited v Templeton [2013] EWHC 1198 (where in concluding that a 12 month restriction in a non-solicitation covenant was reasonable, reliance was placed on the fact that many insurances are renewed annually and 561

11.31  Reasonableness of express covenants

that a 12 month period of restriction is common in the insurance broking industry). Indeed, 13 months is often advised, to take account of a month of grace usually allowed for the renewal of insurance policies (see also eg Underwriting Exchange v Newall 3 February 2016 (QBD) (unreported) at paragraph 15; Lonmar Global Risks Limited v West [2011] IRLR 140 – 12 months restraints appropriate for mostly annual renewal work). •

Whether there is any industry standard eg Beckett Investment Management Group Ltd v Hall [2007]  ICR  1539, [2007]  IRLR  793 (CA), Croesus Financial Services Ltd v Bradshaw [2013] EWHC 3685; Romero Insurance Brokers.

•

Whether there is a disparity with the periods applicable to other employees: Dairy Crest v Wise (24 September 1993, unreported) (QBD), though that is not determinative and there may be differences as to what covenants can be negotiated in different cases: see eg  Egon Zehnder Ltd v Tillman [2017] EWHC 1278 (Ch) at paragraph 54.

11.31 As noted above (see 11.6) the assessment of whether the period is too long is in part a matter of impression, to be approached in a broad common sense way. However, as illustrated by the decision in Beckett Investment Management Group Ltd v Hall [2007] ICR 1539, [2007] IRLR 793 (CA), it does require that full account be taken of the important aspects involved in protecting the legitimate interests in question and, in the case of client connection, consideration of the realities of the time required to take sufficient steps in relation to shoring up customer loyalty. In that case the claimant sought to enforce a client nondealing covenant against its former employees, who were registered independent financial advisers. The first defendant (Mr Hall) had been employed as a sales director and the second defendant (Mr Yadev) as financial consultant. The Court of Appeal regarded the rationale of the judge below for a maximum three-month period as deficient in failing to have regard to what would need to be done to persuade clients to remain loyal. The non-dealing covenant concerned clients of a subsidiary company of the employer (BFS). At first instance HHJ Seymour QC had reasoned that all that was needed was a period long enough to allow BFS to make contact with the client and thereafter to have an adequate opportunity, if the client was not immediately persuaded to continue to do business with BFS, to seek to change the client’s mind. In the view of the judge, any period longer than three months would be excessive because once BFS had made its pitch and failed, to prevent the (former) client from doing business with someone in whom he did have confidence would be contrary to public policy. In rejecting this approach, the Court of Appeal noted that the ex-employees in question were not run of the mill, expendable employees, but were of enormous importance to the success of the employer. To have any prospect of retaining the clientele, the ex-employer would need to ‘recruit, organise, train and project’ suitable replacements. The judge had instead chosen to attach significance to the fact that a non-dealing clause would prevent a client from doing business with someone in whom he had confidence for a period which the judge considered to be too long. During the period of restriction, the client was not compelled to remain with the covenantee. If he could not await the expiration of the period of restriction, he could in the 562

Criteria relevant to reasonableness of all covenants 11.33

meantime seek the advice of any service provider with which the covenantor was unconnected. For these reasons, the Court of Appeal concluded that it was wrong to confine what was reasonable to a period of three months. In concluding that 12 months was a reasonable period, specific regard was had to the seniority and importance of the two ex-employees, the evidence about business patterns, the logistics of replacing them, and the uncontradicted evidence of an industry standard of covenants of 12 months’ duration. 11.32 The nature of the evidence that may assist is further illustrated by the approach in JM  Finn & Co. Limited v Holliday [2014]  IRLR  102. Although this was in the context of considering the appropriate period of garden leave (in relation to a 12 month notice period for a stockbroker, Mr Holliday), the court expressly proceeded on the basis that the period for which a restraint was granted had to be justified on similar grounds to a post-termination covenant. In concluding that a 12 month period of restraint was necessary to protect client connection, the court (Simler J) placed emphasis on evidence from a senior investment manager who had taken over some of Mr Holliday’s clients that in his experience it takes a long time to lay and entrench the foundations of a relationship between a new investment manager and clients. Several factors were identified in support of that view. He explained that formal contact with clients only occurred a few times a year and that it was difficult to accelerate the process by arranging additional meetings, as this may appear too pushy and be counter-productive. He also contended, as is commonly asserted in such cases, that the process of seeking to re-establish the relationship, would be virtually impossible if Mr Holliday, with the advantage of his existing relationship was at the same time soliciting the clients for a new employer. In addition, since valuations were only sent out every six months, and taking into account the volatility of the market, it was argued that it would take at least a year for the client to see an accurate picture of the success of the portfolio with the new investment manager. In all, Simler J accepted (at paragraph 70) that, while some of the factors relevant to a new investment manager establishing a relationship would quickly be apparent, such as whether there was personal chemistry, other factors such as demonstrating integrity, reliability and good performance would take time, that the process of forging a new relationship could not be artificially speeded up without running the risk of this being counter-productive and that the timing of meetings was largely dictated by external factors such as yearly valuations. 11.33  Difficult issues arise when considering teams of employees. Often more junior employees subject to shorter notice and covenant periods will move first to a competing employer: see eg GFI Group Inc v Eaglestone [1994] IRLR 119. They are then able to keep the ‘seat warm’ for the more senior employees who were members of the same team – and who remain on the payroll of the (first) employer. To avoid such planned ‘staggered’ team moves, consideration might be given to applying the same notice period for all team members and/or to imposing covenants of the same period for all team members, though any benefit would need to be balanced against the risk to the business of thereby causing team members to end employment at the same time. In our view, a court would be likely to regard as reasonable a somewhat lengthier period in relation to a more 563

11.34  Reasonableness of express covenants

junior employee in circumstances where that employee forms an important part of a team than might otherwise be justifiable when considering that employee in isolation. However, given that validity is to be determined at the time the contract was entered into, there is a danger that, in relation to the period of the covenant, the court may not be persuaded that a possible team move merits a longer or substantially longer period than would be appropriate viewing the employee’s position individually. It is, of course, possible to draft the notice period and/or covenants so that their period increases where, for instance, more than a certain number of employees leave at the same time or, say, within the previous six months of the covenanting employee’s departure. So far as concerns the notice period, this is an approach sometimes used in solicitors’ partnership agreements. The approach is more problematic in relation to covenants because of the ‘all or nothing’ test for validity. As such, at least in relation to covenants, we do not recommend this technique. It is likely to be complicated to draft and may even fail on grounds that the period is too vague or unpredictable. 11.34 In the case of non-competition or non-solicitation/dealing covenants designed to protect confidential information, the principal factor will ordinarily be the ‘shelf life’ of the confidential information. Where there are secret (but unpatented) processes which are expected to remain confidential for a long time, a long period may be justified. However, in a world of rapidly developing technology it may be difficult to justify a long period, even in the case of technical secrets. In the case of customer information such as prices, special requirements and the like, only short periods (usually in the three to 12-month range) will ordinarily be justifiable. Different considerations will apply according to whether the covenant is a non-solicitation/dealing covenant or a non-competition covenant: in the former type of covenant a longer period may be tolerated. Lifetime restrictions will not normally be upheld: Sir WC Leng and Co Ltd v Andrews [1909] 1 Ch 763. 11.35 Where the ex-employee is prohibited not merely from competing but also from preparing to do so, the overall effect is in practice to extend the duration of the covenant beyond the stated period. For example, the true effect of prohibiting preparatory activity for 12 months may be to prohibit competition for 15 months, if the time required to complete the preparations is three months. It is the 15-month duration which the court must consider. The same may be true where there is a clause in the contract of employment which prevents the employee during employment from engaging in preparatory activities. Likewise, where there is a garden leave clause, the overall period of garden leave together with the restrictive covenant must be considered: Credit Suisse Asset Management v Ltd v Armstrong [1996] ICR 882 (CA). The approach to combining garden leave and other covenants is addressed further at 11.91–11.92 and 11.238–11.247. 11.36  Some similar considerations are likely to apply where the interest to be protected consists of stability of the workforce (primarily protected by nonpoaching covenants). In part the restriction may be founded upon protection of confidential information consisting of knowledge of remuneration terms or particular knowledge of the skillset or qualifications of the relevant employees 564

Criteria relevant to reasonableness of all covenants 11.37

(see eg Dawnay Day & Co Ltd v D’Alphen [1998] ICR 1068 (CA) per Evans LJ at page 1111C). That would suggest a focus on the shelf-life of the information. However, the interest to be protected is rarely based on information which is sufficiently confidential to be protectable after the termination of employment (see 11.56), and ordinarily the need for protection arises from the element of influence which the departing employee may have with the other employees or their loyalty to him, perhaps in combination with knowledge of their terms or aptitudes. In those circumstances the restraint is primarily directed at a period of time reflecting any special knowledge of matters such as remuneration term. It also allows for a period of stabilisation after departure of an important employee, or for ties of loyalty to him to decrease and new working relationships to be established, for example for a successor as head of a team to build up fresh ties of loyalty with the team. The period of protection required may therefore be affected by factors such as whether (viewed from the perspective of what was envisaged at the time of entering into the contract) the employee worked as part of a close-knit team, the seniority and importance to the business of the employee and the likely time to recruit or install a replacement and build up fresh ties of loyalty. The extent of investment in training of staff may also be significant (see SBJ Stephenson Ltd v Mandy [2000] IRLR 233 (at paragraph 39)). 11.37  Each case depends on its own facts and, generally, reference to other cases in relation to periods upheld or not upheld may be apt to mislead. In the most general way it may be said that, as a starting point only, employment covenants in excess of 12 months, particularly non-competition covenants, should be regarded as potentially vulnerable. The reverse is not necessarily true – periods shorter than 12 months may be too long. That may be indicated by the cycle of business. For example, in the inter-dealer broking market (which may be an unusual case) dealers may have daily contact with their clients, so that a replacement will have ample opportunity within a short period of establishing a good connection with the clients. In such circumstances it may be difficult to justify a non-dealing covenant of much longer than four to six months, although no doubt in justifying a period of, say, six months, it could be argued that the time to recruit a replacement needs to be taken into account. Likewise, in some businesses the ‘shelf life’ of confidential information may be very short, justifying only a short covenant. The broader the ambit of the covenant, the harder it will be to justify the period of the covenant. So, 12 months may be permissible for a non-solicitation covenant, but too long for a non-competition covenant (see eg Patsystems v Neilly [2012] IRLR 979: at trial a 12-month non-competition restriction for an account manager was held to be too long to keep out an employee from the only market in which he had employment experience). It is also true that more recent cases may be more influential with the court than older cases. In Coppage and Freedom Security Ltd v Safety Net Security Ltd [2013]  IRLR 970 the Court of Appeal emphasised that each case turns on its own facts and that precedents are not of much assistance. However, decided cases are nonetheless useful in identifying the factors which a court will take into account in assessing the reasonableness of the periods of restrictive covenants – as indeed occurred in Coppage itself. With these reservations in mind, the Appendix sets out examples of cases focusing on the period of the covenants. 565

11.38  Reasonableness of express covenants

2(h) Whether covenant usual or unusual 11.38 In Sir WC Leng & Co Ltd v Andrews [1909] 1 Ch 763 (CA), at 770, one of the main reasons for striking down a non-competition covenant against a reporter was that the uniqueness of the covenant tended to show its unreasonableness. In addition, the employee was a minor at the time the contract was made and, as a junior employee, not privy to any confidential information. The covenant was furthermore unlimited in time. Uniqueness of the covenant is, however, not necessarily decisive against enforceability. In Legends Alive Ltd v Harrison [2016] EWHC 1938 (QB) a 12-month non-competition covenant was enforced, despite the fact that such a covenant was very unusual in the entertainment business. On the detailed facts established at trial, the restriction was narrower than might first have appeared to be the case. 11.39  Conversely, if the covenant is customary, that may help to show that it is reasonably necessary and be indicative that it is not unreasonably severe. In East England Schools v Palmer [2014] IRLR 191 the deputy judge did not give particular weight to this factor. However in Romero Insurance Brokers Limited v Templeton [2013]  EWHC  1198 and in Croesus Financial Services Limited v Bradshaw [2013]  EWHC  3685 the court attached weight to the fact that 12 months was a common restraint period in brokers’ employment contracts. Again in Tradition Financial Services Limited v Gamberoni [2017] IRLR 698 industry practice was said to be a relevant factor to take into account, though not determinative. It was relevant in relation to the six-month covenant under consideration in that case (plus up to three months garden leave) that a six to 12 month noncompetition provision for a broker of whatever experience or seniority was not excessive by the current standards of the industry. See also Marion White Ltd v Francis [1972] 1 WLR 1423 (see 11.72).

2(i)  Period of notice 11.40  The period of notice necessary to terminate the contract of employment may be a relevant factor in determining the reasonableness of the covenant. It may be unreasonable that an employee whose employment could be brought to an end after only a short period of employment and on short notice (eg the statutory minimum notice period) should be limited in his activities for a lengthy period: Mason v Provident Clothing Supply Co Ltd [1913]  AC  724 at pages 732 and 741. See also Gledhow Autoparts Ltd v Delaney [1965] 1 WLR  1366 (CA) at pages 1376 and 1377. Where the notice required to be given by employer and employee are different, what is significant is the length of notice required to be given by the employer to terminate. In M & S Drapers (a firm) v Reynolds [1956] 3 All ER  814 Hodson  LJ expressed the view that the length of notice was not relevant; to take it into account was to enquire into the adequacy of the consideration for the covenant. This is contrary to authority, and indeed his own subsequent dictum in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968]  AC  269: see 13.98. Whether the 566

Criteria relevant to reasonableness of all covenants 11.43

adequacy of consideration should be taken into account is also a matter of some debate: see 13.94–13.102. 11.41  In some modern contracts a ‘ratchet system’ is applied to notice periods: it is agreed that the contractual notice period will be increased at stated intervals of time during the employee’s service and the period of the covenants increased accordingly at the same time. This can be advantageous to the employer seeking to enforce the covenant, in that in an appropriate case it may demonstrate to the court the logic of the period chosen for the restraint (ie  that the more the employee becomes acquainted with the business and its customers, the more protection is required against potential competitive activity by him) and that careful consideration has been given to this aspect of the covenant. This approach tends to have validity only in the early years of employment – a point will come at which notice may increase, but the period of the covenant should not. In some cases this may be a useful technique, but generally we do not recommend it, since the court is likely to be unfamiliar with it and possibly regard its rationale as obtuse. It would be even less attractive to provide for the restrictive covenant period to increase without providing for an increase in the notice period.

2(j)  Consideration for the covenants 11.42  The requirement of consideration for restrictive covenants to be enforceable and whether it is relevant to consider the adequacy of the consideration is dealt with at 13.82–13.102.

2(k)  Equality or inequality of bargaining power 11.43  Equality of bargaining power, or the lack of it, may be taken into account as a relevant factor in assessing the reasonableness of a covenant. The potential significance of the fact that the parties were able to look after their own interests and that the terms were freely negotiated following legal advice, was noted by the Court of Appeal in Dawnay Day & Co v de Braconier d’Alphen and others [1997]  IRLR  442 (CA), per Evans LJ (at paragraphs 33–34), in the course of upholding a non-competition covenant in a joint venture agreement. Again, in the context of upholding lengthy restrictions in the context of a share purchase agreement, the significance of equality of bargaining power was emphasised at first instance in Cavendish Square Holdings BV and another v Makdessi [2013] 1  All E.R. (Comm) 787 (at paragraphs 15(viii)] and 23(v)) (and there was no appeal against the finding that the covenants were valid and enforceable). Following dicta of Millet J in Allied Dunbar (Frank Weisinger) Ltd v Weisinger [1988] IRLR 60, Burton J noted that just as the parties were the best judges of the reasonableness as between themselves of the terms they had negotiated, so the price was the best means of adjusting the otherwise disproportionate advantages and disadvantages of the other terms of the contract. 567

11.44  Reasonableness of express covenants

11.44  As illustrated by Rush Hair Ltd v Hayley Gibson-Forbes, and SJ Forbes Limited [2017]  IRLR  48, even in the context of a share sale agreement there might not be equality of bargaining power. In that case there was a share purchase agreement in the context of relinquishing an interest in a business held under a franchise agreement. The court (at paragraph  68) accepted, following Makdessi, that inequality of bargaining power is one, albeit only one, of the factors to be considered in assessing the reasonableness of covenants. Here, the effect of the franchise agreement was that the business could not be sold to anyone other than the claimant franchisor, and as such the submission was made that the only realistic choice was to either walk away for nothing or accept whatever terms the franchisor offered. Whilst taking that factor into account, the court concluded that the non-poaching and area covenants in question in that case were reasonable. 11.45  The relevance of equality or inequality of bargaining power is not confined to the business sale context. In Legends Live v Harrison [2017] IRLR 59 the defendant was a Michael Jackson tribute performer who had been retained to perform in the claimant’s show in Blackpool. The contract contained a 12 month post-termination restriction on appearing in another Blackpool multiattribute show (but permitted him to appear in a show without other tribute acts). In assessing the covenant, the court took into account and rejected arguments that there was any inequality of bargaining power. On the contrary there was a lack of other good Michael Jackson tribute acts. Further, the more employable the defendant was outside Blackpool, the more reasonable it was to impose a covenant to require him to work elsewhere for a year whilst the claimant’s show was being recreated without him. 11.46 In Dawnay Day ([1998]  ICR  1068 at 1081B), at first instance, Robert Walker J noted that inequality of bargaining power may often be an important factor in considering covenants as between employer and employee. Indeed the decision of the Supreme Court in Autoclenz Ltd v Belcher [2011]  ICR  1157, albeit unlikely to be of direct relevance to post-termination restrictions (as it concerned whether the written terms match the reality of the agreement between the parties), may be regarded as marking a greater judicial willingness generally to give weight to the reality of inequality of bargaining power. However, as emphasised in TFS  Derivatives v Morgan [2005]  IRLR  246, it does not follow from the fact that the covenant is agreed in an employment contract that there is any inequality of bargaining power. In that case a non-competition covenant was contained in an equity derivative broker’s employment contract. Cox J  placed emphasis on the substantial remuneration package enjoyed by the defendant and commented (at paragraph 83) that for employees such as the defendant, ‘who are highly valued and most generously rewarded, the inequality of bargaining power, which is recognised to apply in many employment relationships, simply does not exist, or, at any rate, does not exist to such a degree as to render a non-competition clause … unreasonable as between the parties.’ 568

Criteria relevant to reasonableness of non-competition covenants  11.48

2(l)  Reasonableness to be assessed excluding improbabilities 11.47  In Chapter 12 (12.41–12.43) we discuss the principle drawn from Haynes v Doman [1899] 2 Ch 13, per Lindley MR at page 25, that exceptional circumstances which cannot reasonably be supposed to have been within the contemplation of the parties are not to be treated as within the operation of the covenant even if covered by the literal wording. The principle may be regarded either as one concerning construction, or as applicable to the approach to assessing reasonableness of the covenant. As it was put in Home Counties Dairies Ltd v Skilton [1970] 1 WLR 536 per Salmon LJ at 536C: ‘If a clause is valid in all ordinary circumstances which can have been contemplated by the parties, it is equally valid notwithstanding that it might cover circumstances which are so “extravagant,” “fantastical,” “unlikely or improbable” that they must have been entirely outside the contemplation of the parties.’

See eg  Kynixa Limited v Hynes [2008]  EWHC  1495 (QB) at paragraph  180 where, in considering whether a non-competition covenant in a shareholders’ agreement was enforceable, the court discounted the possibility of a junior employee becoming a shareholder as being a remote possibility not within the contemplation of the parties.

3. CRITERIA RELEVANT TO REASONABLENESS OF NON-COMPETITION COVENANTS 3(a)  Overview of the approach to non-competition covenants 11.48 As Underhill J  put it in Patsystems v Neilly [2012]  IRLR  979 (at paragraph  44) a non-competition covenant is ‘the most powerful weapon in an employer’s armoury’. In that context, whilst the considerations set out in the preceding section remain relevant, a further distinct set of principles has been developed to guide the approach to such covenants. The following overview draws substantially on the convenient summary of relevant propositions set out by Gloster J in Brake Brothers Limited v Ungless [2004] EWHC 2799 (at paragraph 15(13)): 1.

Courts will scrutinise anti-competition covenants with particular care. We suggest that there are two principal, and related, reasons for this. First, it follows from the more far-reaching impact on the departing employees’ ability to earn a living in their area of particular expertise and experience, which is to be balanced against the employer’s reasonable interest in business protection. Second, the correlation between the legitimate interest to be protected and the restriction is typically less precise in relation to such covenants, particularly in the employment context. Typically the covenant will serve to protect confidential information or customer connection, yet will bar the employee from involvement in a competitive business irrespective of whether they use the previous employer’s confidential information or 569

11.48  Reasonableness of express covenants

have any contact with its customers. The issue will be particularly stark if the covenant on its proper construction is capable of applying to taking up employment in a competing large organisation, but in a non-competing part of its business. 2. As one aspect of this scrutiny, the Court will consider whether a lesser form of restriction, by way of non-solicitation or non-dealing covenant and/ or confidentiality covenant, would be sufficient and therefore be a more proportionate restriction. However, it has also been recognised that a noncompetition covenant is often the most appropriate form of covenant to protect confidential information. 3.

In employment cases (as distinct from vendor/ purchaser, or analogous cases such as franchises), two principal factors tend to support the imposition of a non-competition covenant: 3.1 First, there is a legitimate interest in protecting confidential information of a nature protectable after the termination of employment and there are serious difficulties in drawing the line between information which is in this category and that which is not. The information need not be based on documents taken by the employee or the memorising of the contents of documents; it may include information which the employee may carry away in his head. The information must be particularised sufficiently to enable the court to be satisfied that the employer has a legitimate interest to protect: Thomas v Farr Plc [2007] IRLR 419 (CA) (see further 11.56). As such the information relied upon might be wider than is identified in a confidentiality covenant. Greater precision is required in a confidentiality covenant in identifying the particular information due to the need to comply with the cardinal principle that there is certainty as to what is required in order to comply with the covenant: Lawrence David Ltd v Ashton [1989] ICR 123 (CA) at page 132D. 3.2 Second, and potentially applicable in relation to protection of client connection rather than only confidential information, difficulties in policing a narrower form of covenant may provide the basis for the restriction.

4.

A balance has to be struck between the degree of protection legitimately required by the employer, and the degree of restriction on the legitimate use of skill and knowledge and legitimate competition, and the impact on the departing employee’s prospects of employment. Even if there is some justification for a non-competition type of covenant, these considerations are liable to impact on whether the covenant is regarded as reasonable, which to some extent is a matter of impression (see 11.6). Typically relevant considerations in making this assessment will include: 4.1 the duration of the restriction (See Appendix); 4.2 whether the covenant was signed in the context of a transaction involving a transfer of goodwill and as part of protecting that goodwill;

570

Criteria relevant to reasonableness of non-competition covenants  11.50

4.3 the width in terms both of geographical extent, the breadth of businesses covered and the extent to which it leaves the employee realistic alternatives for finding work and doing so in the employee’s area of expertise; 4.4 whether the covenant is restricted only to competing businesses; 4.5 the extent to which it restricts the capacity in which the employee is to work in a competing business, 4.6 the seniority of the employee and the nature and significance of the confidential information or customer connection which the covenant is designed to protect; 4.7 the extent of any difficulties in policing the covenant and any factors ameliorating those difficulties. 11.49  Broadly, in the last decade or so, there has been a greater tendency on the part of the courts to enforce non-competition covenants in appropriate cases than was perhaps previously the case. However the courts will carefully scrutinise the covenant and the underlying facts, to ascertain whether the restriction was at the contract date no wider than reasonably necessary to protect the legitimate interests in play. It is necessary to balance all relevant factors including the impact on the employee, particularly when relying on difficulties in policing to justify a wider covenant than would otherwise be necessary to protect the legitimate interest of the employer. The assessment involves consideration of a range of factors viewed at the time of entering into the covenant including the extent and importance of the information available, the nature of the market, the length of the covenant, whether the covenant is framed in terms which is appropriately limited to the interest to be protected (having regard for example to the nature of the business activities restricted or limits relating to the capacity in which the employee can be involved in such a business) and the likely impact on the employee who is subject to the restriction.

3(b) Whether a non-competition covenant is appropriate 3(b)(i)  Is a non-competition covenant justifiable in principle? 11.50  In addition to considering whether a non-competition covenant is excessive in terms such as duration and geographical area, it is necessary to consider the question of whether such a covenant is justifiable in principle. That is important because the nature of the embargo is almost always wider than that of more finely honed covenants such as non-solicitation/dealing covenants. The principle is set out in Office Angels Ltd v Rainer-Thomas and O’Connor [1991] IRLR 214, where Sir Christopher Slade stated (at paragraphs 49 and 50): ‘The court cannot say that a covenant in one form affords no more than adequate protection to a covenantee’s relevant legitimate interests if the evidence shows that a covenant in another form, much less far-reaching and less potentially prejudicial to the covenantor, would have afforded adequate protection’. 571

11.51  Reasonableness of express covenants

and ‘… in considering the reasonableness or otherwise of a covenant such as this, the court is entitled to consider whether or not a covenant of a narrower nature would have sufficed for the covenantee’s protection.’

In Office Angels, the non-competition covenant was struck down, since a properly drafted non-solicitation covenant would have provided sufficient protection to the ex-employer. The ex-employee’s argument that a non-competition covenant was necessary to ‘police’ infringements by the ex-employee was rejected by the Court of Appeal. See to similar effect Tim Russ & Co v Robertson [2011]  EWHC  3470 where, in relation to an employee of an estate agency, a 12-month area covenant was struck down as (amongst other reasons) the employer’s legitimate interests were sufficiently protected by restricting solicitation of clients, particularly having regard to the limited recurring custom, and (more controversially) by a contractual restriction on misuse of confidential information. 11.51 However, in QBE  Management Services (UK) Limited v Dymoke [2012]  IRLR  458, Haddon-Cave J  noted, emphasising the reference in Office Angels to the question of whether the alternative clause was ‘much less farreaching’, that (at paragraph 230): ‘The exercise is not a marginal one, otherwise courts would be faced with a paralysing debate in every case about whether a covenant with × days shaved off would still provide adequate protection.’

That approach was applied in Praxis Capital Ltd v Burgess [2015] EWHC 2631 (at paragraph  83). However, the court still proceeded (at trial) to find that a covenant restricting a former investment manager from being involved for nine months post termination in competition with any business with which he had been involved for the claimant employer was too wide. The court concluded that it could have been framed in much narrower terms because the mischief which it sought to address was to prevent the former employee exploiting for himself or third parties, investment opportunities relating to particular projects of which he had become aware whilst working for the claimant employer. That could have been addressed by a covenant preventing him for a limited period of time, which could have been nine months, from seeking to exploit on his own behalf or on behalf of a third party, any investment opportunity of which he had become aware during a period of, say, two years up to the termination of employment. 3(b)(ii) Normal justification of non-competition covenant: confidential information 11.52  Normally, in an employment context (not involving a sale of goodwill), non-competition covenants are justified either: (a) on the basis of the existence of a legitimate interest in confidential information akin to trade secrets where it is difficult to draw the line as to what is protectable, and/or (b) (in relation 572

Criteria relevant to reasonableness of non-competition covenants  11.56

to the interest in protecting confidentiality or client connection) difficulties in policing/ enforcing non-dealing or solicitation and/or confidentiality covenants: see eg Tradition Financial Services Limited v Gamberoni [2017] IRLR 698 (at paragraph 96). 11.53  So far as concerns confidential information, the key authority is Littlewoods Organisation v Harris [1977] 1 WLR 1472 (CA) at page 1479A–E where Lord Denning MR explained that: ‘It is thus established that an employer can stipulate for protection against having his confidential information passed on to a rival in trade. However, experience has shown that it is not satisfactory to have simply a covenant against disclosing confidential information. The reason is because it is so difficult to draw the line between information which is confidential and information which is not: and it is very difficult to prove a breach when the information is of such a character that a servant can carry it away in his head. The difficulties are such that the only practicable solution is to take a covenant from the servant by which he is not to go to work for a rival in trade.’

11.54  Such a covenant may well be held to be reasonable if limited to a period which is appropriate having regard to the nature and shelf-life of the confidential information. That appears from the judgment of Cross J in Printers & Finishers Ltd v Holloway [1965] 1 WLR 1 at page 6: ‘Although the law will not enforce a covenant directed against competition by an ex-employee it will enforce a covenant reasonably necessary to protect trade secrets … If the managing director is right in thinking that there are features in the [claimants’] process which can fairly be regarded as trade secrets and which their employees will inevitably carry away with them in their heads, then the proper way for the [claimants] to protect themselves would be by exacting covenants from their employees restricting their field of activity after they have left their employment, not by asking the Court to extend the general equitable doctrine to prevent breaking confidence beyond all reasonable bounds.’

11.55 In Turner v Commonwealth & British Minerals Ltd [2000] IRLR 114 the Court of Appeal referred (at paragraph 18) to the fact that it had been recognised in many cases that, because there are serious difficulties in identifying precisely what is or is not confidential information, a properly drawn non-competition covenant may be the most satisfactory form of restraint. To similar effect see also CR  Smith Glaziers Ltd v Greenan (1993)  SLT  1221 at 1223F, Kall-Kwik Printing v Rush [1996]  FSR  114 at 124 and Brake Brothers Ltd v Ungless [2004] EWHC 2799 (QB) at paragraph 15 (sub-para (13)). 11.56  The role of a non-competition covenant as the most appropriate means of protecting confidential information, particularly where the boundaries of what is confidential is difficult to define, was further addressed in Huw Thomas v Farr Plc [2007] IRLR 419 (CA). Mr Thomas had been employed by the first defendant insurance broker, Farr, operating in the social housing sector. Thomas was (latterly) Farr’s managing director. His contract contained non-solicitation of clients and non-competition covenants and covenants against the misuse of 573

11.57  Reasonableness of express covenants

confidential information, including trade secrets. The non-competition covenant prohibited Mr Thomas for a period of 12 months from the date of the termination of his employment from engaging in any competing business in any place where Farr had conducted business in the 12 months prior to termination. The Court of Appeal rejected Thomas’ submission that Farr was adequately protected by the non-solicitation and confidentiality clauses. Following the Littlewoods approach, the non-competition covenant was the appropriate means of protecting confidential information. The court (at paragraph 41) explained that in order to rely on the legitimate interest in protecting confidential information it was necessary to show that the employment was such as would (viewed at the date of the contract) expose the employee to information of the kind capable of protection after the terms of employment (ie trade secrets or other information of equivalent confidentiality, as to which see further 6.21–6.75.) The degree of particularity required to establish this would depend on the particular facts. It was not a bar to enforcement of the covenant that it might be difficult for the employer and employee to identify precisely what information remained confidential. On the contrary, as noted in Littlewoods, the fact that the distinction was hard to draw pointed to the need for a non-competition covenant as the most satisfactory form of restraint to protect confidential information. 11.57 In Thomas there was ample evidence to support the conclusion that the appointment of Mr Thomas as Farr’s managing director exposed him to information, including pricing and financial information not in the public domain, which Farr was entitled to require Thomas to keep confidential after the termination of Thomas’s employment. The nature of Farr’s business and of Thomas’s role in it were such that he would know a good deal of information of a sensitive nature that was not in the public domain, both at strategic and operational level. Although Thomas would not be able to recall the details of every transaction, it was likely that for key clients and for important aspects of the insurance business he would be able to recall key figures and percentages and strategies. Further, taking into account that the covenant did not prevent Thomas from acting as an insurance broker in sectors other than social housing, and did not prevent him from acting for insurers in that sector (as long as he did not do so in a way which was in competition with Farr), the non-competition covenant was found to be a reasonable limitation to impose in all the circumstances. The 12-month period was also found to be reasonable, given that it was accepted at trial that 12 months was a conservative estimate of the time for which the confidential information would retain its currency. 11.58  The confidential information must consist of information used in a trade or business where the owner of the information has limited its dissemination or at least not encouraged or permitted widespread publication and which, if disclosed to a competitor, would be liable to cause real (or significant) harm to the owner of the information: see Lansing Linde v Kerr [1991]  ICLR  428 (CA) at page 437E-F; FSS Travel & Leisure Systems Ltd [1998] IRLR 382 (CA) at paragraphs 33(5) and (6). As explained in FSS Travel, at paragraph 33(5): ‘(5) The critical question is whether the employer has trade secrets which can be fairly regarded as his property, as distinct from the skill, experience, 574

Criteria relevant to reasonableness of non-competition covenants  11.60

know-how, and general knowledge which can fairly be regarded as the property of the employee to use without restraint for his own benefit or in the service of a competitor. This distinction necessitates examination of all the evidence relating to the nature of the employment, the character of the information, the restrictions imposed on its dissemination, the extent of use in the public domain and the damage likely to be caused by its use and disclosure in competition to the employer. (6)

As Staughton LJ recognised in Lansing Linde Ltd v Kerr [1991] IRLR 80 at paragraph  27, the problem in making a distinction between general skill and knowledge, which every employee can take with him when he leaves, and secret or confidential information, which he may be restrained from using, is one of definition. It must be possible to identify information used in the relevant business, the use and dissemination of which is likely to harm the employer, and establish that the employer has limited dissemination and not, for example, encouraged or permitted its widespread publication. In each case it is a question of examining closely the detailed evidence relating to the employer’s claim for secrecy of information and deciding, as a matter of fact, on which side of the boundary line it falls. Lack of precision in pleading and absence of solid evidence in proof of trade secrets are frequently fatal to enforcement of a restrictive covenant.’

11.59  The emphasis on the need for precision is to be read subject to the important caveat in Thomas v Farr Plc [2007] IRLR 419 (following the guidance of Aldous LJ in Scully UK Ltd v Lee [1998] IRLR 263 (at paragraph 23)), that in assessing whether there has been sufficient particularity in relation to the confidential information requiring protection, the yardstick is whether this is sufficient to satisfy the court that the claimant has a legitimate interest to protect. That would also entail adducing information to show that the information is likely to have a sufficient shelf-life having regard to the period of the covenant. However, provided that is done, nothing more is required. As explained in Thomas v Farr the degree of particularity required will depend on the facts of each case. In particular, the court will need to be satisfied that the information is distinct from the employee’s own knowledge and experience. Thus in FSS, in upholding the decision to refuse an injunction enforcing a one year non-competition covenant (concerning the business of computerised booking systems for the travel industry), the court concluded that neither the pleaded case nor the evidence in support was ‘sufficiently specific, precise or cogent’ to establish that there were trade secrets or other sufficiently confidential information. Instead the matters identified by FSS amounted to skill, experience, know-how and general knowledge relating to the computer systems rather than a separate identifiable body of objective trade secrets or equivalent confidential information. In the circumstances of that case, some concrete examples were required and ‘solid relevant detail’ identifying ‘a separate and specific recognisable body of objective knowledge’ which was sufficiently secret or confidential. 11.60  However, whilst the decision in FSS illustrates the importance of there being sufficient specificity to establish a protectable body of information, it follows from the approach in Thomas v Farr that there is not the same degree of 575

11.61  Reasonableness of express covenants

particularity required as for a confidentiality injunction. As further explained in UK Power Reserve Ltd v Read [2014] EWHC 66 the scope of confidential information relied upon to found the legitimate interest justifying a non-competition covenant can be wider than the narrowly drawn confidential information relied upon for a confidential information injunction. That is not because a lower level of confidentiality is required; as made clear in Thomas v Farr, the information still needs to be sufficiently confidential to be protectable after the termination of employment. Instead, it is a consequence of the greater degree of specificity which is required in relation to a confidentiality injunction so as to provide the party injuncted with certainty over what the order entails. By contrast, subject to the need to establish that there is a body of sufficiently confidential information to show that there is a legitimate interest to be protected, lack of precision as to the boundaries of what is confidential is not a bar to a non-competition covenant. On the contrary it is one reason why a covenant is the favoured means of protecting the information. 11.61 In UK  Power Reserve Ltd v Read the court upheld a 12-month noncompetition covenant (subject to credit for time spent on garden leave), applicable to the UK and any territory in which any Group Company operated. The issue was determined at an interim hearing, but because there was only less than four months of the restriction left at the time, it was determined on the basis of whether the relief was more likely than not to be granted at trial. The defendant, Mr Read, had been a senior employee (Operations Manager) but below director level. He had access to substantial valuable confidential information which could be regarded as amounting to a trade secret and having a shelf life sufficient to warrant the 12-month covenant. Given Mr Read’s position in the claimant’s operations and his seniority, the court concluded that it was realistic to suppose that he was possessed of a body of confidential information which the claimant had a legitimate interest in protecting. This went beyond the specific information identified for the purposes of the confidentiality injunction (which was also granted), albeit that it might be very difficult to know where the line was drawn in relation to what was sufficiently confidential to be capable of post-employment protection. 11.62 Whilst a non-competition covenant was in principle permissible, it remained necessary to consider in the round the duration and scope of the covenant. Here the covenant was regarded as reasonable in duration (having regard to the shelf-life of the information and the length of time over which it was built up and collated) and in geographical extent (given that it mirrored the territories in which the claimant group operated and it was in respect of those territories that it had interests to protect). The court also placed weight on a proviso to the covenant that nothing in the clause would prevent Mr Read carrying on, being employed, engaged or interested in any business insofar as his duties or work related principally to services or goods of a kind with which he had not been involved during his employment with the claimant. This was viewed as a significant limitation, and also as answering the criticism that the covenant was a generic one applicable to all employees; the proviso had the effect of tailoring it to his specific circumstances. 576

Criteria relevant to reasonableness of non-competition covenants  11.65

11.63  Notwithstanding the emphasis that, in order to support a non-competition covenant, the confidential information must be of a nature which is protectable after the termination of employment, in practice, as illustrated by the decision in TFS  Derivatives v Morgan [2005]  IRLR  246, the information likely to fall within this category may be far from being exceptional. At trial Cox J upheld a 12-month post-termination covenant against an equity derivatives broker. The covenant was construed as imposing a restriction on engaging in a competing business activity (and also a restriction on engaging in a similar business, which was regarded as being too wide). Applying the approach in Littlewoods and having regard to the difficulties in policing a non-solicitation covenant, the covenant was upheld on the basis of a legitimate interest in protecting confidential information. The information principally concerned brokerage rates, details of special deals for particular clients, and volumes of business placed by particular clients. It is noteworthy that was the kind of information which would be likely to be possessed by most senior brokers, and equivalent information would be likely to be possessed by most senior sales staff. 11.64  Similarly, in Corporate Express v Day [2004] EWHC 294 (QB) the confidential information that was considered to be sufficient to sustain a six month non-competition covenant in relation to a sales employee consisted of information as to pricing, discounts, margins, customer specific requirements and ‘all information useful for the tendering process’. Mrs Day was a senior sales manager, responsible for national accounts, in the office supplies business. She led a sales team which generated 9% of the claimant’s turnover in what was described as a fiercely competitive market. Douglas Brown J, at trial, upheld as enforceable a non-competition clause which prevented her from working in the sale or marketing of office products for any of a list of 10 major competitors for six months. The judge followed the approach in Littlewoods that a non-competition covenant was the appropriate means of protecting confidential information. He rejected arguments that: (a)  the non-solicitation clause in Mrs Day’s contract provided sufficient protection; and (b)  the employer could and should instead have enforced garden leave. It was also relevant that the covenant was only for six months and that it did not prevent Mrs Day from working at all. It covered the ten major competitors at the time of entering into the contract, but left hundreds of other companies in the sector, large and small, who might be able to offer her employment. However, whilst granting a declaration that the covenant was enforceable, the judge declined to grant an injunction, principally on the grounds that the period of restraint had only five days to run, and the evidence was that Mrs Day risked losing her job with her new employer if an injunction was granted. 11.65 The decisions in Thomas v Farr, UK  Power v Read and Corporate Express v Day may be contrasted with the approach in Wiggle Limited v Burge [2012] EWHC 4374. Mr Burge had been employed by Wiggle Limited, which sold bicycles and bicycle parts and accessories, as a merchandiser. His role did not involve any customer contact, and so there was no question of the covenant being based on protection of client connection. Instead his role involved analysing financial information with a view to advising upon or making business 577

11.66  Reasonableness of express covenants

decisions, and in that capacity he possessed confidential information. The court refused to grant an interim injunction in respect of a 12 month non-competition covenant. The court distinguished the approach in Littlewoods on the basis that it was concerned with the twin problems of difficulty in differentiating between confidential information and information which was not confidential, and with the problem of information which could be carried away by the employee in his head. By contrast the nature of the information with which Mr Burge dealt was such that there was a clear differentiation between what he would probably consider was his own knowledge and experience which could be used with another employer, and material which was plainly confidential. Further, the material which was said to be confidential was very voluminous, and by its nature it was unlikely that he would have an accurate recall of anything worthwhile for a period of 12 months and it would be out of date within that period in any event. As such when taking into account the nature of the information, the period of the covenant and also the very wide scope of the activities restrained by the covenant, the court held that the covenant was unreasonably wide in length and scope and was therefore invalid. 11.66  However, as illustrated by the decision in Dyson Technology Ltd v Strutt [2005] EWHC 2814 (Ch), it does not follow that if the boundaries of confidential information are readily identifiable that a non-competition covenant is inappropriate. The case concerned a battle between two manufacturers of vacuum cleaners and other household appliances: Dyson and Black & Decker. Mr Strutt was a research and development engineer, who wished to move to Black & Decker. The Court upheld at trial a 12-month post-termination covenant. Notwithstanding an argument that Mr Strutt would have no difficulty in distinguishing between confidential information which he was or was not at liberty to use for his new employer, it was accepted that the covenant was reasonably necessary to protect the claimant’s confidential information, relying on Littlewoods. In addition it was noted that he would be placed in a position of extreme difficulty if his new employer required him to work on the design of a proposed new product which he realised would compete with a design of the claimants where the fact that the claimant was working on such a design was itself confidential information; refusal to work on this would itself risk alerting the new employer to the existence and nature of the confidential information. Nor was it an answer that there were no territorial restrictions on the covenant, given the international nature of the Dyson Group’s business. 11.67  The following principles may be distilled: •

A  non-competition covenant is often the most satisfactory means of protecting confidential information.

•

It is necessary to show that the employment was such as to expose the employee to confidential information of a type that would be protectable after the termination of employment and which is distinct from the employee’s own knowledge and experience, and that the confidentiality has a sufficient shelf life to explain the period of the covenant.

578

Criteria relevant to reasonableness of non-competition covenants  11.69

•

That it is difficult to identify precisely where the boundary lies as to which information falls within the category of being sufficiently confidential is a factor pointing in favour of the non-competition covenant as the most appropriate means of protecting the confidential information.

•

The confidential information need not be identified with the same precision as for a confidentiality covenant, because it is only necessary to show that there is confidential information sufficient to be a basis for the covenant, without needing to identify each element of confidential information.

•

The shelf-life of the confidential information, and the period over which it was built up, will be important factors in assessing whether the duration is reasonable.

•

Other relevant factors in the overall assessment of reasonableness include the extent to which the confidential information is likely to be memorable to the employee, the scope of the activities restrained, and the extent to which it leaves the employee able to pursue employment in their field of experience or expertise.

3(b)(iii)  Alternative/additional justification for non-competition covenant: policing 11.68  Non-competition covenants may also be upheld where it can be shown that a non-solicitation/dealing covenant is insufficient to protect the client or trade connection of the employer because of difficulties in ‘policing’ either a confidentiality or a non-solicitation/dealing covenant. 11.69 In Brake Brothers Ltd v Ungless [2004]  EWHC  2799 (QB) at paragraph  52, where the need for the covenant arose in part from the risk of exemployees using confidential information to enable a competitor of Brake (a supplier of food products to the catering industry) to obtain more advantageous terms from suppliers, it was noted that the risk of detection was reduced by the fact that it was overwhelmingly likely that the supplier would already be dealing with both Brakes and the competitor. Again in ASE Plc v Kendrick (QBD) 13 May 2014 (unreported) difficulties in policing influenced the court’s decision in upholding (at the interim stage) a six-month UK wide non-competition covenant intended to protect customer connections and confidential information for a senior employee who was involved in corporate finance services and business development in the automotive industry. The defendant ex-employee was aware of the employer’s business plans and familiar with its client database, 60% of which was confidential. Non-solicitation/dealing covenants would be difficult to police and enforce in this industry, bearing in mind that the majority of mergers and acquisitions within the industry remained confidential until they were announced to the trade after the deal has been completed. See also Tradition Financial Services Limited v Gamberoni [2017]  IRLR  698 where at trial the same conclusion was reached in relation to an inter-dealer broker, taking into account both the difficulties of policing and of drawing the line as to what information was confidential, and indeed which clients fell within the non-solicitation covenant. In Egon Zehnder Ltd v Tillman [2017] EWHC 1278 (Ch) in upholding 579

11.70  Reasonableness of express covenants

a six-month covenant relating to a professional services company in the light of the confidential information to which the employee would have access, the court noted that whilst the non-solicitation, dealing and confidentiality restraints provided a large measure of protection, there were policing difficulties ‘both in terms of ascertaining whether there had been a straightforward breach and in terms of more subtle activity’ since there were many ways in which the information and client connection could be ‘more subtly abused by subconscious reference, indirect guidance, conscious and unconscious suggestions to others in the company, and the like’ (at paragraph 53). (The decision was reversed on appeal but this turned on the construction of the covenant: see 11.17.) A similar conclusion was reached (at first instance) in Dawnay Day & Co v de Braconier d’Alphen [1997]  IRLR  285 (concerning an inter-dealer broker, but in a shareholders’ agreement as opposed to an employment contract). The decision was upheld on appeal ([1997] IRLR 442 (CA)), although this aspect does not appear to have been specifically challenged at the appeal stage. 11.70  Aside from cases focussing on confidential information, policing difficulties have also been persuasive in some instances of reliance on client connection. The argument was accepted, arguably too readily, in Scorer v Seymour-Johns [1966] 3 All ER  347 at 352 where it was said to be too difficult to police a non-dealing covenant given by an estate agent’s negotiator/clerk. In this case the clients were recurring clients and there was no evidence that it would be difficult to identify them, so that a non-dealing covenant should have been sufficient. 11.71 The argument may have more force where the employee is of such high rank that he does not need to have day to day contact with clients in his new employment in order to exploit the business connections of his former employer, but can achieve his ends via members of his team. In Thomas v Farr Plc [2007]  IRLR  419 (CA) (discussed in detail at 11.56), one of the grounds accepted as justifying the enforcement of a non-competition covenant against a former managing director of the claimant was that, as a senior employee of a competitor, it would be almost impossible to detect breaches of a non-dealing covenant. In his senior position he would not be client-facing – he might simply point his subordinates in the direction of clients of the claimant. To some extent that difficulty with a non-dealing provision might be addressed by a restriction on indirect as well as direct dealing with clients. However evidential difficulties may well remain in establishing that the dealing amounts to indirect dealing by the employee subject to the covenant. 11.72 Similarly, policing difficulties are liable to arise where customers are likely to follow the employee, particularly if the nature of the business is such that the customers are not easily identified. A relevant factor may be the existence of a significant passing trade. That may provide a particularly strong basis for an area covenant in relation to business drawn from a particular local area. Such considerations may be regarded as implicit in a series of cases where area covenants have been upheld in relation to hairdressers: see Supercuts Limited v Woods Unreported, 23  April 1986, CA (six-month restriction restraining hairdresser working within 3/8 mile radius of claimant’s salon in Peterborough; only 20 out 580

Criteria relevant to reasonableness of non-competition covenants  11.74

of 80 salons in Peterborough were within the area): Marion White Ltd v Francis [1972] 1 WLR 1423 (CA) (one year restriction over a half-mile radius upheld as personal relationship of hairdressers with customers was an important part of the goodwill of the business); Sean Hanna Ltd v Barber [2015] EWHC 3113 (at the interim stage, six-month area covenant applying to a six mile radius of Cambridge enforced at the interim stage but relief was refused in relation to a covenant against inducing customers to leave on the basis of the balance of convenience); Rush Hair Ltd v Gibson-Forbes and another [2017] IRLR 48 (two year area covenant over a two mile radius covering Windsor and Maidenhead enforced on sale of an interest in a hairdressing franchise business having regard to the need for protection in the light of the vendor’s reputation). In most of these cases the focus was on the personal influence over customers, without specifically focussing on whether a non-dealing covenant would suffice. However, in Steiner (UK) Limited v Spray Unreported, [1993] Lexis Citation 3022, CA, where permission to appeal was refused against a decision upholding a covenant in the same terms as considered in Supercuts (though in Norwich rather than Peterborough), it was emphasised that a non-dealing covenant would in practice be almost impossible to enforce ‘without mounting guard outside the new establishment to see if former customers were entering and seeing if their hair was going to be done by the defendant rather than by some other hairdresser on the premises’ (per Hoffmann LJ). The decision in Office Angels Limited v RainerThomas and O’Connor [1991]  IRLR  214 (CA) (see 11.50) was distinguished on the basis that in that case all customers were dealt with by telephone and so the only purpose of an area covenant was to disadvantage the defendant from a competitive perspective by not being able to set up offices in an otherwise desirable district. 11.73 By contrast where the customers are identifiable and known to the employee and employer, the argument for a non-competition covenant to protect trade connection is weakened. That was the position in S W Strange Ltd v Mann [1965] 1 All ER 1069, where Stamp J held that a non-competition covenant taken from a bookmaker’s manager was not appropriate to protect the employer’s trade connection, in part because the business was exclusively a credit business rather than customers generally attending the premises to pay in cash. As such the names and addresses of all the customers were known to him (ie  a non-solicitation/ dealing covenant would have been effective). Further, the employee did not have such a personal relationship with customers outside the town as to make it likely that they would seek him out if he left his employment (ie, it was sufficient to prevent the ex-employee from seeking out customers). In these circumstances, the non-competition covenant gave more protection than was necessary, while a non-solicitation covenant would have been appropriate. Stamp  J, however, rejected the contention that a non-competition covenant is always inappropriate in relation to an exclusively credit business. 11.74  Similar considerations were persuasive in Monster Vision UK Ltd v McKie [2011] EWHC 3772. Interim relief was refused in relation to a two year noncompetition covenant against the claimant’s former sales director on the basis that there was no serious issue to be tried. The covenant provided that the two 581

11.75  Reasonableness of express covenants

year restriction against competing with the claimant or its affiliates was limited to those countries in which the claimant or its affiliates had conducted or (at the termination date) reasonably planned to conduct business during that two year period. The court accepted that in theory a two year restriction could be permissible, but it was not here, when taken together with other aspects of the covenant, including that sufficient protection could be obtained from an appropriately drafted non-solicitation covenant since at the time of entering into the agreement it was anticipated that there would be a small and discrete number of customers. As such, it was not a case where a non-solicitation covenant would be impossible to police. 11.75  It is in the nature of arguments based on the difficulty of policing that they entail seeking to justify a restriction that is wider than one strictly tailored to protect legitimate interests. As explained in Ashcourt Rowan Financial Planning Ltd v Hall [2013]  IRLR  637, against that context a fact-sensitive assessment is required (viewed as at the date of entering into the contract) of the balance between the effect of having restraints imposed on the employee going beyond those tailored to protection of the employer’s legitimate interest, and the need for the additional restraint so as to police the covenant and give it practical effect. The impact of the restriction on the employee and the extent of the difficulties in policing are both relevant considerations. Applying that approach in Ashcourt Rowan the court struck down a six-month restriction on a former financial adviser being ‘directly or indirectly … engaged or concerned in’ any business or activity of a direct competitor. The difficulties in policing were said to be moderated to some extent by the fact that if the claimant employer’s clients wished to change their advisers they would typically, though not invariably, have needed or at least chosen to contact the claimant to authorise the release of their information to the new employer, and thereby would have alerted the claimant to possible misuse of information. Balancing this against the extent of the restriction, which would have prevented the defendant from working in parts of the financial industry or in roles which did not compromise the claimant’s interests (eg in management roles which did not involve dealing directly with clients), the non-competition covenant was held to be too wide. 11.76  Similarly, even where there may be some policing difficulties, the extent of the difficulties, or the extent of the likely influence over clients (or of misuse of confidential information to which the employee is likely to be exposed) is likely to be significant in the overall assessment of whether a non-competition covenant is appropriate. That was the case in Barry Allsuch & Co v Harris Unreported, 4 May 2001. Mr Harris was employed by the claimant estate agents as Residential Sales Manager at their Radlett office. He was subject to a two-year area covenant restricting him from working for any estate agents with an office in Radlett or working in the business of estate agency in the Radlett area. The decision in Scorer v Seymour-Johns [1966] 1 WLR 1419 (see 11.70) was distinguished on the basis that in Scorer the relevant estate agent office had only been established for three years and the employee had been placed in practically ‘sole charge’ and had particularly close relationships with the clients and many recurring customers who formed a large part of the trade connection. Here only about 5% of 582

Criteria relevant to reasonableness of non-competition covenants  11.78

customers returned within two years, and the employee was not in sole charge. As such, client connection provided an unconvincing basis for the covenant. In any event, the court noted that whilst a non-solicitation covenant might be difficult to police, a non-dealing covenant would have provided adequate protection. 11.77  Drawing together the threads: •

It is important to identify factors which either reduce or increase the risk of detection/prevention of a breach of a narrower (eg non-dealing) covenant.

•

Relevant factors reducing the risk of detection may include that the employee’s seniority or connection to the customers is such that it is likely to be possible to put others in touch with the customers, possibly to ‘mind’ the relationship pending expiry of the covenant or that there are other subtle ways of diverting the relationship, or that the nature of the business is such that passing trade may be picked up without this coming to the attention of the previous employer.

•

The fact the customer or supplier was already dealing with others in the industry (such that the impact would only be on levels of business placed) might in some circumstances make detection more difficult, as in Brake Brothers. However if the ex-employer has an ongoing relationship with the customer, that might mean that a breach of a non-dealing covenant would be more likely to be discovered.

•

Conversely the market may be such that a breach is more likely to be detected, as was the case in Ashcourt Rowan in the light of the fact that the customer would be likely to make contact before transferring.

•

Where difficulties of policing are relied upon, by its nature the argument entails protection which will extend beyond that which is strictly tailored to the legitimate interest. It contrasts with non-dealing and solicitation covenants which are confined to the particular clients or suppliers in relation to whom the employer has a legitimate business interest. For that reason, in assessing the overall reasonableness of the covenant, factors limiting its scope and impact on the former employee’s ability to work in their area of experience or expertise are liable to be of greater importance than with more tightly focussed covenants.

3(b)(iv)  Cases involving transfer of goodwill Overview: the more lenient approach 11.78  As discussed in Chapter 10 (at 10.45–10.54), a less restrictive approach is applied where the covenant is entered into in the context of a sale of goodwill, albeit that the restriction must still be framed in terms that are reasonable to protect the interest in the goodwill acquired. The more lenient approach arises in part because of the assumption that parties of equal bargaining power are best placed to determine reasonableness of the covenants, with the price the best means 583

11.79  Reasonableness of express covenants

of adjusting any otherwise disproportionate elements in the other contractual terms: see Allied Dunbar (Frank Weisinger) v Weisinger [1988] IRLR 60 at paragraph 32; Dawnay Day & Co. Limited and another v D’Alphen [1998] ICR 1068 per Robert Walker J at page 1094A, E, per Evans LJ at 1197E–F,11109H–1110A; Cavendish Square Holdings BV and another v Makdessi [2013] 1 All ER (Comm) 787 at paragraphs 15 and 23(v). It also arises because the interest to be protected is not merely client connection, but also the interest that the vendor should not derogate from the goodwill which has been sold and the public interest in the seller being able to achieve a good price for the business sold, which would be undermined without being able to restrict competition with that business: see Makdessi (at paragraph 15(vi)) and the decisions cited. Arguments to the effect that a non-dealing covenant is more appropriate are therefore unlikely to succeed in this context. Substance over form 11.79  The question as to whether to apply the more lenient approach applicable in the context of a sale of goodwill is one of substance rather than form, focussing on the nature of the legitimate interest to be protected: see Dawnay Day & Co Ltd and another v D’Alphen [1998] ICR 1068 per Evans LJ at pages 1106A–1107B. Thus in Dawnay Day it was not a bar that there had not yet been a sale of shares at the time of entering into the shareholders agreements; they were ‘part of a commercial bargain between business people of broadly equal bargaining power’ (per Robert Walker J at page 1094A, whose approach was approved by Evans LJ at page 1106E. Nor is it a bar that the restriction is applied from the date of termination of employment rather than the date of sale, as is commonly the case where the vendor continues in employment with the purchaser. It was on that basis that a two year post-termination non-competition covenant was upheld in Allied Dunbar (Frank Weisinger) v Weisinger [1988] IRLR 60. As part of the sale of Mr Weisinger’s practice (as a salesman of financial services) to Allied Dunbar, he agreed to act as a consultant for Allied Dunbar for a minimum two year period, with the non-competition covenant to apply at the termination of the consultancy arrangement. The main purpose of the consultancy arrangement was therefore to facilitate the transfer of the goodwill which he had agreed to sell, with the covenant then required to protect the goodwill acquired. It was noted that the restrictions were contained in the sale agreement rather than the consultancy contract but this was said (at paragraph 21) to be of very little weight. An argument that a non-dealing covenant would be more appropriate was rejected (at paragraph 28) on the basis that a non-dealing covenant, particularly one extending to new clients, would be difficult to police and enforce and depend to an unacceptable degree on the honest co-operation of the covenantor. 11.80  Notwithstanding the emphasis in Dawnay Day and Weisinger on putting substance over form in relation to the nature of the restriction, some more difficult issues as to the nature of the restriction and the approach to be applied arise where the restriction is contained in an employment contract. If there are also restrictions contained in a sale agreement it may then be argued that it is those restrictions that are intended to protect goodwill whereas the reasonableness of 584

Criteria relevant to reasonableness of non-competition covenants  11.83

restrictions in the employment contract are to be assessed by reference to the stricter standards ordinarily applied to employee covenants. This was the approach adopted in Ashcourt Rowan Financial Planning Ltd v Hall [2013]  IRLR  637. A six-month non-competition covenant was found to be too wide because the wording prohibited the defendant (Mr Hall), who had been employed by the claimant in a role providing financial advice to clients, from being (even) only indirectly concerned in the business or activity of a direct competitor. It was argued that it was appropriate to apply the less strict approach to covenants entered into the context of a sale of assets because the background to Mr Hall’s employment contract was that the claimant had purchased the shareholding in Mr Hall’s former employer (IFS), including the 35% shareholding held by Mr Hall and his wife. As part of the sale agreement, Mr Hall had agreed to covenants for three years from the date of completion, as well as entering into an employment agreement with the post-termination covenants which the claimant now relied upon. This line of argument was rejected by Andrew Smith J on the basis that it was to be supposed that the covenants in the vendor agreement protected the assets that were sold whereas the covenants in the employment contract could only be justified by the interests as employer. 11.81  The counter-argument is that it will be appropriate to view the transaction as a whole, and that restrictions in the context of a sale of goodwill may be contained in the employment contracts precisely because, as recognised in Weisinger, protection needs to be deferred until the termination of an ongoing relationship. Consistently with this, in TSC Europe (UK) Ltd v Massey [1999] IRLR 22 (at paragraphs 24–31 and 48) and Alliance Paper Group Plc v Prestwich [1996] IRLR 25 the courts both proceeded on the basis that reasonableness of non-poaching obligations in service agreements was to be determined having regard to the overall commercial bargain, in the case of TSC Europe even though there were similar restrictions also contained in the share purchase agreement. 11.82  Some support for both of these strands, can be drawn from the reasoning in Dawnay Day. Evans LJ cited with apparent approval (at page 1107D–E) the decision of the Court of Appeal in George Silverman Ltd v Silverman (unreported), 2 July 1969, noting that the court had declined to view restrictions in a contract of employment entered into following a sale of shares solely in employment terms without reference to the vendor/purchaser aspect. Yet the court also approved the approach taken by Robert Walker J at first instance who had accepted (at page 1094B) that the covenants contained in the service agreements should be treated separately and approached simply as a transaction between employee and employer. 11.83  We suggest that the better view is that, whilst the matter is one of substance not form, the fact that the covenants are contained in an employment contract or a sale agreement is a relevant but not determinative consideration in assessing the overall context. Where it is intended to apply the more generous approach applicable to a sale of goodwill, the safer approach will be to set out the restrictions in the sale agreement rather than the service contracts, where the restriction can still be framed on the basis of applying upon termination of the employment, 585

11.84  Reasonableness of express covenants

or alternatively to include a recital in the service contract which makes expressly clear the connection with the sale. If that is not done, as illustrated by the decision in Ashcourt Rowan, there is the greater risk of a court declining to apply the more lenient approach if the restrictions are contained in a service agreement. Illustrations of the more lenient approach 11.84  It is no bar to applying the more lenient approach to non-competition covenants in the context of a transfer of goodwill that the sale related only to a relatively small shareholding. In Blockfoil Group v Flay unreported, 18 December 2001, the restrictions were contained in an acquisition agreement in which Mr Flay sold his shares amounting to just 1% of the total shareholding. Taking into account that the restraints were in substance as well as form in the context of a sale of goodwill by an employee/vendor, the deputy High Court judge (Robin Purchas QC) concluded at an interim stage that the claimant was more likely than not to succeed in upholding a three-year non-competition (although relief was refused applying the balance of convenience test). It was noted (at paragraph 36) that the fundamental question was not whether the restriction sought to be imposed was justified by the agreed price, but whether it was reasonably necessary to protect the claimant’s legitimate interest, albeit that the court accepted that price may be a factor at trial (as to which see 13.94–13.102). 11.85  The more lenient approach was again applied in upholding a 12-month covenant at trial in Merlin Financial Consultants Ltd v Cooper [2014] IRLR 610. Although the covenant was in the context of an employment relationship, there were also features analogous to a business sale. The employee, Mr Cooper, was an experienced financial adviser. In addition to entering into an employment contract with the defendant (Merlin), he also entered into a ‘goodwill agreement’ under which, in recognition of the substantial client base he had built up prior to joining the defendant, he was to be paid the cash equivalent of a proportion of any funds transferred by his existing client base to Merlin. The goodwill agreement contained a restriction on competing for four years from entering into the agreement, and thereafter a 12-month post-termination restriction, which was the relevant restriction in the case. In upholding the 12-month restriction, the court first noted that there was a legitimate interest to protect in relation to the connection with the client base introduced by Mr Cooper. It was this which had enabled him to obtain more financially advantageous terms than other employees. The restriction covered all of the UK. It was argued that this rendered it too wide because Merlin’s clients were predominantly in London and South East England. Rejecting that submission, the court noted that the financial services market was a single geographic market, and that this was all the more true in an age of electronic communications. However, the decision is also to be seen in the context of the more liberal approach in cases involving an element of business transfer and entered into between parties of equal bargaining power. 11.86  The difference in the nature of the legitimate interest protected on a sale in comparison to simple employment agreement was again emphasised in Emersub XXXVI Inc v Wheatley [1998] Lexis Citation 3579. Here the court upheld a four 586

Criteria relevant to reasonableness of non-competition covenants  11.88

year worldwide non-competition covenant entered into in a sale agreement with the vendor, Mr Wheatley (who received total consideration for the sale of over £10.8 million in a mix of cash and loan notes), notwithstanding that the employment contract entered into with Mr Wheatley only contained a one-year posttermination covenant. The covenant was not regarded as being truly worldwide given the limit to businesses in competition with the business which had been sold, although the court indicated that a worldwide restriction was likely to have been upheld. As to the duration of the covenant, a comparison with the period in the employment contract was held to be misplaced since it ignored the distinction between employee and vendor covenants, where the purpose of the restriction is to protect goodwill, given that the covenant is part of the price obtained to purchase it. Further, the equal bargaining power was emphasised, with the court noting that the four year period was not simply imposed on Mr Wheatley, but was a product of negotiation and a compromise, compared to the original five year period that had been put forward. Application of more lenient approach to connected parties other than the vendor 11.87 In One Step (Support) Limited v Morris-Garner [2015]  IRLR  215 the approach of focussing on substance rather than form enabled the court to take into account a connected transfer of goodwill even against a former employee who was not a party to that transaction. Here the claimant, One Step, provided supported living services to children leaving care and vulnerable adults. The first defendant, Karen Morris-Garner, had been a director and owner of a 50% shareholding in One Step and was the founder of its business, the public face of the company and the person with the most contact and strongest relationships with its clients and local authorities. As part of a global settlement agreement, compromising High Court proceedings and providing for the termination of the first defendant’s employment, she sold her shares in One Step for £3.15m and entered into a deed with a three-year non-competition covenant. The second defendant, Andrea Morris-Garner, was her civil partner and also an employee of One Step. She also agreed to the termination of her employment at the same time and entered into a similar agreement. A year later they entered into competition through another company (Positive Living). The non-competition covenant was upheld at trial against both defendants. It was emphasised that in a vendor case it was reasonable to protect not only a business relationship with existing customers but also the more general goodwill of the business. So far as concerned the second defendant, whilst she had only been an employee and not a shareholder, the real reason she was required to enter into the covenant was because she was the first defendant’s civil partner and also professionally close to her. As such the covenant was necessary to give the purchaser proper and reasonable protection against the vendor and to enable her partner to realise the full purchase price. Franchises 11.88  The more lenient approach applicable in cases involving a sale of goodwill has also been applied to covenants in the context of franchise agreements. As 587

11.89  Reasonableness of express covenants

explained in Dyno-Rod plc v Reeve [1999] FSR 148, the franchise arrangement is akin to a lease of goodwill which is returned on termination of the franchise. Further, one aspect of the legitimate interest in protecting the goodwill is the need for breathing space to find and protect a new franchise business in the area. On that basis, and because a mere non-solicitation covenant would be difficult to police, an interim injunction was granted enforcing a one year post franchise termination covenant, preventing the franchisee having any involvement in any competing business within the former franchise area. See to similar effect ChipsAway International Limited v Kerr [2009] EWCA Civ 320, where this reasoning was approved by the Court of Appeal. The (12 month) non-competition covenant was construed having regard to the commercial purpose of affording the franchisor the space to find and protect an incoming contractor. The approach was again followed in Venture UK Limited v The Image House (Photographers) Limited and others 10 August 2009. The claim concerned a franchise specialising in portraiture. As in Dyno-Rod protection was required because the franchisee had been trained by the franchisor, had long been associated with the franchisor’s name and goodwill, was familiar with the local customer base, price structures, marketing techniques and would be able to undercut any new franchisee. Additionally in Venture UK there was a further element arising from the nature of the franchise in selling a life time experience, with the consequence that there was a significant element of personal customer influence and connection, and business generated from customer recommendation within the area subject to the restraint. The 12-month period allowed breathing space to decide whether to seek, and if considered appropriate to find, a replacement franchisee, and there was a functional correspondence between the area of restriction and the area in which the franchisee operated. See also to similar effect Carewatch Care Services Limited v Focus Caring Services Limited and others [2014] EWHC 2313 (see 11.90) and Kall-Kwik Printing (UK) Limited v Rush [1996] FSR 114 (granting an interim injunction to enforce a two year post termination area covenant in a franchise agreement, applying the Dyno-Rod approach and noting it did not matter that there was no specific sum attached to the goodwill and that a non-solicitation covenant would be virtually impossible to police (taking into account that there were hundreds of individuals and businesses who were contacts)). Limits of the more lenient approach 11.89  Even in cases involving a transfer of goodwill, the restraint must still be tailored to protection of the business in relation to which the goodwill is transferred. As such the covenant will be too wide if it extends to the protection of the purchaser’s existing business rather than the business acquired (see eg  British Reinforced Concrete Engineering Co Ltd v Schleff [1921] 2 Ch  563). On that basis in some instances covenants have been challenged where they provide a restriction by reference to the business carried out by the vendor or franchisor etc ‘from time to time’, on the basis that this is not limited to the business either at the time of the acquisition of goodwill or during employment. An argument to that effect failed in Dawnay Day & Co Ltd and another v D’Alphen [1998] ICR 1068 (CA) where a 12 month non-competition covenant in a joint venture agreement was upheld. The covenant applied to broking business carried on from time to 588

Criteria relevant to reasonableness of non-competition covenants  11.91

time. However, the Court of Appeal accepted (at page 1109B–H) that the nature of the relevant broking business was such that it could not be launched overnight, and that the parties were best placed to assess the period required to encompass protection relating to businesses in an advanced state of preparation. 11.90 The argument arose again in the context of a franchise agreement in Carewatch Care Services Limited v Focus Caring Services Limited and others [2014] EWHC 2313. Again, the argument failed, in part because the restriction was only for 12 months. The claimant franchisor was a provider of home care services through a combination of its own directly owned branches and outlets run by franchises. The franchisee company (Focus) had entered into two franchise agreements which contained the post termination non-competition covenant, preventing Focus from engaging in or being employed by or concerned or interested in a business competing with the franchisor or any of its franchises or any similar business in a defined area supported by a map. The covenant was upheld at trial, following the Dyno-Rod approach that the franchise agreement was akin to a lease of goodwill. Although the restriction applied to a business carried out by the franchisor as it existed from time to time, rather than just that which existed when entering into the franchise agreement, that was not regarded as being too wide as it was still confined to that carried on in the franchisor’s name and providing care, support and training services, and because, since the covenant was only for 12 months, major changes were unlikely to take place in that time. Application of the covenant to similar businesses was also regarded as reasonable on the basis that a business which was similar in the territory was almost bound to be competitive and might be regarded as a proxy for what was competitive. The decision therefore illustrated, even in the context of a transfer of goodwill, the importance of considering the restrictions as a whole. Here limits of time (the 12 month duration) and area were material in assessing reasonableness in the light of provisions covering a business carried on from time to time or a similar business. 3(b)(v) Appropriateness of non-competition covenant where there is a garden leave clause 11.91 In TFS Derivatives Ltd v Morgan [2005] IRLR 246 the court addressed, and rejected, a submission that the existence of a garden leave clause (even though it has not been enforced) rendered it inappropriate for the court to enforce a non-competition covenant. The employer had the benefit of a six-month noncompetition covenant (with credit to be given for any time spent by the employee on garden leave). The court held that the employer was not obliged to put the employee in the garden (with him receiving pay throughout that period) and that failure to do so did not affect whether the non-competition covenant should be enforced. Cox J considered (at paragraph 79) that the point had not yet been reached for garden leave clauses, despite their popularity and prevalence, to negate the necessity for non-competition (or area) covenants in all cases. The matter would always fall to be determined on the particular facts of the case. The judge was of the view that six months’ garden leave was in fact more onerous than the non-competition covenant, since the former would keep the employee 589

11.92  Reasonableness of express covenants

out of employment completely and therefore unable to exercise his skills as a broker. In practice, though, particularly in the case of senior employees, there will be little practical difference to an employee whether he is barred out under a non-competition covenant or by being put in the garden. The employee will be waiting to enter a particular employment and is unlikely in the interim to wish to engage in other (non-competitive) employment. There is of course the not insignificant issue for the employer of ongoing remuneration for no return. Cost is invariably a key factor which may lead the employer to reject garden leave as an option. 11.92  The judge’s approach in TFS Derivatives Ltd v Morgan was in our view correct (ie that the existence of a power to put an employee in the garden ought not to preclude the enforcement of a non-competition covenant) – see similarly Corporate Express v Day [2004]  EWHC QB  294 (see 11.64). However, the other reasons given by the judge for regarding the enforcement of the noncompetition covenant as appropriate (or more appropriate than garden leave) are less persuasive. It was said that garden leave can be resisted as amounting to a breach of trust and confidence, but such an argument is most unlikely to succeed if there is an express garden leave clause. It was also noted that garden leave would not be an option where an employee is summarily dismissed or left his employment without notice. However, it is precisely where an employee wrongly purports to leave without notice that a garden leave injunction is particularly likely to be sought to prevent the employee acting in a way which is inconsistent with the duty of fidelity: see eg  Sunrise Brokers LLP  v Rodgers [2015] ICR 272. Further, whilst garden leave would not apply in the event that an employer elects to dismiss summarily, the employer may instead elect to enforce garden leave. Indeed, as to the latter point, in SG & R Valuation Service Co v Boudrais [2008] EWHC 1340 (QBD) Cranston J held that the employer had been justified in placing employees on garden leave for the length of their notice period where there had been wrongdoing by the employees, even though there was no express contractual power to place them on garden leave. This decision was approved by the Court of Appeal in Standard Life Health Care Ltd v Gorman [2010] IRLR 233.

3(c)  Considerations relevant to geographical scope 3(c)(i)  Extent of the area 11.93  At least where a non-competition covenant is based on protection of trade connection (rather than protecting confidential information), generally speaking, the wider the area the more difficult it will be to justify it as no more than necessary to protect the ex-employer’s legitimate interests. Area and duration are closely related – if the period is short, a wider area may be tolerated: Continental Tyre and Rubber (Great Britain) Company (Ltd) v Heath (1913) 29 TLR 308. Conversely, if the area is small, a longer period may be permitted: Fitch v Dewes [1921] 2 AC 158 (HL) at page 168. Normally, if no area is specified, the area will be taken to be worldwide: Dowden & Pook Ltd v Pook [1904] 1 KB 45 and Commercial Plastics Ltd v Vincent [1964] 3 All ER 546 (CA) at page 550; but in Littlewoods 590

Criteria relevant to reasonableness of non-competition covenants  11.96

Organisation Ltd v Harris [1977] 1 WLR 1472 (CA) the covenant was in these circumstances (surprisingly) interpreted as being limited to the United Kingdom. 11.94  A wide area may be allowed where the ex-employer has the whole or a substantial part of the market share of the product: Standex International Ltd v Blades [1976] FSR 114. It was until more recent decades unusual for worldwide restrictions in employment contracts to be upheld (Vandervell Products Ltd v McLeod [1957] RPC 185 at page 191, and see also Hinton & Higgs (UK) Ltd v Murphy and Valentine [1989] IRLR 519 (Court of Session)). But this is no longer the case in the ‘global village’, where businesses are often conducted worldwide and information is dispersed worldwide in seconds via the internet. This in turn raises the question of whether it is always right to say that the wider the area, the more difficult it will be to justify the covenant. Ironically, in some instances where confidential information or trade secrets need to be protected worldwide, a non-competition covenant which seeks to protect that information over only a limited area may call into question whether that information is truly secret or confidential. Bearing in mind that the key justification for non-competition covenants tends to be the need to protect confidential information – and the ‘global village’ point – it may be that the geographically narrower covenant will require more detailed justification than a broader one. 3(c)(ii) The type of interest sought to be protected 11.95 The area must be no larger than is necessary to protect the legitimate interests of the ex-employer. An important factor in the determination of the appropriateness of the extent of the area will be the type of interest which the covenant serves to protect: covenants designed to protect confidential information will normally justify a wider area and, indeed, may justify a countrywide or even a worldwide restriction: Nordenfelt v Maxim Nordenfelt Guns and Ammunition Company [1894] AC 535; Forster and Sons (Ltd) v Suggett (1918) 35 TLR 87; Kerchiss v Colora Printing Inks Ltd [1960] RPC 235; Caribonum Company Ltd v LeCouch (1913) 109 LT 385 at 587. In Scully UK Ltd v Lee [1998] IRLR 259 the Court of Appeal specifically referred to the fact that business was becoming more international, and the relevant covenant was to protect dissemination of confidential information. That was not constrained by national boundaries. Accordingly, in Poly Lina Ltd v Finch [1995] FSR 751 the claimant (a manufacturer of bin liners and other plastic goods) was able at trial to enforce against its former marketing controller a worldwide covenant taken to protect both technical and commercial information. In the modem ‘global village’ a worldwide covenant may be the only way in which state-of-the-art technology or other trade secrets can be protected: in Polymasc v Charles [1999] FSR 711 (Laddie J) a worldwide interim injunction was obtained to protect highly sensitive bio-technological information. 3(c)(iii) Functional correspondence between restricted area and location of customers 11.96  Where the ex-employer relies on customer connection rather than confidential information to justify a non-competition covenant (something which may 591

11.97  Reasonableness of express covenants

in principle be harder to justify), it will be for the ex-employer to demonstrate that the restricted area corresponds with the location of his clientele. In Reed Executive v Somers (20  March 1986, unreported, CA), the six-month noncompetition covenant failed when a recruitment agency was unable to show any ‘functional correspondence’ (in the words of Leggatt LJ) between the restricted area (a half mile radius of the claimant’s Bishopsgate offices in London) and the area in which the customers were situated – many being outside the area. This case was followed in Office Angels Ltd v Rainer-Thomas and O’Connor [1991] IRLR 214 (CA). It is not always necessary to show sales in relation to every part of the restricted area, provided the employer has substantial goodwill over the area covered by the covenant: Kerchiss v Colora Printing Inks Ltd [1960] RPC 235. In Dyson Technology Ltd v Pellerey [2015] EWHC 3000 (Ch), Snowden J upheld a worldwide non-competition covenant to protect confidential information notwithstanding that the products designed and developed by the employer were not sold in every country; they were sold either directly or by group companies in 65 countries across Europe, the Americas, Asia and Africa and the employers’ group was constantly seeking to expand into new markets around the world. Functional correspondence may also be relevant in relation to confidential information. In BFS Group Ltd v Fox [2008] All ER (D) 400 the employee was employed as a field sales manager in the south west of England. Her contract of employment contained covenants designed to protect confidential information, including a six-month national bar on solicitation, dealing with customers and employment by competing businesses. An interim injunction was refused because the information about local customers was not enough to justify a national covenant, despite the employer’s contention that this information had to be protected against national use. This case points up the difficulties nowadays of defining an appropriate area embargo: on the one hand, in the modern technological age, information can be disseminated with ease worldwide at the press of a button – pointing to the desirability of very extensive area embargoes; on the other hand, where the information has only local value, such a broad restraint will be struck down, as in this case. 3(c)(iv)  Nature of the area 11.97 When the area is a thinly populated rural area, a greater area will be regarded as protectable than in a densely populated urban area: see Scorer v Seymour-Johns [1966] 3 All ER 347 (CA) at page 350. In some instances, in a densely populated urban area, only a very small radius will be tolerated, such as a quarter of a square mile – and indeed in some trades (eg that of employment agencies) a non-competition covenant may not be upheld even where the area is very small. In Office Angels Ltd v Rainer-Thomas and O’Connor [1991]  IRLR  214 a covenant in the contracts of employment of an employment agency precluded employment agents (for six months after the end of their employment) from undertaking the work of employment agents within a radius of 1,000 metres of branches in the Greater London area in which they were employed in the last six months of their employment. This area (about 1.2 square miles, including most of the City of London) was held to be too 592

Criteria relevant to reasonableness of non-competition covenants  11.100

wide, in view of the fact that there were some 400 employment agencies in the City of London and thousands of clients and jobseekers in the area. In Spencer v Marchington [1988]  IRLR  392 the judge regarded as too wide an area restraint in favour of an employment agency covering a radius of 25 miles from their Banbury office, since all but one of their customers were within 20 miles. He would have allowed a radius of 20 miles. In Hollis v Stocks [2000] IRLR 712 (CA) (somewhat surprisingly) an assistant solicitor was prevented for 12 months from working as a solicitor within a 10-mile radius of his ex-employer’s office in Sutton-in-Ashfield for one year. This seems a drastic decision. However, the Court of Appeal deferred to the knowledge of the judge, who knew the local area well, and endorsed his decision which also took into account that the restriction left Mr Stocks free to take up employment in other nearby cities in the East Midlands including Nottingham and Derby. 3(c)(v)  Nature of business and the manner in which it is conducted 11.98  In a business such as a credit betting business, a non-competition covenant, as distinct from a non-solicitation covenant, may be inappropriate: S W Strange Ltd v Mann [1965] 1 All ER 1069 (see 11.73). In Mason v Provident Clothing & Supply Co Ltd [1913] AC 724 (HL) an area of 25 miles from London in relation to a travelling salesman was held to be excessive. In London alone about 1,000 salesmen were employed. Conversely, if the business is conducted by a small number of people with customers widely distributed, a wider area will be permissible. 3(c)(vi)  Geographical area of activities of the employee 11.99  Where the restraint is intended to protect trade connection, there should be correspondence between the activities of the employee and the restricted area – a restricted area drawn with regard to an office in which the employee did not actually work will be unreasonable and, unless severable, will render the whole covenant unenforceable: Scorer v Seymour-Johns [1966] 3 All ER 347. See also Duarte v Black & Decker [2008] 1 All ER (Comm) 401 (QB) (considered at 11.105), where one factor which contributed to the covenant being regarded as unreasonably wide was that it was a worldwide restriction, whereas Mr Duarte’s role, and hence the protectable confidential information, was focussed on the EMEA region. 3(c)(vii) Certainty of the area 11.100  The covenant must be defined with sufficient certainty to be enforceable. An area covenant failed in part on this basis in Landmark Brickwork Limited v Sutcliffe [2011] IRLR 976. The covenant was defined as covering parts of UK to the south of Cambridgeshire and Bedfordshire and ‘any other place’ in which the employer ‘operated’ its business. There was no map supplied with the service contract. Slade J concluded that the geographical scope was too uncertain 593

11.101  Reasonableness of express covenants

to be enforceable, both in relation to the description of the geographical area and because the concept of the place where the employer operated its business was too uncertain. There was nothing in the context to indicate if this meant for example a town, building or office. Further the covenant also failed because there was no evidence adduced to show a real functional correspondence between the prescribed area and the area in which the employer operated. Nor was any evidence adduced to show reasonableness of seeking to bar out the defendant from employment in the prescribed area.

3(d)  Scope of restriction on business activity and role 3(d)(i)  Preliminary construction issues 11.101  In each case the necessary starting point is to resolve any issues as to construction of the relevant covenant. The approach to construction is considered in more detail in Chapter 12. 3(d)(ii) Correspondence between businesses covered by the restriction and protectable interest 11.102  Entities which compete with a claimant employer may also engage in non-competitive activities. As such, the question may arise whether a non-competition covenant is limited to preventing the former employee being engaged in only the competitive activities, and if not, whether it is wider than reasonably necessary. Subject to anything in the particular wording or context to indicate the contrary, the narrower construction is likely to be available where the covenant refers to a competing business, rather than to a company firm or company or named entities. The issue arose in TFS Derivatives v Morgan [2005] IRLR 246, where the key clause read: ‘[not] for six months undertake, carry on or be employed, engaged or be interested in any capacity in either any business which is competitive with or similar to a relevant business within the territory, or any business an objective or anticipated result of which is to compete with a relevant business within the territory.’

11.103 At trial Cox  J  interpreted ‘business’, in the expression ‘any business’, to refer to a business activity, rather than a business entity. This had the effect of narrowing the clause, as it could not be said that the clause prevented the defendant from going to work for a competitor, but in a non-competing activity. Whilst on one view that might be regarded as adopting a benign construction of the covenant, it was a conclusion reached on the basis of ordinary principles of construction rather than due to straining to reach a construction leading to validity of the covenant. To that end, Cox J  took into account various factors as denoting a focus on a functional activity rather than an entity: the factual matrix that brokers exercised their skills in many different asset areas which were not necessarily delineated by different legal entities; that the introductory 594

Criteria relevant to reasonableness of non-competition covenants  11.105

definition of ‘relevant business’ referred to any business of the employer company or associated companies and as such focussed on business activities; the reference to ‘any business’ rather than ‘a business’ and that the focus of the clause on something which was competitive tended to denote a functional activity. On that basis, and having severed the provision restricting engaging in a similar business (which would have been too wide), the covenant was upheld on grounds of the confidential information to which the employee would have had access. 11.104 A  similar conclusion was reached in Dyson Technology Ltd v Strutt [2005]  EWHC  2814 (Ch) in construing a restriction framed by reference to competition with ‘any business’ carried out by the claimant (see 11.66). The relevant covenant provided that, for 12 months post termination, the employee would not: ‘so as to compete with the company, carry on or be engaged, concerned or interested in any business which is similar to and competes with any business being carried on by the company at the termination of the employment and with which you were involved at any time during the period of twelve months immediately preceding the termination of the employment’.

As a matter of construction, the judge held that ‘any business’ referred to a business activity, rather than a business entity. Unlike in TFS Derivatives there was no need to blue-pencil the words ‘similar to’ since these applied in conjunction with the requirement of being a competing business, and denoted that the business concerned had to be one that competed with the relevant business of the employer by reason of the similarity in nature of both businesses. In addition, in context the requirement of having been ‘involved’ in the business was construed to mean involved in the course of employment. Again, taking a realistic approach in context, the court rejected an argument that the claimant’s business was to be regarded only as one of designing and developing products for other companies in the group; the ultimate end was for the products to be supplied to the public and it was with that business that the employee was restrained from competing. The judge also accepted that the non-competition clause was reasonably necessary to protect the claimant’s confidential information. 11.105  By contrast in Duarte v Black & Decker [2008] 1 All ER (Comm) 401 (QB), the covenant was framed by reference to named competitors rather than merely referring to competition with the claimant’s business. As such it was not capable of being construed other than as referring to each of the business activities of the listed entities. The covenant was found to be invalid both under Maryland law and English law since it precluded employment in non-competing businesses within those entities. B&D’s business was divided into consumer products and industrial products. For all but six months of Mr Duarte’s employment (relating to a period starting about 18 months prior to his resignation) he had worked on the industrial product side of the business, and the court proceeded on the basis that B&D’s core protectable interest in relation to Mr Duarte was its confidential information relating to that side of the business and in relation to 595

11.106  Reasonableness of express covenants

EMEA (Europe, the Middle East and Africa). Once all subsidiaries and affiliates of the listed competitor companies were included, there were about 500 entities covered, constituting about 90% of the global power tool market, but also including corporate groups which were primarily concerned with power tools on the consumer product side, and also others which carried on non-competing businesses. The worldwide restriction by reference to the entities in the schedule was therefore too wide. Given Mr Duarte’s lack of connection other than with the industrial power tool side of the business in EMEA, and tenuous knowledge of any confidential information beyond this, it should have been limited to competing businesses (ie business activities) within those competing entities concerned with industrial power tools in EMEA, and not have barred out all those entities themselves. The two-year duration of the covenant also counted against it; Field J commented that, to say the least, if a covenant of that duration was to be upheld the scope of the balance of the covenant would need to be narrowly drawn, which it was not. Finally, the court declined to narrow down the covenant by bluepencilling names from the list of restricted entities, on the basis that this would be to change the character of the contract so as to become not the sort of contract that the parties had entered into at all. 11.106  The decision in Duarte may be contrasted with the interim injunction decision in Intercall Conferencing Services Ltd v Steer [2007] EWHC 519 (QB), where a covenant framed by reference to named competitors was upheld. The listed embargoed businesses included ‘BT’ and other quite vaguely described competitors, but in contrast to Duarte here there were only five businesses listed (albeit reserving the discretion to add others). On the evidence, the court held that the clause was neither too wide nor too vague. The claimant, Mr Steer, had been employed as Head of Training and Personnel Development EMEA for the claimant, a conference provider. It was accepted that the defendant held a senior role in which he had access to confidential information capable of protection after employment and that there was no reason why he should not be able to recall significant quantities of this. Following the approach in Thomas v Farr, a non-competition covenant was the most satisfactory form of restraint because of the difficulties of identifying the boundaries of what was or was not confidential. By contrast with the two-year restriction in Duarte, here there was a six-month period, which was considered to be reasonable. Further, although there was complaint that the covenant was worldwide, it was effectively restricted by the provision that it applied to the businesses (which were named) which were in competition with the claimant at the end of his employment, so as to apply in the UK and Europe where the claimants would be in competition with the relevant named company. Whilst the covenant did not restrict the capacity in which the defendant might be employed, the court considered that this could not be decisive on the basis that if he possessed confidential information there was a risk that in the course of employment this might be breached. The court did not specifically address the question as to whether the covenant had the effect of applying to non-competing parts of the named competitors (as opposed to working in a non-competing capacity within a competing business). However, although the competitors were named, they were described in the clause as being ‘businesses … which are in competition with the business’, and there was no provision that 596

Criteria relevant to reasonableness of non-competition covenants  11.109

all subsidiaries were covered. As such, the clause was capable of being construed as limited to the competing limbs of those businesses. 11.107 A  different approach to the construction of a restriction on business activities was adopted in refusing relief in RSS (Wessex) Limited t/a Rubicon People v Dawson and another [2013] EWHC 2309. A 12-month non-competition covenant, which had been provided to the employer at the employee’s suggestion in the context of the employer (a recruitment company) providing a loan to the employee, was framed as preventing engagement in any capacity in any business competing directly or indirectly with the part of the business with which the employee was concerned to a material extent on behalf of the claimant during the final year of his employment. At an interim stage this was construed as covering employment with a competing entity, even if employed in a part of the business which did not compete. On that basis the clause was regarded as too wide and was struck down. However, neither TFS nor Duarte were cited. The better view would appear to have been that it only applied to competing activities rather than the entity as a whole, and as such if (as Mr Dawson claimed), he was to take part in a non-competing arm of the new employer, there would be no breach. That was the approach adopted in Spotless Facilities Services (Uxbridge) Limited v Jones and others [2012] EWHC 4391. The claimant’s business was as a cleaner of substantial structures. One of its divisions was concerned with cleaning leisure and entertainment structures (the Clean Event side). Two of the defendants had been employed on the Clean Event side as venue cleaning managers, responsible for a particular venue. They joined a competitor, Mitie. They were subject to one year non-competition covenants which were expressed to be UK wide but limited to the ‘business’ with which they were involved or of which they had significant knowledge in the last 12 months of their employment. This was construed (on the interim relief application) as relating to the particular venue, and so had no application to the employment taken up. If it had been construed as relating to cleaning of leisure and entertainment venues across the UK, it would have been too wide. 11.108  See also Extec Screens & Crushers Ltd v Rice [2007] All ER (D) 95, where an eight-month non-competition covenant (on top of three months’ garden leave) was upheld at trial, the court applying a favourable construction to the covenant. The clause was framed by reference to a definition of ‘Restricted Business’ which referred to activities ‘carried on by [Extec] or any Group Company in which [Mr Rice] worked or about which [Mr Rice] knew Confidential Information to a material extent’. The court construed this limitation (as to activities in which Mr Rice worked or knew confidential information) as applying to the whole clause and not merely to the group companies. This was not a matter of adopting a deliberately benign interpretation. Rather it reflected what was considered to be the plain meaning in context, as there was no apparent reason for applying the words only to group companies. 11.109  Notwithstanding the solutions that can sometimes be reached as a matter of construction, these cases, in particular TFS  v Morgan, highlight the importance, when drafting non-competition covenants, of focusing on the nature of 597

11.110  Reasonableness of express covenants

the competitors who are to be embargoed. In particular, where such competitors are large entities, it will usually be necessary to bar out only competing business activities, rather than the entities as a whole. 3(d)(iii)  Role in which the former employee was employed 11.110 Various issues may arise in relation to a non-competition covenant regarding whether the restriction is sufficiently tailored by reference to the capacity in which the departing employee was involved with the employer seeking to enforce the covenant, or is involved with the new employer. One pitfall is where the employer was only involved with one aspect of the claimant employer’s business, and does not have confidential information or client connections in relation to the remainder of the business. A covenant which is not limited to the geographical area or the part of the business with which the employee was involved is likely then to fail (see 11.100 and 11.105). 11.111 An analogous issue arises where, although the covenant is restricted to the part of the business with which the employee was involved, it extends to aspects where the link is too tenuous when compared with the extent of the restriction imposed. That was the case in Norbrook Laboratories (GB) v Adair [2008] IRLR 878 (QBD) where the court concluded that a 12-month non-competition covenant was unreasonably wide by virtue of applying to competing products with which the defendant employee was concerned (which was construed to mean that she dealt with them to any extent in her employment) at any time during the last five years of her employment prior to termination. But for this five year span, the 12-month restriction would have been regarded as reasonable given evidence that the customers would enter into commitments for a period of a year, leaving Norbrook vulnerable to competition at renewal time. There were legitimate interests to protect, both in relation to customer connection and confidential information in relation to customers in the geographical areas where the defendant operated (such as information as to customers, potential customers, prices, discounts, sales, marketing strategies, purchasing patterns and some sales-related technical information). Further, given the need to protect confidential information it was reasonable to have a non-competition restriction. However, the effect of covering any products with which the defendant was concerned over five years was to cover products (of which there were 130) with which the defendant (who had been a territory manager for the claimant pharmaceutical company) might have only a tenuous connection merely on the basis that she had been concerned with selling or offering them for sale (whether or not a sale was in fact made) at any time in that period. That was not required either to protect confidential information or customer connection. Most of the confidential information had only a short shelf-life, and there was no evidence that information about products which a sales person may not have sold for many years, or at all, was likely to be remembered. See also CEF Holdings Limited v Mundey [2012] IRLR 912 where one of the grounds on which a six-month worldwide non-competition covenant was held to be too wide was that there was no limitation on how far back employees could have 598

Criteria relevant to reasonableness of non-competition covenants  11.113

been carrying out the restricted activities; it would apply even if they had been carried out 15 years earlier and the employer no longer carried out those activities and had no intention of resuming them. 3(d)(iv) Capacity in which the former employee may be involved with a competing business 11.112  A further relevant factor in assessing the overall reasonableness of the covenant may be the extent to which it is appropriately limited in relation to the type of work or the capacity in which the employee may be involved with a competitor. The issue here is distinct from that considered at 3(d)(ii) above (11.102–11.109) in relation to whether the restriction covers a non-competing business. Here, the issue is instead as to the application of the covenant to employment within a competing business but in a non-competing role. As noted at 11.75, the failure to place limits on an employee being only indirectly concerned in the business or activity of a direct competitor led to a six-month non-competition restriction failing in Ashcourt Rowan Financial Planning Ltd v Hall [2013] IRLR 637. The clause was viewed as too wide because, although the restriction on being ‘directly or indirectly … engaged or concerned in’ any business or activity of a direct competitor excluded a mere financial interest, it did not restrict the type of role that the defendant, Mr Hall, a financial adviser, was prevented from taking up with a competitor. As such, it would have covered work with a competitor which did not involve dealing directly with clients, such as by way of a management role, regulatory compliance, training, research into investment products or fiscal planning for the competitive business. The judge emphasised that this was to be seen in the context that financial services in the UK do require significant ancillary services of this kind, and he found that there was ‘no obvious justification for preventing Mr Hall from working for a competing business in such roles’. Related to this, the judge held that the covenant was also too broad in that it referred to any of the employee’s activities in the last 12 months of his employment, and he could have been required to undertake duties in parts of the business where he was not involved with clients. Further, on the facts the judge held that the width could not be justified by the need to police less restrictive covenants to which Mr Hall was subject. 11.113 The approach in Ashcourt Rowan was unusually stringent, when placed against the context that it was found that there was a legitimate interest in the protection of confidential information about the claimant’s clients, including their contact details and investment history and decisions. Nor was there any finding that the period of the covenant was excessive having regard to the shelf life of the confidential information. However, the decision is also to be viewed in the context that the argument that the covenant was required in order to police less onerous covenants (such as the confidentiality covenant to which Mr Hall was subject) entailed a fact-sensitive assessment in the particular case. In relation to this, the judge emphasised the need for an assessment, as at the contract date, of the balance between the restraints that the covenant might impose on the employee even though not ‘trespassing upon the legitimate 599

11.114  Reasonableness of express covenants

interests of the previous employer, and the need for such additional restraints in order to police the covenant or to give it practice effect’ (at paragraph 50). In carrying out that balance, the judge highlighted in particular two factors. First, the defendant would have been prevented from working in many parts of financial services industry where it could not reasonably be said that the claimant’s legitimate interests would or might be compromised. Secondly, the difficulties of policing the confidentiality covenant were considered to be ameliorated to some extent by the fact that the clients of an employer wishing to change advisers would typically contact the employer to request and authorise release of their information to the new adviser, and thereby alert the employer to possible misuse of information about the client. The latter consideration in particular appears unconvincing given the difficulties that would remain in establishing the misuse of confidential information. 11.114 The absence of suitable limits on the capacity in which an employee could be engaged was again relied upon in Underwriting Exchange v Newall (QBD) 3  February 2015 (unreported). A  13-month non-competition covenant was regarded as too wide (on an interim relief application) because it sought to restrict employees (who were insurance brokers) from working for a competitor in any capacity whatsoever. That may be contrasted with the approach in Intercall Conferencing Services Ltd v Steer [2007] EWHC 519 (QB) where, as noted at 11.106, the court considered that the absence of a restriction on the capacity in which the employee could work for a competitor could not be decisive. The court considered that if he possessed confidential information there was a risk that the duty might be breached through working for a competitor irrespective of the capacity in which he worked. Similarly in Norbrook Laboratories (GB) v Adair [2008] IRLR 878, although the covenant was held to be too wide on other grounds (see 11.111), it was considered to be reasonable that it was not limited to restricting Adair from taking up a role in a sales capacity; confidential information could be revealed to a competitor irrespective of the capacity in which she was employed. See also Tradition Financial Services Limited v Gamberoni [2017] IRLR 698, where an argument based on inadequate limits on the capacity in which the departing broker could work for the new employer, and should not extend to back office work, was rejected. However, this was on the basis of more specific reasoning in that the confidential information would still be of benefit in back office work, and indeed the defendant employee had carried out back office work for the claimant and the claimant itself imposed confidentiality obligations on some of its own back office staff. 11.115  In some cases issues as to the scope of the restriction on the capacity in which the former employee may work might be capable of being resolved as a matter of construction. That was the case in Hollis v Stocks [2000] IRLR 712 (CA). Here the covenant provided that the employee would not for 12-months post-termination ‘work within 10 miles of the firm’s office to include not advising or representing any clients whatsoever’ at specified police stations. The restriction was construed to mean that the employee would not work as a solicitor rather than imposing a restriction on working altogether. Read in context that was the plain meaning, given that the contract started with a definition of 600

Criteria relevant to reasonableness of non-competition covenants  11.117

Mr Stocks’ employment as being a solicitor, all the terms were directed at that employment and the final words were also plainly directed at this in referring to advising at a police station. Construed in that way, the clause was found to be enforceable. 11.116 Again in Brake Brothers Ltd v Ungless [2004]  EWHC  2799 (QB), in upholding a six-month UK-wide non-competition covenant on top of three months’ garden leave, the court adopted a narrow construction of a restriction on being involved ‘in any capacity’ in competition with any ‘Businesses’. The defendants had been employed as produce buyers, which entailed negotiating trading agreements and dealing with suppliers of food products, which then sold the products on to the catering industry. Having regard to the definition of ‘Businesses’ by reference to those with which the defendants had been involved in the last 12 months, and a clause acknowledging that the defendants possessed confidential information, the court (at paragraph  17) construed the words ‘in any capacity’ (arguably incorrectly) as being limited to employment as produce buyers in a competing business. Given the breadth of the phrase ‘any capacity’ a more natural reading might have been to regard this as extending to other capacities such as sales executives in the competing businesses, which might have rendered the covenants too broad. However, applying the narrower construction, the covenant was regarded as reasonable to protect memorable confidential information and also because of the inadequacy of a non-dealing covenant to protect the interests of the claimant, including the buyer-supplier connection. The court also took into account that the covenant was limited to trade rivals with a turnover of more than £30m, which meant that only three companies were caught, leaving numerous other companies and retailers with whom the defendants would be able to seek employment. 11.117  Conversely, the decision of the Court of Session in Informa UK Ltd v McDougall [2017]  CSOH  149, illustrates the danger of defining too narrowly the capacity in which the employee is restricted from competing. Here the defendants had entered into covenants on promotion which included a restriction on being ‘employed by any direct competitor’. They resigned and took up positions together as partners of what was, or was to be, a direct competitor. In refusing an interim interdict (injunction) the Court noted that the clause did not appear to prohibit them from setting up as a sole trader in direct competition. Equally the Court considered that there was a strong argument that the word ‘employed’ bore what the Court regarded as its usual meaning of employed under a contract of employment, and did not cover being engaged as a partner. That approach appears overly restrictive; it might be thought that the term ‘employed’ was readily capable of being construed more broadly as extending to being engaged in a competing business. However, somewhat surprisingly, the Court considered that the wording reflected that a former employee setting up business in direct competition as a sole trader or partner was not a potential harm contemplated by the claimant (petitioner), being a company which was a multimillion pound business. In any event, it will be prudent to avoid the risk of such a construction by identifying the capacity in which the restriction applies more broadly so as to cover being employed or engaged in the competing 601

11.118  Reasonableness of express covenants

business, but subject to care being taken to avoid the pitfalls associated with a restriction on involvement in a competing business merely in the capacity as a shareholder, as to which see 11.17–11.23.

4. COVENANTS AGAINST SOLICITING/DEALING WITH CUSTOMERS/ PROSPECTIVE CUSTOMERS 4(a) Meaning of ‘solicitation’ (by an ex-employee) and similar phrases 11.118  Solicitation may occur in many different ways – for example, face to face, by email, social media, letter, circular or advertisement. An element of persuasion is required. In Trego v Hunt [1896] AC 7 (HL), referring to the implied restriction on canvassing customers upon the vendor or former partner of a business, Lord Herschell (at pages 20–21) drew a distinction between: (a) where the vendor sets up in competition and ‘appeals generally for custom’ (which is permissible in the absence of a relevant express covenant), and (b) where ‘he specifically and directly appeals to those who were customers of the previous firm’ (which would contravene the implied restriction on canvassing). That test of whether there was a ‘specific and direct’ appeal to the customer was applied in Back Office Ltd v Percival [2013] EWHC 1385 so that the court held that there had been solicitation of a customer (which, in that case, constituted a contempt of court). The approach was also followed in QBE Management Services (UK) Limited v Dymoke [2012] IRLR 458, where Haddon-Cave J suggested (at paragraph 185) that a helpful recent statement was to be found in Equico Equipment Finance Ltd v Enright Employment Relations Authority (Auckland NZ, 17 July 2009) that: ‘In my view, “canvas” is synonymous with soliciting. Both words involve an approach to customers with a view to appropriating the customer’s business or custom. I consider a degree of “influence” is required. There must be an active component and a positive intention.’

11.119  It is often assumed that where it was the customer who first contacted the ex-employee, there is no solicitation. As it was put by Dillon LJ in Hanover Insurance Brokers Ltd v Shapiro [1994] IRLR 82 (CA) (at paragraph 18): ‘If they do not themselves or by their agents make the approach they are not canvassing or soliciting the person in question.’

This is not necessarily the case. For example, where the customer telephones the employee asking what the employee will be doing after employment, it is questionable whether it would amount to solicitation if the employee informs the customer that he will be trading from a particular address in the same line of business as the ex-employer. However, it is likely that there would be found to have been solicitation if his response is, for instance, immediately to offer to make a sales presentation. Each case will turn on its own precise facts. If the gist of what the ex-employee says is responsive to the customer’s enquiries and 602

Covenants against soliciting/dealing with customers/prospective customers 11.122

does not entail persuasion of the customer, there will be no solicitation. If there is significant use of persuasion by the ex-employee, this is likely to be seen as soliciting. It is often difficult to draw the line. 11.120 In Towry EJ Limited v Bennett [2012] EWHC 224 Cox J quoted with approval from the above paragraph (in the 3rd edition) and concluded (at paragraphs 426 and 427): ‘426. … It is that need to establish the existence of persuasion that distinguishes non-solicitation from non-dealing clauses. … 427. In my judgment a contractual, non-solicitation clause of the kind in this case means that ex-employees must not directly or indirectly request, persuade or encourage clients of their former employer to transfer their business to their new employer. Employers are entitled to prevent ex-employees from exerting influence of this kind over their clients. The question in this case is therefore whether Towry has demonstrated to the civil standard on all the evidence that an individual Defendant’s communications with Towry’s clients, as they became, contained a material element of persuasion, with a view to gaining the business of those clients. Whether there has been persuasion or encouragement will depend, in each case, on all the circumstances. Determination of this issue is clearly fact specific.’

Cox J (also at paragraph 426]) cited Baldwins (Ashby) Ltd v Maidstone (9 June 2011, unreported) (HHJ  Simon Brown QC in the QBD  Mercantile Court) in which he stated: ‘There is solicitation of a client by a former employee if the former employee in substance conveys the message that the former employee is willing to deal with the client and, by whatever means, encourages the client to do so.’

11.121  The result was that Towry failed in its claim since, against the context that the former employees had not made the first contact with the clients, the court was not prepared to draw the inference that clients had moved to the competitor as a result of breach of non-solicitation covenants (there were no nondealing covenants). To similar effect see Croesus Financial Services Limited v Bradshaw [2013] EWHC 3685 where it was reiterated (at paragraph 102) that it is not correct to assume without more that where it is the customer who makes the first contact, there is no solicitation by the ex-employee. If the customer initiates the contact that is relevant to the assessment of whether there has been solicitation, but there is no general rule that there would be no solicitation. In that case a documentary trail had been set up to get the clients to contact the ex-employee first and the communications even with these clients involved material encouragement or persuasion to transfer their business, which was the critical factor. 11.122 In Austin Knight (UK) Ltd v Hinds [1994] FSR 52 the ex-employee initially informed some customers of her redundancy (at a time following termination of her employment when she had no prospect of new employment and thus could not be said to be soliciting). Later, after she had found employment with 603

11.123  Reasonableness of express covenants

a competitor, some other customers approached her to act for them. She made a presentation to these clients, and to others who were required to put their work out to tender, but this was held not to be ‘soliciting or endeavouring to entice away’, because to hold otherwise would change the covenant. In our view, this case was borderline, but perhaps correct on the very particular facts of the initial contact having not been for the purposes of soliciting and thereafter the presentation being part of a statutory tender procedure. 11.123  More questionable was the approach of the court in another first instance decision: Taylor Stuart & Co v Croft (7  May 1997, unreported) (Ch  D). The deputy judge was of the view that a communication to the clients of the exemployer by an ex-employee (an accountant) that he had left his employment, and giving his new address, even if sent in the hope of attracting the client, would not have been a solicitation. However the use of the words ‘I … can be contacted as above’ crossed the line and thus there was a solicitation. In our view, while a mere communication by the employee to clients that he is leaving employment is unlikely to amount to a solicitation, where this is coupled with his providing an address where he can be found, this is likely to amount to soliciting – particularly when done in the hope of attracting custom. 11.124 Difficult questions may arise in relation to announcements/advertisements which come into the hands of customers. It may be said, applying the distinction drawn in Trego v Hunt, that without more an advertisement would fall within the category of appealing generally for custom rather than ‘specifically and directly’ appealing to the clients of the former employer. However, if the advertisements are placed locally in an area in which there are a substantial number of customers of the ex-employer, this might be solicitation if on the facts they are found to have been specifically targeted at the former employer’s customers. If the advertising is not done in this way, there will be no solicitation if some customers outside the area in which the customers are mainly situated come incidentally to see the advertisements. In Sweeney v Astle [1923] NZLR 1198 Hosking J said that solicitation: ‘… involves a selection of the persons appealed to … In the cases put it is plain that the trader, by singling out the objects of his solicitation, evidences a specific purpose and intention to obtain orders from them.’

11.125 See also Collins King & Associates Limited v Thorn and another [2016]  EWHC  3636 (QB) where HHJ  Maloney QC noted (at paragraph  15) on an interim injunction application that ‘the concept of solicitation in modern conditions (in particular solicitation via social media, which combine the characteristics of a public communication such as an advertisement and a private or personal communication such as a telephone call or email) is a matter for determination at trial’. He added that if the defendant employee contacted his Facebook friends, telling them that he had left a business and started out on a new venture, and his friends then contacted him back with a view to discussing business, that raised a question as to who was soliciting who, which was properly to be determined on hearing oral evidence at trial. 604

Covenants against soliciting/dealing with customers/prospective customers 11.127

11.126  Difficulties may also arise where the employee, whilst still employed, acts in a manner which may be viewed as designed to solicit away a customer or co-employee but where nothing is said expressly. That issue arose in Ranson v Customer Systems Plc [2012]  IRLR  769 (CA). The defendant employee, Mr Ranson, was employed in a senior sales role. Two days before leaving his employment with the claimant, in his own spare time, Mr Ranson took a customer contact out to dinner. One reason for doing so was to pave the way to obtain business from the customer (who already knew that Mr Ranson was leaving the claimant) after the termination of his employment. However, there was no specific discussion of this during the dinner. The Court of Appeal concluded that this did not amount to canvassing since entertaining the customer in Mr Ranson’s own spare time was, adopting the phrase used by Maugham LJ in Wessex Dairies Ltd v Smith [1935] 2 KB 80 (CA): ‘no more than being “as agreeable, attentive and skilful as it is in his power to be to others with the ultimate view of obtaining the benefit of the customers’ friendly feelings when he calls upon them if and when he sets up business for himself.” It was merely paving the way. He did not divert or interfere with any business opportunity then being pursued by CS [the employer].’

That rather generous approach to whether there was solicitation was followed, but distinguished on the facts, in Threlfall v ECD Insight Ltd [2013] IRLR 185, where the defendant employee (Mr Threlfall), who had worked as the claimant’s head of media, had when his departure from the defendant was imminent, made overt requests for future work from one of the defendant’s customers. This was held to be solicitation in breach of the duty of good faith. 11.127 In addition to the fact-sensitive nature of the enquiry as to whether there has been solicitation, it may be important to focus carefully on the specific terms of the restriction on solicitation. In Ward Evans Financial Services Ltd v Fox [2002] IRLR 120 (CA) one aspect of the case concerned a covenant which stated that the employee, Mr Fox, who was employed as a financial adviser, should not ‘At any time before or after the termination date, induce or seek to induce by means involving the disclosure or use of confidential business information any customer to cease dealing with the company.’ Following a visit to a customer, the employee was asked by the customer’s human resources officer when he would be coming again. He explained that he was terminating his employment. There was then a conversation as to whether, in those circumstances, the customer would be able to transfer to him. He said that he would be able to take over the work and, in the event, the customer transferred its business to the new employer (formed by Mr Fox and another ex-employee). The deputy High Court judge found that Mr Fox had not ‘induced’ the customer to act in the way they did. What took place was a genuine approach by the customer. The Court of Appeal concluded that the judge had not erred in holding that, in acknowledging that they could take over the work of one of their employers’ customers, the defendants were not in breach of the covenant. In some circumstances, action which has the effect of causing a course of action may be said to ‘induce’ that course of 605

11.128  Reasonableness of express covenants

action, even where there is no element of solicitation. However, the clause in that case contemplated that there would only be a breach where confidential business information was deployed by the employee. It did not cover a situation where the fact that the employee possessed the confidential information caused the customer to act. 11.128 In Hydra plc v Anastasi [2005] EWHC 1559 (QB), Royce J considered the meaning of ‘entice’ in the context of a provision concerning non-poaching of employees in a settlement agreement. The covenant provided that Anastasi, after termination of his contract of employment with Hydra, would not solicit or entice away any employee for a period of 12 months following the termination date. Anastasi had been approached by an employee, Marsh (the second defendant), who sought to persuade Anastasi to let him join the new venture. It was argued that Anastasi had still acted in breach of the restriction on solicitation and enticement by agreeing in principle that Marsh could have a share in the new venture. Rejecting that submission, Royce J considered that ‘entice’ meant ‘tempt, lure, persuade and inveigle’, and therefore the clause did not cover the circumstances of the case. 11.129 In Hanover Insurance Brokers v Schapiro [1994]  IRLR  82 (CA) the words ‘endeavour to take way’ were held not to be too vague – they prevented the ex-employees from actively seeking out the ex-employer’s customers (cf Dentmaster (UK) Ltd v Kent [1997] IRLR 636 (CA), where a prohibition against ‘exerting influence’ over customers was (somewhat charitably) taken as meaning making a sales pitch to customers).

4(b) The preferred type of covenant to protect customer connection 11.130  Non-solicitation/dealing covenants are the preferable method of protecting the ex-employer’s customer connection: Office Angels Limited v RainerThomas and O’Connor [1991]  IRLR  214 (CA) (see 11.50) and S  W  Strange Ltd v Mann [1965] 1 All ER 1069 (11.73). Such clauses are preferred to noncompetition covenants, which have a broader anti-competitive effect. This remains true notwithstanding that the courts are showing a greater willingness to enforce non-competition covenants. The employer is entitled by means of a properly drafted non-solicitation/dealing covenant to prevent the ex-employee from using his knowledge of and influence over customers (built up while he was on the employer’s payroll) to entice them away from the ex-employer after the termination of employment. Further, where there is a non-dealing covenant the ex-employer is spared having to prove solicitation of clients – as in the case of a non-solicitation covenant. The dramatic effects of this can be seen from the case of Towry EJ Limited v Bennett [2012] EWHC 224, in which there was a nonsolicitation but no non-dealing covenants, where, at trial, the claimants failed to show that the reason for the movement of clients to a competitor was solicitation of those clients by the defendants. 606

Covenants against soliciting/dealing with customers/prospective customers 11.134

4(c) Criteria relevant to reasonableness of non-solicitation/ dealing covenants: generally (including personal dealings limitations) 11.131  The validity of such covenants depends on: •

the nature of the business;

•

the nature of the employment.

(per Romer LJ in Gilford Motor Co v Horne [1933] Ch 935 (CA) at page 966). 11.132  So far as concerns the first criterion (the nature of the business), this may entail consideration of ‘the nature and specialism of the market in which the employee is engaged’ (Towry EJ Limited v Bennett [2012] EWHC 226 per Cox J at paragraph 373). The focus is on the scope for developing influence and loyalty of the customers or clients to the ex-employer. In Stenhouse Australia Ltd v Phillips [1974] 1 All ER 117, in concluding that in principle a covenant against solicitation of clients might be entirely reasonable, Lord Wilberforce took into account the greater fragility of the relationship between insurance broker employer and client (as compared with that of solicitor and client!), and that a comparatively mild solicitation might deprive an insurance broker of valuable business. Similarly in Towry v Bennett it was noted (at paragraph 383) that the financial advice sector is one where strong client connections with the employee may well be held to justify a non-dealing covenant. 11.133  As to the second criterion (the nature of the employment), an important factor is whether the employment was such that the employee: •

could gain influence over customers; and/or

•

would have access to confidential information concerning customers.

11.134  A non-solicitation/dealing covenant should go no further than is necessary to protect the ex-employer’s customer connection or confidential information. Accordingly, non-solicitation/dealing clauses should ordinarily be limited to: •

customers or potential customers (usually dealt with by separate clauses) with whom the ex-employee will have dealt during a specified period (eg  the last year) prior to termination of employment. See, for example, WRN  v Ayris [2008]  IRLR  889, in which a six-month non-solicitation/ dealing covenant (of a head of sales and marketing of a company providing television broadcast and transmission services) was struck down because it was not limited to customers with whom he personally had dealt; and

•

those customers or potential customers of whose special requirements the ex-employee will have had knowledge by virtue of his access to confidential information or trade secrets of the ex-employer. On that basis the covenant might extend to those customers or potential customers with whom those reporting to the employee dealt (or at least direct reports rather than those 607

11.135  Reasonableness of express covenants

with indirect or ‘dotted line’ reporting): see 11.163. However, it is not always the case that such knowledge is enough to justify the covenant, absent actual dealing. See 11.142 and 11.143. In the light of the restrictive approach to severance adopted in Tillman v Egon Zehnder Ltd [2017]  IRLR  906 (CA) (see 12.50–12.51) it is sensible for these alternatives to be dealt with in separate clauses.

4(d) Who is a customer/client? 11.135 The cases referred to below suggest a tendency by the courts today to scrutinise more carefully non-solicitation/dealing covenants than in earlier cases, and to strike such covenants down where the covenant is inappropriate on grounds: •

of difficulty in identifying customers, especially where dealings are infrequent; or

•

that the customers are not loyal only to the employer (or to a limited number of suppliers, including the employer); or

•

of problems regarding ‘large’ clients.

11.136 In Gilford Motor Co v Horne [1933] Ch 935 (CA), Horne, the managing director of Gilford, had given a non-solicitation covenant (unlimited in time) in relation to those who had been at any time during the employment or were at the date of termination, customers of Gilford or in the habit of dealing with Gilford. At first instance Farwell J struck down the covenant on the basis that since the covenant covered even those who were cash customers (of one part) of the business with whom Horne as managing director would not come into contact or know their names and addresses, it was too wide. In Farwell J’s view it was necessary to define the customers by reference to some list or record of the employer, or limit the definition in some other way. The Court of Appeal overruled this decision, principally on the basis that, as managing director, Horne would have the fullest opportunity of getting to know every customer of the company (per Lawrence LJ at page 964, Romer LJ at page 966), and also that there was no way of limiting the target group otherwise than by calling them ‘customers’ (per Romer LJ at page 967)). As to the meaning of ‘customer’, Lord Hanworth MR (at page 958) defined a customer as a ‘person who frequents a place of business for the purpose of making purchases’, although he appeared to regard a ‘casual purchaser’ as falling outside the definition of customer due to lack of regularity of dealings (at page 960). The words ‘in the habit of dealing’ were construed either as making clear that those who were not yet on a register of customers were covered (per Lord Hanworth MR at page 958) or as synonymous with ‘customer’ (per Lawrence LJ at page 963). 11.137  However, in Reed Executive v Somers (20 March 1986, unreported) (CA) a carefully drafted non-solicitation covenant failed because of uncertainty as to 608

Covenants against soliciting/dealing with customers/prospective customers 11.139

the meaning of ‘customer’. Somers, a branch manager of a recruitment agency, had given a one-year covenant in relation to those who at the date of termination were: (a) customers of, or in the habit of dealing with, Reed (or its subsidiaries), and (b)  with whom any of the employees in any office in which Somers had been employed should have contracted or endeavoured to contract on behalf of Reed, whilst Somers was employed at that office. (The phrase ‘in the habit of dealing with’ is less used nowadays because it can catch more than customers eg  suppliers of non-critical goods/services.) Leggatt  J  (cited with approval by Sir John Arnold in the Court of Appeal) identified that a ‘customer’ might be any one of three classes of person: (a) someone supplied by the claimant who was the subject of an employment contract in the relevant period, (b) those who had been in touch with the relevant branch office in relation to employment, and who it had unsuccessfully tried to place, and (c) the larger class of people designated in the claimant’s records as customers or those with whom they would like to deal. Reed argued that ‘customer’ connoted a person who is on the books and has regularly and recently used the ex-employer’s services. However, Leggatt J concluded that the clause was wholly uncertain in effect. He commented that while in some trades, such as that of milk roundsman, there is no difficulty in identifying customers, there were more sporadic types of business such as employment agencies where different considerations applied. 11.138  Notably, as one step in his reasoning in Somers, Leggatt J commented that he had some difficulty in understanding the dichotomy of the phrases ‘customer’ and ‘person in the habit of dealing’ and found it impossible to regard the latter phrase as explanatory of the term ‘customer’. No reference was made to the Court of Appeal’s judgment in Gilford Motor Co v Horne which is authority to the contrary (see 11.136). That decision might, however, have been distinguished on the basis of what Sir John Arnold in the Court of Appeal referred to as an additional and possibly overriding difficulty, namely that if one were to find a person who has attended the office to have been a customer at a time somewhat earlier than the date of the termination of the employment contract, but who has not since then been back, it would be quite impossible to form any sensible conclusion as to whether after that interval of time the person concerned remained a customer, yet the essential qualification was that the person should have been a customer at the moment of termination. That was not a significant issue which arose in Gilford Motor Co v Horne since the restriction covered customers during the period of employment, rather than only customers at the date of termination. 11.139 In Specialist Recruiters International Ltd v Taylor (4 July 1989, unreported) (RCJ), a non-solicitation covenant failed, inter alia, because it was not limited to firms with whom staff had been successfully placed. Vinelott J held that, on the face of it, this would cover a firm which had approached the employer at the inception of the ex-employee’s employment and which had never been heard of again. (see 11.156) See also Spafax (1965) Ltd v Dommett (1972) 116 Sol Jo 711 (CA) (per Phillimore  LJ), where uncertainty as to the meaning of ‘customer’ appears to have been one of the reasons for the failure of the covenant. However, whether there is any such uncertainty is dependent on the particular context. In both Norwood Laboratories (GB) Limited v Adair [2008] IRLR 878 609

11.140  Reasonableness of express covenants

and Advantage Business Systems Ltd v Hopley [2007] EWHC 1781 (QB) (considered at 11.189) the term ‘prospective client’ was considered not to be too vague or uncertain. In Hopley HHJ Richard Seymour QC commented (at paragraph 36) that a client is essentially a person using the services of a professional person, whereas a customer is a person who makes a purchase or gives business.

4(e)  Quality of contact 11.140  The overriding question in relation to whether a solicitation or non-dealing covenant is appropriate is whether the employee might obtain knowledge of or influence over the customers of his employer, as would enable him, if competition were allowed, to take advantage of his employer’s trade connection: Herbert Morris Ltd v Saxelby [1916] AC 688. If the quality of contact is insufficient to give the employee the opportunity of gaining influence over customers, a covenant relying on contact alone would not be justifiable. In Scorer v Seymour-Johns [1966] 3 All ER 347 at page 351 Salmon LJ referred to the customer relying on the employee to the extent that the customers regard him as the business rather than the employer. However, it is not usually necessary to go so far as to establish that the employee is the face of the business as far as the public are concerned. 11.141  On the other hand, there are many cases where the quality of the contact may be insufficient for there to be any real risk of the employee taking advantage of the employer’s trade connection, eg casual contact by receptionists and telephonists. A non-solicitation/dealing covenant in relation to employees of this sort would be difficult to justify. In Tim Russ & Co v Robertson [2011] EWHC 3470 the court concluded that the ex-employee of an estate agency had had little contact with recurring clients and that there was insufficient protectable interest to justify a non-competition covenant, although the small element of recurring clients was sufficient to justify a non-solicitation covenant. In Croesus Financial Services Limited v Bradshaw [2013] EWHC 3685, Simler J (benignly) interpreted a qualification in a non-solicitation/non-dealing covenant referring to ‘personal contact in the course of duties’ between the employee and the clients as meaning more than trivial business contact so that the covenant was upheld. In any event bumping into clients in the corridor or taking a phone message, which were put forward on behalf of the defendants as illustrating why the clause was too wide, were unlikely to happen given the way advisers operated with their own client base and infrequent visits to the office.

4(f)  Knowledge of customers absent contact 11.142 As discussed further at 11.161–11.171 ordinarily a non-solicitation or non-dealing covenant will be at risk of being considered too broad if applied to customers other than those with whom the employee had material dealings. However, exceptions may apply where there is a limited client base or otherwise where the employee is likely by virtue of his position to have access to confidential information regarding customers. In Spafax Ltd v Harrison [1980] IRLR 442 610

Covenants against soliciting/dealing with customers/prospective customers 11.144

the Court of Appeal upheld a non-solicitation covenant by a manager, Harrison, in relation to any person to whom, during the last 12 months of his employment, the manager or to his knowledge any member of his staff had sold Spafax’s goods. The covenant was limited to goods of the kind sold to such customers during the 12-month period or similar goods. The extension of the covenant outside Harrison’s own territory (in which he acted as salesman four days a week) to other territories comprising the branch, which covered the whole of Cumbria, was justified on the basis of: •

his access to reports whereby he had the means of acquisition of knowledge of the identity and buying patterns of all customers throughout the branch;

•

the fact that his duties of training salesmen took him into the rest of the area outside his own (salesman’s) territory – the training meant that he accompanied salesmen to the doors of customers throughout the branch territory.

11.143  The greater weight appears to have been placed on the latter factor (see per Stephenson LJ at paragraph 46), together with the fact that there was a great deal which Harrison was still free to do. Significantly it was not suggested that the restriction had the effect of covering an unknown class of customers since it only covered those to whom to Harrison’s knowledge his staff had sold goods in the defined period. See also Gilford Motor Co v Horne (where the opportunity of the ex-managing director getting to know the names and addresses of customers was emphasised), Landmark Brickwork (where it was held to be arguable that the defendant’s position as managing director involved possession of confidential information and influence over customers without requiring personal dealings in relation to non-solicitation and dealing covenants) and Monster Vision UK Ltd v McKie [2011] EWHC 3772 (considered at 11.176) and Rex Stewart Jeffries Parker Ginsberg Ltd v Parker [1988] IRLR 483 (CA) (considered at 11.201). 11.144  However in Arbuthnot Fund Managers Ltd v Rawlings [2003] EWCA 518 the Court of Appeal regarded the restraint, in so far as relating to clients of whom the employee had ‘knowledge’ in the last 12 months of employment, as obviously too broad to be enforced, but upheld the covenants after severance of this part of the covenant (and other parts). Again in Capita Plc and another v Darch and others [2017] EWHC 1248 (Ch), it was considered that a six-month post-termination solicitation covenant in the contract of a senior member of management was likely to be held at trial to be too wide because it applied not only to customers with whom the employee had material dealings but also to those about whom the employee became aware or was informed in the course of his employment. In similar vein, see also Norbrook Laboratories (GB) v Adair, [2008] IRLR 878 (also considered at 11.111) where the court regarded as too broad (but ‘blue-pencilled’ from the covenant) that part of a non-solicitation/ dealing covenant which extended beyond customers with whom the employee had had dealings to: (a) those customers to whom she had ‘direct access’, and (b) those customers in relation to which she had access to confidential information. The ‘direct access’ language was regarded as too vague to be enforceable, whereas the ‘confidential information’ connection was regarded as too wide to be 611

11.145  Reasonableness of express covenants

enforceable; there was no reason for the employee to recall confidential information in respect of customers with whom she had no personal connections. 11.145 Generally, the starting point will be that a non-solicitation/dealing covenant will be rendered vulnerable by the absence of a personal dealing requirement. However, exceptionally the covenant might be upheld in relation to particularly senior employees if it can be shown that they are likely to be identified with the business and therefore have influence over the customers even in the absence of personal dealings and/or (and usually cumulatively) because the employee was likely to be in possession of sufficiently confidential information about the customer base to whom the restriction applies, such as would support a non-competition covenant. In that case it may be said that the narrower covenant (ie narrower than a non-competition covenant), focussed on customers should not be regarded as too wide.

4(g)  Problem of loyalty 11.146  Where the ‘customer’ is unaffiliated and eg  purchases from numerous ‘suppliers’ including the employer, in some instance this has led the court to decide that there is no personal influence wielded by the (ex-)employee and no confidential information in relation to such customers who are on the books of many suppliers. In Douglas Llambias Associates Ltd v Napier (31 October 1990, unreported) LEXIS citation 586, Llambias was a recruitment agency specialising in recruiting legal staff. Napier, the employee, had given a 12-month nonsolicitation/dealing covenant limited to those who were clients in the last two years of employment and for whom he had provided recruitment services. The clients were firms of Edinburgh solicitors who were accustomed to contacting all three legal recruitment agencies in the city. The covenant was struck down on the basis that there was no legitimate interest to protect. In particular, there could, in the circumstances, be no confidential list of customers, nor apparently were other trade secrets alleged. Nor was there any possibility of clients being enticed away. (The position might have been different as far as candidates for recruitment were concerned, but there was no evidence of solicitation of candidates). 11.147  A similar consideration was at play in Bowler v Lovegrove [1921] Ch 642, where the court struck down a non-competition covenant against an estate agent. The court considered whether a lesser form of restraint would have been enforceable, such as one confined to prohibiting the defendant from canvassing any person who, at the date when his employment ceased, had to the knowledge of the defendant placed any property he had to sell or let exclusively in the hands of the claimants, or who at that date had, to the defendant’s knowledge, exclusively instructed the claimants to find some property which he desired to buy or rent. However, the court was of the view that it was extremely doubtful whether even such a limited restraint would in the circumstances of that case be justified, considering that the requirements of most if not all of such persons would probably be known to every estate agent in the locality, every one of whom would consider himself at liberty to canvass such persons and try and satisfy their requirements. 612

Covenants against soliciting/dealing with customers/prospective customers 11.150

11.148 It should not, however, be assumed in the circumstances of Douglas Llambias that no non-solicitation/dealing covenant could be effective. In many cases the influence which the employee is liable to build up with a client may be no less important merely because the client spreads its business between various different competitors. The employee’s relationship with the customer may remain a significant factor in the ability to increase the share of business placed with the employer. If, for example, there was evidence that the recruitment consultant would reasonably be expected, in the course of his employment, to build up strong personal connections with recruiting personnel at various firms of solicitors such that they tended to give him a greater share of their recruitment work (or to call him first), it is difficult to see why the employer ought not to be able to protect itself (by means of a properly drafted non-solicitation/dealing covenant) from the employee enticing away these clients or their business to a new firm. The employer ought to be able to have breathing space to enable another employee to build up a similar strong relationship with the clients. Thus in Tullet Prebon Plc v BGC Brokers [2010] IRLR 648 it was no bar to the employer having a protectable interest in relation to client connection built up by brokers that individual traders placed business with various different brokerages. 11.149 The same applied in East England Schools CIC (t/a 4MySchools) v Palmer [2014] IRLR 191. Ms Palmer had been employed by the claimant with the job title consultant. The claimant matched teacher applicants with schools that had vacancies. In challenging the enforceability of a six month post termination non-solicitation covenant relating to schools, candidates and prospective candidates, it was argued that Ms Palmer would not have built up close relationships either with schools or teachers because the market was ‘promiscuous’, in the sense that neither schools nor teachers had loyalty to any particular agency. The argument was rejected and (subject to some blue-penciling) the covenant upheld. Ms Palmer was the representative of the claimant in relation to secondary schools and candidates in Essex. Whilst schools had a relationship with a number of agencies, the relationship between the consultant and the relevant manager at the school might sometimes be a deciding factor as to which agency would be contacted first. Equally, whilst candidate teachers usually registered with a number of agencies, the trust accumulated between the consultant and candidate might be influential in persuading a candidate to stay with a particular agency. Further, whilst there was some information about schools and candidates in the public domain on social media, Ms Palmer would also acquire other information in the course of her employment that was not publicly available, such as likes or dislikes or particular requirements of candidates. The court also emphasised that the fact the relationship with schools and candidates was fragile made the covenant more necessary due to increasing the risk of solicitation being successful.

4(h)  Problems with ‘large’ clients 11.150  In some cases involving large clients a non-solicitation/dealing covenant will be too wide if it does not narrow the embargo to a particular department or branch with which the ex-employee dealt. In First Global Locums Ltd v Cosias 613

11.151  Reasonableness of express covenants

[2005] IRLR 873 the ex-employer was a recruitment consultancy specialising in the recruitment of social care workers for temporary and permanent positions. Its clients were mainly national health trusts and social service departments in local authorities in the Greater London area. A covenant ‘not to solicit any client’ was held to be too wide, since it would include all departments of any local or health authority which had dealings with the ex-employer during the course of the ex-employee’s employment, even though its business would only be with those departments involved in social care. The ex-employee would thereby have been prevented from providing a temporary accountant to the local authority’s treasury department. The words ‘solicit or otherwise’ were, however, regarded as severable from the rest of the covenant, which was narrower in its ambit (interfering with the relationship with the ex-employer’s clients), so that the covenant was upheld after deletion of the severable words. See also International Consulting Services Ltd v Hart [2000]  IRLR  227 (referred to in 11.187) where the court noted (at paragraph 33) that it is impossible to devise a form of covenant covering all the various types of organisational structure which different customers might have and upheld a covenant applicable to those customers with whom the employee’s “subordinates” had dealt. 11.151  In addition, where an employee has dealt with one department of a large company, there must always be the possibility that he could secure business from another by using the first department as a referee. Further, where there is a restriction to operating in competition that may enable the covenant to be construed more narrowly. That was the case in Le Puy Limited v Potter [2015] IRLR 554, where the court (at the interim stage) rejected a contention that the covenant in favour of a recruitment agency supplying temporary staff was too wide due to not being limited to particular branches of the customer (each branch allegedly being responsible for hiring its own temporary staff) with which the employer had dealt. The court considered that it was arguable that, through reference to ‘competitive’ services, the covenant was limited to branches with which the employer had dealt in the 12 months prior to termination of employment.

4(i)  Former customers and customer backstop periods 4(i)(i)  Customer and personal backstops 11.152  There may be a legitimate interest in protecting client connection notwithstanding that the customer has ceased to be such. In G W Plowman & Son Ltd v Ash [1964] 2 All ER  10 (CA) Ash, a sales representative, had given to his employer, Plowman (a corn and agricultural merchant), a non-solicitation covenant in respect of anyone who had been a customer of Plowman at any time during his employment. Ash had been one of five sales representatives collectively covering an area to the west and south-west of Spalding for a distance of about 40 miles. The judge struck down the covenant on the basis that Ash did not know customers to the east or north of Spalding, and Plowman was therefore not protecting a proprietary right in relation to such customers. One of the arguments put forward by Ash in the Court of Appeal was that the covenant 614

Covenants against soliciting/dealing with customers/prospective customers 11.155

did not exclude those who had ceased to be customers and were thus no longer part of the goodwill. However, the Court of Appeal held that if a man had been a customer at the beginning of the employment it was possible that he might become a customer again – and that people who had for the time being ceased to be customers accordingly did not fall outside the proprietary interest. 11.153 This approach was followed by the Scottish Outer House in Axiom Business Computers Limited v Frederick Unreported, 20 November 2003 (Outer House). Here the employer developed and sold computer software programmes to commercial customers. For the purposes of a non-solicitation of customers covenant, customers were defined as including not only those with whom the employer had concluded business transactions, but also those with whom the employee had had dealings on behalf of the employer whether or not this resulted in the conclusion of a business transaction. This was construed as covering present customers and those who had been customers during the period of the employment. The defendant employee was the most senior member of staff and had a good knowledge of the employer’s business, and the context was that systems would require review, upgrade and replacement. As such the position may be regarded as stronger than in Plowman as there was not merely the hope of winning back the customers, but an expectation that they would return due to the nature of the business, and this was to be regarded as part of the employer’s goodwill. Further, there was significant time and resources invested in negotiations with a view to forming a relationship with the customer, and an exchange of information. Against that context, the Outer House upheld the covenant and also accepted that, following Plowman v Ash, it was neither necessary to have a backstop period limiting how recently there was a customer relationship, nor to limit the restriction by area. 11.154 Despite the decision in G  W  Plowman & Son Ltd v Ash it is usually wise to provide that a non-solicitation/dealing provision applies to those who were customers within a certain period of time (often one year) before the termination of employment. The court might otherwise conclude that the employer has no protectable interest in customers who have long ceased to deal with the employer and that, therefore, the covenant is too broad in not excluding such former customers from the ambit of the covenant. We refer to this kind of limitation as being a ‘customer backstop’. Where the covenant is qualified by reference to customers with whom the employee had dealings (as will often be necessary – see below), it will usually be appropriate to limit such customers to those with whom the employee had contact in, say, the last year of his employment. We refer to this below as a ‘personal backstop’. From the point of view of enforceability, there is often an inter-relationship between the two kinds of backstop periods. 4(i)(ii)  Problem regarding former customers 11.155 A  non-solicitation covenant will be struck down insofar as it covers customers who were such before the commencement of employment but not 615

11.156  Reasonableness of express covenants

thereafter: Hinton & Higgs (UK) Ltd v Murphy and Valentine [1989] IRLR 519 (Court of Session). However, the position is more difficult where the covenant prevents the ex-employee from soliciting or dealing with customers who were such at any time of the employment, but who have ceased to be customers prior to the time of termination of employment. This point is closely related to the question of ‘who is a customer?’ (see 11.135–11.139). Whilst reasonableness is to be assessed as at the date of entering into the contract, the problem becomes more evident where, at the time it is sought to enforce the covenant: •

The employee has been employed for a long time, so that even those who were customers many years ago, and have placed no business with the ex-employer since, are potentially within the ambit of the covenant. In relation to such ‘former customers’ the question is whether the ex-employer has any legitimate interest to protect.

•

The customer’s connection with the ex-employer was tenuous, eg  where only one insignificant contract was placed.

11.156 The safer approach is for covenants to be limited to those who were customers during a defined (and often relatively short) period prior to termination of employment. In Specialist Recruiters International Ltd v Taylor (4 July 1989, unreported), Taylor had given a six-month non-solicitation/dealing/supply of services covenant (in connection with the business of accountancy recruitment services) in respect of any person who was a customer of the employer at any time during the period of Taylor’s employment with whom he dealt directly or in any supervisory capacity. One might have expected the covenant to be upheld since the covenant was for a short period and the non-solicitation etc prohibition was limited to customers with whom the ex-employee had direct or indirect dealings. However, Vinelott J, referring to Reed Executive v Somers (20 March 1986, unreported, CA) (see 11.137–11.138), struck down the covenant as being too wide, inter alia because it was not limited (as it had been in Reed Executive) to those who were customers at the time of termination of employment and also because it covered customers over whom the ex-employee, who had been a relatively junior employee, would never have had an opportunity of gaining influence in the course of his employment. The lack of limitation to customers at the time of termination appears to have been regarded as significant even though the employment had lasted only a matter of months; the matter was to be assessed at the time of entering into the contract. (While this is, strictly speaking correct, courts will in such circumstances be tempted to take the shortness of employment into account because the lack of backstop makes no practical difference in such cases or because the shortness of the period of employment may have been reasonably foreseeable at the time the contract was entered into.) However, it is unlikely that the requirement to be a customer at the date of termination would be considered as strongly persuasive today. It is more common to provide for a customer backstop period, to allow for the fact that the employer will have an interest in winning back the customer (as noted in Plowman v Ash) and the backstop period may be tailored to anticipate continuing influence of the employee over the customer. 616

Covenants against soliciting/dealing with customers/prospective customers 11.157

11.157  However, the issue is fact-sensitive. In G W Plowman & Son Ltd v Ash [1964] 2 All ER 10 (see 11.152) a covenant was upheld even though it covered anyone who had been a customer of the claimant at any time during the exemployee’s employment and also without any restriction to the customers with whom the ex-employee had dealt (as to which see 11.161–11.171). The decision was followed in Coppage and anor v Safety Net Security Ltd [2013] IRLR 970 (CA). Here the six-month post-termination non-solicitation covenant of the business development director of a security company provided that the ex-employee (Mr Coppage) would not: ‘approach any individual or organisation who has during your period of employment been a customer of ours, if the purpose of such an approach is to solicit business which could have been undertaken by us.’

Again, the covenant therefore covered customers during the whole of the period of employment and without any restriction to those with whom the ex-employee had dealings, subject to the proviso that the business ‘could have been undertaken’ by the claimant employer. In the Court of Appeal, Sir Bernard Rix (giving the substantive judgment) in setting out applicable general principles, noted that because of the difficulties of testing in the case of each customer, past or current, whether such a customer was likely to do business with the employer in future, a clause which is reasonable in terms of space or time is likely to be enforced, and it is those customers whose future custom is uncertain that are the very class in relation to whom such a covenant is designed to give protection. The court (at paragraph 24) emphasised the fact sensitive nature of the assessment. In upholding the first instance decision that the covenant was valid, the Court of Appeal placed emphasis on the following considerations: •

It was a non-solicitation covenant, and such clauses are to be ‘more favourably looked upon than non-competition clauses’ (at paragraphs 9, 19).

•

It was limited to six months post-termination, which was ‘a powerful factor in assessing the overall reasonableness of the clause’ (at paragraph 19).

•

Coppage was a key employee, and ‘the face’ of the company. Realistically he had power to influence all customers with whom he had come into contact, current and past (at paragraph 20).

•

The stability of the customer base and small minority of relevant customers who had left supported the view that it was reasonable to draft the clause as applying to all customers within the full period of employment (only two years had elapsed since the last contract of employment and its termination) (at paragraphs 19, 21). It could not be said that the insertion of a 12 month retrospective limitation would have made it ‘much less far-reaching and less potentially prejudicial’ (Office Angels). Further, Mr Coppage had not met any difficulty finding work outside Safety Net’s security base. (The large number of customers retained was given prominence in the Court of Appeal’s reasoning. It noted that enforceability is to be judged at the time of entering into the contract, save to the extent that what in fact happened 617

11.158  Reasonableness of express covenants

throws light on what might fairly have been contemplated on a reasonable view of the clause’s meaning. The Court of Appeal appears to have allowed generous application to that exception.) •

Even if the small number of customers who had left was otherwise a problem, the clause had a proviso which, properly construed, meant it did not apply to former customers where recovering their business was not a commercial practical reality, as where they had left under bad terms such that there was no realistic possibility of recovering their business (at paragraph 22).

•

The clause was not to be regarded as invalid merely because it was possible to identify remote possibilities strictly within the wording but which were uncommon or unlikely or fanciful situations. On the facts in Coppage, the court considered this covered scenarios such as that of a customer who left two weeks into the defendant’s employment even if he remained in employment for six years (at paragraph 24).

11.158  In all, the decision in Coppage may best be regarded as an instance of application on the particular facts to a senior employee likely to have influence over all customers in the context of a stable customer base and short period of restraint. More broadly, however, where there is a customer backstop, it does not follow that the period of the backstop must match the period of the posttermination covenant. An argument to the contrary was rejected in Romero Insurance Brokers v Templeton [2013] EWHC 1198 where the covenant applied to clients who had ‘done business with or been a customer or client’ of Romero in the period of six months prior to termination but there was a 12-month posttermination non-solicitation restriction. The court (Sir Raymond Jack) emphasised (at paragraph 38) that the period of restraint and the backstop period fulfil different functions and so it is not necessary that the backstop period should precisely mirror that of the restraint. Whilst the court did not proceed to describe the differing functions, in broad terms this recognised that whereas the backstop period serves to show that there is a protectable interest by virtue of customer connection, the post-termination restriction serves to provide a window to reestablish that connection once the employee has left. It is not difficult to see why, given the varying circumstances in which this might arise, the periods may differ, as illustrated by the facts considered in Romero. In that case, concerned with insurance broking, many customers would renew at 12 month intervals. They would then remain a customer for that period and so the customer backstop could be set at six months, as this would catch the current customer base. The Court noted that to have a 12-month backstop would result in two years of protection (by virtue of covering customers who failed to renew at the start of the backstop period, and then adding the further 12-month post-termination restriction). Sir Raymond Jack commented that this might be thought to render the restriction vulnerable, whereas the six-month backstop period combined with a 12-month post-termination period was regarded as reasonable having regard in particular to the renewal period. The distinct question of whether a covenant may be regarded as too wide because of an imbalance between a personal dealings backstop and the post-termination covenant is considered at 11.169–11.171. 618

Covenants against soliciting/dealing with customers/prospective customers 11.160

4(i)(iii)  Excluding ex-customer from ambit of non-solicitation/dealing injunction? 11.159  Whilst the validity of the covenant is to be determined as at the date of entering into the contract, a distinct question may arise as to whether the court should exercise its discretion not to enforce the covenant in relation to former customers at least if there is no prospect of their returning. An argument to that effect was addressed by the Court of Appeal in John Michael Design plc v Cooke and another [1987] 2 All ER 332. The covenant was found to be valid and an injunction granted, but the judge below excluded a particular client from the scope of the injunction on the basis that the client had no intention of dealing further with the ex-employer. The Court of Appeal allowed an appeal against the exclusion of that client, saying that it did not matter that a particular client had no intention of dealing further with the ex-employer. It did not mean that there was no protectable interest in relation to that customer – for that was the very class of case against which the covenant is designed to give protection. It was only in respect of customers who might be coaxed by the ex-employees to transfer their allegiance that the ex-employer needed protection (as subsequently reiterated in Coppage and anor v Safety Net Security Ltd [2013] IRLR 970 (CA)). The conclusion as to a protectable interest does not however wholly address the issues that arise as a matter of discretion whether to enforce a valid covenant. Whilst at the time of entering into the covenant it would no doubt be impossible to distinguish between former customers whom there was (or was not) a chance of winning back, it might be possible to do so at the time of enforcement. The judgment may be regarded as having the effect of punishing the ex-employee for breaches of contract, rather than protecting the employer’s ongoing legitimate interests. 11.160  A similar question may arise in the guise of an issue as to the scope of the covenant where it provides language to the effect that the employee may not solicit ‘in competition with’ or ‘so as to compete with’ the ex-employer. It may be argued that, in so far as the ex-employee is soliciting customers of the exemployer who have no intention of placing further orders with the ex-employer, this is not competing with the ex-employer. There must always be a temptation on the part of a judge ‘not to kill the goose that lays the golden egg’ where certain clients have already established themselves as such with the new rival business, especially where there has been delay in seeking an injunction. So, in Croesus Financial Services Limited v Bradshaw [2013] EWHC 3685 in order ‘to preserve the status quo’ the judge excluded from the ambit of the injunction granted at trial those clients already excluded from the contractual undertakings given by the defendants – but the basis and circumstances of such exclusion is not clear from the report. In Capgemini India Private Ltd v Krishan [2014] EWHC 1092 (QB) the court refused interim enforcement of a customer non-dealing covenant (repeated in written undertakings to the claimant employer) on the basis that the claimant/ex-employer had lost the relevant client to the competitor (who had signed up the customer for five years) by whom the ex-employee was now employed. The court held that the claimant employer had no prospect of recovering the business in question and an injunction would serve no real or useful purpose and amount to a disproportionate response to breach. In Affinity Financial Awareness Ltd v Ferguson [2016] EWHC 2319 (QB) while unwilling 619

11.161  Reasonableness of express covenants

(in the context of pre-trial undertakings) to allow the ‘carve out’ of certain allegedly ‘vulnerable’ clients (on the basis that there was insufficient evidence of the inability of the ex-employer to service these clients’ needs), the deputy judge indicated (at paragraph 24) that in principle where a particular vulnerable client had developed a close and trusting relationship with a particular adviser and he would be unwilling to accept advice from anyone else, that could be a reason for exclusion of that client from the scope of the undertakings. That approach is highly problematic in the light of John Michael Design (which does not appear to have been cited in either Croesus or Capgemini), but these recent decisions do illustrate the difficulties that judges experience with injunctive principles where clients have been ‘lost’ to the ex-employer.

4(j) Usual need for personal connection limitation/personal backstop periods 11.161  Closely related to the question of the need for customer backstops is that relating to the need for personal connection limitations in the covenant and personal backstop periods. In the case of customer backstops the underlying issue is more one of whether there is a protectable interest in relation to persons who either are no longer or are not or not yet a customer. See eg Berry Birch and Noble Financial Planning v Berwick [2005] EWHC 1803 (QB), considered at 11.162 and 11.182, in which there was held to be no protectable interest in relation to persons with whom there had been negotiations or contact but who had not become customers). The issue of personal backstops relates more to the question of whether it is reasonable for a particular employee’s covenants to extend to particular customers such as those over whom the employee could never reasonably have been expected to gain influence. 11.162  It is usually necessary to limit a customer non-solicitation/dealing covenant to customers or potential customers with whom the ex-employee will have dealt during his employment or those customers with whom those reporting to him will have dealt if this would be likely to involve having sufficiently confidential information about the customers. It might also extend to customers or potential customers of whose identity or special requirements the ex-employee will have had knowledge by virtue of his exposure to confidential information of the ex-employer (see 11.181–11.189 in relation to potential customers). Otherwise the clause will ordinarily be too wide. That was the case in Berry Birch where a UK wide 12-month post-termination non-solicitation/dealing covenant in a contract of commission paid agents providing financial and investment advice was held to be too wide inter alia in covering customers who had had no contact with the agents and in respect of whom the agent had no information, knowledge, contact or influence; there were approximately 20,000 customers and the five defendants only had dealings with about 1,500 in total, predominantly in East and West Midlands. See also eg WRN v Ayris [2008] IRLR 889 (see 11.134). 11.163  Further, it remains good practice to limit the scope of the embargo to customers with whom the employee dealt during a specified limited period 620

Covenants against soliciting/dealing with customers/prospective customers 11.165

before the end of employment. In some cases, where this can be expected to give rise to influence over customers, or being apprised of significant confidential information about them, it may be sufficient that the restriction is framed by reference to supervisory control over other employees dealing with the customer. That was the case in Spafax Ltd v Harrison [1980]  IRLR  442, where in relation to a branch manager the non-solicitation covenant extended to customers to whom either he, or to his knowledge any member of his staff had sold goods on behalf of the employer. This was enforceable since his supervisory role entailed access to confidential information about customers other than those for which the manager/salesman was directly responsible and training other salesmen, including accompanying them on sales visits (see 11.142). See also International Consulting Services (UK) Limited v Hart [2000]  IRLR  227 where a covenant which was limited by reference to contact of the employer or one of his subordinates was upheld, but the fact the covenant covered contact with subordinates was not one of the grounds on which the covenant was specifically challenged. However, in Norbrook Laboratories (GB) Limited v Adair [2008] IRLR 878 (at paragraph 94) a restriction which was applied, in the alternative to a restriction on dealings with the customer, to those customers to whom the employee had ‘direct access’, was held to be too uncertain to be enforceable, though the restriction was blue pencilled. 11.164  However, as noted at 11.157, in Coppage the Court of Appeal rejected the contention that there is an invariable requirement for a restriction to customers with whom the ex-employee dealt (or held confidential information) and/or to limit this to dealings within a specific period prior to termination of employment. The court upheld a covenant which did not have that limitation taking into account various case-specific factors including the stability of the customer base, that it concerned a senior employee who was the face of the company and the shortness of the covenant (limited to six-months post-termination). In that respect the Court followed the approach in Plowman v Ash [1964] 1 WLR 568 (CA), where one of the arguments by Ash was that the covenant in question did not confine itself to customers with whom Ash had had contact. After the contract was entered into, Ash confined his attention to only a part of the area in which the contract envisaged he would operate. However, the Court of Appeal upheld the covenant because at the date of the contract the employer might have required the employee to work anywhere in the particular sales area, and he might thus obtain special influence over, or knowledge of, the customers throughout the whole area. This followed the approach of the Court of Appeal in Gilford Motor Co v Horne [1933] Ch 935 which reversed the decision of Farwell J to strike down a non-solicitation covenant as being too broad, inter alia because it extended to customers with whom Horne had had no contact and of whom he had no knowledge. Lawrence LJ referred to the fact that the ex-employee had the fullest opportunity of getting to know all the customers. 11.165  The decisions in Gilford Motor Co v Horne and Plowman v Ash were explained in Austin Knight (UK) Ltd v Hinds [1994] FSR 52 on the basis of the likely influence which the employee would have over the whole customer base. In Plowman v Ash it was noted that the employee was a sales representative 621

11.166  Reasonableness of express covenants

dealing with farmers and market gardeners in a small and predominantly agricultural community and would be likely to be known as an employee of the claimant company and likely to acquire special influence or knowledge of the requirements of any of the customers whether he dealt with them directly or not. That was contrasted with the position in Austin Knight where the employee, an account manager in a recruitment consultancy, had dealings only with about one-third of the customer base at her branch. She was not known to the other two thirds of customers and did not have any special influence over them or any special knowledge about them. As such, the court struck down the covenant imposing a two-year post termination non-solicitation restriction in relation to customers or those in the habit of dealing with the employer, which was not limited by any requirement that she had any contact or dealings with the customer. 11.166 A  similar approach was adopted in Marley Tile Co Ltd v Johnson [1982] IRLR 75 (CA). Johnson, a manager, accepted (for a period of one year after termination of his employment) a non-solicitation and non-dealing covenant in relation to persons who in the area in which he had been employed in the 12 months prior to termination of his employment (almost the whole of Devon and Cornwall) were customers or in the habit of dealing with Marley. This clause was struck down in the light of the large number of customers who would have fallen within the scope of the covenant (about 2,500) and that Johnson could not have known of, or come into contact with, more than a small percentage of them. Lord Denning MR regarded the covenant as being too wide, having regard to the size of the area, the number of customers and the class of products, although the period of 12 months was considered reasonable. Templeman  LJ referred to the lack of evidence that Johnson had substantial influence over 2,500 customers (and the fact that enforcing the covenant would condemn Johnson to unemployment for 12 months). Lord Denning stated that it was not necessary in order that the covenant should be upheld that the employee should know all the customers – it was sufficient that there was the possibility that he would get in touch with them. He referred to the basis of the decision of the Court of Appeal in G W Plowman & Son v Ash [1964] 1 WLR 568 as having been that the employer in that case was a local firm which carried on business with only five travellers, such that in a small area the representatives might get to know all the customers. 11.167  Likewise, in Spafax (1965) Ltd v Dommett (1972) 116 Sol Jo 711 (CA) the court struck down a countrywide non-solicitation covenant in relation to a salesman who had only operated in West Cornwall and which was not limited to customers with whom he would have had contact. See also Office Angels Ltd v Rainer-Thomas and O’Connor [1991] IRLR 214 (CA) where the judge below struck down a non-solicitation/dealing covenant because the employees knew only the clients of their branch (about 100 clients), whereas the covenant extended to the clients of all the branches (6,000 to 7,000 clients). The decision was followed in White Digital Media Ltd v Weaver [2013] EWHC 168 where interim injunctions based on non-solicitation/dealing covenants were refused against the defendant despite his having held a senior role (Regional Director of Operations), and despite the covenant being limited to customers of the claimant in the year prior to termination and to products and services in which the employee was 622

Covenants against soliciting/dealing with customers/prospective customers 11.169

directly concerned, because the covenants were not limited to customers of whom the defendant had knowledge and over whom he could exert influence. There were about two thirds of the customers whom the employee did not canvass or deal with. Similarly, in Energy Renewals Ltd v Borg [2014] IRLR 713 (after a trial in relation to an agency agreement) the customer non-dealing covenant, contained in an agency agreement between an energy contract broker and a salesman (Mr Borg), failed because it was not limited to customers with whom the agent had dealt. In Bartholomews Agri Food Ltd v Thornton [2016]  EWHC  648 (QB) a six-month non-dealing covenant which covered all customers even though the employee (a junior agronomist) had dealings with only about 1% of the client base was (at the interim stage) struck down as too wide. 11.168  Again, in Arbuthnot Fund Managers Ltd v Rawlings [2003] EWCA 518 (CA) the absence of a personal dealings backstop at least in relation to clients introduced by the ex-employee, was regarded as rendering the covenant obviously too wide. The decision was criticised in Coppage, where the Court of Appeal was clear that the decision in Arbuthnot was not the modern answer to Plowman v Ash. Arbuthnot concerned an interim injunction application against the former executive director of a provider of fund management and other investment services. There was a 12-month post-termination non-solicitation covenant which was construed as being limited to investment clients (within the last 12 months) of the employer company or the group. There was then a further limitation which the Court of Appeal construed to mean that it was limited either to clients with whom he had dealings or knowledge in the 12 months prior to termination or to clients introduced by him at any time (though that construction was criticised in Coppage at paragraph  16). The Court of Appeal in Arbuthnot regarded the covenant as obviously too wide in so far as it was based on mere knowledge of the customers (in the last 12 months) or to customers introduced at any time. So far as concerned clients introduced by the ex-employee, the approach was questioned by the Court of Appeal in Coppage in part on the basis that it could well understand an employer having an interest in preventing an ex-employee soliciting current clients that he had introduced at any time during his employment. The decision was explained and distinguished in Coppage in part on the basis that it was only an interim decision, that there was a restriction to clients in the last 12 months, and that it was the contrast between the 12-month backstop period for business dealings and the lack of any backstop for client introductions which led the Court in Arbuthnot to regard the lack of any backstop for introductions as strange. However, a core aspect of the reasoning in Arbuthnot was the premise that the 12-month post-termination restriction indicated that this was the period of breathing space required. The Court in Arbuthnot (at paragraph 32) reasoned that if (having introduced the client) there had then been no business dealings by Mr Rawling in the 12 months prior to termination, there would already have been the requisite 12-month period for someone else to establish a relationship with the client and therefore no need for protection relating to that client. As discussed below (11.169–11.170) that is another unconvincing aspect of the decision. 11.169  To some extent the factors relevant to the length of the backstop period overlap with considerations relevant to the period of restraint. Thus, in defining 623

11.170  Reasonableness of express covenants

a reasonable backstop period, one relevant factor is likely to be the length of the business cycle. In some businesses it may be clear that if after, say, 12 months a customer has not been in contact with the business, it has probably gone elsewhere. In other businesses it may be much longer than that before it can be said that it is no longer really a customer. Equally, where confidential information in relation to customers provides a basis for the restraint, the shelf life of the confidential information is likely to be an important factor. 11.170  However, the post-termination covenant and the backstop provision each serve separate, (though overlapping) functions which give rise to distinct considerations. Essentially this distinction was recognised in East England Schools v Palmer [2014] IRLR 191, where the court upheld six-month non-solicitation/ dealing covenants, and accepted a 12-month personal dealings backstop as reasonable (if not perfectly accurate) as identifying the client and candidate base in relation to which a recruitment agency was entitled to protection. The role of the backstop is to show that there is a protectable interest by virtue of customer connection, whereas the post-termination restriction serves to provide a window to re-establish that connection once the employee has left. Depending on the nature of the business it may well not follow from the fact that the last personal dealings were a considerable time ago, that there is no ongoing customer connection requiring a period of protection once the employee has left and is actively competing for the business. Equally, considerations as to proportionality of the restriction which may limit the period of post-termination restriction do not apply in quite the same way to the backstop. See also eg Wincanton Ltd v Cranny [2000] IRLR (CA), upholding a non-solicitation covenant involving a 12-month post-termination restraint and which was construed (at paragraphs 19–20) as limited to customers with whom Cranny himself had dealt in the course of their dealings with the employer in the two years prior to termination of his employment. 11.171  Further, irrespective of whether a backstop period is essential, the presence of such a provision, framed in proportionate terms, may be persuasive in the overall assessment of whether the covenant is reasonable. That was the case in Pickwell v ProCam CP Ltd [2016] IRLR 761, where the court upheld six-month post-termination non-dealing and non-solicitation covenants with a 12-month personal backstop, in the contracts of employment of trainee agronomists. The parties contemplated at the time of signing their contracts that after their training the trainees would become fully fledged agronomists in respect of whom the customer non-dealing covenants would provide the employer with reasonable protection. Both the limit of the post-termination restriction to six months, and the personal backstop, were relied upon as indicating that the restriction was reasonable.

4(k) Cases where the courts do not insist on personal contact/ connection limitation 11.172 Ordinarily, other than in cases where the employee holds a position likely to involve exposure to substantial confidential information in relation to 624

Covenants against soliciting/dealing with customers/prospective customers 11.174

substantially all customers (as to which see 11.142 and 11.143), the safer course is to limit the covenant by reference to a requirement for customer contact and a personal backstop. However, the issue as to whether such a limit is required for the covenant to be enforceable is fact-sensitive. As highlighted by the decisions in Plowman and in Coppage, it may be sufficient that at the time of making the employment contract there was the possibility that the employee would get in touch with them. 11.173  As illustrated by the decisions in Plowman and Coppage important considerations are likely to include the size and nature of the customer base, whether at the time of entering into the contract it could be expected that the employee would have influence over or confidential information about the customer base as a whole, or indeed as in Coppage be the ‘face’ of the employer company, the seniority of the employee (though that may be significant because of its implications for other considerations such as exposure to confidential information), the duration of the covenant and other limitations confining the scope of the covenant. In Devere Holding Co Ltd v Belgravia Wealth Management Europe Kft [2014] EWHC 3189 (QB) Simler J (at paragraph 30) noted a submission that the client non-solicitation and non-dealing covenants are likely to be too broad if not restricted by a requirement for personal dealings except in relation to a small employer with a limited client base. Simler J added that there may also be an exception in relation to somebody in a very senior and very strategic role but there would need to be evidence supporting and justifying such a wide restriction. In that case one of the defendants to whom the restriction applied did have a strategic role but given that the client base extended to some 80,000 clients in more than a hundred countries some limit should still have been placed on the customers to whom the restrictions applied. 11.174  As is clear from the decision in Allan Janes LLP v Johal [2006] IRLR 599 an important factor will be whether, at the time of entering into the contract, it was contemplated that the employee was likely to hold a role which would entail influence over, or confidential information held, in relation to clients or potential clients other than those with whom the employee would have dealings. In Allan Janes an assistant solicitor with a solicitors’ firm was subject to a non-dealing covenant (and also a non-competition covenant). The terms of the non-dealing covenant were: ‘You will not on your own behalf or as the employee, partner or agent of any other person or persons [in a defined geographical area] during a period of one year following the date of termination of your employment by the firm directly or indirectly act as a solicitor or do the work of a solicitor for any person who shall have been a client of the firm at any time during the shorter of the period of one year immediately preceding the termination of your employment or the period of your employment with the firm.’

On its face, the covenant prohibited dealing with clients of the firm, even though the defendant might have not dealt with them personally in the preceding year. It seems to have been acknowledged that, at the date of the termination of her employment, the defendant dealt with only a small percentage of the clients of 625

11.175  Reasonableness of express covenants

the firm. The covenant was, however, upheld at trial essentially on the basis that at the date of the contract the defendant was seen as a potential partner and was recruited on this basis. Since the defendant was recruited into a senior position with a mutual hope that it would mature into a partnership offer, it was within the actual contemplation of the parties that the claimant would promote the defendant to all its actual and target clients, that she would assist in marketing, would generate relationships with actual and potential clients and might well be successful in generating clients from just the sort of introductions as were the natural consequence of each of the marketing events on which the claimant spent its money. 11.175  Further, whilst a customer backstop may not always be required, where there is one, that is a factor limiting the scope of the covenant that may contribute to the assessment of whether the restriction is reasonable. That was the case in Dentmaster (UK) Ltd v Kent [1997]  IRLR  636 where the Court of Appeal on an interim relief application upheld as being arguably valid a non-solicitation covenant which included a requirement of the employee having dealt with the customers ‘during the course of his employment’, but did not otherwise limit this by reference to a personal backstop period. The covenant was upheld in view, in particular, of the short period of restraint (six months), the short customer backstop period of six months (defining the embargoed customer base) and the defendant employee’s acknowledged skill in attracting customer loyalty. 11.176 Factors which are material to whether a non-competition covenant would be permissible are also liable to be relevant in this context. Thus, just as access to confidential information of a type protectable after termination of employment may support a non-competition covenant, access to such information relating to the customer base as a whole may justify a covenant which is not limited to those with whom the employee dealt. Thus, in Landmark Brickwork Ltd v Sutcliffe [2016] IRLR 976 (referred to in 11.96) the absence of a personal dealing (with customers) limitation was not regarded as fatal at the interim injunction stage given the seniority of the employee (managing director) and likelihood of influence over customers as a result of his position and possession of confidential information relating to customers (including about pricing and customer requirements). In particular the confidential information to which he was likely to have access meant that he would have been able to have influence over customers whether or not he had personal dealings with them. A  similar decision was reached in Monster Vision UK Ltd v McKie [2011] EWHC 3772 based on the employee’s senior sales role and responsibility for promoting the services of the company generally, and the inference that he was therefore likely to have access to detailed knowledge of matters such as the claimant company’s workings, products and projects. 11.177  Reliance on access to confidential information will not however assist on this issue if it is only in relation to a part of the customer base. That was the case in BFI Optilas v Blyth and others [2002] EWHC 2693 (QB) where the court concluded, on an interim relief application, that a 12-month post-termination non-solicitation covenant was invalid. The covenant applied to all customer and 626

Covenants against soliciting/dealing with customers/prospective customers 11.179

suppliers of the employer during the 12 months prior to termination, without a restriction to those with whom the employee dealt or had knowledge. The defendant employee had been employed as business development director. In that role he had access to sensitive and commercially valuable information in relation to certain of the claimant’s products, but not across the breadth of products or the whole customer base. Further, there had been a merger of two businesses, but the defendant only had contact with customers from one side of the merged business. In those circumstances a covenant applicable to all customers without restriction was too wide. 11.178  Similarly, as with non-competition covenants, the absence of a requirement for the employee to have dealt with the restricted customers is more likely not to be fatal upheld in cases involving or akin to a transfer of goodwill or in the context of a settlement agreement, as illustrated by the decision in Thurstan Hoskin v Jewill Hill & Bennett and others [2002]  EWCA  Civ 249. Here the Court of Appeal upheld a non-solicitation/dealing covenant against an employed solicitor as follows: ‘In the event of the termination of the Partnership as aforesaid the Salaried Partner shall not within such period aforesaid canvass solicit or endeavour to take away from Mr Hoskin the business of any Clients of the Partnership who shall have been clients of the partnership within one year of the termination of the partnership …’

This was repeated (in slightly modified form) in Heads of Agreement (which were attached to a consent order in proceedings brought by the employee) in full and final settlement of all claims which either party might have against the other in connection with or arising from their Deed of Partnership. It was not a routine employer/employee agreement. It was an agreement between a principal and a salaried partner, bringing to an end their business relationship, for which the ex-employee received and accepted valuable consideration. However, in any event the Court of Appeal were not prepared to hold that the judge was wrong: it was legitimate on the special facts of this case for him to conclude that, in the context of a small firm of solicitors in essentially rural Cornwall, the protection which this covenant in the circumstances afforded, going as it did beyond clients with whom the ex-employee had personally dealt, was legitimate. 11.179 By contrast, we suggest that the decision in Business Seating (Renovations) Ltd v Broad [1989] ICR 729, is to be treated with caution. Millett LJ concluded that (after severing the application to other group companies) a one year post-termination non-solicitation covenant against a salesman, effective for one year after termination of employment in relation to those who had been customers of the ex-employer during the last 12 months of employment, was enforceable. This was so notwithstanding that the restriction applied whether or not the salesman had had contact with such customers and whether or not they had discontinued their custom. The covenant was not limited to the areas where the employee worked. Indeed he worked in only two areas whereas the employer’s business was nationwide. In the absence of any suggestion that it was contemplated that he was liable to come into contact with the customer base 627

11.180  Reasonableness of express covenants

as a whole, or to hold confidential information about them, or otherwise be in a position from his employment to have influence over them, there appears to have been no strong basis for contending that the nationwide restriction over all customers was reasonably necessary to protect the employer’s legitimate interests.

4(l)  Future customers 11.180 Plainly, a non-solicitation covenant extending to those who become customers after termination of employment, if there is no limiting factor such as possession of confidential information relating to them or prior contact such as ongoing negotiations, does not protect any legitimate interest of the employer and is invalid: Konski v Peet [1915] Ch 530. An otherwise properly drawn nonsolicitation covenant which extends to customers who become such after termination of employment may be cured by severance (see 12.46–12.59) of that part: Rex Stewart Jeffries Parker Ginsberg Ltd v Parker [1988] IRLR 483 (CA), albeit that the scope for this is now to be viewed in the light of the restrictive approach to severance indicated in Tillman v Egon Zehnder Limited [2017]  IRLR  906 (CA) (see 12.50–12.51).

4(m)  Potential customers 11.181 More difficult questions may arise where the category of prospective future customers is limited in some way which gives rise to an argument that there may be confidential information in relation to, or influence over them. In Arbuthnot Fund Managers Ltd v Nigel Rawlings [2003] EWCA 518 (CA) the Court of Appeal regarded a covenant preventing dealing with prospective customers of the ex-employee as obviously too broad, in so far as it extended beyond prospective customers with whom the ex-employee had had discussions to customers with whom – to his knowledge – other employees had had discussions. In Norbrook Laboratories (GB) v Adair [2008] IRLR 878 (referred to at 11.111), the court went further in concluding that one part of a non-solicitation/dealing covenant with a two year personal backstop period was too broad (though it was blue-pencilled) in referring to prospective customers even in so far as it was limited to those with whom the defendant employee had dealings. The defendant employee had been a territory manager of a pharmaceutical company. The court reasoned (at paragraph  104) that the prospective customers were those whose custom the defendant company had failed to obtain, and that it would be unreasonable to restrain the claimant from dealing with such potential customers who might already be customers of a putative new employer. 11.182  A similar conclusion was reached on an interim relief hearing in Berry Birch and Noble Financial Planning v Berwick [2005] EWHC 1803 (QB) involving a non-solicitation and dealing covenant relating to commission paid agents of the claimant who provided independent financial and investment advice. The covenant was regarded as clearly too wide, amongst other reasons, in that it covered: (a) those who had been in direct or indirect commercial negotiations 628

Covenants against soliciting/dealing with customers/prospective customers 11.185

with the claimant with a view to placing business with it (but even if they did not in the event place business with the claimant), and (b) persons who had been visited by the agent on behalf of the company for the purpose of ascertaining the possibility of that person doing business with the claimant (even though the person did not in the event place any business). Cox J held (at paragraphs 25 and 27) that the claimants had no legitimate interest to protect in relation to those who were not and had never become clients of the claimants. The decision in that regard is also to be viewed in the light of the width of the covenant, which aside from the prospective customers, also covered 20,000 customers of the claimants even though the five defendants only had contact with about 1,500 in total (and was also found to be too wide in that respect); nor did they have any confidential information about the customer base as a whole. 11.183  The decisions are to be seen in the context that they included non-dealing obligations and, particularly in Berry Birch, in the context of the extent of the customer base covered and the lack of any special knowledge over the customer basis or any strong grounds on the facts for there being some rapport built up with the customers such as might be regarded as part of the goodwill of the employer. The reasoning that there was no legitimate interest where the claimant had failed to obtain the business (but whose business the employer might still hope to win in future) may be contrasted with the rationale for covenants to be enforceable in relation to past customers that there may be the prospect of winning back the lost business: see 11.152; G W Plowman & Son v Ash. 11.184 In Business Seating (Renovations) Ltd v Broad [1989]  ICR  729 Millett  J  held that it would be an unwarranted extension of Plowman v Ash to uphold the validity of a covenant which prohibited solicitation of potential customers even if they were defined as existing customers of another associated business. Business Seating, which carried on a business renovating office furniture and commercial seating, had an associated company which carried on the business of manufacturing and selling new office furniture and commercial seating. Broad’s covenant extended to non-solicitation of customers of the associated company, which could be a step towards encouraging that customer placing its custom for other parts of its business with the other company. In that sense it was regarded as akin to covering potential customers. That part of the covenant was struck down. However, the covenant in Business Seating was widely drawn, without any requirement for there to have been personal dealings between Mr Broad and the potential customer. That factor was also crucial in Gledhow Autoparts Ltd v Delaney [1965] 1 WLR 1366 (CA) where Sellers LJ considered that a covenant would have been valid in covering potential customers in the sense that the defendant travelling salesman had made calls to them but they had not yet placed business with the claimant employer. However, the covenant failed because it covered people in the area in which the defendant operated but on whom he had never called. 11.185  However, dealings with prospective customers might give rise to influence or a rapport which could indeed provide a sufficient basis for an enforceable covenant. As noted in Associated Foreign Exchange Ltd v International Foreign 629

11.186  Reasonableness of express covenants

Exchange (UK) Ltd [2010] IRLR 964, at paragraph 70, factors which would tend to support extending protection to prospective customers include: •

The extent to which building up of a relationship is a long and difficult process.

•

The employee’s seniority.

•

Whether the employee is liable to be involved in protracted negotiation with customers.

•

Whether significant time and money is likely to be invested in attempting to establish relationships with potential customers.

Because there was no evidence to indicate that any of these factors applied, the court concluded that a non-solicitation covenant would be likely to fail at trial on this ground, in addition to its conclusion that the 12-month period of protection was too long (see Appendix). By contrast, in Axiom Business Computers Limited v Frederick Unreported, 20 November 2003 (Outer House), there was found to be significant time and resources invested with a view to forming a relationship with potential customers. Reliance was placed on this fact (at paragraph 33) in upholding an 18-month post-termination applying to customers with whom the employee had dealt ‘whether or not such dealings … resulted in the conclusion of a business transaction’ (although this was construed as referring to past customers rather than wholly new customers). 11.186  There will often be difficulty in defining potential customers sufficiently narrowly. However, that was arguably achieved in Monster Vision UK  Ltd v McKie [2011]  EWHC  3772 where, on an interim relief application, the court considered that it was arguable that a two-year post-termination non-solicitation covenant was enforceable in covering not only clients or customers but also those with whom the employer ‘reasonably planned to do business’ during two years after termination of employment. The court emphasised the defendant employee’s senior sales role. It was argued that he had specific responsibility for promoting the employer’s services, and the court accepted that he arguably had detailed knowledge of the company’s workings, products, projects and so forth. 11.187  The prospect of a covenant being upheld is also improved if limited to a suitable sub-class such as by reference to those with whom there have been negotiations, albeit that no contract has yet been entered into or business placed. That was the case in International Consulting Services Ltd v Hart [2000] IRLR 227. Mr Hart was employed by the claimant as a senior consultant in their business of providing consultancy services to companies in the telecommunications sector. The relevant restrictive covenant prevented (for 12 months after employment) solicitation or dealing with persons who had been negotiating in the last 12 months with the claimant for the supply of services which were competitive with those in respect of the supply of which the defendant was concerned in the last 12 months of his employment, and where he (or one of his subordinates) had dealt or had contact with that person. The phrase ‘negotiated’ was held to be not too vague to be 630

Covenants against soliciting/dealing with customers/prospective customers 11.189

enforceable, although there might be cases where it was hard to say whether communication with prospective customers amounted to negotiations. ‘Negotiations’ meant more than a customer expressing an interest in employing the employer’s services. It required a discussion between the parties about the terms of a contract which both parties have in view and which is a real possibility. In most cases this will be clear on the facts. The claimants had a legitimate interest in preventing approaches to prospective customers with whom there had been negotiations. The decision to uphold the covenant was, however, regarded as borderline because although the covenant only applied if the employee, Mr Hart, or a subordinate had had contact with the potential customer (which was construed to mean some substantial contract and not for example a mere handshake), this did not need to be contact in relation to the negotiations, and nor did the contact need to be within the last 12 months. However, the court (at paragraphs 38 and 39) took into account that (applying Plowman v Ash) non-solicitation clauses could be upheld even though the employee had never had contact with the customer, and that because of the complexity of the subject matter of negotiations and the long period of time over which they were often conducted, the employer could legitimately regard the connection with potential customers resulting from the negotiations as part of the goodwill to be protected. The fact that the covenant extended to contact other than in the negotiations did ‘not quite tip the balance’ because of: (a) Mr Hart’s central and influential position (as a senior consultant) which meant that previous contact could give him a rapport with the customers, and (b) that in his role he might have some input in the preparation of a proposal for negotiations even if he had no actual contact with the customer in connection with the negotiations. 11.188 As noted above, the decision in Berry Brothers illustrates that it does not necessarily follow from the restriction to those prospective customers with whom there have been negotiations that the employer will be regarded as having a legitimate interest even if the negotiations fail. However, in Berry Brothers the covenant applied to such customers irrespective of whether the agent had contact with them, whereas in International Consulting Services v Hart there was a requirement of such contact albeit not necessarily recent or in relation to such negotiations. The failure to include a restriction to customers with whom the employee dealt during employment was again fatal in WRN  Ltd v Ayris [2008] IRLR 889, but the inclusion of prospective customers who were negotiating with the company (or any group company) was regarded as permissible and not too uncertain. Similarly to the approach in International Consulting Services v Hart, this was construed in context to mean that the prospective customer was in discussion about making a contract for the supply of the relevant products; it was not enough that there had been some enquiry or general expression of interest on the part of the prospective customer. There had to be a specific proposal or supply which was actively under discussion. 11.189  Again in Advantage Business Systems Ltd v Hopley [2007] EWHC 1781 (QB) the court (HHJ  Seymour QC) considered that a non-solicitation/dealing covenant was valid where, on the court’s construction, it applied to prospective customers only where the employees had dealings with them or responsibility for the relationship involving personal contact which might be considered to give 631

11.190  Reasonableness of express covenants

rise to some influence over that party, or became aware of the prospective party as a result of his employment. However, the judge added that if the clause had been construed so as to extend to cover prospective clients with whom the employee had no actual dealings at all merely on the basis of administrative responsibility for that party, or on the basis of being known to the employee during employment with the claimant but not through that employment, the covenant would have been too broad. On the construction of the clause which the judge adopted there was in any event found to be no breach: in the absence of evidence of any special meaning, HHJ Seymour QC (at paragraph 36) would have inclined to the view that a ‘prospective’ client or customer connoted that there was ‘a chance, not merely fanciful’ that that person would become a client or customer and that it was ‘not intended to cover a merely theoretical or remote possibility’ but that subject to this, given the requirement for material dealings or responsibility for the prospective client, it was a term of wide import. However (at paragraph 37) he accepted on the basis of the evidence that here it bore a special meaning of there being ‘a high likelihood of winning business in the near future’. Although a meeting had been agreed with an organisation which had expressed an interest in a demonstration of the claimant’s product, the court at trial regarded the prospect of any business being done as too speculative for the organisation to be regarded as a ‘prospective client’.

4(n)  Limitation of customers by area 11.190  It is not normally necessary to apply a distinct limit in a non-solicitation clause to customers in a particular area. The limitation to customers of the exemployer, at least if accompanied by a personal dealings requirement, ought (properly drafted) to be a sufficient limitation in itself (but note the problem with large customers, discussed at 11.150–11.151): see Gledhow Autoparts Ltd v Delaney [1965] 1 WLR  1366 (CA) at 1375. However, see Hinton & Higgs (UK) Ltd v Murphy and Valentine [1989] IRLR 519 (Court of Session), where a non-dealing clause was struck down, inter alia because: (a) the restriction was worldwide whereas the employer’s area of operations was limited to the United Kingdom, and (b) even if in practice the effect of the covenant was therefore limited to the UK, the defendant employees’ area of operation was limited to Scotland. The second aspect of the reasoning, based on the employees’ area of operation, in effect applied an orthodox requirement of personal connection of the employees with the restricted customers.

4(o) ‘The employee’s customers’ – brought with him to the employer 11.191  A problem may arise in relation to the employee who brings to his new employment customers from his previous employment or own business, and who accepts a non-solicitation/dealing covenant in favour of his new employer in which no distinction is made between ‘his’ customers and new customers whom he meets through his new employment. In M & S Drapers (a firm) v Reynolds 632

Covenants against soliciting/dealing with customers/prospective customers 11.194

[1956] 3 All ER 814 (CA) Reynolds (a collector and salesman) accepted a fiveyear non-solicitation covenant in relation to customers on whom he had called in the last three years of his employment. A large proportion of the customers covered by the covenant comprised persons with whom Reynolds had formed a connection before he entered into the service of M & S Drapers – when he was employed by someone else in the drapery trade (see page 817G of the report). 11.192 None of the Lords Justices in M  &  S  Drapers regarded the fact that there were many customers who were the ‘employee’s customers’ (ie  brought with him) as meaning that the employer had no legitimate interest to protect in relation to such customers (although Denning LJ came close to such a finding (at page 821). Indeed, the proprietary right of the employer in relation to such customers was expressly recognised by Hodson LJ (at page 817F–G) and Morris LJ (at page 820F–G). The Court of Appeal, however, regarded the fact that a large proportion of customers had been known to the employee prior to his employment as being a factor relevant to the reasonableness of the covenant (ie militating against a long restriction), and that five years was in the circumstances far too long a period. The decision of the Court of Appeal appears to imply that in these circumstances both the (new) employer and the employee have some sort of proprietary interest in the customers whom the employee brings to the employment. No express consideration was given to the fact that the employee had presumably built up the connection with customers while employed by someone else, and in that sense it might be argued that the customers were never ‘his’. On the other hand, in Hanover v Schapiro [1994] IRLR 82 the Court of Appeal adopted a different approach where a more senior employee was concerned. A non-solicitation injunction was granted against a managing director in relation to several customers whom he had personally brought with him to the company. As a senior employee he was to be taken to be fully aware of the basis upon which he contracted with his employer and, unlike in M & S Drapers, his customers were not ‘tools of his trade’. 11.193  In our view, what may be a reasonable period during which the new employer is entitled to protection must be determined by reference to the extent of his interest in these customers and what contribution he has made in relation to retaining and servicing them. Thus, if a capital payment has been made in relation to the customers, the employer will be entitled to full protection: see Allied Dunbar (Frank Weisinger) Ltd v Weisinger [1988] IRLR 60 and Merlin Financial Consultants Ltd v Cooper [2014] EWHC 1196 (QBD). Usually, the employer may at least have incurred overheads to enable the new clients to be serviced such that, if the employee leaves with those customers, there will be wasted expenditure, and the period of restraint should at least be sufficient to allow him to recover this. 11.194  Of course, the covenant period will normally be geared to customers generally, and the question arises whether the covenant falls to be struck down merely because, while reasonable in relation to the ‘employer’s’ customers, it is unreasonable having regard to the ‘employee’s’ customers. In these circumstances the answer must depend on the proportion of the ‘employee’s’ customers 633

11.195  Reasonableness of express covenants

to the whole, as well as the extent and duration of the restriction. If the proportion is significant, the whole covenant may be struck down. 11.195  An additional complication may arise where the employer was complicit in the acceptance of customers ‘brought’ by the employee in breach of covenant with his ex-employer. Apart from the question of the employer’s own liability to the previous employer for inducing breach of the previous employment contract, such an employer who seeks enforcement of the non-solicitation/dealing injunction is unlikely to be considered sympathetically when it comes to the exercise of (discretionary) injunctive relief. This may be seen as an application of the principle that those who seek equitable relief must come to the court with ‘clean hands’. 11.196  Clearly many of these difficulties are avoided where there is an express agreement to exclude pre-existing clients or where they are dealt with a separate covenant. There may, however, still be issues as to the scope of the exclusion, including as to whether it includes those connected with the excluded clients. That issue arose in Cartlidge Morland v Thomas [2011]  EWHC  2086 where it was found that pre-existing clients had been excluded, and indeed that this was good practice in the industry – being the provision of wealth management services. The exclusion was given a wide meaning so as to cover individuals with a close personnel connection with the pre-existing clients, taking into account the personal nature of the services provided by the defendant (a wealth management consultant) and the fact that many of his clients were married couples or families.

4(p)  Non-solicitation of persons who are not customers 11.197 Not infrequently, a non-solicitation/dealing covenant may, because of its very wide scope, be similar in effect to a non-competition covenant, and be struck down. In Gledhow Autoparts Ltd v Delaney [1965] 1 WLR 1366 (CA) a non-solicitation covenant by a salesman extended to any person in the area in which he had operated. The covenant was struck down because it was not limited to established customers, or even potential customers in the sense of persons on whom the ex-employee had called but who had not given their custom to the ex-employer.

4(q)  Period of non-solicitation/non-dealing covenants 11.198 As noted at 11.157, in Coppage and anor v Safety Net Security Ltd [2013]  IRLR  970 (CA) it was emphasised that the shortness of a six-month restriction was a powerful factor indicating that a restriction was reasonable. That approach was followed in Pickwell v ProCam CP  Ltd [2016]  IRLR  761 again in upholding a six-month covenant. 11.199  It is rare for an otherwise suitably drafted non-solicitation/dealing covenant to be struck down only by reason of the period of the restraint. However, two years was held to be too long in Dairy Crest v Wise (24 September 1993, 634

Covenants against soliciting/dealing with customers/prospective customers 11.201

unreported) (QBD), IDS Brief, vol 515) in the light of evidence that the period had subsequently been reduced to 12 months for other roundsmen. The fact that the employer regarded a shorter period as sufficient at a later stage was used to attack the earlier longer covenant, since conditions had not changed. This was regarded as having the effect that the employer could not logically justify the longer covenant in issue before the court. The risk of such a conclusion is an important issue to be taken into account when seeking to vary covenants, where there is a risk that some employees may resist the change. 11.200 In Basic Solutions Ltd v Sands [2008]  EWHC  1388 (QB) the claimant was unable to show an arguable case that 12 months (rather than a lesser period) was a reasonable period for the non-solicitation of customers covenant. The claimant company was a supplier of chemical-based products and was in the process of preparing to tender to Network Rail for the supply of a product to combat the longstanding problem of ‘leaves on the line’. The defendant left his employment with the claimant and, while the tender process was underway, the claimant was informed that the defendant was also proposing to tender for the Network Rail contract on behalf of a company which had been formed by his son. The only justification put forward for the period of 12 months in the nonsolicitation covenant was that there are sometimes long lead times in the industry – which was illustrated by the prolonged period required for being permitted to tender for the Network Rail contract. Eady J was unconvinced by the relevance of this factor to the covenant period, and since no evidence had been put forward to justify the period, he held that the covenant was unenforceable (being one of several grounds for the refusal of various kinds of injunctive relief sought in that case). This case illustrates the necessity these days for an employer to justify in his witness statement the covenant period. While it is rarely helpful for witnesses to give direct evidence as to the appropriate length of the period (see 11.29), nonetheless the facts must be put forward to the court from which it can draw its conclusions as to the appropriateness of the covenant period (eg the length of the business cycle, how soon the confidential information relied on to support the covenant is likely to come into the public domain, how often employees see customers etc). As to the kind of evidence on which the court can rely in assessing the appropriateness of the restraint period, see 11.28–11.35. 11.201  For a further illustration of the approach of the court to the question of the period of restraint, see Rex Stewart Jeffries Parker Ginsberg Ltd v Parker [1988] IRLR 483 (CA), where a period of 18 months was held not to be excessive in relation to a managing director (of an advertising agency) who had by virtue of his senior position more opportunity to develop relationships with customers – as compared with a junior employee in relation to whom (in the view of the judge below) a lesser period would have been appropriate. A longer period of restraint may be justified in relation to a non-solicitation covenant than a non-dealing covenant. Accordingly, in Taylor Stuart & Co v Croft (7 May 1997, unreported) (Ch D) three years was held to be reasonable for a non-solicitation covenant in an employee-accountant’s contract of employment, but this period was held to be too long for a non-dealing covenant. Also see Beckett Investment Management Group Ltd and others v Hall [2007] IRLR 793, where the judge’s 635

11.202  Reasonableness of express covenants

finding that the non-dealing covenant was too long was overturned on appeal (see 11.31 and the Appendix, where illustrative examples are set out of periods upheld and rejected).

5. NON-DEALING COVENANTS 11.202  Having considered non-solicitation and non-dealing covenants compendiously, in view of their increasing popularity with employers it is worthwhile focusing separately on the non-dealing covenant. The employment contract will often include such a covenant (usually by way of an addition to a non-solicitation covenant) which prevents, not merely solicitation of customers, but also dealing with those customers (by whomsoever initiated). The main advantage of a non-dealing covenant is that, in order to establish a breach of a non-dealing covenant, the ex-employer does not have to establish that it was the ex-employee who solicited the customer. It is all too easy for the ex-employee to assert that the customer approached the ex-employee and that there was no persuasion by him such as to amount to solicitation. This is difficult for the ex-employer to disprove, particularly where the ex-employee and the customer are friendly. On the other hand, it may be argued that the customer should not be deprived of dealing with whom he pleases. 11.203 In Beckett Investment Management Group Ltd and others v Hall [2007]  IRLR  793 (CA), Maurice Kay LJ (at paragraphs 25–26), giving the only substantive judgment, endorsed the proposition that the narrower and more specialist the market, the more likely that a non-dealing covenant will be upheld given that clients will in those circumstances naturally gravitate to the ex-employee who opens a new competing business. More broadly, given the recognised difficulties that often arise in policing a non-solicitation covenant and bearing in mind that the courts will enforce properly drafted non-competition covenants which are almost always bound to affect at least some who were not customers of the ex-employer, it is to be expected that the courts will not be too quick to strike down properly drafted non-dealing covenants. In John Michael Design plc v Cooke and another [1987] 2 All ER 332 (CA) the Court of Appeal upheld in favour of ex-employers (shopfitters) against a former ‘associate director’ a two-year non-dealing/solicitation covenant in respect of those who had been customers in the last four years of employment. The court made no distinction between the non-dealing and the non-solicitation parts of the covenant (nor does there appear to have been any argument on the point). Also, in Marley Tile Co Ltd v Johnson [1982] IRLR 75 (CA) and in T Lucas & Co Ltd v Mitchell [1972] 3 All ER  689 (CA), there was a non-dealing covenant, but there was no indication that the distinction between non-solicitation and non-dealing covenants played any part in the court’s decision in either case. See also Hinton & Higgs (UK) Ltd v Murphy and Valentine [1989] IRLR 519 (Court of Session) and Specialist Recruiters International Ltd v Taylor (4  July 1989, unreported) (RCJ), both referred to above. In London & Solent Ltd v Brooks (January 1989, unreported), IDS Brief 389, the Court of Appeal upheld a non-dealing covenant 636

Non-dealing covenants 11.206

in addition to a non-solicitation covenant given by an assistant director and head of a marine reinsurance broking team. In view of the intimate nature of the market in which movement of senior employees from one broker to another quickly became general knowledge, the company was entitled to the additional protection to prevent the natural gravitation of clients towards the ex-employee, who knew their personal requirements and in whom they had gained confidence. See too the observation of Cox J in Towry EJ Limited v Bennett [2012] EWHC 226 (QB) at paragraph 383: ‘The reasonableness of a non-dealing clause of this kind will depend upon the nature and specialism of the market in which the employee is engaged.’ She went on to refer specifically to the strong client connection in the financial advice sector justifying such a restriction. 11.204 In Croesus Financial Services Limited v Bradshaw [2013] EWHC 3685 (and Landmark Brickwork Ltd v Sutcliffe [2011] IRLR 976 at paragraph 47) the court found justification for the non-dealing covenant in the difficulty of defining and policing solicitation. Again, in Le Puy Ltd v Potter [2015] IRLR 554, the court (at the interim stage) although not finally deciding the matter, was unattracted by the contention that a prohibition on ‘dealing’ with customers was too vague or too wide due to stopping customers from making an unsolicited choice to deal with the ex-employee, the court pointing to the large number of reported cases where there had been no such suggestion. The courts’ approach is therefore generally favourable to non-dealing covenants. The same factors as are relevant to reasonableness of non-solicitation covenants apply in the case of non-dealing covenants. 11.205  It is often surprising to non-lawyers that a covenant can be enforced which has the effect of innocent third parties being deprived of their choice of supplier of services. However, this is generally not treated as a factor of great significance by the courts, who regularly enforce non-dealing provisions albeit that they may deprive the innocent client/patient of his choice of solicitor, accountant or doctor: see eg  Croesus Financial Services Limited v Bradshaw [2013] EWHC 3685. The point was reiterated by the Court of Appeal in Beckett Investment Management Group Ltd and others v Hall [2007] IRLR 793, where the court referred to the solicitor cases to the effect that a non-dealing clause may be valid notwithstanding the potential interference with the client’s choice as to whom to instruct and the degree of confidence which exists between client and solicitor. The Court of Appeal relied on Fitch v Dewes [1921] 2 AC 158 at page 165 per Lord Birkenhead  LC and Bridge v Deacons [1984] AC  705 at pages 719C–720B per Lord Fraser of Tullybelton. In Beckett, one of the reasons for the Court of Appeal overruling the decision of the court below was that the judge gave too much weight to the effect on third parties of enforcing the covenant. 11.206  Generally, rules governing the conduct of professionals such as solicitors and accountants may need to be consulted since these may bear on whether they are regarded as reasonable. Further where the position of the client may be prejudiced by a change of personnel (as where an employed solicitor leaves in the middle of a complex case or an employed professional is the only specialist available to render particular services to the client), the employer may feel professionally obliged to waive a non-dealing covenant, at least in part or temporarily. 637

11.207  Reasonableness of express covenants

6. COVENANTS AGAINST ENTICING/EMPLOYING/ARRANGING EMPLOYMENT FOR FELLOW EMPLOYEES/CONSULTANTS AND ANTI-TEAM MOVES AND RELATED COVENANTS 6(a)  Meaning of solicitation 11.207 As in the case of covenants prohibiting solicitation of customers (see 11.118–11.129), there may be difficulty in deciding what amounts to enticement or solicitation of colleagues or former colleagues. In many cases the position will be clear, but in some cases there may be difficulty in establishing breach. As with covenants prohibiting solicitation of customers, the key question in borderline cases is likely to be whether, having regard to the context, there was an element of persuasion or encouraging in what was said or done. Thus in Lonmar Global Risks Limited v West [2011]  IRLR  140, there was found to have been no solicitation in merely discussing future plans with other employees. Issues may also arise as to whether providing of the names of former colleagues to the new employer amount to enticement or solicitation. Such activity may not in itself amount to a breach of covenant unless the prospective employer acts on the information provided to him by the ex-employee, and the covenant is drafted widely enough to cover procurement of enticement by the prospective employer. As to advertisements in the general or trade press, similar considerations apply to those discussed in 11.124 and 11.125 in relation to solicitation of customers.

6(b)  Permissibility in principle of non-poaching obligations 11.208  As discussed in more detail at 10.28, it is settled law that an employer has a legitimate interest in maintaining the stability of his workforce sufficient to justify a non-poaching (of employees) covenant: Dawnay Day & Co v de Braconier d’Alphen [1997] IRLR 442 (CA) – settling the clash between Hanover v Schapiro [1994]  IRLR  82 (CA) (‘employees are not apples and pears’) and Ingham v ABC  (12  November 1993)  LEXIS (CA) to the contrary. See also eg Alliance Paper Group plc v Prestwich [1996] IRLR 25 and SBJ Stephenson Ltd v Mandy [2000]  IRLR  233 (at paragraph  39), in which the non-poaching covenants were upheld, and TSC Europe (UK) Ltd v Massey [1999] IRLR 22, in which the covenant was regarded as enforceable in principle but struck down as being too widely drafted. It was too broad in that it prohibited solicitation of any employee without reference to his or her importance in the business, or technical knowledge or experience, and it applied to any employee who joined the company during the prohibited period, including those whose employment began after the defendant had ceased to be an employee. Further, in Office Angels Ltd v Rainer-Thomas [1991] IRLR 214 the Court of Appeal held that a recruitment agency had a protectable interest in relation to its trade connection with its pool of temporary workers. The temporary workers were not employees of Office Angels, nor were they its clients, since Office Angels was prohibited (by section 6(1) Employment Agencies Act 1973) from taking a fee from them. The Court of Appeal, in upholding the covenant, distinguished its decision in Kores 638

Covenants against enticing/employing/arranging employment for fellow employees, etc 11.211

Manufacturing Co Ltd v Kolok Manufacturing Co Ltd [1959] Ch 108 (where a non-poaching agreement between employers was struck down).

6(c)  Application to working relationships other than employees 11.209 We suggest that by parity of reasoning, the same approach could be applied in relation to other working relationships, including with consultants and independent contractors, particularly where the employees’ dealings with them is liable to generate influence over them or access to confidential information about them (see eg Hydra plc v Anastasi [2005] EWHC 1559 (QB), considered at 11.128, 11.215 and 11.225). However, it does not follow that the same extent or duration of restriction will be appropriate. Factors which may merit a longer period of restriction in relation to poaching of employees, such as in order to reflect the degree of investment in training of staff, may not be applicable to independent contractors (although there are dangers in generalising given the range of relationships treated by the employer as amounting to independent contractors, particularly in the ‘gig’ economy).

6(d)  Scope of the restriction 11.210  The employer will still need to show that the covenant goes no further than is reasonably necessary to protect his legitimate interest. Considerations relevant to the duration of the covenant are addressed at 11.36, and see Appendix at 11.292–11.293. In our view, although 12 months is a fairly common period for a non-poaching covenant, it should not be assumed that it is always a ‘safe’ period – in view of the court’s concern about undue inhibiting of the free movement of labour. However, the reported cases concerning non-poaching covenants have tended to focus on issues as to the scope of employees (or workers or contractors) covered, particularly in terms of: (a) when they were employed, (b) any restrictions by reference to personal contact with them, and (c) any restrictions by reference to their importance to the business. 6(d)(i)  Restriction to employees during the period of employment 11.211  As in TSC Europe (UK) Ltd v Massey [1999] IRLR 22 (11.208) the covenant will be too wide if it covers employees who joined only after employment began with whom the defendant had no dealings and in relation to whom no confidential information was acquired in the course of employment. Similarly in Dawnay Day & Co v de Braconier d’Alphen [1998] ICR 1068, at first instance Robert Walker J concluded (and there was no appeal on this issue) that a nonpoaching restriction contained in a shareholders agreement for a period of two years from the date of that agreement, covering ‘any person who is for the time being a director, officer, employee or other service of the company’, was too wide even allowing for the greater latitude available taking into account the commercial context. The covenant was challenged (at page 1096E) on the twin grounds 639

11.212  Reasonableness of express covenants

that it applied to all employees irrespective of their seniority (as to which see 11.214–11.219) and that it extended to employees taken on during the period of restriction after the end of their employment. A non-poaching covenant in the service agreements which avoided these defects was upheld both at first instance and on appeal. 11.212  Equally, given that the legitimate interest principally relied upon in relation to such covenants is stability of the workforce, the covenant is likely to fail if it covers employees whose employment had already terminated – though the language of solicitation or enticing away is likely to make clear that it does not cover such a situation. Similarly in SBJ Stephenson Ltd v Mandy [2000] IRLR 233, in rejecting a submission that a non-poaching covenant was too wide because it was said to cover staff who had already left the claimant before termination of the defendant’s employment, the court (questionably) placed emphasis on a provision that the covenant applied whether or not the person who was poached committed any breach of contract by reason of leaving his service. This was taken as indicating that the clause related only to individuals who were still employed by the claimant. 6(d)(ii)  Personal contact requirement 11.213  In the case of employers who employ large numbers of staff, it will be necessary to establish a connection between the employer and the colleagues whom the covenant prevents him from enticing. (This is similar to the requirement of connection between employee and customer, often in the form of contact, discussed above in relation to non-solicitation of customer covenants.) Accordingly, it may be important, particularly where there are a large number of employees covered, to limit the non-enticement to colleagues, preferably of a certain level of seniority by reference to their skill-set or role, with whom the employee has had material contact for a limited period prior to the end of his employment or about whom they would have confidential information. In CEF Holdings Limited v Mundey [2012]  IRLR  912 the covenant did not contain any qualification in relation to the employees of the claimant (approximately 3,000 in all) to whom the restriction on solicitation applied (during and for six months after the end of employment). The court struck down the covenant since it would have precluded soliciting employees with whom the defendants had no contact during their employment, and about whose employment they would know little and who would have no reason to have any loyalty to the defendant employees. They would have known only a small percentage of the employees covered, given the large number of employees in question and that the defendant employees worked within a small designated area. Indeed, as a distinct reason for refusing relief, Silber J considered that the defendant employees would not know whom they could or could not solicit because so many of the claimant’s employees were not known to them. That was said (at paragraphs 43, 44) to infringe the cardinal principle, more usually applied in relation to confidentiality injunctions, that the order must enable a person enjoined to know what it is he is to be prevented from doing (referring to Lawrence David v Ashton [1989] IRLR 22). Other supporting 640

Covenants against enticing/employing/arranging employment for fellow employees, etc 11.215

factors (at paragraphs 54–57) were the absence of equivalent restrictions for more senior employees, that defendant employees only had to give one week’s notice to terminate their employment contracts which was regarded as inconsistent with employees being so difficult to replace, and that adequate protection would have been given by further limiting the class of employees who could not be solicited to those with whom the employee had worked, or perhaps to his subordinates or superiors. Silber J (at paragraph 49) explained the decisions in SBJ Stephenson Ltd v Mandy (11.212) and Dawnay Day & Co v de Braconier d’Alphen [1998] ICR 1068, as showing that employee poaching covenants will be upheld where they ‘apply to identifiable employees, who formed part of a team which included the employee, who was being enjoined’. In particular he noted that in Dawnay Day at first instance Robert Walker J, in upholding the non-poaching covenant in the service agreements, had specifically referred (at page 1097E) to ‘the small size of the bond-broking community, the specialised and competitive nature of its business and the importance of the team element’. 6(d)(iii)  Critical person requirement 11.214 The safer course will often be to include an additional restriction by reference to the category of employees to whom the non-poaching restriction applies, whether by seniority or otherwise in a way that identifies their importance to the business. As noted at 11.208, the absence of such a restriction was one ground on which the restriction was held to be too wide in TSC  Europe (UK) Ltd v Massey [1999] IRLR 22 (following dicta to that effect in Hanover v Schapiro [1994] IRLR 82 (CA)). It was also one of the grounds of challenge to the non-poaching covenant contained in a shareholders agreement which was struck down in Dawnay Day (see 11.211), whereas the non-poaching obligation contained in the service agreements which applied to any person who had been a director or senior employee of the company during the employee’s service, was upheld. Robert Walker J specifically noted (at page 1096H) that it avoided the defects which he referred to as rendering the non-poaching term in the shareholders agreement ‘obviously indefensible’, being the inclusion of all grades of employees and future employees. 11.215  Covenants without such a restriction may still be found to be reasonable, particularly where there is a small pool of employees affected and/or a restriction to those with whom the defendant employee had dealings. In Hydra plc v Anastasi [2005] EWHC 1559 (QB) the covenant in a compromise (now a settlement) agreement provided that one of the defendants who had provided services under contract to the company would not solicit or entice away any employee for a period of 12 months following the termination date. Royce J held that the covenant was not unreasonably in restraint of trade by reason of the fact that it did not distinguish between senior and more junior members of staff. Each case had to be looked at on its own facts. The ex-employer was a small company with few employees. It was entitled to protect the stability of its relatively small workforce. Likewise, in SBJ  Stephenson Ltd v Mandy [2000]  IRLR  233 the fact that the non-poaching covenant did not limit the employees who might be 641

11.216  Reasonableness of express covenants

approached to those of a particular rank or kind was held not to affect the validity of the covenant – the ex-employer was entitled to protect not only the broking staff, but also support staff whom they had trained. The covenant was limited to employees with whom the defendant had dealings, which covered about 30 or 40 staff working at the same location as the defendant, who worked as a close team. 11.216  However, as emphasised in TSC Europe v Massey (see 11.214), if giving weight to the small number of employees and their importance to the business as at the date of entering into the agreement, it is also relevant to have regard to what the parties would reasonably have contemplated would happen in future. In TSC  Europe there were only 21 employees at the date of the agreements, almost all of whom were considered to be crucial to the business, but the court emphasised that it would also have been contemplated that further employees would be recruited, and it was considered unrealistic to assume that all of them would be vital to the business. 11.217  The courts have also demonstrated a practical approach towards difficulties of definition of individuals covered. Thus, in Dawnay Day & Co v de Braconier d’Alphen and Alliance Paper Group plc v Prestwich criticisms of expressions in covenants such as ‘senior employees’ or employees ‘in a senior capacity’ as too vague (without definition of the term) were regarded as unjustified. In Dawnay Day, Evans LJ (at page 1110C–D), commented that he could not see what other formula could be adopted if something more precise and detailed was required, and, perhaps optimistically, that he saw no reason to suppose that applying it presented any undue difficulty to any person with knowledge of the kind of business carried on by the claimant. 11.218  However, whilst on the facts in Dawnay Day the court was willing to proceed on the basis that the reference to senior employees could be sufficiently understood in the context, it remains necessary to consider on the facts of each case whether the restrictions are framed in terms that are sufficiently clear to enable the employee to understand what is restricted. In White Digital Media Ltd v Weaver and another [2013] EWHC 1681 (QB), it was argued that the definition of ‘Critical Persons’ to whom the restriction applied, was too vague to enable the defendant to understand the scope of the restriction. The definition included any employee, agent, director, consultant or independent contractor who by reason of his seniority and experience or knowledge of confidential information or influence over clients, customers or suppliers was likely to be able to assist a business in or proposing to be in competition. The court found it unnecessary to resolve the argument on the basis that the clause was in any event too wide by reason of being a non-employment covenant rather than only restricting solicitation (see 11.220). However, there would appear to have been force in the criticism as to uncertainty in the definition which required the defendant to form a judgment as to whether the skill, knowledge and experience of a person would enable them to assist a competitor. 11.219  Difficulties of this nature are particularly acute where there is a large and geographically disparate workforce. It is likely to be important that the critical 642

Covenants against enticing/employing/arranging employment for fellow employees, etc 11.221

person definition is accompanied by a requirement that the person had personal and material dealings with the class of employees covered. In Capita Plc and another v Darch and others [2017] IRLR 718 the absence of such a restriction led the court to the view that a non-poaching covenant was not likely to be upheld at trial. The clause covered those who by reason of their employment or engagement were ‘likely to be able to assist or benefit a business in or proposing to be in competition with the employer’. In the context of a business with over 2,800 employees, the deputy judge (Richard Spearman QC) considered that in the light of the difficulty of knowing which persons were covered, it was not likely that the covenant would be regarded as enforceable.

6(e)  Non-employment covenants 11.220  In contra-distinction to non-poaching covenants, it is unlikely that the courts would favour ‘non-employment’ covenants, ie a covenant restraining an employee from employing or offering employment to his erstwhile colleagues (without the ingredient of solicitation): Dawnay Day & Co v de Braconier d’Alphen [1997]  IRLR  285 obiter per Robert Walker  J  – referring to a nonemployment clause as ‘indefensible’ (at paragraph 77). The matter is arguable to the contrary, since non-dealing (with customers) covenants have been upheld (see 11.202–11.206) as an alternative to (or additional to) non-solicitation covenants, in particular because of the difficulty of proving solicitation. Similar arguments might be raised in relation to a non-employment covenant. However, such a covenant would have to be very narrowly drafted to have any chance of success and to overcome a reluctance on the part of the courts not to interfere unduly with the free movement of labour. The approach of Robert Walker J can be seen to be based on the important public interest which exists in the mobility of labour. See, for instance, Eastham v Newcastle United [1964] 1 Ch 413 at pages 442–3 per Wilberforce J, where he emphasised that an employee’s: ‘liberty to seek employment is considered by the law to be an important public interest.’

Likewise, in Hanover v Schapiro [1994] IRLR 82 Dillon LJ (at paragraph 15) explained: ‘…  the difficulties in law in the way of a non-poaching agreement between employers are very clearly explained in the decision of the Court in Kores Manufacturing Co Ltd v Kolok Manufacturing Co Ltd [1959] Ch  109. In particular, the employee has the right to work for the employer he wants to work for if that employer is willing to employ him …’

These comments have, however, to be seen in the context of the subsequent developments in the law (referred to at 11.208) showing that the courts are prepared to recognise the validity of properly drafted non-poaching of employee covenants. 11.221 In TFS  Derivatives v Morgan [2005]  IRLR  246 the court enforced a non-employment covenant, but (in the context of a case which was principally 643

11.222  Reasonableness of express covenants

concerned with a much more significant non-competition covenant). Morgan is not recorded as having placed reliance in argument on the distinction between non-poaching and non-employment covenants. Nor is there reference in the judgment to the comments of Robert Walker J in Dawnay Day referred to above. Further, in Tullett Prebon Plc v BGC Brokers LP and others [2010] IRLR 648, interim relief was granted which had the effect of preventing BGC from recruiting from Tullett Prebon. The circumstances of the case were unusual by reason of the sheer scale of the poaching exercise. At the time the interim relief was granted it was understood that 19 out of 60 desks at Tullett were affected, concerning at least 96 employees. The relief was said to be justified on the basis that Tullett was facing an attack on its workforce in which desk heads were being used as recruiting sergeants and in which it was intended to call recruits to leave Tullett, regardless of whether the recruits were entitled to do so. It was said in that context that the only way to prevent this conduct was to bar BGC from recruiting from Tullett in any way (at paragraph 247). Whilst not relief based on enforcing a non-employment covenant, it had the same effect. 11.222  However, the reasoning of Robert Walker J  in Dawnay Day has continued to be influential, and was followed in Monster Vision UK  Ltd v McKie [2011] EWHC 3772 and White Digital Media Ltd v Weaver [2013] EWHC 1681 where non-employment covenants were struck down. See also Niit Technologies Ltd v Chaturverdi [2017] Lexis Citation 134 (at paragraphs 34–37) where, relying on this approach, the argument proceeded on the basis that a non-employment covenant would be invalid. 11.223  Until settled by the Court of Appeal, the position regarding non-employment covenants is therefore an open one. The courts are likely to lean against enforcement of such clauses, and it would be wise for an employer to bargain for a separate properly limited non-poaching covenant, drafted so that it is severable from the non-employment covenant, in case the latter is struck down.

6(f) Team move clauses 11.224  What is said above about the reluctance of the courts to interfere with the mobility of employees applies all the more in relation to covenants which are designed to prevent team moves. There are two kinds of covenants of this sort. First there are anti-team move covenants, preventing employees from inducing each other to leave employment in concert. This kind of covenant adds little to the common law position and is not usual for that reason and the difficulties of proving breach. Secondly, there is the preferred type of covenant commonly referred to as an anti-association covenant which prevents employees from assuming employment or otherwise engaging in a business which has employed by it (or engaged or interested in it) other members of the same ‘team’ as the covenanting employee. This type of covenant will typically state that the employee may not for a stated period after the end of employment be concerned in a business in which there are employed or engaged (former) colleagues of that employee with a specified level of seniority and/or with whom 644

Covenants requiring disclosure of job offers/disclosure of covenants to prospective employer 11.227

the employee had contact in (say) the last 12 months of employment with the employer/covenantee. In our view a court is likely to be reluctant to enforce such a covenant. The considerations which apply to non-employment covenants apply with perhaps even greater force given the range of circumstances in which an employee may come to share an employer with a former colleague. If such a clause were to have any chance of success at all, it would have to be drafted in the narrowest terms. 11.225 In Hydra Plc v Anastasi [2005]  EWHC  1559 (QB) (at paragraphs 5154), referred to at 11.128 and 11.215, a narrower form of covenant, which restricted an employee, Mr Marsh, from entering into ‘partnership or association’ with ‘Key Persons’ (which included a self-employed consultant) for a period of 12 months following the termination of his employment, was held to have been breached. The court construed the restriction as meaning that it would not have prevented Mr Marsh from entering into employment with the ‘Key Persons’, as opposed to becoming a partner. However, it is not clear from the report whether the enforceability of this clause was challenged. Nor was there any explanation as to why such a provision should be treated differently from the approach to non-employment covenants indicated by the comments on Robert Walker J in Dawnay Day (see 11.220 above), which the court appeared to accept in finding (at paragraph 45) that a non-poaching covenant in the settlement agreement entered into by another of the defendants would have been too wide if it had covered accepting an employee of the claimant into employment without solicitation. 11.226  It is also notoriously difficult to draft such clauses in a way that is even superficially effective – for example, the draftsman must cater for the situation where the embargoed employee is joined in a competitive business by a former colleague who is not so embargoed. On the face of it, to require the embargoed employee to leave his new employment in such circumstances would be wholly excessive. If the exercise is to be embarked on at all, it would be best to draft the covenant so as to catch only the case where the embargoed employee proposes to join a business which already employs/engages prohibited colleagues. Further provision may be needed to limit the covenant to a situation where the employee subject to the covenant is to work together with the other employee, so as to deal with the specific problem of reconstituting the same team with the new employer. However, such limits may render circumvention of the covenant easy. These are merely illustrations of the many difficulties inherent in such covenants. See also 11.33, where we refer to the possibility of extending notice periods and covenant periods to help cope with possible team moves.

7. COVENANTS REQUIRING DISCLOSURE OF JOB OFFERS/ DISCLOSURE OF COVENANTS TO PROSPECTIVE EMPLOYER 11.227  An increasingly common feature of modern employment contracts is to include a clause requiring the employee to inform the employer of the receipt 645

11.228  Reasonableness of express covenants

by him of any job offers, or acceptance by him of any such offers or of any planned team moves of which he becomes aware. The better view is that such clauses are not subject to the restraint of trade doctrine at all, since they do not in themselves prevent or inhibit the employee from taking up new employment. That was the view of Jack J in Tullett Prebon Plc v BGC Brokers [2010] IRLR 648 (at paragraph 67), and followed by Snowden J in Dyson Technology Ltd v Pellerey [2015] EWHC 3000 (at paragraphs 148–151). It will often be quite difficult to show that breach has resulted in substantial damage to the employer. However, that is not necessarily the case. There may be the loss of a chance of being able to persuade the employee to stay, or others subject to the team move to do so, before they have been contractually committed to taking up new employment. The clause might also have a deterrent effect on employees who are considering departing (particularly as part of a team). It may also be relevant if there are other contractual provisions, such as ‘good leaver’ provisions in relation to bonus entitlement, which are affected by having acted in breach of contract. Further, where the employee has obtained a competitive advantage as a result of non-disclosure of the approach, this may be the basis for a springboard injunction. That was the case in Pellerey. Mr Pellerey, an engineer employed by Dyson, had received a conditional offer of employment by Tesla. The disclosure obligation was limited to approaches with a view to an offer from a competitor. It was triggered when Mr Pellerey was informed that Dyson was working on a (confidential) project to develop an electric car, and as such it was then apparent that Tesla was potentially a competitor. No disclosure was made until the following month when the offer of employment was made unconditional. In the meantime he had been assigned to the project and acquired highly confidential information about it, which would not have occurred had he made the disclosure as required under his contract with Dyson. There was an inevitable risk of disclosing the confidential information, albeit inadvertently, if taking up employment with a competitor working on development of the same product. Snowden J would therefore have been willing to grant a 12 month springboard injunction restraining Mr Pellerey from taking up employment with Tesla (although this was not needed due to the presence of a non-competition covenant). It was no answer that the non-disclosure had not been deliberate, with a view to obtaining the confidential information. 11.228 A  different kind of disclosure obligation is one which requires the employee to show a prospective or new employer any restrictive covenants to which he is subject. Again in Dyson Technology Ltd v Pellerey [2015] EWHC 3000 Snowden J considered that restraint of trade principles were not engaged by such a clause. It is sometimes regarded as a useful means, if the employee complies with the obligation, of fixing the proposed new employer with the necessary knowledge for the purposes of claiming that he has knowingly induced breaches of the covenants or committed other related economic torts and deterring the inducement of any such breaches (see Chapter 19). In addition, on being informed of the departure, the current employer will typically seek confirmation that there has been compliance with this obligation. Beyond this, the value may lie largely in showing the employee in a bad light or exposing him and/or the new employer to effective cross-examination as to their credibility. 646

Supplier/non-interference covenants 11.230

8. COVENANTS AGAINST THE DISCLOSURE/USE OF TRADE SECRETS AND CONFIDENTIAL INFORMATION 11.229  Since there is an implied duty of confidence imported into every employment contract, the question is what (if any) advantage is gained by the incorporation into the employment contract of (often elaborate) express covenants relating to confidentiality. The advantages of incorporating an express confidentiality covenant are threefold: •

An employer who asserts confidentiality in relation to particular information is required to show that he treated the information as such and communicated to the employee the fact that the information was confidential. An express covenant may assist in identifying (which it should do non-exhaustively) the categories of information which are to be treated as confidential.

•

It may help to support a non-competition covenant or non-solicitation/ dealing covenant which is taken to protect confidential information of the employer, by supporting the case that such information does exist and that this was accepted by the parties.

•

More fundamentally, (possibly) protection may be obtained for (mere) confidential information which would not otherwise be protected after employment.

Express confidentiality covenants are dealt with in detail at 5.44 and 6.98–6.112.

9. SUPPLIER/NON-INTERFERENCE COVENANTS 11.230  These may be in the form of non-solicitation/dealing covenants or noninterference with suppliers’ covenants. The relationship between the employer and suppliers is materially different from its relationship with customers. Generally, the relationship with a supplier is not in the nature of an ‘asset’ of the employer, the relationship tending not to be exclusive. In such cases it is often difficult for the employer to identify an interest which is protectable by restrictive covenant. A protectable interest may, however, be identified: •

in relation to an exclusive supply relationship; that said, the relationship will normally be protected by contract between the employer and the supplier, which may render more difficult the task of showing why an embargo is required on the (ex-)employee soliciting or dealing with such suppliers;

•

(even where the relationship with the supplier is not exclusive) where supplies are limited, or identification and approval of effective suppliers is important, or where preferential terms may be available from a preferred supplier;

•

in relation to confidential information relating to suppliers, as to, for example, the identity of the supplier, where that is not generally known, or 647

11.231  Reasonableness of express covenants

as to the terms on which suppliers have dealt with the employer, including special discount arrangements. 11.231  Where such a protectable interest exists, the covenant must (in the usual way) extend no further than is reasonably necessary to protect that interest. Accordingly, non-solicitation covenants may be easier to justify than non-dealing covenants. A quite common form is one which requires the (ex-)employee not to interfere with the relationship between the employer and the supplier. Provided that the period is not excessive, such covenants may be expected to be upheld. So, in Landmark Brickwork v Sutcliffe [2011] IRLR 976 an interim injunction was granted to enforce a (six-month post-termination) covenant against persuading suppliers to cease supplying the employer. In Energy Renewals Ltd v Borg [2014] IRLR 713 the non-dealing with suppliers’ covenants (in an agency agreement) failed because the covenant covered all of the six national energy suppliers and therefore effectively precluded the agent from acting in competition. Non-interference covenants may extend to other relationships such as those with independent contractors: see 12.119. 11.232 In Brake Brothers Ltd v Ungless [2004] EWHC 2799 (QB) the defendants were both employed by Brake Brothers as national buyers with responsibility for negotiating trading agreements and dealing with suppliers of food products, which Brake Brothers would, in turn, sell on to the catering industry. Each of the contracts contained a covenant prohibiting the employee from enticing away from the Brake Brothers group any suppliers (or party in negotiation with the group with a view to becoming a supplier) with whom he had material dealings during any part of the 12 months prior to the termination date. There was also a six-month UK-wide non-competition covenant – which was the only covenant in issue at the trial. The court enforced the non-competition covenant against the ex-employees (who had already served three months’ garden leave). Gloster  J  concluded that the covenant was reasonable to protect memorable confidential information, and also because of the inadequacy of a non-dealing covenant to protect the interests of the claimant, including the buyer-supplier connection. She rejected the suggestion that Brake Brothers had no protectable interest, because the supplier wants to sell to the buyer and not the other way around (although the grounds for this conclusion were surprisingly based, at least in part, on the existence of the non-enticement covenant itself). In relation to the supplier (non-enticement) covenant, although there was no real issue raised regarding this covenant, Gloster J regarded it as clearly reasonable because it was limited to those suppliers with whom a buyer had had material dealings.

10.  OTHER TYPES OF POST-TERMINATION CLAUSES 11.233  Other such clauses include: • 648

Prohibitions on the ex-employee holding himself out as connected with or associated with the ex-employer. There seems to be nothing inherently

Combining different types of covenant 11.235

objectionable in such a clause – since the prohibition normally extends no further than the general law under which one is not allowed falsely to pass off (or misrepresent) one’s business as that of another. However, care should be taken to exclude from the embargo the interest of shareholders who continue as such after their employment has ended. •

Non-disparagement clauses. Similarly, there would seem to be no objection in principle to such clauses; in so far as disparagement involves false accusations, the prohibition again extends no further than the general law – in this case the law of defamation.

11.234  These kinds of clauses may arguably engage considerations of the right of free speech under the Human Rights Act 1998. The position may be compared with covenants in employment contracts under which the employee undertakes not (during or after employment) to disclose information – whether confidential or non-confidential information. In certain instances such an agreement in relation to non-confidential information can be effective: see 6.80–6.97. However, application of the rule in Bonnard v Perryman [1891] 2 Ch 269 means that the courts’ discretion to grant interlocutory relief would not ordinarily be exercised to restrain a libel where the defendant had a defence or claimed justification, unless the claimant can prove that the libel is plainly untrue. It might be argued that the effect of a non-disparagement clause is to disapply the rule where the employee merely asserts, but has not proven the truth of, the relevant statements. It would, however, seem surprising that the inclusion of such a (fairly routine) clause would have such an effect on a rule aimed at preserving free speech.

11.  COMBINING DIFFERENT TYPES OF COVENANT 11(a) Combining non-competition and non-solicitation/ dealing covenants 11.235  The effect of combining different covenants may sometimes be to encourage the court to reject the more stringent clause and to uphold the less stringent. In Stenhouse Australia Ltd v Phillips [1974] 1 All ER 117 the fact that there was a non-solicitation as well as a non-dealing covenant was one of the reasons for rejecting the latter (at page 124f–g per Lord Wilberforce): ‘The presence of one restraint diminishes the need for the others, or at least increases the burden of those who must justify those others.’

That no longer represents the modern approach so far as concerns combining non-solicitation and non-dealing covenants. As noted in WRN  Ltd v Ayris [2008] IRLR 889 (at paragraph 71), non-solicitation and non-dealing covenants are commonly included together in the light of the difficulties liable to arise in proving solicitation. The court specifically rejected a submission that it was unreasonable to include both. See to similar effect Beckett Investment Management Group Ltd v Hall [2007] ICR 1539 (CA) per Maurice Kay LJ (at paragraph 25). 649

11.236  Reasonableness of express covenants

Similarly the modern approach is ordinarily to include a non-competition covenant and non-solicitation/dealing covenants, and ordinarily the court will consider these on their merits without viewing the presence of a non-solicitation/ dealing covenant as detracting from the enforceability of the non-competition covenant (see eg Alliance Paper Group plc v Prestwich [1996] IRLR 25: noncompetition covenant, non-solicitation and non-dealing injunctions granted). 11.236  The risk of one covenant detracting from another may still have force with less common instances of overlap. That was the case in WRN  Ltd v Ayris [2008] IRLR 889 where there was both a restriction on soliciting clients without any qualification requiring there to have been personal dealings, and a further restriction on soliciting using confidential information. In support of the conclusion that the first and wider non-solicitation covenant was unreasonably wide, the court noted that the restriction on solicitation using confidential information dealt with the circumstances in which there could be a need for a restriction on solicitation in the absence of personal dealings. HHJ  Richard Seymour QC commented (at paragraph 61) if there was one adequate covenant the employer did not need another one, and that the submission that there was no objection to the employer being protected by more than one covenant was fundamentally at odds with the basic requirement for the covenants not to impose restrictions that were greater than reasonably necessary to protect the business. 11.237  Notwithstanding the approach in WRN Ltd v Ayris, however, it will commonly be the case that broader and narrower forms of a covenant will be set out particularly in areas where there is scope for doubt as to enforceability. Indeed the approach to severance in Tillman v Egon Zehnder Limited [2017] IRLR 906 (CA) (see 12.50–12.51) provides fresh impetus for setting out distinct restrictions by way of separate covenants so as to assist in being able to sever the wider parts, if required.

11(b)  Combining covenants with ‘garden leave’ 11.238 In Credit Suisse Asset Management Ltd v Armstrong [1996] IRLR 450 the Court of Appeal upheld six-month non-competition and non-solicitation covenants, notwithstanding that the claimant had already had the benefit of six months’ ‘garden leave’. On appeal, it was argued for the defendants that since it was apparent from the terms of the restrictive covenants that the claimant had selected six months as the period for which it required protection from the activities of former employees, and the garden leave had already afforded them six months’ complete protection, the effect of the judge’s order was to double the period of time which the claimant had itself selected as necessary. Accordingly, there should be some set-off in respect of the period of garden leave. The court rejected that argument, holding that there was no basis for a set-off of the period of the covenant against the period of garden leave; nor could the court re-write the covenant so as to enforce it for a lesser period than that agreed. 650

Combining different types of covenant 11.242

11.239  However, while the Court of Appeal in that case did not require the period spent on garden leave to be ‘set off’ by another contractual provision against the restrictive covenant period, nonetheless it did require the overall periods of garden leave and restrictive covenant to be considered in the round. Neill LJ also stated (at paragraph 43): ‘… it is to be remembered that the existence of a garden leave clause may be a factor to be taken into account in determining the validity of a restrictive covenant as at the date of the contract.’

11.240  This approach of considering the overall potential period of restriction in the round was followed in Tradition Financial Services Limited v Gamberoni [2017] IRLR 698, where a six-month non-competition covenant was upheld in relation to a broker, taking into account a possible total restriction of nine months if including the period that could be required to be spent on garden leave. The court noted that there was not yet any reported decision in which a restrictive covenant has been held to be unenforceable because of the length of the period of garden leave which may be imposed on the employee. The court concluded (at paragraph 118) that whether or not including the potential garden leave, the covenant period reflected a reasonable pre-estimate of how long it might take to replace the employee, at the same time as preserving the client base that he left behind. The court then had a discretion not to grant an injunction for the whole period if not justified by the circumstances at the time of enforcement. 11.241 In Credit Suisse Asset Management Ltd v Armstrong, having referred to the need to take into account the total period of restriction from garden leave and other covenants, Neill LJ added (at paragraph 44) that: ‘I would, however, add a caveat. Terms which operate in the restraint of trade raise questions of public policy. The opportunity for an individual to maintain and exercise his skills is a matter of general concern. I would therefore leave open the possibility that in an exceptional case where a long period of garden leave had already elapsed, perhaps substantially in excess of a year, without any curtailment by the Court, the Court would decline to grant any further protection based on a restrictive covenant’.

11.242 Whilst Neill LJ therefore contemplated declining to grant any further protection by way of covenants, a more flexible approach was adopted in Tullett Prebon Plc v BGC Brokers LP [2010] IRLR 648. Jack J held that when exercising the discretion whether and to what extent to enforce a covenant, the court can take into account the period of garden leave served or enforced, and that the decision in Credit Suisse did not require that the discretion must either be to enforce the whole of the period of the covenant or no part of it. The court therefore enforced (in relation to some of the defendant brokers) both garden leave and restrictive covenants, focussing on the total appropriate period of restriction. Where in relation to those defendants it was found that a total of 12 months’ protection was appropriate, the court super-added to the eight months’ garden leave injunction already served a further four months’ 651

11.243  Reasonableness of express covenants

restrictive covenant relief ie  four months out of a six-month post-termination restriction. The court was not breaking the cardinal rule that it was not possible to re-write the covenant. It was still necessary in determining validity of the covenant to consider whether the full six months’ notice period was no greater than necessary to protect the employer’s legitimate interest at the time the contract was entered into. However, there was then a discretion as to whether and to what extent to grant injunctive relief in the light of the circumstances existing at trial (and in particular the amount of time spent on garden leave). The court could therefore consider how much of the period of an enforceable restrictive covenant it was equitable to enforce by way of injunctive relief – consistent with the dictum of Neill LJ in Credit Suisse referred to above (and TFS  Derivatives Ltd v Morgan [2005]  IRLR  246). That in turn was viewed (at paragraph  237) as providing an answer to the argument that the absence of a set off, or the absence of a full set off, for the period spent on garden leave rendered the covenant unreasonable. As it was put by Jack J, because the court would only enforce the garden leave restriction to the extent necessary to protect the employer’s legitimate interest, and also had a discretion as to the extent of the covenant to be enforced (if the covenant is valid), any necessary adjustment is ‘built in by the law’. 11.243 In Sunrise Brokers LLP  v Rodgers; [2015]  ICR  272 (CA), while not deciding the point (which was not necessary for the decision), Underhill LJ broadly supported this approach. The court (at paragraph  50) upheld the approach at first instance of taking into account the extent of the garden leave and the covenant together in relation to the extent of the restriction to be enforced. However, Underhill LJ also noted that he could see no reason why the exercise of the discretion to enforce a covenant should be all or nothing (provided that there is a valid covenant). It was also acknowledged that in some cases it may be permissible to take into account that (if it be the case) an employee had not been paid during a period of leave. Here this was not a persuasive point as the employee had been the author of his own misfortune in refusing to attend work, with the effect that the transferor employer was not under an obligation to make payment. 11.244  The more flexible approach adopted in Tullett Prebon Plc v BGC Brokers LP [2010] IRLR 648 has become increasingly important in the light of the modern approach to enforcing garden leave periods. Until quite recently there had been no reported case of a court-imposed garden leave period in excess of six months (though there were instances of employees agreeing on request of their employers to take 12 months’ garden leave.) However, more recently there has been a judicial willingness to enforce longer periods of garden leave, and a willingness to take this into account in relation to the extent of the covenant which the court has been willing to enforce. In JM Finn Co Ltd v Holliday [2014] IRLR 102 the court granted a garden leave injunction lasting 12 months and (given that the courts have often enforced 12 months non-competition covenants where ordinarily no payments are made to the ex-employee over that period), this case may herald the enforcement of similar longer periods of garden leave in particular cases. See also eg ICAP Management Services Ltd v Berry and BGC Services 652

Combining different types of covenant 11.246

(Holdings) LLP [2017] EWHC 1321, where a 12 month garden leave provision was enforced, of which there was two months still to run at the date of trial (and due to a provision to set off time spent on garden leave, there was no additional period of post-termination covenants). 11.245  In our view, notwithstanding Credit Suisse v Armstrong, and the approach adopted in Tullett Prebon v BGC Brokers, with the possible exception of very short covenants, it is prudent when drafting covenants to provide that the length of the covenant will be reduced by any period spent on garden leave. This is often the practice which is followed in drafting modern restrictive covenants. Whilst the absence of a provision for a set off for time on garden leave may not mean that the covenant is void, the provision of such a set off may contribute to the impression of the covenant as being carefully limited to that which is required to meet the employer’s needs. Sometimes, where there is no express right to offset garden leave as against the covenant period, if the employer is concerned that the court will regard the total period of garden leave and the restrictive covenants as excessive, he may be tempted to offer the offset at the time of sending the employee on garden leave. The employee is, of course, not obliged to accept the offer – and indeed may seek to rely on the fact of the offer (if openly made) as itself indicating that the overall period is too long. 11.246 If, however, a set off provision is included, it should be drafted in terms that make clear what amounts to the employer electing to put the employee on garden leave. In Ashcourt Rowan Financial Planning Ltd v Hall [2013] IRLR 637 the court adopted what may be regarded as a generous construction in favour of the employer so as to confine garden leave to what it regarded as its conventional meaning rather than extending to circumstances where the employee continued working but was given some different duties. The contract provided that during any period of notice the employer could require the defendant employee, Mr Hall, not to perform all or part of his normal duties or no duties whatsoever or suspend or exclude him from all or any of its premises or require him to refrain from contracting or dealing with any clients, suppliers or staff. This was defined as ‘the garden leave period’. A  different provision of the contract stated that any period spent by Mr Hall ‘on garden leave as envisaged by’ the garden leave clause was to be deducted from the period of the post-termination covenants. After Mr Hall had given six months’ notice of resignation he was given a revised set of duties which he was required to carry out. A  dispute arose as to whether this amounted to being placed on garden leave within the meaning of the contract for the purposes of the set off provision. It was argued on behalf of Mr Hall that the set off applied not only where he was put in the garden, in the sense of being suspended from all duties, but also when any of the other steps were applied within the definition of ‘the garden leave period’ including being required not to contact some clients or given different duties. The court (at paragraph  35) rejected this argument on the basis that the set off provision referred to time spent ‘on garden leave’, rather than specifically to ‘the garden leave period’ and that there was not a sufficient basis to depart from what was regarded as the accepted conventional meaning of garden leave as meaning being required to 653

11.247  Reasonableness of express covenants

perform no duties whatsoever. Of course even during a period conventionally regarded as garden leave, an employee might be expected to carry out some duties such as relating to a handover. However, in this case, applying the natural meaning of ‘garden leave’, the court concluded that Mr Hall, who continued to work during the notice period, was not on garden leave during that period. 11.247 See further the discussion of TFS  Derivatives Ltd v Morgan [2005]  IRLR  246, at 11.91, where the court considered and rejected an argument that a non-competition covenant was inappropriate on grounds that there could instead have been a garden leave provision, and to similar effect Corporate Express v Day [2004] EWHC 294 (QB) (holding that the employer’s decision not to implement garden leave did not affect the enforceability of a non-competition clause; it was a matter for the employer’s commercial discretion and it had sound reasons for enforcing the covenant – see 11.92.)

12. INDIRECT COVENANTS AND PAYMENTS MADE UNDER SUCH COVENANTS 12(a) Generally 11.248  Covenants may be structured in such a way that they do not look like restrictive covenants. The provision may be for forfeiture of pension payments in the event of post-termination of employment competition by the ex-employee, or a requirement for a departing employee who leaves with customers of the ex-employer to share commission with the ex-employer. The court will look to the substance and practical effect rather than the form: Stenhouse Australia Ltd v Phillips [1974] AC 391 at pages 402–403, Marshall v NM Financial Management Ltd [1995] 1 WLR  1461 at page 1467B; Proactive Sports Management Ltd v Rooney [2012] IRLR 241 (CA), per Gross LJ (at paragraph 148). 11.249 The starting point is to ascertain whether the provision is in fact in restraint of trade at all. The dictum of Lord Denning MR in Petrofina (Great Britain) Ltd v Martin [1966] Ch 146 (CA) at page 160 is often cited: ‘Every member of the community is entitled to carry on any trade or business he chooses and in such manner as he thinks most desirable in his own interests, so long as he does nothing unlawful: with the consequence that any contract which interferes with the free exercise of his trade or business, by restricting him in the work he may do for others, or the arrangements which he may make with others, is a contract in restraint of trade. It is invalid unless it is reasonable as between the parties and not injurious to the public interest.’

11.250 Judges have often been reluctant to define the dividing line between contracts which are in restraint of trade and those which merely regulate normal commercial relations, preferring to rely on ‘a broad and flexible rule of reason’: see eg Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 at 331 per Lord Wilberforce (and see also Lord Reid (at page 289) and Lord Pearce (at page 324)): 654

Indirect covenants and payments made under such covenants 11.253

‘Often, in reported cases, we find that instead of segregating two questions, (i)  whether the contract is in restraint of trade, (ii)  whether, if so, it is “reasonable”, the courts have fused the two by asking whether the contract is in “undue restraint of trade” or by a compound finding that it is not satisfied that this contract is really in restraint of trade at all but, if it is, it is reasonable. A well-known text-book describes contracts in restraint of trade as those which “unreasonably restrict” the rights of a person to carry on his trade or profession. There is no need to regret these tendencies: indeed, to do so, when consideration of this subject has passed through such notable minds from Lord Macclesfield onwards, would indicate a failure to understand its nature. The common law has often (if sometimes unconsciously) thrived on ambiguity and it would be mistaken, even if it were possible, to try to crystallise the rules of this, or any, aspect of public policy into neat propositions. The doctrine of restraint of trade is one to be applied to factual situations with a broad and flexible rule of reason.’

11.251 In relation to the impact of restraint of trade principles on indirect restraints, such as loss of benefits, an important distinction arises between provisions which: •

attach financial consequences to competitive activity after termination of employment (such as loss of a deferred bonus if joining a competitor); and

•

attach adverse consequences, and thereby provide a disincentive to, termination of employment (such as loss of a bonus if employment terminates within a specified period).

Whilst both types of provision serve as a disincentive to competitive activity, the distinction is important. The application of restraint of trade principles is clearly established in the first category but its application in the second category is subject to conflicting authority. To a large extent the distinction mirrors the differing approach to direct restraints on competitive activity. We consider each category in turn below.

12(b) Forfeiture of benefits due to post-termination competitive activity 11.252  So far as concerns provisions relating to post-termination competitive activity, in Marshall v NM Financial Management Ltd [1997] ICR 1065, at page 1071E, Millett LJ summarised the general principle as follows: ‘The restraint is imposed in the form of a condition. It is settled law that there is no difference in this context between a contract by a person that he will not carry on a particular trade (which if valid would be enforceable against him) and a contract that if he does not do so he will receive a benefit to which he would not otherwise be entitled (which if valid would not prevent him from carrying on the trade but merely result in the loss of the benefit in question): see Wyatt v Kreglinger and Fernau [1933] 1 KB 793.’

11.253  Of course it does not follow from the fact that indirect restraints are subject to restrictions on agreements in restraint of trade that the agreement will 655

11.254  Reasonableness of express covenants

necessarily be void. It remains necessary to consider whether the restriction is wider than necessary to protect a legitimate interest. We suggest also that consistent with the ordinary approach, where the impact on the employee is taken into account, the nature and extent of the financial disincentive will be a relevant factor in assessing the reasonableness of the indirect restraint. 11.254 In Wyatt v Kreglinger and Fernau [1933] 1 KB 793, the defendant company had written to a long serving employee agreeing to pay him a pension subject to his not entering into employment or business in the wool trade. The Court of Appeal concluded that, to the extent that the letter gave rise to a binding agreement, the agreement not to enter into the wool trade was void as being in restraint of trade, being unlimited in terms of space and time. Since this was the only consideration for the agreement to pay a pension, that obligation was therefore also found to be unenforceable. The decision was followed in Bull v Pitney-Bowes Ltd [1966] 3 All ER 384, where a provision in an employee’s pension scheme providing for forfeiture of pension in the event of competition was struck down as being in restraint of trade. Thesiger J accepted (at page 282F) that the employer could not achieve by the inducement of a continued pension what it could not achieve by a direct promise in return for a payment. However, in contrast to Wyatt since it could not be said that the condition was the only consideration for the pension, the effect was to render the condition unenforceable but not to deprive the employee (who had sought the declaration of unenforceability) of his right to the pension. 11.255 The same approach was applied by the Privy Council in Stenhouse Australia Ltd v Phillips [1974] AC  391 in the context of the imposition of an obligation to share profits from post-termination competitive activity. One of the covenants in a severance agreement provided that in the event of the ex-employee gaining financial benefit from the placing of any business by one of the customers of the employer for a three-year post-termination period, the employer would receive half the benefit. The court construed that covenant (in conjunction with a three-year non-dealing covenant) not as a simple profit-sharing arrangement, but as a restrictive covenant (which it struck down as being unreasonably wide). It placed emphasis on the practical effect, given that the provision was closely linked to the non-dealing covenant, and the fact that the obligation to pay over the 50% share of commission arose even if the business was obtained without his knowledge and regardless of the size of the financial benefit obtained by him. 11.256  The principle was applied to a provision for forfeiture of commission in Sadler v Imperial Life Assurance Co of Canada Ltd [1988] IRLR 388. A provision in an insurance agent’s contract of employment, which purported to remove his entitlement to post-termination commission if he remained working in the insurance industry after termination of employment, was held to be an unenforceable restraint of trade, though capable of being excised without affecting the remainder of the contractual obligations. The same applied in Marshall v NM Financial Management Ltd [1995] 1 WLR 1461 (ChD); [1997] ICR 1065 (CA) where a self-employed sales agent was subject to terms which provided an entitlement to continue to receive commission in respect of introductions 656

Indirect covenants and payments made under such covenants 11.258

previously made by him, provided: (a) he had been in employment for 5 years, and (b) he did not compete after employment. At first instance the restraint relating to being engaged by a competitor was held to be void as being in unreasonable restraint of trade, but not the requirement to remain in employment for five years. On appeal there was no challenge to the decision that the provision concerning non-competition was in unlawful restraint of trade, but only to the enforceability of the remaining obligation to make payment of commission. As to that the Court of Appeal upheld the conclusion that that entitlement survived, since the consideration was founded not only on the unlawful restraint but also on the five years’ service condition. 11.257 Sometimes under Long Term Incentive Plans (‘LTIPs’) and similar schemes, instead of providing for forfeiture of benefits in the event of breach of restrictive covenants, the scheme will provide that the awards do not vest unless there has been compliance with the relevant restrictive covenants. There is no direct English authority on whether such a provision operates in restraint of trade. However, a provision of this nature was considered by the Singapore Court of Appeal in Singh v Cargill TSF Asia Ptr Ltd [2012] SGCA 42. Forfeiture provisions in the relevant incentive plan provided that deferred payments that had been awarded but not yet distributed would be lost if the participant employee was either terminated for cause, or if after their employment was terminated (other than by reason of disability) he continued his career within another business in the financial or commodity trading industry within two years of termination of employment. Following resignation from employment, the claimant sought a declaration that the forfeiture provisions were void as being in restraint of trade, and claimed payment of the deferred awards (which had been deferred for three year periods) totaling about US$1.7m plus interest. The court drew a distinction between what it referred to as a ‘forfeiture-for-Competition’ clause (such as the clause in that case in so far as it applied in relation to employment with a competitor), and a ‘Payment-for-Loyalty’ clause, making payment conditional on continued employment. At first instance the judge declined to follow Wyatt and concluded that, since with the forfeiture for competition clause the employee still had a choice of whether to compete, it was not in restraint of trade. However the Court of Appeal disagreed. In considering the application of restraint of trade principles, the court drew a further distinction based on whether the forfeiture provision had already ‘vested … as a legal entitlement’, in the sense that the bonus had already been earned and awarded, albeit that it was not yet due for payment. That was distinguished from a situation where on the true construction of the agreement, the bonus was not just awarded for past performance but was also in part for continued satisfactory performance and loyalty. In the latter case where it was clear that the award had not yet vested there would be nothing to forfeit. However in the present case the court accepted that the award had fully vested and was paid on the basis of performance in the relevant performance years. 11.258  The court proceeded to accept, following the Wyatt line of cases, that restraint of trade principles applied to forfeiture clauses at least where the payment had vested in the above sense, but would not apply to a payment for loyalty clause since (at paragraph 44): 657

11.259  Reasonableness of express covenants

‘… the Forfeiture Provision and a typical Payment for Loyalty clause are quite different. The former, as mentioned above, comprises a clause which restrains the employee concerned from leaving the employment of the employer by withholding what had already been vested in him if he did in fact leave such employment and join a competitor. The latter, on the other hand, contains – as the relevant case law emphasises – no restraint as such; a typical Payment for Loyalty clause simply provides that, if the employee concerned continues in the employment of the employer, he or she will receive an additional payment for his or her loyalty. It is of the first importance to note that the employee concerned has hitherto not done anything that entitles him or her to such payment and, hence, nothing is vested in him or her as such. There is therefore no restraint on the employee, who is free to choose whether he or she would like to continue in the employment of the employer in order to be entitled to such a (loyalty) payment.’

11.259  The need to focus on whether there is a vested entitlement was said in Singh to be illustrated by the decision of the High Court of Ireland in Finnegan v J & E Davy [2007] IEHC 18. There the court accepted that restraint of trade principles were engaged where an employer stockbroker firm purported to exercise a discretion to defer an element of bonus. The reasoning proceeded on the basis that there was a pre-existing entitlement to have bonus determined by reference to performance only, rather than also by applying a criteria of loyalty (implicit in the decision to defer payment). Taken together with the lack of reasonable notice of the change, there was therefore said to be an irrational exercise of discretion in the forfeiture of an entitlement to bonus that crystallised on declaring the amount of the bonus. (See further 11.263–11.269 in relation to the fact that the purported condition was of continued employment rather than a restriction on activities post termination of employment). 11.260  The Court in Singh proceeded to comment that in the absence of a vested entitlement it might be sufficient to establish an entitlement based on reasonable expectations, as to which it suggested that by analogy with promissory estoppel it would be relevant to consider whether there was some detrimental reliance on a representation from which it would be inequitable to resile (see also in relation to reasonable expectations eg  Brogden v Investec Bank Plc [2014] IRLR 924 at paragraphs 115–117). However, a difficulty that arises both with the concept of ‘vested’ rights and reasonable expectations is that there is an element of circularity in the reasoning. Where an incentive scheme provides that payment is conditional upon non-competition, then whether there is a reasonable expectation of payment in turn depends on the enforceability of that restriction. The same might be said as to whether the entitlement to payment can be said to have vested. 11.261  The better approach we suggest, consistent with the Wyatt line of cases and public policy underlying restraint of trade, is to consider whether there is or would be an entitlement to payment but for the restriction imposed on posttermination competition. If there is, then applying the principles in the Wyatt line of cases, restraint of trade principles may apply. As emphasised in Singh v Cargill TSF Asia Ptr Ltd, this remains a threshold requirement and it remains 658

Indirect covenants and payments made under such covenants 11.264

relevant to consider whether the restriction is necessary to protect the employer’s legitimate interests. However, as we consider in the following section, the distinction highlighted in Singh between an award earned from past performance, and one entailing an element of reward for future loyalty (denoted by continued employment) remains material, and it may be appropriate to draw this element out specifically in the terms of the scheme. 11.262  See also Greck v Henderson Asia Pacific Equity Partners [2008] CSOH 2 where the court declined to deal with a restraint of trade challenge to a bad leaver provision under a limited partnership agreement on the basis that it had not been pleaded. The court commented (at paragraph 87) that there might be evidential issues as to whether the impact on carried interest entitlement, in terms of losing 20% of the entitlement, was in fact a financial disincentive as the new employer might be able to compensate for that loss. Framed in those terms, the question would appear to overlook the need to assess the validity of the agreement at the time it was entered into. In any event, the extent of any financial disincentive might be taken into account in considering whether the restriction, even if in restraint of trade, was reasonable.

12(c)  Payment/forfeiture linked to continued employment 11.263  As discussed in Chapter 15 (15.45–15.63) where a restriction on competition applies during employment, or limits the circumstances in which the employment may be terminated by virtue of a fixed term or notice requirement, different considerations arise as to whether restraint of trade considerations are relevant: see JM Finn Ltd v Holliday [2014] IRLR 102, where the court reasoned that restraint of trade principles, whilst relevant to whether to grant garden leave injunctive relief, do not apply in relation to the validity of an express negative covenant preventing work for a competitor during employment. By extension it is to be expected that restraint of trade considerations would ordinarily not apply where such restrictions during employment are sought to be enforced by indirect means, such as loyalty payments for continued employment. That said there may still be some exceptional situations in which the public policy on restraint of trade applies to onerous restrictions during the currency of the employment relationship or to restrictions on termination, consistent with the principle that the restraint of trade doctrine is capable of applying to restrictions during the contract as well as after, and that there is to be a ‘broad and flexible’ approach: see Esso Petroleum v Harper’s Garage, Panayiotou v Sony Music Entertainment (UK) Ltd [1994] EMLR 229; Proactive Sports Management Ltd v Rooney [2012] IRLR 241 (CA) at paragraph 148. 11.264  The distinction between restrictions on termination and post-termination restrictions on competition was highlighted in Peninsula Business Services Ltd v Sweeney [2004]  IRLR  49 (EAT) where it was held (at paragraphs 38–44) that a commission agreement under which entitlement ceased on termination of employment was not in restraint of trade. It did not impose any restraint on the employee’s employment after leaving Peninsula. The EAT emphasised in 659

11.265  Reasonableness of express covenants

particular the differing treatment in Marshall v NM Financial Management Ltd [1995] 1 WLR  1461 (ChD) as between: (a) a condition for receiving renewal commission of a minimum of five years’ service (which was not in unlawful restraint of trade), and (b) not becoming an employee or intermediary of a competitor for a one year period (which was). Clearly both provisions were capable of acting as a disincentive to resign, but where this was not tied to a restriction on post-termination activity it was insufficient to render it in restraint of trade. 11.265 That approach was followed in Tullett Prebon Plc v BGC  Brokers LP [2010] IRLR 648 in relation to provisions for the repayment of signing or retention payments (paid to brokers when they joined Tullett Prebon or upon extending their contracts) if the employees did not serve out their full term of employment. Jack J held that these were substantial payments paid to highly paid employees as a reward for loyalty, and not in restraint of trade. 11.266  The distinction was further considered and explained by the Singapore Court of Appeal in Singh v Cargill TSF Asia Ptr Ltd [2012] SGCA 42, where the court commented (at paragraph 71) that: ‘The second consideration is that Forefeiture for Competition clauses … purport to contractually govern what happens after the employee has left his employment. These may be distinguished from Payment for Loyalty clauses, which do not provide for the post employment situation. The employee who leaves under a Forfeiture for Competition clause may still be entitled to the benefit if he does not compete. The employee who leaves under a Payment for Loyalty clause forfeits the benefit completely, even if he subsequently chooses not to compete. In the post employment context, the relevant question would be whether there was, in purpose and effect, a restraint on trade after the employee has left his employment. The relevant time frame under a Payment for Loyalty clause is thus narrower than that of usual employment constraints. It is in this context that the Forfeiture for Competition clauses may be distinguished from the Payment for Loyalty clauses. Whilst a Forfeiture for Competition clause purports to govern what happens post employment, the Payment for Loyalty clause ignores what happens post employment.’

11.267  However, the application of restraint of trade principles to payment or forfeiture conditional on continued employment is not yet wholly settled, in part as a result of some conflicting authority and in part because of the ‘broad and flexible’ approach to be adopted. In Electronic Data Systems v Hubble (20 November 1987, unreported) LEXIS, discussed at 5.8, the employee’s contract required him to sign promissory notes for the repayment of training costs if he resigned from employment within 36 months. The Court of Appeal declined to grant summary judgment on the claim for repayment in the light of the defence raised that the promissory notes formed part of an arrangement which was in unlawful restraint of trade, taking into account the arguable contentions that there was inequality of bargaining power, that the sum to be repaid represented about half of the employee’s salary and also overstated the true cost of the training and its true value to the employee, and that it could be inferred that the true purpose of the 660

Indirect covenants and payments made under such covenants 11.270

promissory note was not to recover the costs but to deter staff who had been trained from then joining a competitor. 11.268 In Tullett Prebon Plc v BGC Brokers, Jack J concluded that, given that in Hubble there was only a decision on a summary judgment application that the defence was arguable, there was no broader principle to be derived from the decision. However reliance was placed upon it in 20:20 London Ltd v Riley [2012]  EWHC  1912 (Ch). The defendant, Mr Riley, sold his digital marketing business to the claimant for shares and £1.5m in cash, paid into an escrow account. At the same time as the sale he also entered into a service agreement with the claimant. This contained a golden handcuff provision under which he was required to repay the cash consideration if his employment terminated in the first three years, with the amount to be repaid varying (after the first year) depending on whether he was a good or bad leaver. He was summarily dismissed after less than two years’ employment. On a summary judgment application the court held that there was a triable issue as to whether the golden handcuff provision was void as being in restraint of trade. The court first noted that it made no difference that Mr Riley was dismissed from employment because the wording did not permit blue-pencilling so it was not possible to distinguish between voluntary and involuntary departures. Relying on Hubble, the court concluded that public policy in relation to restraint of trade applied due to the disincentive effect of the repayment provision. A test was to be applied of whether the restrictions were reasonably necessary for protection of legitimate interests and commensurate with the benefits offered under the contract. The court noted that this had similarities to the approach in considering post termination covenants, but that it might open the scrutiny and evaluation up to an examination of the contract as a whole rather than focussing only on the individual restriction. See also Finnegan v J & E Davy [2007] IEHC 18 (considered at 11.259) where the deferral of a bonus and linked requirement to remain in employment was considered by the High Court of Ireland to operate in restraint of trade. 11.269  We suggest that the reasoning in 20:20 London Ltd v Riley was unconvincing in so far as it failed to reflect the distinction between restrictions during employment related to incentivising loyalty, and restrictions on competition post-termination. That said, there are cases (as Hubble may illustrate), in which the penalty for resignation is so severe and out of proportion to the benefit conferred that, particularly in a context where there has been inequality of bargaining power, it would be possible to argue that the obligation was in restraint of trade.

12(d)  Recovery of payments under an unenforceable covenant 11.270  When a restrictive covenant has been declared unenforceable, the question will often arise whether the consideration for the restraint can be recovered (or remains payable). In practice, this question has tended to arise in the case of indirect covenants and is accordingly dealt with here. The position was described by Lord Millett in Marshall v NM Financial Management Ltd [1997] ICR 1065 (CA) at pages 1069–1070: 661

11.271  Reasonableness of express covenants

‘It is obvious that, where the invalid restraint of trade provides the only consideration for the promise, the promisee cannot enforce it. He has given no (valid) consideration for the promise which he seeks to enforce. Shorn of the “adventitious trappings” of the contract, this was the position in Vancouver Malt and Sake Brewing Co Ltd v Vancouver Breweries Ltd [1934] AC 181. It was also the position in Wyatt v Kreglinger and Fernau [1933] 1 KB 793, where on the eve of his retirement an employee who otherwise had no entitlement to a pension was granted an ex gratia pension conditional on his not competing with his former employer. The condition was held to be void and the pension not payable. At the other extreme are cases where the invalid restraint is merely an incident of a larger transaction which could “survive without difficulty the elimination” of the invalid restraint: see Romer LJ in Goodinson v Goodinson [1954] 2 QB 118, at page 126. This was the position in In re Prudential Assurance Co’s Trust Deed; Horne v Prudential Assurance Co Ltd [1934] Ch 338 and Bull v Pitney-Bowes Ltd [1967] 1 WLR 273. In both cases a contract of employment entitled the employee to a pension with a proviso that upon retirement after the qualifying period of service the employee would not compete with his former employer. In both cases the pension would continue to be payable even though the proviso was void. Most cases fall in between these two extremes. The invalid restraint is only part of the consideration for the promise, but it is an important part, for without it the promise would probably not have been given.’

11.271 In Marshall the restraint was severed from the rest of the agreement, leaving the sales agent able to enforce his entitlement to commission. The commission was held to be in substance for the agent’s services in procuring business for the company. In similar vein is the case of Sadler v Imperial Life Assurance Co of Canada Ltd [1988]  IRLR  388 where, having applied the conditions for severance of the covenant (see 12.46–12.59), the court found that there was sufficient consideration to support the obligation to pay commission after termination. See also to similar effect Bull v Pitney-Bowes Ltd [1966] 3 All ER  384. If, however, as occurred in Wyatt v Kreglinger and Fernau [1933] 1  KB  793, the entire consideration for a payment was the restrictive covenant, which is held to be unenforceable, it is difficult to see how in principle repayment of that consideration could be resisted unless a defence of change of position can be established. The law recognises that there is a general right to recover money paid under a mistake, whether of fact or law, subject to the defences available in the law of restitution, such as the defence of change of position: Kleinwort Benson v Lincoln City Council [1999] 2 AC 349 (HL).

13. ANCILLARY CLAUSES SEEKING TO STRENGTHEN OR PRESERVE RESTRICTIVE COVENANTS 11.272 In Chapter 12 we consider various types of clauses which may be included with a view to strengthening the employer’s position. These include clauses which purport to permit severance of the covenant (dealt with at 12.60), covenants which are qualified by a provision for consent (see 12.134–12.135), clauses confirming reasonableness (12.146–12.147) and clauses confirming that legal advice has been taken by the employee (12.148–12.149). 662

Covenants in termination/settlement agreements/contractual or court undertakings 11.273

14. COVENANTS IN TERMINATION/SETTLEMENT AGREEMENTS/ CONTRACTUAL OR COURT UNDERTAKINGS 11.273 The fact that a covenant is contained in a termination or settlement agreement is likely to dispose the court towards enforcement of the covenant, even though the agreement remains subject to the application of normal restraint of trade principles. There are a number of reasons for this: •

Both parties will normally be legally represented. Indeed in the case of a statutory settlement agreement under section 203 Employment Rights Act 1996 (and corresponding provisions of other employment legislation) the employee must be so represented.

•

The parties are better able to judge the reasonableness of the restraint. In Stenhouse Australia Ltd v Phillips [1974] 1 All ER 117 Lord Wilberforce explained this point: ‘While not regarding this as decisive, their Lordships cannot be uninfluenced by the fact that this period was accepted by the respondent in March 1972, at a time and in circumstances when he, as much as anyone in the employment of the Stenhouse Group, would be able to appraise the nature and quality of the interest which the appellant would wish to protect. A  period of five years had been stipulated in the previous agreement of 1964: at that time it could only be a pre-estimate of what might, in circumstances which could not be precisely foreseen, be required. But in 1972 the parties were faced with an actual situation, and unless the period fixed was clearly excessive, they may be thought to have agreed upon a realistic limitation’.

(Even though it is most unlikely that a court today would enforce a fiveyear restraint, the general point remains a good one). •

The employee may no longer be in an unequal bargaining position – the relationship may tend to be seen as more of a commercial at arm’s length transaction, where the parties are the best judge of what is reasonable between them. In East England Schools v Palmer [2014]  IRLR  191, while the deputy judge considered the fact of an offer of undertakings by a legally represented ex-employee (which on the facts he held were not enforceable in their own right as a separate contract) were relevant in considering the reasonableness of similar covenants in the employment contract, he did not in the event consider that to be a factor of great weight (paragraph  96). However, in Capgemini India Private Ltd v Krishan [2014] EWHC 1092 (QB) (at paragraphs 71 and 75–76) the fact that Krishman (with the benefit of independent legal advice) had given an undertaking to Capgemini’s solicitors (in terms of his covenant in the contract of employment) was regarded as a powerful consideration, though not the final word. Nor is the approach dependent on the parties having entered into a formal settlement agreement or upon the relationship of employee/employer having come to an end at the time of entering into the undertakings. In Personal Management Solutions Ltd and another v Brakes Bros Ltd [2014]  EWHC  3495 (QB) undertakings were given at 663

11.274  Reasonableness of express covenants

a time when the defendant, Mr Eaton, was still a director and employee of the claimant, although he was serving out notice on garden leave. As a result of having sent contact information and other material to his personal email address, he was subject to disciplinary proceedings and given a written warning. At the conclusion of the disciplinary proceedings, an undertaking was sought from him in respect of all the confidential information of the claimant which he had in his possession, requiring him to list it, provide details of the use made of it and to state to whom he had divulged it. He provided this undertaking after taking legal advice. He failed to comply with the undertaking, and the court concluded that there was no good reason for failing to do so. In ordering specific performance, the court (HHJ Curran QC) emphasised (at paragraph 220) that Mr Eaton had entered into the undertaking on a fully informed basis after taking legal advice and that, in signing it, had effectively settled all proceedings which might otherwise have been in contemplation at the time. (The clause was not in any event regarded as being improperly or unlawfully in restraint of trade, since it only limited or restricted unfair competition.) See further 11.275–1.276 in relation to the Capgemini case. •

The public interest that there should be an end to litigation – this is particularly true in relation to settlement agreements entered into by way of resolving extant court proceedings – see Thurstan Hoskin v Jewill Hill & Bennett and others [2002]  EWCA  Civ 249 (discussed at 11.178). In a judgment in WWF-World Wide Fund for Nature v World Wrestling Federation Entertainment Inc [2002] EWCA Civ 196, Carnwath LJ stated (at paragraph 48): ‘To summarise, where the claimant has been party to a settlement of a genuine dispute, designed to define the boundaries of his trading rights as against the defendant, he is entitled to expect that to be enforced. It is not for him to prove that it is reasonable. The presumption is that the restraints, having been agreed between the two parties most involved, represent a reasonable division of their interests. It is for the defendant, seeking to avoid the agreement, to show that there is something which justifies such a course, because the dispute was “contrived” … or because there was no reasonable basis for the rights claimed … or because it is otherwise contrary to the public interest, for example, going beyond the legitimate purpose of seeking to “avoid confusion or conflict” between the parties.’

11.274 This line of authority was followed and applied in Davies v Hart [2015]  EWHC  3121 where the court declined to set aside a default judgment because there was no real prospect of the defendant establishing that covenants contained in the defendant director’s service agreement and a settlement agreement were void and unenforceable. The settlement agreement had provided that the post-termination restrictions in the service agreement would apply. These included a 12-month non-competition restriction and a 12-month restriction on soliciting customers and poaching staff. The court emphasised (at paragraph 20) that where, as was the case here, the party has the benefit of legal advice and the terms have been entered into as a result of a settlement agreement, the presumption is that the restraints are reasonable and it was noted that there were dicta to 664

Covenants in termination/settlement agreements/contractual or court undertakings 11.276

the effect that it would be contrary to public policy to allow their enforceability to be re-opened. As part of the arrangements, there had also been entry into a share sale agreement which entailed a two year non-competition restriction. That was also upheld, taking into account the more liberal approach to enforceability in the context of a share sale agreements and that the period had been the subject of specific debate and the sum paid for the shares reflected the goodwill for a two year period. 11.275  However, in Capgemini India Private Ltd v Krishan [2014] EWHC 1092 (QB), in relation to voluntary undertakings which an employee had offered to avoid the costs of legal proceedings, the court rejected a submission that the agreement to provide those undertakings was necessarily decisive. Krishnan withdrew the undertakings when he learned that his new employer would meet any costs. In support of that submission reliance was placed on dicta of Jonathan Parker LJ in Thurstan Hoskin suggesting that it was not open to a party who had entered into covenants in an agreement compromising earlier proceedings to then contend that the obligations were unenforceable as being in restraint of trade. The court in Capgemini (HHJ Robert Owen QC) concluded that this was obiter. In considering the claim for injunctive relief it was necessary to consider all the circumstances, including that at a time when the defendant was no longer in an employer/employee relationship and with the benefit of independent legal advice he had provided the voluntary undertakings and also the public policy that agreements to compromise either actual or threatened litigation are to be encouraged and also supported unless there is good reason not to do so. That public policy argument was ‘powerful’ and sufficient at least to establish a serious issue to be tried at the interim stage. However, it was not the final word. The court was still bound to consider all of the circumstances, including the fact that an undertaking was willingly given (albeit not an undertaking given to the court or within legal proceedings). Here, although there was a serious issue to be tried the court refused to grant interim injunctive relief on the balance of convenience, taking into account in particular that there was no prospect that the grant of interim enforcement would enable the claimant to recover the lost client. 11.276  The court in Capgemini was not directly concerned with terms of settlement that had been incorporated in a consent order or undertakings given to the court. The power to vary or revoke a consent order is provided by CPR Part 3.1(7). Ordinarily the power is narrowly curtailed, with the main exception being where there is a material change of circumstances or where the facts on the basis of which the decision was made were misstated: Tibbles v SIG  Plc [2012] 1  WLR  2591 (CA). Similarly the court has jurisdiction to vary or discharge an undertaking given to the court if it is just to do so, even when given as part of a consent order, but that is a necessary and not a sufficient condition; ordinarily there would first need to be a significant/ material change of circumstances: Mid Suffolk DC v Clarke [2007] 1 WLR 980 (CA) (at paragraphs 15–17, 47; 50–56). In Birch v Birch [2017] 1 WLR  2959 (SC), where Mid Suffolk was approved, it was said, at paragraphs 10, 11, that it was ‘hard to conceive’ of grounds for release from an undertaking without a significant change of circumstances. 665

11.277  Reasonableness of express covenants

11.277 In Gerrard Ltd v Michael Read (21 December 2001) (Ch) the issue arose of balancing public considerations in respect of the need for finality as against the countervailing public policy in relation to restraint of trade. Proceedings had been resolved by a consent order containing a non-dealing/contacting restriction in relation to a list of clients until 30 April 2002. One of the defendants subsequently sought a variation of the order to provide for it instead to terminate on 3 January 2002. He argued that there was no legitimate interest in a restraint extending beyond that date. The court concluded that the jurisdiction to vary a consent order extended to discharging a term which is void and unenforceable on the grounds of being in unlawful restraint of trade. The jurisdiction was therefore not framed as conditional on establishing a material change of circumstances. The court however declined to vary the order, and in doing so it emphasised the public interest in holding a party to the terms of an order to which, with the benefit of legal advice, he had consented. We suggest that this consideration is likely to be crucial, save perhaps in clear cases where the restriction is plainly too broad. In any event, where the obligation is contained in a consent order or undertaking to the court, unless and until set aside or varied, it would be necessary to comply so as to avoid the risk of contempt proceedings.

15. COVENANTS COMBINED WITH FORFEITURE/LIQUIDATED DAMAGES OR PENALTY CLAUSES 11.278  The law relating to penalties was extensively reviewed by the Supreme Court in Cavendish Square Holding BV  v Makdessi [2016]  AC  1172, in the context of financial and other adverse consequences flowing from breach of restrictive covenants entered into by a vendor/director to protect goodwill. The court concluded that the penalty doctrine was confined to obligations (not necessarily payment of money) which were in substance contingent on a breach of contract. A provision, whether for payment or withholding of money or transfer of property, which is contingent on breach is to be regarded as penal if, judged at the date of entering into the agreement, it imposes a detriment which is out of all proportion to any legitimate interest which the innocent party has in enforcement of the primary obligation (other than simply punishing the contract breaker). Further, it is relevant to have regard to the circumstances in which the contract is made, in that where there is a contract negotiated between properly advised parties of equal bargaining power, this gives rise to a strong initial presumption that the parties themselves were the best judges of what was legitimate in a provision dealing with the consequences of breach (per Lords Neuberger, Sumption and Carnworth at paragraph 35). 11.279 The Supreme Court also approved the modern approach to penalty clauses to the effect that a clause that is not a genuine pre-estimate of loss is not necessarily a penalty. There may be some other commercial justification for the payment. This was illustrated by the decision on the facts in Makdessi. The defendant, Mr Makdessi, agreed to sell a majority interest in the group holding company (an advertising and marketing company which he had founded) to the claimant (Cavendish). This had been the product of substantial negotiation with 666

Covenants combined with forfeiture/liquidated damages or penalty clauses 11.281

each party having the benefit of professional advice. The price was to be paid in instalments. A large part of the price reflected goodwill and the agreement sought to protect that goodwill. Clause 5.1 of the share sale agreement provided that if a seller became a ‘defaulting shareholder’ he would not be entitled to receive the interim and/or the final payment. The definition of ‘defaulting shareholder’ included a seller who was in breach of certain restrictive covenants. Under Clause 5.6 of the share sale agreement each seller granted the purchaser an option to purchase his remaining shares in the event that he became a defaulting shareholder, at a price reflecting the net asset value. Another provision conferred on each seller a put option to sell his remaining shares to Cavendish at a price determined by reference to the relevant audited consolidated operating profit after tax. Mr Makdessi acted in breach of the covenants, but the operation of the default provisions had financial consequences far beyond the loss directly flowing from this. In the Court of Appeal Clauses 5.1 and 5.6 were therefore held to be penalties. However, overturning the Court of Appeal’s conclusion, and reinstating the first instance decision, the Supreme Court emphasised the importance attached to the seller’s loyalty, which provided a commercial justification for requiring the payments which went beyond the direct loss, and that the parties were the best judge of the value to be attached to this, having entered into the agreement with the benefit of legal advice, and as parties of equal bargaining power. The Supreme Court noted that the goodwill of the business was critical to its value to Cavendish, and loyalty of the sellers, including Mr Makdessi, was in turn critical to the goodwill. Once Cavendish could no longer trust the sellers to observe the covenants, this introduced a significant business risk, the impact of which could not be measured only by reference to provable consequences of particular breaches. The business was worth considerably less to Cavendish than if that risk did not exist. How much less would have been a matter for negotiation, but in that context it could not be said that the payment was out of all proportion. Similar considerations led to the conclusion that there was no unlawful penalty by virtue of Clause 5.6. There was some difference between the Law Lords as to whether these provisions were in any event not to be regarded as penalties because they were in substance properly to be regarded as primary obligations; namely a price adjustment mechanism as to the amount to be paid to purchase the shares (Clause 5.1) and an obligation as to sale. However, nothing turned on this in the light of the conclusion that it was not in any event a penalty even if regarded as a secondary obligation (ie consequential on breach). 11.280  Broadly, the effect of the approach in Makdessi is to widen the circumstances in which it may be possible to show that a provision for payment or repayment of sums on breach of a covenant will not amount to an unenforceable penalty. That is particularly so where the covenants are imposed in the context of an agreement for the sale of goodwill. The reasoning in Makdessi will then be more directly applicable, focussing on the connection between the value of the goodwill and the expectation of loyalty at least to the extent of compliance with the covenants. 11.281  The Court in Makdessi cited an earlier employment case of Murray v Leisureplay plc [2005]  IRLR  946 (CA), as providing a further illustration of 667

11.282  Reasonableness of express covenants

the importance of focussing on the commercial context, and looking for commercial justification other than simple assessment of loss, when determining if there is an unlawful penalty (see eg per Lord Mance at paragraph 150). In that case a clause in the claimant/employee’s service agreement with the respondent company provided for payment of a year’s gross salary to the employee in the event of the termination of his employment without one year’s notice. The judge below regarded the absence of any requirement of mitigation as conclusive in favour of the liquidated damages provision being a penalty rather than a genuine pre-estimate of damages. The Court of Appeal held that in deciding whether a clause was a penalty clause, it should consider: •

to what breaches of contract the clause applied;

•

what amount was payable on breach;

•

what amount would be payable if a claim for damages for breach of contract had been brought at common law;

•

what were the parties’ reasons for agreeing the relevant clause; and

•

whether the amount payable under the clause was imposed as a deterrent or whether it constituted a genuine pre-estimate of loss (applying Dunlop Pneumatic Tyre Co v New Garage and Motor Co Ltd [1915] AC 79 and United International Pictures & ors v Cine Bes Filmcheck Ve Yapimcilik As [2003] EWCA Civ 1669).

11.282  Consistently with the approach subsequently approved in Makdessi, the Court of Appeal, in overruling the judge below, stated that it is important not to move automatically from the fact that a clause could result in greater recovery than the amount of the actual loss, to an assumption that without further justification the clause must be penal in nature. The comparison between the stipulated amount and the possible loss that might be sustained in the event of breach is relevant, but no more than a guide. There will only be a penalty ‘if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach’ judged as at the date of the agreement. (In the parlance approved in Makdessi that may now be more appropriately put in terms of whether the payment was out of all proportion to any legitimate interest which the innocent party has in enforcement of the primary obligation (other than simply punishing the contract breaker).) Here the sum payable to the claimant was generous but not unconscionable. There was no reason why the company should not include as part of his remuneration package generous reassurance against the eventuality of dismissal. It was also relevant that the service agreement had been included in a prospectus relating to an offering of shares and admission to trading on the Alternative Investment Market and had been reduced from three years to one year, following investor objection. This also led to the inference that the clause as finally agreed did not cut across market expectations. The restrictions which the employee undertook to observe on termination were also important and significant. There were other potential advantages to the employer and disadvantages to the employee on a termination. Further, it was in the interest of both parties to 668

Covenants combined with forfeiture/liquidated damages or penalty clauses 11.284

know the position so as to avoid dispute in the future. In all, as noted in Makdessi, the decision therefore illustrated that there could be a commercial justification other than a genuine pre-estimate of damage even in a case where there would be no difficulty in assessing damages. 11.283  A more traditional focus on whether there was a genuine pre-estimate of loss, together with emphasis on being slow to interfere with the bargain reached between two parties of equal bargaining power, was relied upon in Tullett Prebon Group Limited v Ghaleb-El Hajjali [2008] IRLR 60 (QB). Nelson J held that a sum that was to be paid pursuant to a clause in an employment contract after a prospective employee, in breach of contract, failed to start work for the employer, was a liquidated damages clause rather than an unlawful penalty clause. Tullet had decided to hire a specialist broker and had entered into negotiations with the defendant, both parties having the benefit of legal advice. The clause provided that if the defendant failed to take up employment, he would have to pay a sum equal to 50% of his net basic salary and 50% of the signing payment that Tullet had contracted to pay. The defendant’s solicitors attempted to draw the defendant’s attention to the clause prior to him signing the contract, and he was advised that if he failed to take up employment after signing it, Tullet would be likely to sue. The defendant signed the agreement, but subsequently changed his mind. Tullet searched for a replacement employee but failed to find a suitable candidate. The court held that where an employee was to be hired for a particular project or particular function and his presence was critical to that project or function and, as a result of his failure to honour the bargain, loss was sustained by the prospective employer, there was no reason why a liquidated damages clause should not operate to compensate the employer, provided it was not on its proper construction a penalty clause. The clause in question was a liquidated damages clause and not a penalty clause. The defendant had entered into the employment contract, which included the clause, with the benefit of expert legal advice. Where a bargain had been struck by two parties of equal bargaining power, with each party legally represented, a court should consider long and hard before permitting one of them to resile from the agreement. In such circumstances it was only where a stipulated sum was extravagant or unconscionable in amount compared with the greatest loss or range of losses that could conceivably follow a breach that the clause should be held to be a penalty. Tullet would probably be able to establish a loss from the defendant’s failure to work for it and establish that such a loss was probably considerably in excess of the sum calculated on the basis of the clause. 11.284  Furthermore, there had been specific discussion within Tullett about the need to avoid the clause being regarded as a penalty clause. That was sufficient consideration of the matter, in circumstances where the loss was difficult to assess, to render the clause a liquidated damages clause. The failure of the parties to have discussed or agreed what the loss might be was not fatal to Tullett’s case. It was only necessary that Tullett should have considered the stipulated sum and sought to ensure it was not pitched at such a level as to be greater than any damages it might recover. The fact that any liquidated damages clause would also deter a potential payee from breach of contract did not in itself make the clause a penalty. Deterrence had to be the predominant purpose of the clause, and in 669

11.285  Reasonableness of express covenants

the instant case that was not so. Tullett had done its best to seek a replacement employee, but had failed to do so. It was, therefore, not in breach of any duty to mitigate. The correct measure of damages where a substitute could not be found was consequential loss rather than the cost of a replacement, depending on Tullett’s choice. The outcome of this case would be the same following Makdessi. 11.285  Sometimes restrictive covenants are combined with clauses providing for payment of sums in the event of breach. There are potential advantages and disadvantages to such provisions: •

670

It might be argued that the wording of such provisions suggest that the parties have agreed a ‘price’ for breach, and that as such, on an interim relief application, an injunction should be granted because damages would be an adequate remedy: see 14.15; and eg Pera Consulting Ltd v Swallowfield Plc (15 March 1995, unreported) (CA). However, strong authority to the contrary is to be found in the (non-employment) cases of AB v CD [2015] 1 WLR 771 (CA) and Bath and North East Somerset District Council v Mowlem plc [2015] 1 WLR 785 (CA). In Bath and North East Somerset DC, the Council had been granted an injunction requiring Mowlem, who were main contractors, to allow alternative contractors onto a site to carry out remedial work. On appeal it was argued that the injunction should not have been granted because there was a provision in the building contract requiring Mowlem to pay ‘liquidated and ascertained damages’ at a specified rate in the event of delay in completion, and it was contended that damages were therefore an adequate remedy. The argument was rejected. Mance LJ noted first that, irrespective of the language used to describe the payment in respect of delay, it could not be assumed that the agreed rate constituted a fair measure of the full loss likely to be suffered by the council. The parties might, for commercial reasons, have concentrated on only certain easily quantified items of cost or they may have agreed to limit the financial loss recoverable. Secondly, even if the court was to assume that the clause was an attempted measure of the full loss likely to be suffered in the event of breach, it remained the case that the primary obligation of a party was to perform the contract. It was not an agreed price which entitled Mowlem to breach the contract. Further, even if there had been an attempt to quantify the full loss, the Court should recognise that the assessment of the totality of any likely loss before the event is an even more rough and ready and difficult exercise than after the event and as such that exercise may prove after the event not to give rise to adequate compensation, whereas injunctive relief may completely avoid the loss. This approach was followed in AB v CD in the context of a provision capping recoverable damages and excluding liability for loss of profits for breach of a licensing agreement. The Court emphasised that claims for damages and for an injunction were two different contexts, and the fact that the level of compensation had been capped in a damages context could not be treated as an agreement to excuse performance of that primary obligation. The rule that damages should not be granted where damages would be an adequate remedy should be applied in a way which reflected the substantial justice

Covenants combined with forfeiture/liquidated damages or penalty clauses 11.285

of the situation and ought not to prevent the victim of the breach from enforcing the primary obligation by injunction. Indeed, to the contrary, the ‘cap’ on damages might indicate that damages were inadequate, so indicating the appropriateness of injunctive relief. As illustrated by Bath and North East Somerset DC that reasoning did not depend on the provision being expressed as a damages ‘cap’. More broadly, it suggests that the court will not readily regard a liquidated damages provision as an agreed ‘price’ for breach when considering injunctive relief. It will though still be sensible to include a provision which expressly preserves the right of the (ex-)employer to seek injunctive relief to enforce the covenant and records that damages are not regarded as an adequate remedy. •

These provisions may amount to unenforceable penalty clauses and may contribute to the court forming a view that the restrictive covenant is unreasonable: cf Taylor Stuart & Co v Croft (7  May 1997, unreported) (Ch  D). However, again the reasoning in Bath and North East Somerset DC v Mowlem and in AB v CD emphasises the need to keep in mind the differing contexts of a damages provision and claims for injunctive relief, and that any penal elements in a damages clause should not affect whether the covenants are wider than reasonably necessary to protect legitimate interests. Further, as discussed above the trend is towards enforcement of provisions under which the parties stipulate the amount payable on breach provided the stipulated sum is not out of all proportion to any legitimate interest which the innocent party has in enforcement of the primary obligation, taking account not only of the maximum direct loss that could be sustained but also whether there is any other commercial justification. That said, it is easier to pre-estimate loss for a single event (such as not taking up employment, as in Tullett Prebon, or termination without notice, as in Murray) than to pre-estimate loss for breaches of different covenants – and one of the hallmarks of a penalty clause is that the stipulated sum remains the same irrespective of the gravity of the breach or breaches. In some commercial sectors or professions it may be possible to circumvent, or at least reduce, this difficulty. For instance, provisions requiring payment of stipulated sums for breach of restrictive covenants are quite common in accountancy partnership deeds (which may cover ‘salaried partners’ who may in fact be employees, as well as genuine partners) and employment contracts in the accountancy profession where the loss is sometimes expressed as a percentage of the fees which would have been generated over the period of the restriction, in relation to a client whom the ex-partner or ex-employee unlawfully solicits or deals with in the covenant period. In the current atmosphere of favourable treatment of provisions requiring payment upon breach of stipulated sums, it is quite likely that such percentage of lost fees provisions would be enforced – provided they are drafted with care (eg so that the stipulated percentage of fees is modest, so as to take into account the reduced overhead of the ex-employee’s salary and benefits). Bearing in mind the practical difficulty in certain business or professional sectors of insisting on client non-dealing covenants which may affect the choice of third party clients (whom the (ex-)employer may not wish to 671

11.286  Reasonableness of express covenants

upset), the liquidated damages clause offers an attractive alternative. As noted above, particularly in the context of any contract involving a sale of goodwill (which might include for example partnership agreements where interest in the partnership is sold on departure), the reasoning in Makdessi may be apposite to justify a price-adjustment provision or its equivalent in the event of non-compliance with covenants, notwithstanding that this may not be readily related to any direct loss liable to be attributed to a more minor breach. •

They may have a greater deterrent effect on the (ex-)employee, and possibly the future employer, who see the results of breach stipulated in pounds and pence.

Accordingly, in the future, wider use may be made of such provisions.

16.  TERMINATION ‘HOWSOEVER CAUSED’ 11.286  During and after 1994, a number of decisions were handed down both in England and Scotland to the effect that covenants were unreasonably in restraint of trade if they were expressed to be applicable ‘however [termination of the employment contract] comes about and whether lawful or not’ (see Living Design v Davidson [1994] IRLR 69), or ‘if the agreement is terminated for any reason whatsoever’ (D v M [1996] IRLR 192), or using other such language designed to retain for the employer the benefit of covenants even where the employer had repudiated the contract of employment (thus seeking to circumvent the rule in General Billposting Co v Atkinson [1909] AC  118). This line of authority was decisively rejected by the Court of Appeal in Rock Refrigeration v Seward [1997]  IRLR  675. It was held that where there is a repudiatory breach of the contract of employment by the employer, the principle in General Billposting v Atkinson applies. The employee is released from his obligations under the contract, and restrictive covenants against him cannot be enforced. Therefore, the law applicable to covenants in restraint of trade is not relevant in such circumstances, because it applies only where there exists an otherwise enforceable contract. The Court of Appeal held that if an otherwise reasonable covenant purports to remain binding in circumstances where the law will inevitably strike it down, there is no justification for holding that it is, on that account, an unlawful restraint of trade. Nor were there any grounds for holding that (despite the apparent sufficiency of the General Billposting principle to meet the justice of the case where the employer repudiates the contract) there remained a need for the restraint of trade doctrine to strike down in their entirety restrictive covenants which purport to apply in those circumstances because (so the employee argued) they have a detrimental effect on the mind of the employee in deciding whether or not to accept the employer’s repudiation. In his judgment (concurring with the result) Phillips LJ surprisingly cast doubt on the rule in General Billposting, stating that it accords neither with current legal principle nor with the requirements of business efficacy. Since there is no other principle of law which precludes the parties from validly agreeing to restraints that will subsist even if the employment is 672

Termination ‘howsoever caused’ 11.287

brought to an end by repudiation, it was (he stated) at least arguable that not every restrictive covenant will be discharged on a repudiatory termination of the contract of employment. See further 9.54–9.56 in which the relationship between the General Billposting principle and that in Photoproductions Ltd v Securicor Ltd [1980] AC 827 (HL) is discussed. It is suggested that it would be wise on the part of those advising in this area to assume that the General Billposting principle continues to be applicable until revisited by the Supreme Court. 11.287 The Living Design v Davidson line of authority may still have resonance where covenants are contained in agreements to which ordinary principles as to the effect of repudiatory breach do not apply. In Flanagan v Liontrust Investment Partners LLP [2016] 1 BCLC 177 it was held that doctrine of repudiatory breach does not apply to LLP Agreements. It has similarly been held not to apply to traditional partnership agreements (Golstein v Bishop [2014] Ch  131 at paragraphs 114–123, following the comments of Lord Millett in Hurst v Bryk [2002] 1 AC 185). As noted in Flanagan (at paragraph 240), there is also doubt as to the applicability of the repudiatory breach principles to multi-party contracts more generally. If the repudiatory breach doctrine is excluded, the reasoning in Rock Refrigeration would not apply. It might therefore still be argued that a provision that applies a covenant irrespective of the circumstances resulting in departure from the LLP or partnership, is thereby unreasonably wide. That may be particularly pertinent where, as is becoming increasingly common in some sectors such as with hedge funds, there is a tendency to structure the relationship around LLP membership but where in substance there is an employer/ worker (but not employee) relationship: see Bates van Winkelhof v Clyde & Co LLP [2014] ICR 730 (SC).

673

APPENDIX TO CHAPTER 11

Examples of duration NON-COMPETITION COVENANTS 11.288  In the following instances non-competition covenants were upheld: •

Four-year worldwide non-competition covenant entered into in a sale agreement enforced even though the employment contract only included a 12-month post-termination restriction: Emersub XXXVI  Inc v Wheatley [1998] Lexis Citation 3579.

•

Three-year non-competition covenant enforced against a vendor of the business and an employee who was her civil partner and agreed the restriction at the same time and related to protection of goodwill on the sale: One Step (Support) Limited v Morris-Garner [2015] IRLR 215.

•

Two-year post-termination covenants in the context of a transfer of goodwill: eg  Rush Hair Ltd v Gibson-Forbes and another [2017]  IRLR  48 (area covenant over a two mile radius covering Windsor and Maidenhead on sale of a hairdresser business); Allied Dunbar (Frank Weisinger) v Weisinger [1988]  IRLR  60 (two-year non-competition covenant agreed on sale of practice but not applicable on termination of consultancy arrangement); Cavendish Square Holdings BV and another v Makdessi [2013] 1 All ER (Comm) 787 (two-year restriction until later of termination of employment, disposal of shares under payment of option price); Carewatch Care Services Limited v Focus Caring Services Limited and others [2014] EWHC 2313 (11.90) and Kall-Kwik Printing (UK) Limited v Rush [1996] FSR 114 (both concerning franchise agreements).

•

12-month non-competition covenants: >

674

Dyson Technology Ltd v Pellerey [2015] EWHC 3000 (Ch): 12 month worldwide non-compete provision upheld at trial, in relation to an engineer employed in a research and development role which entailed possession of highly confidential information with a shelf life considerably in excess of 12 months (having regard to the timescales over which the employer conducted its research and development projects). It was no bar that the restriction extended to employment in competition with group companies with which he was involved or materially informed, since it was envisaged that during employment the employer would supply products to the associated companies using its confidential information, and as such had a financial and commercial interest in the business of the group.

Non-competition covenants 11.288

Nor was it too wide by reason of being worldwide. The products designed and developed by the employer were sold either directly or by group companies in 65 countries across Europe, the Americas, Asia and Africa and were constantly seeking to expand into new markets around the world. >

UK Power Reserve Ltd v Read [2014] EWHC 66: interim injunction enforcing a UK wide non-competition covenant applicable to territories in which claimant’s group operated, against an operations manager, who was a senior employee with a key role in procurement of goods and services for projects. In the light of his role he was likely to be possessed of a significant body of the claimant’s confidential information and it was likely to remain confidential for a long period of time given the length of time over which it was built up.

>

Prophet Plc v Huggett [2014]  EWHC  616: covenant upheld at trial against a sales manager based on his knowledge of yearly renewal dates of computer software licences – but the injunction was discharged on appeal on the basis that it had been incorrectly construed, and properly construed there was no breach ([2014] IRLR 798 (CA)).

>

Merlin Financial Consultants Ltd v Cooper [2014]  EWHC  1196 (QBD): UK-wide covenant upheld at trial against a financial adviser under a ‘goodwill agreement’ under which the financial adviser had been paid for the client base he brought with him to his employer.

>

Kynixa Limited v Hynes [2008]  EWHC  1495 (QB): 12-month restriction in shareholders’ agreement applicable to any shareholder ‘at any time connected with the Company’ (construed to mean employees), running from the time of ceasing to be so connected.

>

Huw Thomas v Farr Plc [2007] IRLR 419 (CA): managing director of an insurance broker specialising in services for providers of social housing; the defendant was exposed to sensitive confidential information including pricing and financial information with a shelf life that could be more than a year, and a narrower covenant would be difficult to police.

>

LTE Scientific Limited v Thomas [2004] EWHC (20 December 2004, unreported) QB: technical director of a company manufacturing sterilising units for hospital, who had access to all the claimant’s confidential information; the period was reasonable in the light of the time it took to develop new products.

>

Dyson Technology Ltd v Strutt [2005]  EWHC  2814 (Ch): engineer employed in R&D  department; worldwide 12-month covenant was reasonable in the context of the type of confidential information being protected and the international nature of Dyson group’s business.

675

11.289  Examples of duration

>

Hollis v Stocks [2000] IRLR 712 (CA): assistant solicitor prevented from working as a solicitor within a 10-mile radius of his ex-employer’s office in Sutton-in-Ashfield.

•

Eight-month non-competition covenant – in addition to possible three months garden leave: Extec Screens & Crushers Ltd v Rice [2007]  EWHC  1043 (QB) (sales manager of manufacturer and supplier of spare parts).

•

Six-month non-competition covenant: ASE Plc v Kendrick (QBD) 13 May 2014 (unreported) (senior employee in automotive industry who was aware of the employer’s business plans and familiar with its client database, 60% of which was confidential, upheld at interim stage); TFS  Derivatives v Morgan [2005] IRLR 246 (equity derivatives broker); Corporate Express v Day [2004] EWHC QB 294 (national account manager in the office supplies business – embargo against ten major competitors).

•

Six-month non-competition covenant after three months’ garden leave: Brake Brothers Ltd v Ungless [2004]  EWHC  2799 (QB) (purchasing managers of wholesale food supplier to the catering industry).

•

Six-month (worldwide) non-competition covenant after one month’s garden leave: Intercall Conferencing Services v Steer [2007] EWHC 519 (QB) (head of training and personnel development of business providing conferencing services).

•

Six-month non-competition covenant and up to three months’ garden leave: Tradition Financial Services Limited v Gamberoni [2017]  EWHC  768 (QB); [2017]  IRLR  698 (enforced against junior broker in a highly paid industry).

•

Three-month non-competition covenant (and 12-month non-solicitation/ dealing covenant): Mantis Surgical Ltd v Tregenza [2007]  EWHC  1545 (QB) (sales manager of distributor of surgical equipment).

11.289  Non-competition covenants were struck down in the following cases: •

Duarte v Black & Decker [2008] 1 All ER (Comm) 401 (QB): two year worldwide non-competition restriction struck down; Field J  commented (at paragraph  109) that if a two-year restriction was going to be upheld then, ‘to say the least’, the scope of the balance of the covenant had to be narrowly drawn (whereas here it was in any event too wide, in that it restricted employment in a non-competing business).

•

Monster Vision UK  Ltd v McKie [2011]  EWHC  3772: a two-year noncompetition covenant was struck down given (inter alia) that a narrower form of covenant would have been sufficient and not too difficult to police.

•

Barry Allsuch & Co v Harris Unreported, 4  May 2001: a two-year area covenant restricting working as for estate agents in the Radlett area was not enforced due to the small percentage of recurring customers and because a non-dealing covenant would have sufficed.

676

Non-competition covenants 11.289

•

Underwriting Exchange v Newall (QBD) 3 February 2015 (unreported): a 13-month non-competition covenant failed (at the interim relief stage) on the basis that it restricted the employees from working for a competitor in any capacity whatsoever.

•

Norbrook Laboratories (GB) v Adair [2008] IRLR 878 (QBD): a 12-month non-competition covenant (territory manager for pharmaceutical company) was struck down because, regardless of whether she would be dealing with existing customers of her ex-employer, the embargo covered products (of which there were 130) with which the ex-employee may have had only a tenuous connection five years before the end of her employment.

•

Patsystems v Neilly [2012] IRLR 979: a 12-month non-competition covenant for an account manager was struck down at trial as too long to keep out an employee from the only market in which he had employment experience (even if it was to be judged at the date of the employee’s promotion, which the judge ruled was not appropriate). Underhill J  took into account the nature of the market, in which the clients also used competitors’ products. As such a competitor would not typically gain access to an entirely new customer, but at most a more influential relationship with an existing client. Confidential information did not support a 12-month covenant, as pricing was fairly transparent and information as to new products did not require more than a six-month covenant and employees with access to similar information only had six-month covenants.

•

QBE Management Services (UK) Limited v Dymoke [2012] IRLR 458: a UK wide six-month non-competition covenant was held to be invalid as it was not shown to be required to protect confidential information or client connection.

•

Tim Russ & Co v Robertson [2011]  EWHC  3470: a non-competition covenant preventing employees of an estate agency from working in another agency within a five mile radius was struck down. The ex-employer’s legitimate interests were sufficiently protected by non-solicitation of clients and confidentiality covenants and 12 months was in any event excessive to protect against the misuse of confidential information (which appears to have been fairly limited).

•

Wiggle Ltd v Burge [2012]  EWHC  4374: the court refused to grant an interim injunction in respect of a 12-month non-competition covenant because the confidential information was too voluminous to be carried away in the defendant’s head and/or 12 months was too long for accurate recall of such information as might be recollected and/or it would be out of date before the expiry of the period.

•

Axiom Business Computers Ltd v Frederick (20  November 2003, unreported) (Court of Session): a 12-month non-competition covenant in relation to a software developer and seller was not enforced due to the absence of a territorial limit and the generality with which the market was defined (referred to broadly as the ‘field of computer systems’) and the absence of any equivalent covenant restricting the employee from entering into competition on her own account. 677

11.290  Examples of duration

•

Forshaw v Archcraft Ltd [2005] IRLR 600 (EAT): a 12-month nationwide non-competition covenant in relation to manufacturing staff was ‘obviously too wide’ (the issue before the EAT was whether dismissal for refusal to sign up to a restraint was unfair).

•

Wincanton Ltd v Cranny [2000] IRLR (CA): a 12-month non-competition covenant was struck down as the prohibition against competing in any capacity with any business was not confined to the field of activity in which the employee was engaged.

•

Landmark Brickwork Ltd v Sutcliffe [2011]  IRLR  976: a six-month area covenant was not enforced due to lack of certainty in the area and lack of functional correspondence between the prohibited areas and those in which the claimant operated.

•

CEF  Holdings Limited v Mundey [2012]  IRLR  912: a six-month noncompetition covenant was held to be too wide for numerous reasons, namely: >

that a non-solicitation of clients’ covenant was sufficient;

>

it prevented the employee from having any interest in the competing company (even a shareholding);

>

there was no geographical limitation to the place where he worked;

>

there was no limitation on how far back employees could have been carrying out the activities; it would apply even if they had been carried out 15 years earlier and the employer no longer carried out those activities;

>

more senior employees (the general managers) did not have the provision in question; and

>

the covenant was uncertain (as to whether selling different types of components would be regarded as competing).

NON-SOLICITATION/DEALING WITH CUSTOMER COVENANTS 11.290 •

Three-year non-solicitation covenant upheld – but not three-year nondealing covenant: Taylor Stuart & Co v Croft (7  May 1997, unreported) Ch D (accountant/salaried ‘partner’).

•

Two-year non-solicitation/dealing covenant upheld: Dairy Crest Ltd v Pigott [1989] ICR 92 (CA) (milk roundsmen); but two years was held to be too long in Dairy Crest v Wise (24 September 1993, unreported) QBD – IDS Brief, Vol 515) in the light of evidence that the period had subsequently been reduced to 12 months for other roundsmen); this case points up the dangers inherent in revising covenants: see 13.120–13.125.

678

Non-solicitation/dealing with customer covenants 11.290

•

Two-year non-solicitation covenant upheld: Spafax Ltd v Harrison [1980]  IRLR  442 (CA) (branch manager and a salesman of a company selling spare motor parts to the trade).

•

Two-year non-solicitation covenants in relation to each employee upheld: John Michael Design plc v Cooke [1987] 2 All ER 332 (CA) (a director and a senior designer of a high class shopfitting company).

•

Two-year non-solicitation covenant was arguably enforceable despite lack of backstop (limiting period over which customers were dealt with by employer during employment) given the defendants’ seniority and detailed knowledge of customers: Monster Vision UK Ltd v McKie [2011] EWHC 3772.

•

18-month non-solicitation covenant upheld: Rex Stewart Jeffries Parker Ginsberg Ltd v Parker [1988]  IRLR  483 (CA) (managing director of advertising agency).

•

One-year non-solicitation covenant upheld: Business Seating (Renovations) Ltd v Broad [1989] ICR 729 (sales representative of office furniture company).

• 12-month non-solicitation/dealing covenant upheld: Alliance Paper Group plc v Prestwich [1996]  IRLR  25 (managing director of company manufacturing and selling paper). •

12-month non-solicitation/dealing with clients/prospective clients giving credit for time served on garden leave: Advanced Business Systems Ltd v Hopley [2007]  EWHC  1783 (QB) (business consultant selling computer software) – held to be enforceable in principle, but there was no evidence of threatened breach.

•

12-month non-dealing covenant upheld: Allan Janes LLP  v Johal [2006] IRLR 599 (assistant solicitor in a law firm).

•

12-month non-dealing covenants upheld: Beckett Investment Management Group Ltd v Hall [2007] ICR 1539, [2007] IRLR 793 (sales director and financial consultant of financial services company).

•

12-month non-solicitation and dealing covenants upheld: Lonmar Global Risks Limited v West [2011] IRLR 138. It was not an answer that the clients had followed the employee to the claimant employer from a previous employer, as the employees were paid to maintain and develop relationships and the claimant employer had a legitimate interest in protecting client connection and much of the work was on an annual renewal basis.

•

12-month non-solicitation covenant (with six months backstop re personal dealings with customers) upheld at trial: Romero Insurance Brokers Limited v Templeton [2013] EWHC 1198. The judge said he would not have upheld a longer covenant. The legitimate purpose was to give the employee’s replacement time to build connection with clients and diminish strength of ex-employee’s connection. 12 months was a common period for the insurance broking business, where many insurance policies were renewed annually. It was not a problem that the client backstop was six months: this period served a different purpose. 679

11.291  Examples of duration

•

12-month non-solicitation and non-dealing covenant was upheld at trial against broker in Croesus Financial Services Ltd v Bradshaw [2013] EWHC 3685. Relationships were built up gradually, with the majority of clients contacted annually and establishing a new relationship depended on establishing integrity, reliability and good performance. The process of establishing loyalty could not be artificially accelerated, 12 months appeared to be industry standard and although the employee was junior, he was recruited as successor to his father who was a vendor-employee. See also JM Finn Ltd v Holliday [2014] IRLR 102 to similar effect in that in relation to enforcing 12 months’ garden leave against an investment adviser, the court accepted that it took a long time to lay and entrench the foundations of a relationship between a new investment manager and clients and that time was needed for clients to assess performance of the manager.

•

Six-month non-dealing and non-solicitation on top of six months’ ‘garden leave’ upheld: Credit Suisse Asset Management Ltd v Armstrong and others [1996] IRLR 450 (fund managers and marketing officer of division of the claimants’ business which provided fund management services to private clients).

•

Six-month non-solicitation covenant upheld against a business development director notwithstanding that it applied to all customers of the employer during the period of employment, irrespective of whether or not there were any personal dealings with the defendant employee: Coppage and Freedom Security Ltd v Safety Net Security Ltd [2013] IRLR 970: The Court of Appeal stated that the lack of specific limitation as to personal dealings and that it covered the whole period of employment was not fatal on the facts of this case; in particular there was a stable client base, Mr Coppage was a key employee who had power to influence all customers with whom he came into contact and indeed was the ‘face’ of the business, and there was a further limitation that the purpose of the approach was to solicit business which could (as a commercially practical reality) have been undertaken by the claimant employer. The court also emphasised that the fact that the non-solicitation covenant was only six months was a powerful consideration in favour of the reasonableness of the covenant, although each case turns on its own facts.

•

Six-month non-solicitation/dealing covenant against a teacher recruiter upheld at trial: East England Schools v Palmer [2014] IRLR 191. It was not unreasonable for the employer to envisage that the covenant period would encompass a school holiday – perhaps even the long summer holiday; relationships with schools and teachers take time to build up, so justifying a longer period.

11.291 By contrast, in the following instances 12-month non-solicitation restraints were rejected: • In Associated Foreign Exchange Limited v International Foreign Exchange (UK) Limited [2010]  IRLR  964, the court refused to grant an injunction in respect of a 12 month non-solicitation covenant on the basis that it was likely to be held at trial that any period beyond six months (which applied 680

Non-poaching covenants 11.292

to a non-dealing covenant) would be objectionable. Although a case on interim relief, it was decided on the basis that there could not be a trial until all or substantially all of the covenant period had expired, rather than just assessing if there was a serious issue to be tried. As such, the court considered whether the claimant was likely to succeed at trial. The employee was not senior, being an accounts executive who was not usually engaged in projects where his involvement was important in winning business. It was not usual to take many months to establish customer relationships, and the fact that it might on occasion do so did not justify a covenant affecting all customers. After six months customers would have dealt with other individuals at the employer and things would have moved on so much that protection against solicitation was unnecessary. The critical factor for the customer was likely to be price. However, the foreign exchange market (in which the employer operated) was fast moving and it was unlikely that after six months information held by the employee would be of much value. •

Basic Solutions Ltd v Sands [2008] EWHC 1388 (QB): the claimant was unable to a show an arguable case that 12 months (rather than a lesser period) was a reasonable period for the non-solicitation of customers covenant. See 11.200.

NON-POACHING COVENANTS 11.292  Twelve-month post-termination non-poaching covenants were upheld in the following cases: •

Alliance Paper Group Plc v Prestwich [1996]  IRLR  25: 12-month nonpoaching restriction in a service agreement entered into in the context of sale of a business, applying to any person who had in the six months prior to termination been employed or engaged by the employer in a senior capacity. However, the reasoning did not address the length of the restriction, and in any event highlighted the share sale context.

•

Dawnay Day & Co Ltd v D’Alphen [1998] ICR 1068 (CA): 12-month nonpoaching covenant applicable to anyone who had been a director or senior employee of the employer during the period of the defendant employee’s employment. The protection was held to be required due to the risk of the ex-employee exploiting the knowledge gained of particular qualifications, rates of remuneration etc of senior employees, which were part of the specific confidential information which the ex-employee had acquired. This was said to ‘amply suffice’ to justify the one-year restrictions, taking into account also that the remaining employees remained free to make their own inquiries for work in the normal way (per Evans LJ at page 1111D). At first instance emphasis was also placed on the small size of the bond-broking community, the specialist and competitive nature of the business and the importance of the team element (per Robert Walker J  at page 1097E). A non-employment covenant was rejected at first instance and there was no appeal in relation to this. 681

11.293  Examples of duration

•

SBJ Stephenson Ltd v Mandy [2000] IRLR 233: 12-month non-poaching agreement applicable to any employee or director of the company or any other group company with whom the employee had dealings in the 12 months prior to termination, subject to consent not being withheld if the person was not considered by the employer either to have had personal influence with clients or to be in possession of confidential information. The restriction to personal dealings meant that the clause applied to about 30 or 40 staff at a particular location who worked as a close team, all of whom could be expected to be in possession of some confidential information, and it was also noted that the claimant had invested a great deal in the training of its staff.

•

Hydra Plc v Anastasi [2005] EWHC 1559 (QB): 12-month non-poaching of employees covenant in a compromise agreement with a supplier of services upheld despite not distinguishing between senior and more junior employees, taking into account that: (a) the claimant (a supplier to resellers in the data networking, internet performance and security market) was a small company with only 12 employees, and (b) it was contained in a commercial (settlement) agreement between experienced businessmen of equal bargaining power.

•

Lonmar Global Risks Limited v West [2011]  IRLR  138: 12-month nonpoaching covenant in insurance brokers’ contracts, in similar terms to those in SBJ Stephenson v Mandy; the employer had a legitimate interest in maintaining stability of the workforce and employees’ influence over their colleagues was likely to last at least 12 months after termination of employment.

11.293  Conversely, non-poaching covenants failed in the following cases, albeit with little focus on the duration of the covenants: •

TSC  Europe (UK) Ltd v Massey [1999]  IRLR  22 (Ch): non-poaching covenant for three years and 12 months post-termination failed due to ‘two clear vices’ in that: (a) it applied to all employees irrespective of how junior, and (b) it covered employees whose employment had commenced post-termination of Mr Massey’s employment. Whilst it was this, rather than the period which led to the covenants failing (despite being viewed as part of the wider commercial setting of a share sale agreement), the court noted (at paragraph 51) that these vices were to be viewed in the context that the covenant was to last for at least three years and could have lasted considerably longer depending on the date of termination.

•

CEF  Holdings Ltd v Mundey [2012]  IRLR  912 (QB): six-month post termination covenant applying to any employee of the claimant company, and potentially applicable to cover approximately 2,500 employees, was too wide principally due to the absence of any restriction to those with whom the defendant employees had worked and covering employees of whom they were not even aware.

Note: these examples are to be treated with caution, since each case depends on its own facts. 682

CHAPTER 12

Drafting restrictive covenants Kate Brearley Introduction 

12.1

1. Why are express restrictive covenants important to the ex-employer? 

12.4

2. Drafting the covenants: preparatory steps  12.9 2(a) Criteria for enforceability  12.10 2(b) When must the covenant be reasonable?  12.11 2(c) The courts’ approach to the interpretation of restrictive covenants  12.17 2(c)(i) The modern approach to construction of contracts  12.25 2(c)(ii) Words used are given their ordinary meaning  12.32 2(c)(iii) The covenant must be interpreted in the context of the agreement as a whole and to give effect to the intention of the parties  12.35 2(c)(iv) Extravagant interpretations of the covenant can be ignored  12.41 2(c)(v) The court has no power to re-write the covenant  12.44 2(c)(vi) Severance  12.46 2(c)(vii) Contra proferentem  12.62 2(d) Rectification of mistakes  12.65 2(e) Nature of business/role of the employee/likely competitive activity  12.74 2(f) Information checklist  12.80 2(f)(i) Nature of the business  12.80 2(f)(ii) Role of the employee  12.81 2(f)(iii) Likely competitive activity  12.82 3. Drafting the covenants  3(a) Types of covenant  3(a)(i) Ambit of each covenant  3(b) Ambit of the specific covenants  3(b)(i) Non-competition covenants  3(b)(ii) Non-solicitation/non-dealing covenants  3(b)(iii) Non-poaching covenants  3(b)(iv) Non-interference covenants 3(b)(v) Anti-team moves/anti-association covenants  3(c) General drafting points  3(c)(i) Preambles and recitals  3(c)(ii) Covenants ‘during and after employment’  3(c)(iii) Garden leave offset  3(c)(iv) Indirect activities  3(c)(v) Repudiatory breach 

12.84 12.85 12.86 12.90 12.90 12.104 12.109 12.119 12.121 12.122 12.122 12.137 12.138 12.141 12.142 683

12.1  Drafting restrictive covenants

3(c)(vi) Protection for group companies/other connected entities  3(c)(vii) Acknowledgement of reasonableness  3(c)(viii) Legal advice  3(c)(ix) Note of rationale  3(c)(x) Ancillary clauses 

12.143 12.146 12.148 12.150 12.151

Appendix to Chapter 12 – Case Studies

INTRODUCTION 12.1  Chapter 10 addresses in detail the concept of legitimate protection for an ex-employer against competition by his former employees. As well as setting out a general statement of the doctrine of restraint of trade (at 10.7–10.18), that chapter identifies what legitimate interests the ex-employer is entitled to protect and the types of covenant that he might use to do so. Chapter 11 focuses on the central issue of reasonableness. By reference to each of the different types of restrictive covenant, we consider the various criteria used to judge reasonableness and how the courts have applied those criteria in particular cases. This chapter is about converting theory into practice. Our goal is to draw together key concepts and provide practical assistance for the draftsman to enable him to produce effective restrictive covenants. 12.2  Because in this chapter we are highlighting the key practical issues for the draftsman, that will necessarily include a certain amount of recapping of topics covered in Chapters 10 and 11. Where appropriate, we will refer to the relevant paragraphs in those chapters, but that is no substitute for reading the chapters in full when time permits. 12.3  In summary, the topics we will cover in this chapter are: •

The advantages to the employer of having restrictive covenants (12.4–12.8).

•

The key concepts the draftsman needs to understand, including, in particular, the importance of clarity of drafting, the rules of construction of covenants applied by the courts, the rules relating to ‘severance’ (or ‘blue-pencilling’) and ‘rectification’ of erroneous drafting (12.9–12.73).

•

The facts the draftsman needs to gather in order to draft effective covenants (12.74–12.83).

•

The types of covenant the draftsman might select and how he should go about framing the particular covenant he is drafting (12.84–12.121).

•

Some common drafting issues (12.122–12.154).

•

Two practical case studies, illustrating how a suite of covenants might be drafted based on a particular set of facts. (Appendix).

684

Why are express restrictive covenants important to the ex-employer? 12.5

1. WHY ARE EXPRESS RESTRICTIVE COVENANTS IMPORTANT TO THE EX-EMPLOYER? 12.4  Express restrictive covenants are the ex-employer’s primary source of protection against competition by a former employee. In the absence of such covenants, the ex-employer’s only protection, subject to one important exception, is to be found in the continuing implied duty of the ex-employee not to use or disclose his ex-employer’s trade secrets (or information akin to a trade secret). The exception is where the ex-employee’s competitive activity is based on a ‘springboard advantage’ founded on breaches of confidence (trade secrets or mere confidential information) during or after employment, or other breaches of duty (such as breaches of fiduciary duty or the duty of fidelity) during employment. A common example is the misuse of confidential information copied during employment and used later in a competitive business. Where the ex-employer can prove such a breach and the existence of a continuing springboard advantage at the time of his seeking a springboard injunction, it will give him a remedy against the ex-employee and may enable him effectively to prevent the ex-employee competing (see 15.78–15.152, where we discuss springboard injunctions). However, even in today’s electronic age where tracking an employee’s illicit activities is arguably a simpler, if not inexpensive, task, obtaining the necessary proof, can be difficult. Often all the exemployer has is a grave suspicion that a breach has occurred or it is difficult to establish the existence of a continuing springboard advantage. Not only will the ex-employer be faced with the potential expense of litigation, he may also have the dilemma that to succeed in any action it may be necessary to approach customers/ clients who typically have no interest in becoming embroiled in what they will see as a ‘domestic dispute’. As a result, this exception, albeit important, will only provide protection for the ex-employer in a limited number of cases. It should never be treated by employers as a substitute for properly drafted covenants. 12.5  The deterrent effect of well drafted covenants on both an employee and a prospective new employer is also not to be underestimated. A prudent employee thinking about leaving will check to see what restrictions he has agreed on his future activities. The more cautious ones may even take legal advice at that stage although that is less usual until one or more prospective employers have been identified. Particularly where the employer has a reputation of taking a tough line on covenants, an initial review alone may be sufficient to provide effective protection for the employer. Also, contracts now commonly include an express obligation on an employee to disclose his covenants to a prospective employer and we recommend the inclusion of this disclosure obligation (see for example clause 13 in Case Study 1 in the Appendix to this chapter). Once the prospective employer becomes aware of the covenants, either because of compliance with a disclosure obligation by the individual or because they have asked about the restrictions, it is common practice for legal advice to be taken. Where the advice is that the risk of the covenants being enforceable is high, that may be sufficient to cause plans to be abandoned or at least altered in such a way that the potential damage to the current employer is significantly reduced. Typically, employees are concerned about the risks of becoming embroiled in very expensive litigation with their former employer. Where there is a likelihood of that being a real 685

12.6  Drafting restrictive covenants

possibility, that will often play a significant part in deterring competitive activity and more so where the individual senses any reluctance on the part of the prospective employer to underwrite or share the risk by, for example, indemnifying the individual for legal fees he may incur in responding to threats or proceedings by his current or former employer and, less commonly, also for any award of damages he may be ordered to pay. 12.6  While restrictive covenants are challenging to draft and enforceability can never be guaranteed, an employer will almost never be worse off as a result of including restrictive covenants in its contracts of employment. The employer will generally be in a significantly better position to prevent or limit competition as a result of their inclusion and at the very least they will provide the basis for negotiation. The two possible exceptions stem from a comparison of different contracts of the same employer. The more common situation is where covenants of more limited duration or scope are included in the contracts of a comparable employee and those more limited covenants are used to undermine the reasonableness of the wider covenants; see for example Patsystems v Neilly [2012] IRLR 979 where Underhill J’s conclusion that a 12 month non-competition covenant was not reasonable was ‘reinforced’ by the fact that other employees with similar access to confidential information and similar customer connections, albeit that they were more junior, had only six month covenants. See also Dairy Crest v Wise (24 September 1993 unreported QBD – IDS Brief Vol 515) where the comparable covenant ran for 12 months rather than 24. The second and perhaps more extreme exception is where the difference in the contracts is used to challenge the existence of a legitimate interest. In CEF Holdings Ltd v Mundey [2012] IRLR 912 (at paragraph 54) Silber J in refusing an injunction to enforce a non-poaching covenant was ‘fortified’ by the absence of similar covenants in the contracts of more senior employees. Since there was no cogent and rational explanation for the inconsistency, Silber J found that absence of similar covenants undermined the existence of any legitimate interest by CEF Holdings, particularly so where there ‘… was every reason to believe that CEF would have had an appreciably stronger case …’ to justify those covenants for the more senior employees. 12.7 These exceptions of course merely highlight the importance for the employer of ensuring a carefully reasoned and focussed approach is taken to covenants across all of their employment contracts. This approach must be mirrored in the drafting and amendment of covenants and is a critical factor for the draftsman at the fact-gathering stage – see 12.74–12.83. 12.8  References in this chapter to restrictive covenants include confidentiality covenants that operate after termination of employment. This type of covenant is considered in detail at 6.98–6.112 and a precedent included at 5.44.

2. DRAFTING THE COVENANTS: PREPARATORY STEPS 12.9 The draftsman of restrictive covenants has two aims. First, that the covenants should have the best possible chance of being found to be enforceable and, 686

Drafting the covenants: preparatory steps 12.11

secondly, that they prohibit or limit the competitive activities of the particular employee to the maximum extent consistent with the employer’s wishes and their being enforceable. Traditionally, instructions from employers have been to cast the covenants as wide as there is a realistic chance of their being enforceable. However, in more recent times there has been a discernible trend amongst some employers to a more conservative view, opting for narrower and particularly shorter covenants. In some instances the narrower approach is driven by what the employer has been able to negotiate with a senior recruit of similar bargaining power. In other cases the more sophisticated employer will opt for a narrower covenant which has a better chance of being upheld than a wider one. Whichever approach the employer has decided to take to achieve his goal, the draftsman must understand: •

the basic criteria by which enforceability is judged;

•

when the criterion of reasonableness is applied;

•

how the courts approach the interpretation of restrictive covenants (including the doctrine of severance (or ‘blue-pencilling’) and the limited circumstances in which the courts might rectify (amend) the wording of a restrictive covenant; and

•

the nature of the business in which the employee is/will be employed, including the restrictions applicable to other comparable employees, the employee’s role and the likely type of competitive activity.

2(a)  Criteria for enforceability 12.10  In every case the employer must be able to show that the covenant protects a legitimate interest and that it goes no further than is reasonably necessary to protect that legitimate interest: Mason v Provident Clothing & Supply Co Ltd [1913] AC  724 (HL); Herbert Morris Ltd v Saxelby [1916] 1 AC  688 (HL); Stenhouse Australia Ltd v Phillips [1974] 1 All ER 117 (PC). These two criteria are considered in detail in Chapters 10 and 11. The draftsman should have them at the forefront of his mind at all times.

2(b) When must the covenant be reasonable? 12.11 The reasonableness of a covenant is judged at the time the contract is made, not at the time the ex-employer is seeking to enforce it: Commercial Plastics Ltd v Vincent [1965] 1 QB 623 (CA); see also Gledhow Autoparts Ltd v Delaney [1965] 1 WLR 1366 and S W Strange Ltd v Mann [1965] 1 WLR 629 and more recently Coppage v Safety Net Security Limited [2013] IRLR 970 (CA) and Bartholomew Agri Foods Ltd v Thornton [2016] IRLR 432. In Bartholomew McKenna J rejected as ‘manifestly inappropriate’ a six month covenant prohibiting Thornton from dealing with any of Bartholomew’s customers in a defined area where the covenant had been entered into 20 years previously when Thornton was a trainee with no experience and no customer contacts. The reasonable 687

12.12  Drafting restrictive covenants

expectations of the parties at the time the contract was made can be taken into account: Lyne-Pirkis v Jones [1969] 1 WLR 1293. Reasonableness should not be judged on the facts applying when enforcement is sought: NIS Fertilisers v Neville [1986] 2 NIJB 70. However, to obtain an injunction the ex-employer will need to show that the covenant is reasonable at the time enforcement is sought. These principles were conveniently summarised by Cox J in TFS Derivatives Ltd v Morgan [2005] IRLR 246 at paragraphs 38 and 39 in the following way: ‘Thirdly, once the existence of legitimate protectable interests has been established, the covenant must be shown to be no wider than is reasonably necessary for the protection of those interests. Reasonable necessity is to be assessed from the perspective of reasonable persons in the position of the parties as at the date of the contract, having regard to the contractual provisions as a whole and to the factual matrix to which the contract would then realistically have been expected to apply. Even if the covenant is held to be reasonable, the court will then finally decide whether, as a matter of discretion, the injunctive relief sought should in all the circumstances be granted, having regard, amongst other things, to its reasonableness as at the time of trial.’

12.12  A very common reason why covenants fail is that the ex-employer seeks enforcement based on the employee’s role when employment terminated, a role which is often very different than the one held at the time the covenants were entered into. As the Court of Appeal made clear in Coppage, (Sir Bernard Rix at paragraph 9): ‘The question of reasonableness has to be asked at the outset of the contract, looking forwards, as a matter of the covenant’s meaning, and not in the light of matters that have subsequently taken place (save to the extent that those throw any general light on what might have been fairly contemplated on a reasonable view of the clause’s meaning).’

In other words, the mere fact, for example, that an employee has been promoted will not be relevant to the reasonableness of the covenant, unless it can be said that promotion was anticipated at the time the covenant was entered into. So in Ashcourt Rowan Financial Planning Limited v Hall [2013] IRLR 637 in considering the enforceability of a non-competition covenant the High Court rejected as ‘of little or no relevance’ disputed evidence about Hall’s duties when his employment terminated, commenting at paragraph 12 ‘What matters is what ARFP and Mr Hall contemplated on 30 January 2008, rather than what Mr Hall actually did while employed; Thomas v Farr plc [2007] EWCA Civ 118, [2007] IRLR 419 at paragraph 41’. 12.13 Similarly, in WRN  Limited v Ayris [2008]  IRLR  889 the High Court rejected a submission that the possibility of promotion, which had in the event occurred, could be taken into account in assessing the reasonableness of various restrictive covenants. Judge Richard Seymour QC stated at paragraph 60: ‘Moreover, it would be a very strange position if restrictive covenants which were unreasonable in the context of the position to which Mr Ayris was appointed by the employment contract, if considered on its own, became 688

Drafting the covenants: preparatory steps 12.16

reasonable because of the chance that he might be promoted to a role in which the restrictive covenants would be appropriate.’

See also Patsystems v Neilly [2012] IRLR 979 (QB) in which at paragraph 39 Underhill J, correctly in our view, ruled that a covenant which the ex-employer had conceded was unreasonable at the time the contract was entered into was unenforceable ab initio and ‘… should simply be disregarded unless and until it is subsequently and explicitly re-agreed’. In Underhill J’s view this approach was right not only in principle but also on grounds of policy and practicality. He pointed out that during the lifetime of a contract of employment it will often be varied in a number of different ways and with varying degrees of formality. Emphasising the requirement for certainty for employees, he commented (at paragraph 37) that ‘It would be very undesirable that every such change could in principle have the potential to revive a defunct restrictive covenant’. On promotion Neilly had signed a letter agreeing the variations to his contract as to salary, pension and notice and agreeing that all other terms ‘remain unchanged’. Underhill J  rejected an argument that by doing so Neilly had entered into the covenants afresh at the time of his promotion. 12.14  For a useful case in which the reasonable expectation of the parties at the time the contract was entered into rendered a seemingly unenforceable non­ dealing covenant enforceable see Allan Janes LLP v Johal [2006] IRLR 599. The case is discussed in detail at 11.174 but essentially it was the fact that Johal was recruited as a potential partner and it was in the contemplation of the parties that she would be given exposure to actual and potential clients with a view to generating business from them, and thereby building her business case for partnership, that justified the one year covenant. 12.15  On a similar theme in Croesus Financial Services Limited v Bradshaw & Bradshaw [2013] EWHC 3685 Simler J upheld a 12 month non-dealing covenant, notwithstanding that at the time the contract was entered into Matthew Bradshaw, the second defendant, was a junior unqualified employee with no experience as an independent financial adviser. He had been recruited as the successor to his father, the first defendant, to take over a loyal client following built up over many years. The envisaged role as successor was sufficient to overcome his junior status. 12.16  As Cox J pointed out in TFS Derivatives (see 12.11), the court must be satisfied that the covenant is reasonable at the time the contract is entered into but, in deciding whether to grant an injunction, take into account its reasonableness as at the time of trial. It is therefore vital for the employer to ensure that restrictive covenants are always kept up to date and reflect the employee’s current position and duties. The case of Dent Wizard (UK) Limited v Thomas [2002] EWHC 1671 (QB) is a good example of difficulties that can arise from covenants not being kept in step with an employee’s role. Dent Wizard were dent removal contractors operating throughout the UK and undertaking work abroad. Thomas joined the company as an area technician in 1998 and was given responsibility for Wales. His role involved developing relationships with customers in his region and servicing 689

12.17  Drafting restrictive covenants

their needs. In 1999 Thomas encountered some personal financial difficulties which resulted in his need to relocate to the West Midlands. Having no vacancies for area technicians in that region but anxious to accommodate Thomas, Dent Wizard appointed him as a holiday relief manager. As the job title suggests, in this role Thomas’s job was to travel the country covering area technicians’ holiday absences and therefore the primary, but not exclusive, focus was on short-term contact with customers and not sustained relationship development. On appointment as holiday relief manager, Thomas signed a new contract including covenants prohibiting him dealing with or soliciting the business of customers with whom he had dealt in a defined period prior to termination. In 2001 Thomas changed roles again and reverted to being an area technician, but with no relevant change in his contractual terms. In 2002 Thomas resigned and established a competitive business under the name ‘Jim Will Fix it’. Dent Wizard sought enforcement of the restrictions in the 1999 contract. Thomas challenged the enforceability of the covenants, primarily on the basis that their reasonableness fell to be judged at the time they were entered into, ie when he was a holiday relief manager, and judged against that role they were wholly unreasonable. Swayed, no doubt, by the lengths to which Dent Wizard had gone to assist Thomas with his financial difficulties – in addition to relocating him and finding him a different role Dent Wizard had provided him with an interest free loan – the deputy judge upheld the covenants. To do so he ruled, first, that it had been in the reasonable contemplation of the parties that Thomas would revert to the role of area manager and, secondly, that in any event Thomas’s role under the contract might well entail him working in such a way as would involve him establishing with customers ‘a fully blown personal relationship requiring the protection of the sort of covenants included …’ in the 1999 contract. Dent Wizard therefore secured a successful outcome but the result could have been quite different. It is safer to update covenants as an employee’s role changes than to have to rely on a generous interpretation of the facts by the court. That said, updating covenants can be problematic: see for example the experience of Patsystems (12.13 and 13.85). In Chapter 13 we consider in detail the issues associated with varying or introducing restrictive covenants during employment, including the requirement for consideration and the obtaining of consent, particularly where there are a number of employees affected, and provide practical guidance as to how to avoid common pitfalls.

2(c) The courts’ approach to the interpretation of restrictive covenants 12.17  It is well established that restrictive covenants should be interpreted by the courts in the same way as any other contractual term see, for example, Chadwick LJ in Arbuthnot Fund Managers Ltd v Rawlings [2003] EWCA Civ 518 (at paragraph  21). However, the courts have at different times applied particular rules of construction with more or less enthusiasm, sometimes showing a more ‘procontract’ and at other times a more ‘pro-competition’ approach. 12.18 Sometimes the courts have taken a strict literal approach, tipping the balance in favour of the employee’s freedom to compete; see, for example, 690

Drafting the covenants: preparatory steps 12.20

Commercial Plastics v Vincent [1964] 3 All ER  546 (CA); Greer v Sketchley Ltd [1979] IRLR 445 (CA); and Scully UK Ltd v Lee [1998] IRLR 259 (CA). In the latter two cases the Court of Appeal refused to limit the scope of a non-­ competition covenant to ‘competing businesses’, being unpersuaded by submissions by the former employer that this was the obvious underlying purpose of the covenant. On other occasions it is the ex-employer’s interests that have been jealously guarded by the courts and a far more flexible approach taken in the application of the relevant rules. Likewise, in cases of ambiguity the application of the ‘contra proferentem’ rule (see 12.62–12.64) – which tends to result in the covenant being struck down – has often given way to a more purposive interpretation, tending to result in the upholding of the commercial bargain (and therefore the covenant). 12.19  The current climate is one which can very broadly be described as ‘pro­ contract’, ie  where the court tends to give greater precedence to the principle of freedom of contract over freedom of competition. At 11.3 we summarise the most significant ways in which this approach manifests itself in court decisions. Throughout the cases considered in Chapter 11 further examples can be found of the courts’ positive approach to enforcement. As can be seen from Chapter 11, the tendency has generally been to uphold the covenant where there is ambiguity: TFS  Derivatives v Morgan [2005]  IRLR  246 (in that case, and also in Dyson Technology v Strutt [2005] EWHC 2814 (Ch) the court preferred a narrow construction of the covenant by interpreting the word ‘business’ to mean ‘business activity’ rather than a business entity, and was therefore able to uphold the covenant). Similarly in Croesus Financial Services Limited v Bradshaw & Bradshaw [2013] EWHC 3685 in upholding a non-dealing covenant the court interpreted the phrase ‘personal contact in the course of his duties’ to connote business contact which was more than trivial. In doing so the court rejected a submission that the phrase covered activities such as bumping into a client in a corridor or taking a phone message, both of which the court regarded as trivial and in any event unlikely to occur on the particular facts of the case. In some instances, there has been an inclination on the part of the courts to uphold covenants even where, strictly speaking, there is no ambiguity, but rather the literal meaning of the covenant is disregarded to give it business efficacy, instead of rendering it a ‘pointless provision’: see for example Beckett Investment Management Group Limited v Hall [2007] IRLR 793. In Beckett one of the key issues was that the non-competition covenant was expressed to protect the business of a holding company, whereas the business in which Hall was engaged was conducted through a subsidiary company. This, said the Court of Appeal, was not fatal to the covenant – the reference to the holding company was interpreted so as to include the subsidiary. In reaching this conclusion Maurice Kay LJ followed Stenhouse Australia Ltd v Phillips [1974] AC 391. In Stenhouse at page 404D Lord Wilberforce concluded that ‘The subsidiary companies were merely agencies or instrumentalities through which the appellant company directed its integrated business’ and Maurice Kay LJ found those words resonated with the facts in Beckett. 12.20 There are, however, lengths to which the courts have not been willing to go to find an enforceable promise. In Wincanton Limited v Cranny 691

12.21  Drafting restrictive covenants

and SDM  European Transport Limited [2000]  IRLR  716 the Court of Appeal declined to ‘read down’ a non-competition covenant so as to make it enforceable. The covenant was drafted so as to prevent Cranny from being involved in types of business which had formed no part of his duties with Wincanton. Applying J A Mont (UK) Limited v Mills [1993] IRLR 172, the Court of Appeal found that the complete absence of any effort to formulate the covenant in a way which focused upon the restraint necessary in respect of the particular employee rendered the covenant unenforceable. It is most unlikely that Wincanton would be decided differently today. The court cannot be expected to assist an employer who makes no attempt to formulate the covenant properly. Further, it is an abuse for such an employer to enjoy the benefit of wide covenants vaguely drafted and then only at the doors of the court (as against those employees who have the will and the means to challenge the covenants) to seek to argue for a narrow prohibition, in order to ‘rescue’ the covenants. 12.21  For more recent examples of cases in which the courts have refused to save covenants cast too wide see Ashcourt Rowan Financial Planning Ltd v Hall [2013] IRLR 637 and White Digital Media Limited v Weaver [2013] EWHC 1681 (QB). 12.22 In Prophet v Huggett [2014] IRLR 797 the Court of Appeal re-emphasised the underlying requirement that there must be ambiguity in the language of a covenant before the courts can intervene. Rimer LJ at paragraph  33 accepted that: ‘If faced with a contractual provision that can be seen to be ambiguous in meaning, with one interpretation leading to an apparent absurdity and the other to a commercially sensible conclusion, the court is likely to favour the latter. Such an approach can, however, only be adopted in a case in which the language of the provision is truly ambiguous and admits of clear alternatives as to the sense the parties intended to achieve.’

See also Tillman v Egon Zehnder Limited [2017]  IRLR 906 (CA), Longmore LJ at paragraph 12. In Prophet where there was no ambiguity in the covenant the Court of Appeal declined to save what Rimer LJ acknowledged was on its proper interpretation ‘a toothless restrictive covenant’. The flaw in the covenant in Prophet lay in the wording of the proviso, the effect of which was to limit Huggett’s activities only to those products with which he had been involved for Prophet. Since the products were exclusive to Prophet the covenant provided no protection for Prophet. Prophet is considered in more detail at 12.103. 12.23  More recently and in the same direction of travel as Prophet, albeit in the context of a commercial agreement in Arnold v Britton [2015] AC 1619 the Supreme Court in a majority decision (Lord Carnwath dissenting) appeared to signal a return to a more traditional (literal) approach to the construction of contracts. In Arnold, a case involving the interpretation of service charge provisions in leases, the Supreme Court emphasised the importance of giving effect to the words used by the parties over and above finding an interpretation which makes ‘commercial common sense’ of what the parties have agreed. It seems, however, 692

Drafting the covenants: preparatory steps 12.25

that this apparent change in approach was illusory. In their subsequent decision in Wood v Capita Insurance Services Limited [2017] 2 WLR 1095, a case involving the interpretation of an indemnity in a share purchase agreement, the Supreme Court rejected an argument that Arnold represented a departure from the earlier and broader guidance to contract interpretation given by the Supreme Court in Rainy Sky SA  v Kookmin Bank [2011] 1 WLR  2900. The decisions in Arnold and Wood and their effect on the future interpretation of restrictive covenants is considered at 12.26–12.31. 12.24  Not least because of the difficulty of predicting the attitude of the courts to interpretation of the covenant at any particular time, the prudent draftsman will not rely on the courts applying benign modes of construction, but will ensure that his restrictive covenants are drafted as clearly and accurately as possible in the context of the facts. However, it is a counsel of perfection to require the draftsman to cater for all possibilities and express himself perfectly at all times. By understanding the need to be as clear as possible in his drafting and the rules of construction, the draftsman can avoid at least some of the potential pitfalls. He is also best placed to know how to challenge the covenants of other draftsmen when acting for the (ex-)employee or the poaching employer.

2(c)(i) The modern approach to construction of contracts 12.25  As a starting point, and before focusing on particular rules of construction and how they have been applied in restrictive covenant cases, it is useful to have regard to the general approach taken by the courts to the construction of contracts. The best known and most frequently referred to summary is that of Lord Hoffmann in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 (HL). That case involved a dispute relating to allegedly negligent advice given in connection with the sale of home income plans. The issue before the House of Lords was whether on the proper construction of a contract there had been an effective assignment of certain of the investor’s rights to the Investors Compensation Scheme. At pages 912–13 Lord Hoffmann, having referred to the fact that ‘Almost all the old intellectual baggage of legal interpretation has been discarded’, summarised the principles as follows: ‘(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. (2) The background was famously referred to by Lord Wilberforce as the “matrix of fact”, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man. (3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible 693

12.26  Drafting restrictive covenants

only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them. (4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same meaning as its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meaning of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investment Co Limited v Eagle Star Life Assurance Co. Ltd [1997] AC 749. (5) The “rule” that words should be given their “natural and ordinary meaning” reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera SA v Salen Rederierna A.B [1985] AC 191 at 201: “… if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.”’

12.26  Over the years since the Investors Compensation case the appellate courts have considered further the question of how contracts should be interpreted, most notably in Chartbrook Limited v Persimmon Homes [2009]  1 AC  1101 (HL); Attorney General of Belize v Belize Telecom [2009] 1 WLR 1988 PC and Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900. In broad terms the direction of travel in those authorities has been to favour commercial common sense over too literal an approach to the interpretation of contractual provisions. However, in Arnold v Britton [2015] AC 1619 the Supreme Court appeared to indicate a level of retrenchment in favour of freedom of contract. 12.27 In Arnold whilst the majority do not suggest that the principles in Investors Compensation are wrong, Lord Neuberger at paragraphs 16–23 emphasised seven relevant factors (the 7th was specific to the facts of the case, namely whether service charge provisions in leases were subject to special rules of interpretation which the Supreme Court found they were not). Of the remaining six, the first five stress the importance of giving effect to the words used by the parties and the caution that should be exercised before discarding the natural meaning of those words in favour of an interpretation which makes commercial common sense. In summary, the six factors identified by Lord Neuberger were: 694

Drafting the covenants: preparatory steps 12.30

(1) The reliance placed on commercial common sense and surrounding circumstances should not be invoked to undervalue the words of the provision being construed. (2) The clearer the natural meaning of the words used the more difficult it is for the court to justify departing from that meaning and conversely the less clear they are the more readily the court can adopt another meaning. The court cannot, however, embark on an exercise of ‘searching for, let alone constructing drafting infelicities to facilitate a departure from the natural meaning’. (3) Commercial common sense cannot be invoked retrospectively. Its relevance is limited to how matters would have been perceived at the time the contract was entered into. The fact that the bargain as struck on its natural meaning has worked out badly is not something the court can take into consideration. (4) Although commercial common sense is a very important factor to take into account, courts should be slow to reject the natural meaning of a provision simply because it seems to be a very imprudent term; it is not permissible to rely on hindsight. (5) Only facts known to both the parties at the time the contract was made can be taken into account. (6) In some cases, where an event occurs that was not intended or contemplated by the language of the provision but it is clear what the parties would have intended, effect can be given to that intention. 12.28  Broadly speaking the combined effect of these factors, particularly factors 1–5, tend to point to a more limited freedom for the courts to depart from the natural meaning of words used to craft enforceable covenants. Arnold does not differ from the Supreme Court’s earlier decision in Rainy Sky that where words are ambiguous an interpretation consistent with business common sense should be preferred. However, the general tenor of the decision in Arnold suggests that the courts should adopt a more literal approach to the interpretation of contracts with more reluctance to reach a conclusion that there is ambiguity. 12.29 In Arnold the Supreme Court was considering the proper interpretation of various similar service charge provisions in leases of plots for holiday chalets. The arguments were detailed but in essence the tenants’ argument was that if given their natural meaning the words of the provision by which the service charge increased at fixed intervals would produce an absurdly high service charge which could not be right. Applying the principles identified by Lord Neuberger including the high inflation levels prevalent at the time the leases were entered into, the provision accorded with commercial common sense at that date. The fact that it subsequently became apparent that the sum payable could substantially exceed the parties’ expectations at the time the lease was entered into was not a reason to give the clause a different meaning. The natural meaning of the words used in the service charge provision were clear and the clause was upheld. 12.30 However, in Wood v Capita Insurance Services Limited [2017] 2 WLR 1095, the Supreme Court gave short shrift to an argument that Arnold 695

12.31  Drafting restrictive covenants

represented a departure from the earlier and broader guidance to contract interpretation given by the Supreme Court in Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900. A little surprisingly Lord Hodge, giving the unanimous judgment of the Supreme Court, which included Lord Neuberger, found the two decisions in Rainy Sky and Arnold were consistent. Lord Hodge summarised the court’s task and the correct approach in the following way: ‘The court’s task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement. It has long been accepted that this is not a literalist exercise focused solely on a parsing of the wording of the particular clause but that the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning’ (paragraph 10).

The court will look both to the language used (textualism) and the context in which it is drafted (contextualism). Those concepts Lord Hodge said (paragraph 13) ‘… are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation’ rather they are tools to be used by the court and the extent to which each will assist the court will vary according to the circumstances of the particular agreement. He then drew a distinction between two types of contract. First, sophisticated and complex agreements drawn up by skilled professionals, those were more likely to be successfully interpreted by textual analysis. Secondly, informal and brief agreements drawn up by laymen where the factual matrix would be of greater relevance. However, even in the first category of contracts Lord Hodge recognised that for various reasons provisions could lack clarity in which case the factual matrix and what he referred to ‘… as the purpose of similar provisions in contracts of the same type’ may assist the court in interpreting the provision. Where there are rival constructions to a clause the court can take into account which construction is more consistent with business common sense but must consider the quality of the clause, the fact that a party may have agreed to a clause that with hindsight did not serve his interest, that the clause was a negotiated compromise or that more precise terms could not be agreed. 12.31 Lord Hoffmann’s summary in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 (HL) and the subsequent decisions culminating in Wood are useful, and there is little doubt that the principles in Wood will be raised in restrictive covenant disputes. However, it remains helpful for the draftsman to focus briefly on the various rules of construction as they have been applied in the context of restrictive covenants in employment contracts to date. What follows should, however, be read with the guidance of the Supreme Court in Wood in mind. 2(c)(ii) Words used are given their ordinary meaning 12.32  The basic rule, and indeed the one emphatically endorsed in Arnold is that words are to be given their ordinary and natural meaning, (subject to some limited 696

Drafting the covenants: preparatory steps 12.36

exceptions). So, for example in Basic Solutions Ltd v Sands [2008] EWHC 1388 (QB) the provision of samples for the purpose of testing albeit with a view to possible future sales was not sufficient to constitute ‘supply’ for the purposes of the restrictive covenants. 12.33 In Mallan v May (1844) 13 M&W 511 the rule was stated in the following way (at page 517): ‘Words are to be construed according to their strict and primary acceptation, unless from the context of the instrument, and the intention of the parties to be collected from it, they appear to be used in a different sense, or unless in their strict sense, they are incapable of being carried into effect.’

As seen at 12.25–12.31, this rule now operates in a slightly modified form, per Lord Hoffmann in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 (HL) at page 913. Where it is plain from the background to the contract that something has gone wrong with the language so that the words given their ordinary meaning do not reflect the parties’ intentions, the words will be interpreted in the context of the parties’ intentions; as Lord Hoffmann explained, ‘… the law does not require judges to attribute to the parties an intention which they plainly could not have had’. Following the guidance in Arnold, however, the instances of the courts finding something has ‘gone wrong’ with the drafting may now be fewer. For a recent example of a case in which the Court of Appeal declined to find that something had ‘gone wrong’ see Prophet v Huggett [2014] IRLR 797 (CA) considered at 12.22 and 12.103. 12.34  Technical words will normally be given their technical meaning, unless the contract excludes that meaning: Laird v Briggs (1881) 19 Ch D 22. So, for example, if it is clear from the contract in what sense the words are used, that sense will be used instead of the technical meaning: Graham v Ewart (1856) 1 H&N 550. Whilst both of these authorities are very old, they remain an accurate statement of the law as it stands today and are consistent with the principles set out by Lord Hoffmann in Investors Compensation Scheme.

2(c)(iii) The covenant must be interpreted in the context of the agreement as a whole and to give effect to the intention of the parties 12.35  In practice, this rule of construction gives the court considerable latitude to save a covenant that might otherwise be too wide by adopting a purposive approach. Whilst Arnold arguably signals a greater emphasis on parties being held to the language in which they express their bargains, with a consequent need for precision by draftsmen, in our view this rule of construction will continue to be highly relevant. 12.36 In GW Plowman & Son Ltd v Ash [1964] 2 All ER 10 (CA), Ash had been employed as a sales representative in Plowman’s business of corn and agricultural merchants and animal feeding stuff manufacturers. He had covenanted that 697

12.37  Drafting restrictive covenants

he would not, for two years after his employment terminated, canvass or solicit business from farmers or market gardeners who had been Plowman’s customers during his employment. The clause did not, however, define the type of goods Ash was prohibited from selling. When Plowman sought to enforce the covenant, Ash argued, inter alia, that the covenant was too wide to be enforced because its effect was to prohibit him selling goods of any description to those who had been customers of Plowman during his employment. The Court of Appeal unanimously rejected this argument. They held that looking at the agreement as a whole the covenant was confined to those goods which were the subject of Ash’s employment, notwithstanding that there was no such express limitation in the covenant itself. In reaching this conclusion two members of the Court of Appeal specifically referred to the fact that the nature of Plowman’s business was set out in the same clause of Ash’s service agreement. Similarly, in Business Seating (Renovations) Ltd v Broad [1989] ICR 729 the court interpreted a covenant which prohibited the ex-employee, Broad, from canvassing, soliciting or endeavouring to take away from the employer ‘the business of any customers or clients of the employer’ as only prohibiting Broad from seeking to obtain orders to repair or renovate office furniture. The court found this interpretation could be inferred from an earlier clause in the contract, which described Business Seating’s business. In Home Counties Dairies Ltd v Skilton [1970] 1 All ER 1227 (CA), the leading case on disregarding extravagant interpretations of a covenant, a provision in the contract of employment of a milk roundsman not to ‘serve or sell milk or dairy produce’ or to ‘solicit orders for milk or dairy produce’ was construed only to prohibit the ex-employee, Skilton, doing those things as a milk roundsman and not in any other capacity. In Hanover Insurance Brokers Ltd v Schapiro [1994]  IRLR  85 (CA) a covenant prohibited the canvassing of the ‘business’ of the ex-employer’s customers but did not define the nature of the business the ex-employees were prohibited from canvassing. The ex-employees had all been engaged in the insurance broking business for Hanover, and it was held that the covenant prohibited only the canvassing of that type of business and was therefore enforceable. 12.37 The most extreme example of the purposive approach is to be found in the majority decision of Lord Denning MR and Megaw LJ in Littlewoods Organisation Ltd v Harris [1978] 1 All ER 1026 (CA). Harris had been employed by Littlewoods as a divisional director of ladies’ fashions in their mail order business. The covenant prevented Harris for 12 months after the termination of his employment from entering into ‘a Contract of Service or other Agreement of like nature with GUS Limited or any company subsidiary thereto’ or being ‘directly or indirectly engaged concerned or interested in the trading or business of GUS Ltd or any such company aforesaid’. Harris argued that the covenant was unreasonable on three grounds: •

it included subsidiaries of GUS Ltd which had nothing to do with the mail order business;

•

there was no geographic limit, although the business of Littlewoods was limited to the UK; and

698

Drafting the covenants: preparatory steps 12.38

•

the covenant was not limited to the mail order business, which was the only legitimate interest Littlewoods had to protect vis-a-vis Harris.

The Court of Appeal rejected all three arguments. They found that it was legitimate for the covenant to include subsidiaries in order to prevent Harris being employed by another company in the GUS group and passing confidential information back to the mail order business. In reaching this view the majority relied on the fact that because of the control structure in the GUS group it was appropriate to look at the group as a single entity. They construed the clause as only applying to those parts of the GUS group that operated in the UK on the basis that to do so reflected the perceived intention of the parties. Finally, the business in which Harris was prohibited from being involved was limited to the mail order business on the ground that it was that business in which Harris had been employed by Littlewoods. The lengths to which the Court of Appeal went to enforce the covenant against Harris are very surprising. Of the three findings, the second is clearly unjustifiable and directly contradicts the normal rule that where there is no geographical limit expressed in the covenant it will be construed as imposing a worldwide ban: Dowden & Pook Ltd v Pook [1904] 1  KB  45 and Commercial Plastics Ltd v Vincent [1964] 3 All ER 546. 12.38 In Arbuthnot Fund Managers Limited v Rawlings [2003] EWCA Civ 518 the Court of Appeal, through a combination of: (a) construing the covenant in the context of Arbuthnot’s business; and (b) severance, upheld the key covenants prohibiting Rawlings from soliciting or dealing with defined actual or prospective clients. Rawlings was originally co-owner with a Mr Alexander of an investment business, A  & R  Equity, which they sold in 1994 to a company in the Arbuthnot group for over £500,000. At the point of sale Rawlings and Alexander became employees of Arbuthnot and entered into service agreements, including the covenants which Arbuthnot subsequently sought to enforce against Rawlings, albeit that by that time the covenants were part of a revised service agreement. By 2002 Rawlings was Arbuthnot’s most senior fund manager, and the clients with whom he had extensive dealings accounted for 42% of their funds under management. By 2002 a rift had developed between Rawlings and Arbuthnot’s managing director, which led to Rawlings resigning and claiming constructive dismissal. The issue of repudiatory breach was deferred to trial. The Court of Appeal confined itself simply to considering whether the injunctions granted against Rawlings at first instance should be upheld. At first instance, the judge had severed references to ‘the Group’ and interpreted references to business as ‘investment’ business, thereby making it clear that it was only those who were the ‘end user client’ as distinct from intermediaries that were caught within the pool of protected clients/prospective clients. The Court of Appeal supported both those deletions but went considerably further. In response to submissions that the covenants were nonetheless too wide because of the quality of the connection between Rawlings and the clients/prospective clients, the court introduced temporal restrictions on the period within which Rawlings must have had a connection with the client for that client to be protected. The prohibition was ‘… or deal with … any person firm or company who has at any time during the 12-month period immediately preceding such cessation of this agreement done 699

12.39  Drafting restrictive covenants

business with the Company or the Group and whom he had introduced or with whom he had any business dealings’. The court (by way of interpretation) added at the end of this sentence in the injunction the words ‘during such period’, so as to limit the period of personal dealings. Additionally, the court took a fairly liberal approach to severance to cut down the protected pool, deleting references to clients whom Rawlings had ‘introduced’ and those of whom ‘he had knowledge’. Whilst the severance issues are perhaps unsurprising, some aspects of the court’s ruling in relation to the temporal restrictions sit uncomfortably with the draftsman’s original wording and indeed in Coppage v Safety Net Security Ltd [2013] IRLR 970 (CA) Sir Bernard Rix expressed some disquiet about the case which he found ‘a rather difficult case on which to build any lessons’. Although the point is not laboured in the judgment, the Court of Appeal in Arbuthnot clearly had in its sights that Rawlings and his partner received a considerable sum on the sale of their business – over £500,000 – and a substantial part of that was given for the client relationships. It is an interesting question whether the Court of Appeal would have taken quite the same interventionist approach if the sale aspect had not been present. (It is noteworthy that in Arbuthnot the Court of Appeal made it clear that unless there were disputed facts which required trial which bore on the clauses, the court should interpret the covenants at the interim stage rather than postponing that issue to trial.) 12.39  Similarly, in TFS Derivatives Limited v Morgan [2005] IRLR 246 Cox J in a final decision adopted a purposive approach in upholding a non-competition covenant against Morgan who had resigned to join a competitor, GFI. Again, this case has a slightly unusual background in that, due to a fault in the computer processing of the template service agreement, Morgan’s contract did not include TFS’s standard non-solicitation or non-dealing covenants. It followed that unless the non-competition covenant was upheld, TFS had very limited practical protection against Morgan approaching their clients. Additionally, TFS had recent experience that an undertaking given by another ex-employee, Anderson, who had left to join GFI (that he would not deal with specified clients) had not prevented the loss of one of those major clients to GFI. The material facts were as follows. Morgan ran TFS’s DAX desk. He was recruited by GFI to set up a similar desk for them. Morgan resigned, giving the three months’ required notice. When initial attempts to persuade him to stay proved fruitless, TFS sent Morgan on garden leave for the balance of his notice period. Thereafter, TFS were seeking to prevent Morgan joining GFI for the remaining period of the noncompetition covenant which prohibited him from being ‘employed, engaged, concerned or interested in any capacity in any business which is competitive with or similar to … any business in which he was involved to a material extent in the twelve months prior to the termination of his employment with TFS’. Rejecting arguments that the covenant was too wide, Cox J adopted a narrow construction of ‘business’ to mean the business activity in which Morgan had been involved for TFS, as distinct from a business entity. In response to a submission that the covenant was too wide in that it sought to restrain employment ‘in any capacity’ in any competitive business, or in any business which was ‘similar to’ a relevant business within the territory, Cox J further narrowed the scope of the covenant by severing the words ‘similar to’ and ruling that the words ‘in any capacity’ 700

Drafting the covenants: preparatory steps 12.42

qualified only the word ‘interested’ and had simply been included by the draftsman to cover the varying ways in which Morgan could be interested in a competitive business, whether as an employee or shareholder etcetera. Whilst TFS is perhaps a less extreme application of the purposive approach than Arbuthnot Limited v Rawlings or Littlewoods v Harris, nonetheless it is an illustration of the lengths to which a court will sometimes go to uphold a covenant. It is interesting to speculate whether the result would have been different had TFS’ usual non-dealing non-solicitation covenants not been accidentally omitted from the contract. 12.40  For a case in which the court declined to save a non-competition covenant by applying the rule of construction that the covenant must be interpreted in the context of the agreement and to reflect the intention of the parties, see Scully UK Ltd v Lee [1998] IRLR 259 (CA). Scully was involved in supplying overfill prevention systems, liquid level detection systems and fuel handling systems to the petrochemical industry. Lee’s contract forbade him for one year after his employment terminated from being involved in any business which carried out activities in relation to ‘overspill prevention or tank gauging’. The restriction was not expressly limited to businesses competing with Scully, and the Court of Appeal refused to imply such a limitation. In the court’s view the phraseology used ‘was intended to extend the ambit of the covenant to any business which dealt in such equipment’. See also Wincanton Ltd v Cranny and SDM European Transport Limited [2000] IRLR 716. 2(c)(iv)  Extravagant interpretations of the covenant can be ignored 12.41  This is really a part of the previous rule, but it is sufficiently important to consider separately. In Haynes v Doman [1899] 2 Ch 13 (CA) at pages 24 and 25 Lindley LJ expressed the rule in the following way: ‘Another matter which requires attention is whether a restriction on trade must be treated as wholly void because it is so worded as to cover cases which may possibly arise, and to which it cannot be reasonably applied … Agreements in restraint of trade, like other agreements, must be construed with reference to the object sought to be obtained by them. In cases such as the one before us, the object is the protection of one of the parties against rivalry in trade. Such agreements cannot be properly held to apply to cases which, although covered by the words of the agreement, cannot be reasonably supposed ever to have been contemplated by the parties, and which on a rational view of the agreement are excluded from its operation by falling, in truth, outside and not within its real scope.’

12.42 In Haynes v Doman the covenant was a mixed confidentiality and noncompetition covenant designed to protect Haynes’ confidential information and business methods. The court found that the possibility of Doman leaving employment before having acquired any knowledge of Haynes’ confidential information or business methods, which had not in the event happened, fell outside the scope of the covenant and could be ignored. In Home Counties Dairies v Skilton [1970] 1 All ER 1227 (see 12.36), the possibility that could be ignored 701

12.43  Drafting restrictive covenants

was that of a customer of Home Counties and the ex-employee both moving to the same distant place and the non-dealing/non-solicitation covenant preventing the ex-employee serving milk or dairy produce to that customer. Similarly, in Arbuthnot, the suggestion that the covenants would prevent dealing with intermediaries was discounted. 12.43  More recently in Coppage v Safety Net Security Limited [2013] IRLR 970 (CA) the Court of Appeal rejected a submission that a six month nonsolicitation covenant was too wide because at the time it was entered into theoretically Coppage could have worked for Safety Net for six years but have been prohibited from soliciting a former customer who had left two weeks after Coppage’s arrival. The court held that to be ‘an example of an argument from merely theoretical or fanciful possibilities which the jurisprudence decries’ (paragraph  23). In reaching this conclusion Sir Bernard Rix cited the comment of Mance J in Skipskredittforeningen v Emperor Navigation SA [1997] 2 BCLC  398 at 413 cited with approval in Regus (UK) v Epcot Solutions Ltd [2008] EWCA Civ 361 ‘… the court should I think, take care to consider the clause as a whole in the light of the circumstances when the contract was made, in order to judge in the round whether it satisfies the requirement of reasonableness. The court should not be too ready to focus on remote possibilities or to accept arguments that a clause fails the test by reference to relatively uncommon or unlikely situations’. 2(c)(v) The court has no power to re-write the covenant 12.44 A  distinction must always be drawn between a court using the rules of construction to interpret a covenant in a way that it may be upheld, which is permissible, and re-writing the covenant, which is not permissible. At times that distinction has become somewhat blurred (Littlewoods Organisation Ltd v Harris [1978] 1 All ER 1026), but it is a fundamental tenet of contract law that the courts have no power to re-write the bargain struck by the parties and that rule applies as much to restrictive covenants as to any other contractual term: Mason v Provident Clothing and Supply Company Ltd [1913] AC 724 (HL), applied in JA Mont (UK) Ltd v Mills [1993] IRLR 172 and see more recently UK Power Reserve Limited v Read [2014] EWHC 66 (at paragraphs 94–95) and Prophet v Huggett [2014] IRLR 797 (CA). 12.45  It follows that the court has no power to extend a covenant to prohibit an activity which the draftsman omitted to cover. So in WAC  Ltd v Whillock [1990] IRLR 23 (Court of Session) a covenant in a shareholders agreement prohibiting Whillock carrying on any business in competition with the company did not, in the court's view, preclude him from being either a director or employee of a competing company. The prohibition was only against Whillock personally carrying on a competitive business and the court could not extend that. Contrast the WAC case, however, with the decision in Steffen Hair Designs v Wright [2004] EWHC 2995 (Ch). In Steffen, albeit for a matter of a few weeks pending trial, the deputy High Court judge, granted an injunction in effect replacing a 702

Drafting the covenants: preparatory steps 12.47

non-­competition covenant and a non-solicitation covenant (each applying for one year from termination) with a prohibition against Wright providing professional hairdressing services within the geographical limit defined in the non-competition covenant to those who had been her clients at Steffen. In other words, the court replaced the covenants agreed between the parties with an entirely new restriction which was no part of their original bargain and did so where that formulation had not even been ‘canvassed at the hearing’ (at paragraph 25). In our view, the court did not have the power to grant an injunction in the terms ordered. More recently in Prophet the Court of Appeal discharging an injunction in relation to a covenant which they interpreted as ‘toothless’ and contained in clause 19 of the employment contract commented that ‘It was not for the judge nor is it for this court to remake the parties’ clause 19 bargain. Prophet made its clause 19 bed and it must now lie upon it’ (Rimer LJ at paragraph 38). 2(c)(vi) Severance 12.46  Severance, or as it is sometimes called, ‘blue pencilling’ is the process whereby the court deletes words from a contract to remove an unenforceable provision, leaving behind a valid and enforceable provision. Requests to the court to exercise its power of severance are commonplace in the litigation of restrictive covenants. Severance is the usual way in which a restrictive covenant which would otherwise be too broad is cut down so as to create an enforceable restraint. See for example, TFS Derivatives Ltd v Morgan [2005] IRLR 246. In TFS the non-competition covenant prohibited Morgan from activities that were ‘competitive with or similar to’ certain defined business of TFS. The court found that the inclusion of the words ‘or similar to’ made the covenant too wide, but severed those words to create an enforceable covenant. 12.47 The limits of permissible severance were considered by the Court of Appeal in Beckett Investment Management Group Ltd v Hall [2007] IRLR 793. In Beckett two independent financial advisers had resigned from their employment with Beckett and established a competing business. The issue before the Court of Appeal was whether a non-dealing covenant was enforceable. Various arguments were advanced by Beckett in support of the covenant, including an argument that in so far as an extended definition of ‘relevant client’ might be said to be too broad to be enforceable, part of the definition could be severed, thereby reducing the scope of the covenant to an acceptable breadth. In Beckett the Court of Appeal adopted the threefold test formulated by the deputy judge of the High Court in Sadler v Imperial Life Assurance Co of Canada Ltd [1988] IRLR 388 (at paragraph 19). Maurice Kay LJ, with whom the other members of the Court of Appeal agreed, found that threefold test to be ‘a useful way of approaching these cases and should be adopted’ (paragraph 43). The test in Sadler requires the following conditions to be satisfied: •

the unenforceable provision is capable of being removed without the necessity of adding to or modifying the wording of what remains;

•

the remaining terms continue to be supported by adequate consideration; 703

12.48  Drafting restrictive covenants

•

the removal of the unenforceable provision does not so change the character of the contract that it becomes ‘not the sort of contract that the parties entered into at all’.

The Court of Appeal found in Beckett that these conditions were satisfied and severed the extended definition of ‘relevant client’. The severance of that extended definition was one of the factors that contributed to the Court of Appeal upholding the non-dealing covenant. 12.48  What is most significant about the decision in Beckett is its effect on the earlier cases on severance, in particular the case of Attwood v Lamont [1920] 3 KB 571 (CA), which Maurice Kay LJ regarded as the appropriate starting point for the law on severance. In Attwood, Younger LJ (obiter) put the requirements for severance as follows (at page 593): ‘The doctrine of severance has not, I  think, gone further than to make it permissible in a case where a covenant is not really a single covenant but is in effect a combination of several distinct covenants. In that case and where the severance can be carried out without the addition or alteration of a word, it is permissible. But in that case only.’

Attwood accordingly requires two pre-conditions for severance. First, there must be two or more distinct covenants and, secondly, it must be possible to sever the offending words without adding to or altering the wording that remains. Attwood’s business was that of a draper, tailor and general outfitter in Kidderminster. Lamont had been employed in Attwood’s tailoring department. The relevant covenant prohibited Lamont from being involved at any time in the ‘trade or business of a tailor, dressmaker, general draper, milliner, hatter, haberdasher, gentlemens’, ladies’ or childrens’ outfitters’ within a 10-mile radius of Kidderminster. The court ruled that this was a single promise to protect Attwood’s entire business and not severable. A non-competition covenant was also found to constitute a single promise in NIS  Fertilisers v Neville [1986] 2  NIJB  70. Grammatically the offending words of the covenant, which extended the area of the covenant beyond that in which Neville had worked, could be severed, but that was not permissible, since the covenant was a single promise. Compare, however, Scorer v Seymour-Johns [1966] 3 All ER 347; Rex Stewart Jeffries Ginsberg Limited v Parker [1988] IRLR 483 (CA); and Business Seating (Renovations) Ltd v Broad [1989] ICR 729, in each of which the offending words were found to constitute a separate promise and could be severed. 12.49  Although the requirement in Attwood that the words to be severed must constitute a separate promise represented the approach of the courts for many years, while purporting to follow Attwood, the Court of Appeal in Beckett effectively dispensed with this as a necessary pre-condition for severance. In Beckett Maurice Kay LJ at paragraph 43 equated a formulation of the approach required by Attwood by Russell LJ in T  Lucas & Co v Mitchell [1972] 3 All ER  689 as being no different in principle from the third stage of the threefold test in Sadler. In other words, the courts’ focus following Beckett has been on whether 704

Drafting the covenants: preparatory steps 12.51

the effect of severance would be to make the contract radically different from the contract the parties had entered into, in which case severance will not be permitted, rather than focussing on whether the part of the covenant which is the subject of potential severance is a separable covenant. HHJ Richard Seymour QC in Advantage Business Systems Ltd v James Hopley [2007] EWHC 1783 (QB) (at paragraph 84) put the matter baldly: ‘The guidance of Younger LJ in Attwood v Lamont [1920] 3 KB 571 at page 593 … is apparently no longer to be followed.’

12.50 As a result of the decision in Beckett, the pre-conditions for severance appeared, accordingly, less stringent than they had previously been. However, in the recent case of Tillman v Egon Zehnder [2017] IRLR 906 (CA) the Court of Appeal has cast some doubt on whether that remains the correct position. In Tillman the issue was whether a six month non-competition covenant under which Tillman could not ‘directly or indirectly engage or be concerned or interested’ in any business which competed with any business of Egon Zehnder was enforceable. The court found that since the words ‘be concerned or interested’ would prohibit Tillman being a shareholder in any competing business it was impermissibly wide unless it could be severed in some way, which it could not. The court declined to permit severance on two grounds. The first, which was uncontroversial, was that the only words which Egon Zehnder sought to be severed were the words ‘or interested’. Severing those words without also severing the word concerned would still leave the covenant impermissibly wide and would therefore be a pointless exercise. Secondly Longmore LJ said (at paragraph  29) ‘… it is well settled that parts of a single covenant cannot be severed; it is a requirement of severance that it can only take place where there are distinct covenants … and, perhaps, not even then’. Acknowledging that in Beckett the Court of Appeal approved the threefold test in Sadler, Longmore LJ proceeded to treat as the same the single covenant obiter dictum of Younger LJ in Attwood with the third limb of the test in Sadler. In our view to do so is to confuse two very different tests, the first is a formal test, ie is the covenant a single covenant or are there two or more distinct covenants, and the second is a far more easily surmountable test, ie that subject to the first two limbs of the Sadler test being satisfied severance is permitted unless to do so would be to change radically the nature of the contract. Longmore LJ also suggests that in Beckett the Court of Appeal was following Attwood which in our view the court was not. In Beckett the words severed were words within a definition of ‘client’ which had the effect of extending the concept of client to intermediaries acting for the ultimate client. To regard the severed words as constituting a separate covenant is in our view untenable and was not the approach of the Court of Appeal in Beckett. Rather the Court of Appeal was applying the third limb of the Sadler test. 12.51  The question for the future is what test the courts will apply in considering requests for severance. Will it be the stricter Attwoood separate covenant test or the more pragmatic and commercial Sadler test as adopted in Beckett? In the face of two apparently contradictory Court of Appeal decisions predicting 705

12.52  Drafting restrictive covenants

approaches with any confidence is extremely difficult. In our view the Beckett approach is more likely to be the one followed endorsing the Sadler test which in the main has worked reasonably sensibly for some considerable time. In view of this conclusion in the following paragraphs we look briefly at the background to the Sadler test and how it has been applied in recent years. Before doing so, and particularly in view of the uncertainty created by Tillman, the safest advice of course is to draft covenants to minimise the possibility that any resort to severance will be needed, something often easier said than done. 12.52  Turning to Sadler it is useful to look briefly at the facts of the case and how the test in Sadler was applied by the Court of Appeal in Marshall v NM Financial Management Ltd [1997] IRLR 449 and other more recent cases. In Sadler the question was whether a non-competition covenant, the effect of which was to prevent Sadler indefinitely from working for any other insurance company, could be severed from a clause dealing with Sadler’s entitlement to commission after the termination of employment. The High Court found that it could, the three conditions being satisfied. 12.53  On its facts, Marshall was very similar to Sadler. The case turned on whether an unenforceable restrictive covenant could be severed, leaving intact an entitlement to renewal commission. NM Financial Management argued it could not, primarily because the right to commission was, it argued, conditional on the restrictive covenant. Converting a conditional right into an unconditional one would be a substantial change in the balance of the parties’ agreement. This argument was rejected both at first instance and by the Court of Appeal. Both courts acknowledged that severance would entail an alteration in the character of the contract. However, they concluded that alteration was not objectionable, because the restrictive covenant did not represent the ‘whole or substantially the whole consideration’ given by Marshall in return for the promise to pay renewal commission (the Court of Appeal applying Bennett v Bennett [1952] 1 KB 249). The consideration Marshall had given for the covenants was procuring the business for his then employer prior to termination of employment, not the acceptance of the covenant. Both courts stressed the importance of looking at the substance of the consideration, not the form of the agreement, and Millet LJ warned against attempts by parties to ‘disguise their true intentions by artificial stratagems’ (at paragraph 20). In Beckett Maurice Kay LJ rejected a submission that Marshall and TFS together with other cases decided following Sadler, were either ‘aberrant’ or merely applicable within a sub-set of cases involving future payment of monies under the terminated contract. 12.54  Before leaving the test for severance and looking at examples of its application in recent times it is worth pointing out that in Marshall at first instance the deputy judge (Jonathan Sumption QC) suggested that a fourth condition should be added to the test in Sadler, namely that severance ‘… must be consistent with the public policy underlying the avoidance of the offending part’ ([1995] ICR 1042 at 1047). That fourth condition was treated as a requirement by Cox J in TFS and also by the deputy judge in UK Power Reserve Limited v Read [2014] EWHC 66 (Ch). However, no mention is made of this fourth condition 706

Drafting the covenants: preparatory steps 12.58

in Beckett and it therefore remains doubtful as to whether strictly it stands as a separate requirement. 12.55  Turning to some recent examples of cases in which the courts have exercised their power of severance, see East England Schools CIC t/a 4MySchools v Palmer [2014] IRLR 191 where the court severed a restriction in a non-dealing covenant on Palmer being ‘concerned with’ the supply of certain services on the basis that that could be infringed by her being a minority shareholder in a competing business which would render the covenant too wide. Similarly in UK Power Reserve Ltd v Read [2014] EWHC 66, albeit obiter, the court would have allowed the severance of the words ‘concerned or interested in’ again to address the shareholding issue identified in East England Schools. See also Landmark Brickwork Ltd v Sutcliff [2011]  IRLR  976 where, again obiter, the court would have been willing to sever the words ‘be interested’ (paragraph 34). 12.56 In Tullet Prebon PLC v BGC Brokers LP & Others [2010] IRLR 648 Jack J at paragraph 240 ruled that the words ‘for whom you were responsible’ could be severed from a definition of ‘client’ used in separate non-solicitation and nondealing covenants. Jack J  accepted the argument that because the words were unlimited in time they would cover a situation where a broker’s responsibility for a client had ended years before which would on the facts render the covenant too wide to be enforceable. The words could, however, be excised leaving enforceable covenants for which injunctive relief was granted. In Tullett the first two limbs of the client definition required the person to have been a client within the 12 months ending with the termination of employment, or in the case of a prospective client to be a person to whom Tullett or any group company was ‘actively and directly’ seeking to supply services and there to have been direct or indirect dealings with the ex-employees during that period. The same was not, however, the case where the connection was the ex-employee having had responsibility for the client hence the need for the excision of that element of the definition. 12.57  In contrast with Tullett in Francotyp-Postalia Ltd v Whitehead and Others [2011] EWHC 367 (Ch) considered in detail at 12.130 the court refused to sever words in a definition of ‘Restricted Area’ used in both non-competition and nonsolicitation covenants on the basis that that would involve a re-writing of the bargain reached between the parties. The explanation for the different result in the two cases stems in part from the acceptance by the parties in Francotyp-Postalia that the non-solicitation covenant (as opposed to the non-competition covenant) with the wider, unamended definition of ‘Restricted Area’ was enforceable. In the light of that acceptance, the judge’s conclusion was unsurprising since the first limb of Sadler (see 12.47) was not satisfied. 12.58  Finally it is just worth a reminder that it is a key requirement that no amendment is required to the wording of the covenant following severance. Consequently, if as a result of severance it would be necessary to amend the remaining provision in any way in order that it makes sense, severance is not permissible. For this reason it is never possible to validate by severance a covenant stated to cover a single area which the court has ruled is too wide or otherwise 707

12.59  Drafting restrictive covenants

inappropriate. The only gloss on this condition is that the severed words continue to be available to explain the remaining words: British Reinforced Concrete Engineering Co Ltd v Schelff [1921] 2 Ch 563 (Ch D). So, in T Lucas & Co Ltd v Mitchell [1974] 3 All ER 689 the court was able to sever an invalid covenant not to ‘deal in’ particular goods from a valid covenant not to solicit orders for or supply those type of goods to customers of the former employer, notwithstanding that the description of the type of goods covered was contained in the severed covenant. The description remained available for the purpose of construing the remaining words. 12.59  Severance is allowed more readily in the case of vendor/purchaser covenants: Ronbar Enterprises Ltd v Green [1954] 1  WLR  815, distinguishing Attwood v Lamont [1920] 3 KB 571. However, even in the case of employer/ employee covenants, the Court of Appeal has confirmed that once the pre-conditions for severance are established – ie provided the court ‘find two restraints which as a matter of construction are to be regarded as intended by the parties to be separate and severable, and the excision of the unenforceable restraint being capable of being made without other addition or modification’ – it is not then a matter for the court’s discretion to decide whether to treat the covenants as separate: T Lucas & Co Ltd v Mitchell [1972] 3 All ER 689 at page 694. That quotation has now, of course, to be understood as modified by Beckett Investment Management Group Ltd v Hall [2007] IRLR 793 in relation to the substance of the pre-­conditions, but there is no reason to doubt what it says about the absence of discretion on the part of the court, even when applying the less stringent conditions laid down in Beckett. Indeed, the decision in T Lucas, in so far as it refers to an absence of discretion, was quoted with apparent approval by the Court of Appeal in Beckett at paragraph 39. Express severance clauses 12.60 It is common practice to include an express provision permitting the severance of covenants which are unenforceable, leaving the remaining enforceable covenants intact. Such clauses, however, merely reflect the courts’ common law powers of severance: see for example: UK Power Reserve Ltd v Read [2014]  EWHC  66 (Ch). Although on the facts of that case it was not necessary for the issue of severance to be determined the deputy judge found such a clause ‘… not to add to the powers of the court. Its presence does not affect the result’ (paragraph 95). To similar effect see Monster Vision (UK) Ltd v McKie [2011] EWHC 3772. Consequently whilst such clauses may (unless drafted in more restrictive terms than the common law doctrine of severance) do no harm, their true benefit is merely to serve as a reminder to both parties of the court’s powers of severance which in turn can prompt an early resolution of a dispute. When faced with a challenge to his covenants one important option for the exemployer is always to consider whether there are any deletions that might be made which whilst still providing a sufficient level of protection would make the amended covenants more palatable to the ex-employee and also enhance their prospects of enforceability. Whilst such a course might suggest that the (ex-) employer is not confident in his covenants, where the deletions are ones that a 708

Drafting the covenants: preparatory steps 12.63

court may be likely to make by way of severance, and any proposal can be made on a ‘without prejudice’ basis this approach can often lead to an early resolution of a dispute. The ex-employee faced with a greater risk that the covenants with the offending wording severed will be enforceable may opt to give undertakings (to comply with the covenants in their reduced form), and the significant costs of court action may accordingly be avoided. The same option is, of course, available to the ex-employee and for those who are well advised undertakings offered in settlement will often be crafted with the courts’ powers of severance in mind. For an example of an express severance clause see clause 11 in case study 1 in the Appendix to this chapter. 12.61 Some employment contracts, particularly older ones, include a more elaborate clause which in addition to allowing for deletions purports to confer on the court the power to re-write the contract by substituting such reasonable periods of time (or area) as the court thinks appropriate. It is well established that these more extensive clauses are ineffective: Living Design (Home Improvement) Ltd v Davidson [1994] IRLR 69 (Court of Session Outer House). Because the principle that English courts have no power to re-write a contract (which is subject to English law) is so widely known (see 12.44–12.45) it is very unlikely that this wider type of clause would have any benefit even at the negotiation stage of any employment dispute and we do not recommend including a clause that goes beyond permitting deletions. 2(c)(vii)  Contra proferentem 12.62  This rule now sometimes referred to as the ‘construction against grantor’ rule applies only in cases of ambiguity and where other rules of construction do not assist. It can only be applied to remove an ambiguity not to create one. As a rule of last resort it has not been widely used, although examples in the field of commercial contracts can be found in John Lee & Son (Grantham) Ltd v Railway Executive [1949] 2 All ER 581 at page 583 and more recently in Lexi Holdings plc v Stainforth [2006] EWCA Civ 988 and Pratt v Aigaion Insurance Company [2008] EWCA Civ 1314. See, however, the Court of Appeal’s decision in Persimmon Homes Limited and others v Ove Arup & Partners and another [2017] EWCA Civ 373 where, albeit obiter there being no ambiguity in the exclusion clause under consideration, the Court indicated that the rule had only a very limited role in relation to commercial contracts negotiated between parties of equal bargaining power. 12.63  The substance of the rule is that where the ambiguity can be removed by construing the contract against the originator (or proferens), that will be done: Doe d Davies v Williams (1788) 1 Hy BI  25. In negotiated contracts where both parties contribute to the drafting of the final contract it has been doubted whether the rule can apply. However, strictly speaking if, for example, the employer puts forward covenants on a non-negotiable basis which are accepted as originally drafted by the employee it must at least be arguable that the rule could apply. 709

12.64  Drafting restrictive covenants

12.64  In the context of the interpretation of restrictive covenants, it might be said that this rule sits somewhat uneasily with the approach of the courts over recent years of reading covenants containing material ambiguity wherever possible in a way which upholds their enforceability. In TFS Derivatives Ltd v Morgan [2005] IRLR 246 at paragraph 43 Cox J, accepting a submission on behalf of TFS, described the approach in the following way: ‘… if, having examined the restrictive covenant in the context of the relevant factual matrix, the court concludes that there is an element of ambiguity and that there are two possible constructions of the covenant, one of which could lead to a conclusion that it was in unreasonable restraint of trade and unlawful, but the other would lead to the opposite result, then the court should adopt the latter construction on the basis that the parties are to be deemed to have intended their bargain to be lawful and not offend against the public interest.’

In the majority of cases dealing with the interpretation of restrictive covenants, the approach described by Cox J will mean that any ambiguity is resolved and the contra proferentem rule is not brought into play. However, whilst they will be very rare, it remains conceivable that there will be instances in which the rule may still be relevant and the draftsmen should bear it in mind when reviewing the covenants he has drafted. It is far better to cure any ambiguity at the drafting stage than to have to rely on the court to resolve drafting defects.

2(d)  Rectification of mistakes 12.65  In limited circumstances where, as a result of a mistake, a written contract does not accurately reflect the intention of the parties, a court has the power, but not the obligation, to cure that mistake by amending, or rectifying, the wording of the contract, thereby ensuring that the parties’ intentions are implemented. Where a mistake is obvious – and it is clear what is meant – it is common nowadays, and in particular in the context of restrictive covenants, for the ‘correction’ to be made as a matter of construction. However, there may be situations in which rectification is necessary and it is therefore useful both for a draftsman and those seeking to enforce/resist the enforcement of covenants to know when rectification is available. What follows is a brief summary only of the rules on rectification; for a fuller discussion of this topic see Chitty (32nd edition), Volume 1, paragraphs 3-057–3-104. The traditional analysis of rectification is that it is available where: •

by reason of a mistake common to both parties the written contract does not represent their previous oral understanding: (common mistake): Burroughes v Abbott [1922] 1 Ch 86; or

•

only one party (A) is mistaken about the written agreement, but the other party (B) knows of the mistake and fails to draw it to the attention of A  and it would be inequitable to allow B  to insist on the agreement as written being enforced: Thomas Bates & Son Ltd v Wyndham’s (Lingerie) Ltd [1981] 1  WLR  505 (CA). B’s knowledge may be actual or in effect deemed as a result of B either: (a) wilfully shutting his eyes to the obvious;

710

Drafting the covenants: preparatory steps 12.71

or (b) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make (unilateral mistake): George Wimpey UK Limited v VI Construction Limited [2005] EWCA Civ 77; or •

a purely clerical error has been made.

12.66  To obtain rectification it is not necessary to show that there was a concluded contract prior to the written contract of which rectification is being sought. However, there must have been a continuing common intention regarding the particular provision at the moment of execution: Joscelyne v Nissen [1970] 2 QB 86. As a matter of evidence, as distinct from strict legal requirement (which the older cases required), there must be an ‘outward expression of accord’ between the parties: Munt v Beasley [2006] EWCA Civ 370. 12.67 In Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101 the House of Lords arguably somewhat blurred the distinction between the traditional categories of common and unilateral mistake. They did so by stating, albeit obiter, that whether the required ‘continuing common intention’ was present is to be judged objectively. This approach has not been without its critics, see, for example: Daventry District Council v Daventry Housing Limited [2011] EWCA 153 and Tartsinis v Navona Management Co [2015] EWHC 57. See Chitty at paragraphs 3.077–3.088 for a more detailed consideration of the effect of the ruling. 12.68  Rectification is not available to deal with points which the parties have simply failed to address and on which they have no common intention: Harlow Development Corporation v Kingsgate (Clothing Productions) (1973) 226 Estates Gazette 1960. 12.69 Rectification is available where the words used in the contract do not record accurately what the parties have agreed or where the legal effect of the words used was not what the parties had agreed. So, for example, in Burroughes v Abbott [1922] 1 Ch  86, a case concerning the implementation of a divorce settlement, reference to a fixed sum being made ‘free of tax’, which would have been contrary to tax legislation, was rectified to make it clear that the fixed sum was a net figure, ie the amount due to the claimant after tax had been deducted. 12.70  The parole evidence rule, now sometimes referred to as the exclusionary rule, does not apply in an application to rectify a document: Lovell and Christmas Ltd v Wall (1911) 104 LT 85; Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 at paragraph 47. Contrast contract interpretation generally where the rule remains firmly in place. In Chartbrook the House of Lords unanimously rejected an invitation to review the parole evidence rule re-affirmed in Prenn v Simmonds [1971] 1 WLR 1381. 12.71  In an application to rectify, the burden of proof is on the party seeking rectification and he must produce proof (Joscelyne v Nissen [1970] 2 QB 86) of the inaccuracy of the initial document and the accuracy of the proposed rectified document: Fowler v Fowler (1859) 4 De G & J 250. In Joscelyne the court 711

12.72  Drafting restrictive covenants

referred to ‘convincing proof’ but the House of Lords has confirmed that there is only one standard of proof to be applied in all civil cases which is the balance of probabilities: In re B  (Care Proceedings) [2009] 1 AC  11. In that case the House of Lords rejected the formula that ‘the more serious the allegation the more cogent the evidence needed to prove it’. 12.72  It is a ground for refusing rectification that the parties cannot be restored to the position they were in before the contract of which rectification is sought, but restoration to substantially the same position is probably adequate: Beauchamp (Earl) v Winn (1873) LR 6 HL 223.. 12.73  With the exception of clerical errors, the instances of rectification being an available option in the case of restrictive covenants are likely to be rare. However, it is a power which the court has and which should in appropriate cases be given proper consideration, remembering always that it is an equitable remedy and therefore subject to all the usual principles applicable to equitable remedies including the maxim that delay defeats equity.

2(e) Nature of business/role of the employee/likely competitive activity 12.74 It is imperative to have a full understanding of each of these factors before any drafting is undertaken. One of the most common problems encountered by those seeking to enforce restrictive covenants is that the covenants simply do not reflect the facts accurately and consequently provide only limited protection or, worse still, none at all. For example, if the ex-employee was a senior employee in possession of a considerable amount of confidential information concerning customers but had direct contact with only a very few of them, a covenant prohibiting him from dealing with customers with whom he had direct contact whilst employed would achieve little. Similarly, a covenant which prohibited an ex-employee from competing within a radius of five miles of an address of his employer at which he had never worked would not provide any protection at all for the employer. 12.75 To avoid these pitfalls it is critical that the draftsmen of the covenant undertakes a fully comprehensive fact-gathering exercise at the outset. To assist in that exercise, set out at 12.80–12.83 is an Information Checklist which identifies the types of information which will be needed. The Checklist has been compiled primarily for use where a new employee is being recruited. However, the majority of the information identified should also be gathered when drafting/revising covenants for an existing employee for example at the time of a promotion. 12.76  One word of caution, the Checklist is not, and cannot be, exhaustive and should be used intelligently rather than slavishly followed. If a draftsman of covenants thinks he needs more information he should ask for that information. It is better to err on the side of caution at the drafting stage rather than produce 712

Drafting the covenants: preparatory steps 12.79

defective covenants. To avoid that happening, the draftsman should also always ensure that he takes his instructions from reliable and credible sources. Too often organisations give responsibility for preparation of contracts, even for key hires, to relatively junior human resources/administration staff who have very limited knowledge of exactly what the employee will do and from where any competitive threat may come. Whilst these individuals may be perfectly competent to deal with other aspects of the contract, when gathering information to draft the restrictive covenants the draftsman should ensure that he takes instructions from an individual within the employer’s business with a sound working knowledge of the employee’s role and the potential competitive threat. Usually this will be the employee’s direct line manager or overall head of the area in which the employee will work, or, at the very least, one who cross-checks his instructions with such a person. Employers can be resistant to this approach often on grounds that it is either distracting senior employees from their roles or incurring unnecessary expense or frequently both. However, it is vital that the draftsman persists with his request for accurate instructions, diplomatically pointing out to the employer that it will be a far costlier exercise if the covenants fail for want of accurate information. 12.77 For the same reason the draftsmen should always resist drafting covenants in a vacuum and without sight of the full contract into which they are to be incorporated. A  cost-conscious employer may for example ask for a set of template covenants and may even give reasonably full instructions on the covenant specific information. However, those template covenants will always be interpreted in the context of the contract into which they are incorporated as a whole with the consequent risk that other provisions of the contract will adversely affect the interpretation of the covenants. If the employer insists on the template approach, in providing the covenants the draftsman should always accompany his draft with a very clear written health warning about the enforceability of the covenants. 12.78  As will be seen, the Checklist requires a significant amount of detail to be provided by the employer. In our experience the best and most efficient way to gather that information is in a meeting or on a call with the employer with a careful note being made of the information provided. Employers will rarely provide sufficiently detailed information in writing. By talking to the employer the draftsman should readily be able to pick up additional areas of information that need to be gathered and complete this stage of the process in one, or possibly two sittings, when hopefully the employer is not being distracted by other matters. Once the covenants have been drafted the note can be used in preparing the written rationale for the covenants which we recommend the draftsman prepares and normally shares with the employer at the end of the process: see 12.150. 12.79  One point that arises when drafting covenants for board level, (and some other senior employees), is with whom the draftsman deals. At the fact gathering stage it will generally be appropriate, and indeed important, that the information come from an executive director. However, wherever possible that information should always be checked with the appropriate non-executive director. In larger 713

12.80  Drafting restrictive covenants

companies this is often a member of the remuneration committee. Beyond the fact-gathering stage, and particularly in relation to advice which is to be privileged, for example advice on the enforceability of the covenants, that should only be given to the non-executive director. For non-corporate organisations the same principles apply and the draftsman will need to identify an appropriately independent person with whom to engage.

2(f)  Information checklist 2(f)(i)  Nature of the business 12.80 The key facts which must be established in relation to each company/ organisation for which the employee is to perform services are: (a) The nature of the business and whether it includes types of activity different from those in which the employee will be involved. (b) Who in general terms the relevant customers will be and whether the customer is the whole of an organisation or part only of that organisation (for example a small specialist division of a large organisation or a separate corporate entity within a larger group); whether customers have a contract with the employer, fixed term or terminable by notice; the regularity with which customers place orders/require services, whether they also use other suppliers/providers of services for their requirements; the approximate number of customers and whether they are readily identifiable; the longevity of the relationship between the customers and the employer. (c) Whether there are any business connections to whom the employer provides products or services who would not fall within the ordinary meaning of a customer and in respect of whom the employer is seeking protection. For example the candidates registered with recruitment agency or individuals registered with an employment agency. In relation to each, the nature and longevity of the relationship with the employer. (d) The extent to which intermediaries play a part in the employer’s business, for example insurance brokers or financial advisers. (e) How the employer attracts new/repeat business and the extent to which significant expenditure is involved. The likely lead time and investment cost of converting a prospective customer/client into an actual customer/ client. (f) Who the relevant suppliers will be and any relevant information relating to them, for example, what products they supply to the employer and at what intervals and in what volumes; the longevity of the relationship with the employer; whether there is any scarcity of any particular item supplied to the employer; and whether they also supply competitors of the employer. (g) Where (geographically) the business in which the employee will be involved is carried on as distinct from the employer’s premises. 714

Drafting the covenants: preparatory steps 12.81

(h) Whether in the foreseeable future there is likely to be any material change in the type of business, relevant customers or suppliers, or in the area where the business in which the employee will be involved will be carried on. (i) How the employer’s employment structure works in terms of grading and salary/remuneration arrangements and whether the employer’s workforce consists solely of employees or also includes, for example, partners, members of an LLP or independent contractors. (j) The general approach taken by the employer to notice periods, restrictive covenants and protection of its confidential information. Whether restrictive covenants are included in the contracts of all employees or only those of certain seniority. Whether there is a consistent approach to the duration and scope of covenants across the workforce. In the context of potential competitive activity which categories of employee could be considered to be comparable to the employee for whom the covenants are being drafted and what the broad ambit of their covenants are. (k) Whether there is any industry/sector standard approach to restrictive covenants. (l) Who the employer’s key competitors are and who they are expected to be in the foreseeable future.

2(f)(ii)  Role of the employee 12.81  The key facts that must be established are: (a) The identity of the employer and whether it is an operating company/ organisation for which the employee will perform all or the majority of his duties or a service company which is the employer for a group of companies/ organisations. (b) The employee’s job title, status/grade and basic remuneration package including details of any variable pay and incentive schemes. (c) What, if any, continuing obligations the employee will owe to a former employer. Where the employee is joining as part of a team the same information will be required for each team member. (d) What the employee’s duties will be: if he is to have a job description, then a copy, in final form, should be obtained. (e) What the expectations are for the employee’s future role, for example is he being recruited with a view to promotion as part of a succession plan or with a view to a relocation once a required visa/work permit has been obtained. What representations/promises have been made in this regard. (f) Whether the employee’s skills are very specialised or of general application and the employee’s career history, including details of any customers the employer is hoping the employee will attract. 715

12.81  Drafting restrictive covenants

(g) Where (geographically) the employee will perform his duties ie  the employer’s premises at which he will/could be based and whether he can be required to work from a customer’s premises; (h) Whether the employee will be responsible for the employer’s activities or customers in any specific geographic region. (i) Whether the employee will be required to perform duties for any other company or organisation connected with the employer, for example a subsidiary or associated company or a joint venture company and if so what is the relevant group structure. (j) Whether the employee will have direct contact with customers; if he will have direct contact, with what types and numbers of customers, how regularly and for what reason. (k) Whether the employee will have direct contact with prospective customers; if he will have direct contact, with what types and numbers of prospective customers, and what his role will be in that contact. (l) Whether the employee will have direct contact with suppliers; if he will have direct contact, with what types and numbers of suppliers, how regularly and for what reason. (m) Whether the employee will be responsible for supervising other employees/ personnel; if he will, the same information which is needed for the employee will be required for each employee he supervises. In addition, where those employees/members of personnel already have contracts of employment, copies of those contracts will be needed to see how the various relevant terms including notice period, garden leave provisions and, restrictive covenants might mesh together. (n) The identity of other key employees/personnel with whom the employee will work. As in (m) the same information which is needed for the employee will be needed for those employees/members of personnel, together with their contracts will be required. (o) Generally what trade secrets or confidential information the employee will be privy to and, the extent to which that is directly customer focussed; where relevant, the ‘shelf life’ of that information. (p) Whether the employee will be a Companies Act director and of which entities; separately whether the employee is likely to be classed as a fiduciary. (q) Whether the contract is to be for a fixed term or of indefinite duration and in either case the length of notice required to terminate the contract. Whether there is to be a payment in lieu of notice clause and/or a garden leave clause in the contract and the terms of each. (r) How long the employee is likely to stay with the employer: and how long would it take the employer to replace the employee were he to leave.

716

Drafting the covenants 12.85

2(f)(iii)  Likely competitive activity 12.82  To draft restrictive covenants which will protect the employer it is essential to understand the source of potential competition; what form it will take and how the employer could counteract its effect. The employer will be the person best placed to judge this and in every case it is vital that clear and specific instructions are obtained from a reliable and knowledgeable source within the employer. In addition, that individual must be asked to justify those instructions by explaining why, for example, a particular competitive activity is likely to cause real harm. If the employer is unable to justify his concerns when the covenant is being drafted, that will normally be a strong indication that there is no sound basis for the covenant. In our experience, a timely reminder at this stage that the enforceability of covenants is judged at the time the contract is made tends to produce clearer and more reliable instructions. 12.83  In some instances the competitive activity which the employer anticipates may be very specific. For example, in Littlewoods Organisation Ltd v Harris [1978] 1 All ER  1026 Littlewoods perceived the real threat to be Harris joining their arch-rival Great Universal Stores – hence the area covenant prohibiting Harris joining any part of that group of companies. In other cases the likely competitive activity may be more general, for example, the possibility that the employee builds up a customer following from the employer’s existing customers so that, were he to join another organisation, those customers would transfer their business with him.

3. DRAFTING THE COVENANTS 12.84  Drafting the covenants is a two-stage process. First, the draftsman must decide what types of covenant he is going to include and, secondly, he must determine the ambit of each covenant (see the case studies in the Appendix to this chapter).

3(a) Types of covenant 12.85  The principal types of covenants are listed at 10.43; in summary they are: •

Non-competition or area covenants.

•

Non-dealing covenants.

•

Non-solicitation covenants.

•

Non-poaching covenants.

•

Confidentiality covenants.

In addition some contracts will contain: •

Non-interference covenants.

•

Anti-team moves/association covenants. 717

12.86  Drafting restrictive covenants

The drafting of trade secrets and confidentiality covenants is dealt with at 5.44. In selecting the covenants to include in the employment contract, usually the most challenging decision the draftsman will have to make is whether there is sufficient justification to include a non-competition covenant. That question is considered at 11.50–11.77. 3(a)(i)  Ambit of each covenant 12.86 This is a far more difficult question than deciding which covenants to include and one to which the draftsman needs to give very careful thought, taking into account the rules on enforceability set out in Chapters 10 and 11. Until comparatively recently, all employers tended to want very wide covenants to catch every eventuality. While ultimately the employer’s wishes may prevail, the draftsman faced with those instructions should endeavour to curb what has been described as ‘the wilder extravagances’ of the employer and to draft the covenants as narrowly as is consistent with protecting the employer’s legitimate interests. Where the employer rejects this approach, the likelihood is that the covenants will not be enforceable and the draftsman should advise the employer of this in writing. This is important for two reasons: first, so that there can be no question of any misunderstanding and, secondly, to avoid a negligence claim as and when the courts refuse to uphold the covenant. Giving this negative advice whilst at the same time retaining the confidence of the client is undoubtedly tricky, but it is a responsibility that the draftsman should not shirk. Furthermore, it is key that this advice remains confidential, so even where email is the normal means of communication with the client, this advice is better given in a hard copy letter clearly marked ‘Strictly Private & Confidential Addressee Only’, either delivered by courier or sent by special delivery post, which is much less likely to be seen by anyone who should not be privy to the advice. Where it is necessary to send the advice by email then we suggest that it is set out in a word document which is password protected before being attached to an email. The password should be agreed orally but the draftsman should remember to keep a separate and accessible written note of the password on his file for future use. For emails, use of private rather than business email addresses may also be advisable. 12.87  In recent times there has been a discernible trend amongst some employers to take a more conservative approach and opt for shorter and/or narrower covenants. The more conservative approach may be driven by a variety of factors including previous wider covenants proving ineffective, the breadth of the covenants the employer has been able to negotiate with incoming employees, (particularly those with significant bargaining power) and changes in industry/ sector practices. Although these covenants might at first sight appear to provide more limited protection they are likely to be much less vulnerable to attack on the grounds that they are unreasonable. 12.88  There are two key points the draftsman in this situation needs to bear in mind. First, he must make sure that the covenants are not so limited that they fail to provide effective protection. Secondly, he must be alive to the risk that the shorter and/or more focussed covenants may result in broader covenants in 718

Drafting the covenants 12.91

the contracts of comparable employees being unenforceable. See for example, Patsystems v Neilly [2012] IRLR 979 where the existence of a six month noncompetition covenant in the contracts of comparable, albeit more junior employees, was relied upon by Underhill J  as reinforcing his decision that a similar 12 month non-competition covenant was unenforceable. Where this issue arises, unless re-negotiation of the broader covenants is a realistic option, the employer will have to decide whether to prioritise consistency over greater chances of enforceability for the more focussed covenants. If the broader covenants are not obviously excessive, the employer’s better choice may be to prioritise consistency, but each case will turn on its particular facts. 12.89  Because of this risk of one set of covenants undermining another, it is vital at the fact gathering stage for the draftsman to gain a clear understanding of both the employer’s general approach and practices in relation to covenants and the specific approach to comparable employees and those in the same team. These issues are covered in our Information Checklist (see 12.80–12.83). Having gained that understanding the draftsman must have the impact of this undermining argument at the forefront of his mind, when drafting. To avoid unnecessary repetition we have not referred to the issue in each of the paragraphs in the section below. However, when we refer to the draftsman choosing the shortest periods, narrowest areas etc it is always subject to consideration of the wider issue of the impact on the covenants of other comparable employees.

3(b)  Ambit of the specific covenants 3(b)(i)  Non-competition covenants 12.90  In most cases there are three key factors: geographic area, duration and prohibited activity. The exceptions are those covenants which merely prohibit the employee joining certain identified competitors. Area 12.91  The factors to be taken into account in fixing the geographical area are considered at 11.93–11.100. As those paragraphs illustrate, because there are an increasing number of businesses that are genuinely international, if not global, the definition of area is a less significant topic than it was even a decade ago. Where the business is international or global, the courts accept the ‘area’ should reflect that state of affairs. However, many purely domestic businesses remain, which draw their customers from a more local base. For those businesses, the definition of area is critically important and the factors referred to at 11.93–11.100, as well as the following issues, need to be taken into account. Care should always be taken to include a degree of flexibility within the definition of the area, to avoid the covenant being rendered obsolete by, for example, the employer moving premises, or expanding into new geographical areas. In addition, the area should be defined with precision and remembering that distances are measured on a map as the crow flies; Mouflet v Cole (1872) LR 8 Exch 32. So, for example where a 719

12.92  Drafting restrictive covenants

radius of, say, five miles is used, there should be a stated single point from which the radius is measured; the covenant should not say ‘within five miles of Leeds’. In Landmark Brickworks Ltd v Sutcliffe [2011]  IRLR  976 a non-competition covenant that defined the area as ‘separately and severally Cambridgeshire, Bedfordshire and those parts of the UK to the South thereof and any other place in which the company operates its business for the purposes for which the executive was employed’ was held to be unenforceable. Landmark did not invite the court to sever the words after Bedfordshire and Slade J found that in the absence of a map appended to the Service Agreement ‘… the geographical reach of an area to the south of named counties is inherently uncertain’ (paragraph 39). Also since there was no material from which the words ‘… any other place in which the company operates its business for the purposes for which the executive was employed’ could derive a special meaning, that concept also was too uncertain to define an area; Slade J pointed out the place could variously mean a building site to which Landmark provided services or where the offices of the customer was located or the place/places where Landmark had offices or depots. The case is a salutary reminder of the need for clarity in defining an area. 12.92  In some cases, rather than prohibit the ex-employee competing within a defined area, the employer prefers simply to name a number of organisations the ex-employee cannot join; see Intercall Conferencing Services Limited v Steer [2007] EWHC 519 (QB), [2007] All ER (D) 273 where such a covenant was upheld as being reasonable to protect Intercall’s confidential information. (However, in such a case consideration should be given to whether it is safer to prohibit competition with a (narrower) business activity rather than a (wider) business entity: TFS Derivatives Ltd v Morgan [2005] IRLR 246 (see 12.122) and consideration should also be given to the ‘large client’ problem (see 12.101 and 11.150–11.151).) Usually such covenants make no express reference to the area in which the named competitor operates either because the view is taken that the identity of the named competitors has a built-in geographic limitation, ie they only operate in particular regions or because the threat to the legitimate interest being protected, (generally confidential information), justifies a complete ban on joining the competitor. In identifying his list of named competitors the underlying issue of area should always be borne in mind by the draftsman and in appropriate cases an express reference to area may be appropriate to avoid the covenant being too wide. 12.93  One challenge for the draftsman in this scenario is how to keep the list of names current without falling foul of the principles that the ex-employee should be clear what he can and cannot do and that the covenant must be reasonable at the time it is entered into. Whilst Company A may be a key competitor when the covenant is entered into at the time of enforcement that company may either no longer exist or have been taken over or a wholly different set of competitors may have emerged. Because of these challenges it is relatively rare nowadays to find a non-competition covenant which only prohibits the ex-employee joining named competitors. Where there is such a prohibition, it would more usually be coupled with a conventional non-competition covenant and we would generally recommend that option. Where both types of covenant are included, to support an 720

Drafting the covenants 12.95

argument for severance the draftsman is advised to draft the different prohibitions as separate clauses. 12.94  There are a number of ways to deal with the need to keep the list of named entities current. First, the covenant should provide that the prohibition is limited to the ex-employee joining any named entities where they are in competition with the employer at the end of the employment. Secondly, the draftsman should consider providing that each named entity includes any successor or assigns of the whole or any material part of the entity or its business. Doing so does create the risk that the breadth of the covenant may be significantly expanded where a named entity is taken over by a much larger and more diverse business and the draftsman needs to address that risk in his drafting. Thirdly, to address the possibility of significant new competitors emerging the employer can include a unilateral right to amend the list on written notice to the employee. Such a right was included in the covenant in Intercall but no point seems to have been taken as to the effect of its inclusion. This is probably because the entity which Intercall wished to prevent Steer from joining was one of the original named competitors. Two points of caution on the inclusion of a unilateral right to vary the list of named competitors: first, in our experience it is very common that the employer fails to make any amendments with the result that the original list does not identify key competitors at the time enforcement is sought. Secondly, whilst we are not aware of any authority directly on point, in our view the approach is unlikely to find favour with the courts, particularly when unfettered by any requirement that objectively identifies any addition to the list as needing to be a significant competitor. We take this view based on the courts’ general lack of enthusiasm for clauses which permit unilateral variation by the employer, see 13.30–13.40; this is echoed in the authorities that make it clear that a defective covenant cannot be saved simply by providing that prohibited activities can become permissible if consented to by the ex-employer. 12.95  If a draftsman is to include a right on the part of the employer to amend the list then the following factors may have some influence with the courts. First, a mechanism by which the new name can be objectively identified as a key competitor in the area of the business in which the employee operates. Conditions we have seen used include, rankings in independent annual surveys and level of market share as independently verified by, for example, trade bodies. Secondly a requirement for some discussion/consultation either directly with the employee or a more senior employee/group in advance of a name being added. Whilst, this might to be said to be inviting an objection, in some organisations an annual review of terms of employment is standard and consequently the list of competitors can be revised comparatively easily as part of that general review. Also, presentationally the exercise creates at least the impression of collaboration. Thirdly, wherever possible, the amendments should be made at a time when the employee is being given something extra, to which he is not otherwise entitled, with that additional benefit being linked expressly and directly to the revised list. This last requirement ensures that if the court takes the view that the change is a bilateral variation the employer should be able to demonstrate that the employee has received the necessary consideration; see Reuse Collections Limited v Sendall [2015] IRLR 226 considered at 13.91. 721

12.96  Drafting restrictive covenants

Duration 12.96  The courts may be reluctant to enforce what was described by Underhill J in Patsystems v Neilly [2012] IRLR 979 (at paragraph 44) as ‘the most powerful weapon in an employer’s armoury’, non-competition covenants. Whilst in the current broadly pro-contract climate (see 11.3) enforcement has become increasingly common, this type of covenant remains likely to be closely scrutinised, the courts generally preferring (where appropriate) narrower restrictions such as customer non-solicitation/dealing covenants. To maximise the prospects of enforceability, the draftsman should always elect for the shortest period which will provide meaningful commercial protection. General points on duration of restrictive covenants are discussed at 11.28–11.37 and for the relevance of the length of notice required to be given to the employee: see 11.40–11.41. Prohibited activity 12.97  A common reason for covenants failing is that the prohibited activity is simply too broad. See for example Tim Russ & Co v Robertson [2011] EWHC 3470 (Ch) where Mann J found that a prohibition on activities with which Robertson had not been involved was a factor which ‘… by itself broadens the covenant beyond what is reasonable’ (paragraph 49). In all cases the prohibited activity should be clearly set out and should be no more than is reasonably necessary. Whilst the courts have used the rules of construction to cut down an apparently excessive prohibition in order to give effect to an area covenant: Marion White Ltd v Francis [1972] 3 All ER 857 and Clarke v Newland [1991] 1 All ER 397 and, more recently, TFS Derivatives Ltd v Morgan [2005] IRLR 246 and Dyson Technology Ltd v Strutt [2005] EWHC 2814 (Ch) (considered at 11.101–11.104), the draftsman should never rely on the court to do so. 12.98 A  useful way for the draftsman to identify the prohibited activity is to break it down into two separate issues, first, capacity, ie in what capacity is the ex-employee to be restricted, and secondly scope, ie  what activities are to be restricted. Once the draftsman has his preliminary view on each issue, he should test them rigorously for clarity and to identify any areas where the prohibition might be too wide. That process involves considering precisely what the exemployee could do and, if he cannot do something, why not and what realistic damage the activity would cause to the ex-employer. In our experience it is generally the absence of sufficiently diligent testing at this initial stage that is the cause of covenants being held to be unenforceable. 12.99  An illustration of how this two-step approach can help to identify where a covenant is too wide arises in the context of activities prohibited as a shareholder. So in CEF Holdings Ltd v Mundey [2012] IRLR 912 at trial one of the reasons why the non-competition covenant was found to be unenforceable was because it would have prohibited the ex-employee holding even a single share in a publicly quoted company. Similarly in Landmark Brickwork Ltd v Sutcliffe [2011] IRLR 976 at paragraph 34 whilst indicating that the words ‘be interested’ could have been ‘blue pencilled’ Slade J  felt they would be likely 722

Drafting the covenants 12.101

to be unenforceable as ‘including having a shareholding in a competing business however small’. In both CEF and Landmark the relevant prohibition was the commonly used prohibition against being ‘interested’. Whilst each case will turn on its facts, following the Court of Appeal decision in Tillman v Egon Zehnder Ltd [2017] IRLR 906 as a minimum a non-competition covenant should have a general proviso the same as the usual permitted shareholding provision in quoted companies that normally applies during employment – see 5.31. Whilst some commentators have taken the view that including this type of proviso will be sufficient to protect their covenant from attack we do not necessarily share that opinion. Certainly the proviso will do no harm but will it be enough where for example the ex-employee attacks the breadth of the covenant on the basis it precludes an interest in a private company? For this reason, in our view it may be appropriate to go further and permit a capped shareholding in any non-competitive company or, depending on the seniority of the employee and the likelihood he will have sufficient funds to build up any significant stake in a company or business, take shareholdings/financial interests in a business outside the ambit of the covenant altogether. 12.100  It is worth noting that the objection the courts have taken to prohibition of a mere shareholding interest will not apply to covenants where the prohibited activity involves active competitive participation, direct or indirect, by the ex-employee, for example the canvassing or soliciting of business or dealing with a customer; East England Schools CIC t/a 4MySchools v Palmer [2014] IRLR 191. In those instances, for there to be a breach of the covenant the ex-employee must undertake some competitive activity in addition to holding shares. Contrast a covenant which merely requires that the ex-employee should not be ‘concerned with’ the supply of services. In East England Schools the deputy judge found that formulation would have invalidated a non-dealing covenant since the rules of construction did not justify interpreting the requirement of ‘being concerned with’ as involving a positive act (see paragraphs 79–81). However, he was prepared to sever the words ‘be concerned with the supply to any Client or Prospective Client of Services or otherwise’ leaving an enforceable non-dealing covenant. 12.101  Two particular ways in which the prohibited activity may be sensibly limited are by avoiding blanket bans and by the use of provisos. Particularly in the case of competitors that are large organisations, rather than a blanket ban on joining a competitor the ex-employee should normally only be prohibited from working for a competitor in the type of business in which he worked for the ex-employer. Quite understandably, employers tend to be resistant to the idea that an ex-employee can work for a rival business at all. Sometimes for good reason, they take the view that the apparent engagement of the ex-employee in a different line of business from that in which he worked for the ex-employer is little more than a ‘smoke screen’ designed to sidestep a legitimate restrictive covenant. However, the danger of a blanket ban is that a court will be unwilling to interpret the covenant benignly and will strike down the whole covenant. See, for example: TFS Derivatives Ltd v Morgan [2005] IRLR 246 in which, but for interpreting narrowly a non-competition covenant which appeared to impose a 723

12.102  Drafting restrictive covenants

blanket ban on joining a competitor (so that on the narrower interpretation it restricted only competing business activities of that competitor) the court would have struck the covenant down. 12.102  Provisos can be used to carve out particular activities from an otherwise wide prohibition. For example, the covenant may provide that the ex-employee is not prohibited from working in the public sector or from working for certain named organisations but see 12.92–12.95 generally on the issues involved in referring to named organisations. 12.103 Where provisos are to be used it is vital that they are accurate and achieve the draftsman’s objective. In Prophet v Huggett [2014] IRLR 797 (CA) a clear but ineffective proviso resulted in a toothless non-competition covenant and the consequent discharge by the Court of Appeal of the injunction granted at first instance. In Prophet the first part of the covenant provided that Huggett could not be involved ‘in any business which is similar to or competes with, any business of the company in which the employee shall have worked whilst employed hereunder (in that they provide computer software systems of whatever kind to any company involved in the fresh food industry’). It was common ground between the parties that without any qualification that wording would have been too wide to have been enforceable (paragraph 6). The wording was, however, qualified, by a proviso to the effect that the prohibition would only apply ‘… In connection with any products in, or on, which [Huggett] was involved whilst employed hereunder’. Whilst employed Huggett had only worked on two software products Pr2 and Pr3. Since neither were provided by any competitor to anyone the result was a covenant which had little or no commercial effect. In rejecting attempts by Prophet to save the covenant on the basis that something had ‘gone wrong’ in the drafting, the court took into account the fact that the draftsman was ‘plainly sensitive’ to the risk of the initial part of the covenant being void and consequently for the ‘need for the proviso to be drawn very tightly’. Rimer LJ therefore approached the proviso ‘on the basis that it was a carefully drawn piece of legal prose in which the draftsman chose his words with deliberate and specific care’. He commented (paragraph 35) ‘That is exactly what one would expect in the drafting of a restrictive covenant; and the fact that the proviso was tacked on to clause 19 with the plain intention of saving the validity of the clause as a whole merely serves to underline that’. In the Court of Appeal’s view this was not a case where something had gone wrong with the drafting, the wording was unambiguously clear, but rather the draftsman had not thought through the ‘concept underlying his chosen words’ (paragraph 36); had he done so the court felt the draftsman would have started again. The case is a stark illustration of how inadequate rigour in the drafting by legal advisers of a covenant can lead to disaster. In view of the emphasis the court placed on the proviso being a careful piece of legal prose and following the decision in Wood v Capita Insurance Services Limited [2017] 2 WLR 1095, (considered at 12.30) the involvement of lawyers in the drafting is a significant factor in the interpretation of covenants. Accordingly, legal advisers must scrutinise the covenants which they draft rigorously, ideally including scrutiny by a colleague or counsel, before finalising them. 724

Drafting the covenants 12.106

3(b)(ii)  Non-solicitation/non-dealing covenants 12.104  The key factors are duration, the definition of the customer/supplier and prohibited activity. Duration 12.105  In practice, the period of these types of covenants is scrutinised less than the period of a non-competition covenant. However, the court has no power to reduce the period the parties agree and therefore the period should be selected carefully, taking into account matters such as the regularity with which customers place orders/require services, the role of the employee, the period it is likely to take another employee to be recruited, trained and to establish a relationship with the customer and what is normal in the particular industry/sector. In the rare case where the covenant is designed to protect confidential information (which is more usually protected by a non-competition covenant) the principal factor will be the ‘shelf life’ of that confidential information. Duration generally is considered in more detail at 11.28–11.37 and in relation to non-solicitation/non dealing covenants at 11.198–11.201. Definition of the customer/supplier 12.106  Which customers can legitimately be the subject of restrictive covenants, and the basis on which they can constitute a legitimate interest of the employer, are discussed at 11.135–11.196. Drawing clear conclusions from the authorities is far from easy and in considering the enforceability of a non-solicitation covenant the Court of Appeal recently remarked that because cases ‘… turn so much on their own facts that the citation of precedent is not of assistance’: Sir Bernard Rix in Coppage v Safety Net Security Limited [2013] IRLR 970 (CA) at paragraph 9. However, whilst acknowledging the highly fact sensitive nature of each case there are certain common threads running though the authorities and the following are our suggested guidelines: •

It must be clear what is meant by the term ‘customer’. In many cases it is, but there are instances where it is not – for example, who is the ‘customer’ of a recruitment consultant: the individual whom the consultant places with a new employer or the new employer? If there is any doubt, then an appropriate definition or definitions should be included to avoid subsequent dispute. So, for example in East England Schools CIC t/a 4MySchools v Palmer [2014]  IRLR  191 the schools with which East of England matched teacher applicants were described as ‘clients’ and the teachers as ‘candidates’. Some covenants, often those found in older contracts, refer to both customers and clients but define neither group. In practice, the two terms have broadly the same meaning and which is appropriate will depend on the employer’s business. Professional services firms will use the term client whereas a manufacturer would tend to refer to their customers. To reduce the scope for future arguments it will generally be better to use only the term most appropriate to the employer’s business. Throughout this book 725

12.106  Drafting restrictive covenants

we have generally referred to customers to avoid unnecessary duplication but the term client should be used where that is more apt on the facts. •

Where the customer is a large organisation, but the employer only deals with, for example, a particular branch or department, thought should be given to whether the covenant can and should be limited to that particular branch or department. To date the courts have been willing to take a fairly benign approach to the issue of large customers recognising the practical difficulties for the draftsman and construing covenants narrowly in order to give the ex-employer some protection – see, for example, First Global Locums Limited v Cosias [2005]  IRLR  873 and Le Puy Limited v Potter [2015]  [IRLR] 554 considered at 11.150–11.151. However, where it is possible to adopt a narrower definition, without making it too simple for the covenant to be circumvented, consideration should be given to that approach.

•

The covenant should not include anyone who becomes a customer after the employment terminates – the only exception to this is where there is a separate covenant dealing with prospective customers (with whom the employee was negotiating during employment: see bullet points below).

•

Whilst there may be some exceptional cases, customers should in our view be defined as such within a specified period (which we refer to as the ‘customer backstop period’) prior to the termination of employment. This period should be fixed taking into account the regularity of contact with the customer and by reference to the ‘customer cycle’, ie the intervals at which the customer normally requires goods or services; for example in the case of the insurance business, where contracts generally run for 12 months, the appropriate backstop period would be 12 or possibly 13 months, an additional one-month grace period often being permitted by insurers for those customers who are a little tardy in sorting out their ‘annual’ renewals. See 11.152–11.154 for further detail on appropriate customer backstop periods.

•

If prospective customers are to be included, the term should be carefully defined to catch only those persons on whom the employer has expended time and effort (and consequently resources including money) in an attempt to secure their custom. The covenant should also appear in a separate subclause to facilitate severance, if needs be. In practice finding a definition for prospective customers that identifies a sufficiently strong connection to justify the covenant is often difficult. A common formulation is to refer to direct negotiations for the supply of goods or services with the (ex-)employee which have occurred within a relatively short period prior to termination of employment. That formulation has been upheld by the courts; see for example International Consulting v Hart [2000] IRLR 227. In some sectors the alternative of a recent pitch/tender for business in which the ex-employee has been involved may be an appropriate formulation. Similarly, building in concepts such as the (ex-)employee having ‘responsibility for’ or a relationship with ‘the prospective customer’ may be an option although in Advantage Business Systems Ltd v Hopley [2007]  All ER  D  the mere fact that a meeting had been arranged for a demonstration of a product where the prospect of any business being done was too speculative for the organisation

726

Drafting the covenants 12.106

to be a prospective client. What is clear is that the greater the degree of effort and resource expended to secure prospective business and the more pivotal the role of the (ex-)employee in that process the higher the chance a covenant will be upheld; see for example the comments albeit obiter of the deputy judge in Associated Foreign Exchange Ltd v International Foreign Exchange (UK) Ltd [2010]  IRLR  964 at paragraph  70. See also Axiom Business Computers Ltd v Frederick Unreported 20 November 2003 (Outer House) (per Lord Bracadale at paragraph 33) and WRN Ltd v Ayris [2008] IRLR 889. On prospective (or potential) customers generally see 11.181–11.189. •

The covenant should set out the link between the employee and the customer either through: (a) direct dealings (which is the norm in most cases), or (b) indirectly through, for example, direct supervision of other employees with whom the customer had direct dealings as a result of which the employer had access to confidential information, or (c) access to confidential information concerning the customer, for example because of the employee’s seniority. (For when a link short of direct dealings between employee and customer is sufficient see 11.142–11.145.) Since the absence of an appropriate link between ex-employee and customer is the most common reason for a nonsolicitation/dealing covenant failing, this is a key area of focus for the draftsman. As in the definition of customer, the link should be seen to be reasonably current, and the normal provision is therefore that the link, which we refer to as the personal backstop period, must take place/be active within a specified period prior to the earlier of: (a) the termination of employment; and, where relevant, (b) the date on which the employee is excluded from the business in accordance with an express garden leave provision. The reason for this is to ensure that the covenant is not rendered nugatory as a result of the employee having no contact with, or information in relation to, customers whilst on garden leave. For example, where the covenants define the protected pool of customers as those with whom the employee dealt in the six months prior to the termination of his employment and the employee spent those six months on garden leave at the employer’s request, there would be no customers in the protected pool and therefore the covenant would be of no use to the (ex-)employer. Where, however, the protected pool of customers is those with whom the (ex-)employee dealt in the six months prior to commencing garden leave, the (ex-)employer will have the benefit of protection in relation to those customers. It is worth noting that it is not necessary for the personal backstop period to match the period of the covenant; see for example Romero Insurance Brokers v Templeton [2013]  EWHC  1198 and East England Schools CIC t/a 4MySchools  v Palmer [2013] EWHC 4138.

•

The link between the employee and a prospective customer must also be very clear. Whilst broadly the same principles outlined in the previous bullet point apply the quality of the relationship is likely to come under even greater scrutiny in the case of prospective customers. For this reason ideally the covenant should be limited to those with whom the (ex-)employee had direct personal contact and did so within a relatively short period prior to 727

12.107  Drafting restrictive covenants

termination. Where possible the contact should also be limited to contact in connection with attempts to secure business although in International Consulting Services Limited v Hart [2000] IRLR 227 (considered at 11.187) because of Hart’s central and influential position that was not considered to be a necessary element of the connection. Contrast Arbuthnot Fund Managers Limited v Rawlings [2003] EWCA Civ 518 (CA) where on appeal the Court of Appeal declined to uphold a covenant to the extent that the basis for the connection was knowledge of discussions held by other employees. Where an employee may have differing degrees of involvement with particular groups of prospective customers an approach is to have two separate covenants. The first covenant would cover those prospective customers with whom, for example, the employee is conducting the negotiations and the second where the connection is looser, for example, where the prospective customer has less potential and so the negotiations are conducted by a more junior employee, with only limited information being passed to the senior employee. Where the covenant is against solicitation of or dealing with suppliers, the same basic points as outlined above apply, modified to take account of the different relationship, such as the regularity of supply. See 11.230–11.232 in relation to supplier covenants generally. Prohibited activity 12.107  The draftsman should always describe with precision the precise activity which is to be prohibited. Where a covenant does not expressly define the type of business the employee is prohibited from soliciting/transacting with the customer, the court may nonetheless interpret the covenant to be limited to that part of the employer’s business in which the employee was engaged: GW  Plowman v Ash [1964] 3 All ER  10 and Business Seating (Renovations) Ltd v Broad [1989] ICR 729. However, the draftsman should never rely on the court taking this approach; it did not do so, for example, in Greer v Sketchley Ltd [1979] IRLR 445 (CA), nor in Scully UK Ltd v Lee [1998] IRLR 259 (CA). 12.108  The principles of the avoidance of blanket bans and the use of provisos considered in 12.101–12.102 apply equally in the case of non-solicitation/non dealing covenants. In Coppage v Safety Net Security Limited [2013] IRLR 970 (CA) in upholding a six month non-solicitation covenant one of the factors on which the Court of Appeal placed reliance was the proviso that solicitation was only prohibited where its purpose was to ‘solicit business which could have been undertaken by us’. In the context of a small and stable customer base where Coppage had been the face of the business the Court of Appeal interpreted the proviso as requiring a ‘commercially realistic possibility’ of Safety Net providing the relevant services to the customer. In the words of Sir Bernard Rix at paragraph 22 ‘In effect the proviso emphasises that the purpose of the clause is to counter the diversion, from employer to employee, of realistically available custom of customers who would be known to Mr Coppage through his employment’. It is the concept of diversion of realistic custom that is central to effective non-solicitation/non-dealing covenants and it is a concept that the draftsman 728

Drafting the covenants 12.112

should have at the forefront of his mind when framing both the protected pool of customers/potential customers and the prohibited activity. 3(b)(iii)  Non-poaching covenants 12.109  Non poaching covenants generally are considered at 11.207–11.226. The key factors are duration, defining the ‘staff’ and the prohibited activity. Duration 12.110  The difficulty is that there is no particularly obvious yardstick by which to set a period in this type of covenant and there is little guidance that can be gleaned from past cases although for examples see the Appendix to Chapter 11 – 11.292–11.293. Effectively what the employer is seeking to do is to protect the stability of his workforce and simultaneously prevent the ex-employee using the knowledge he has acquired of the skills, aptitudes and remuneration terms of other members of staff and capitalising on the working relationship and influence he has built up with or over them (and often indirectly on their relationships with customers thereby increasing his chances of securing future business from those customers). Since the strength of the relationship between an ex-employee and his former colleagues will in many cases weaken as time passes, lengthy periods are unlikely to be reasonable. Other relevant factors will include the seniority of the individual, whether the employee works as part of a close-knit team, the likely time to recruit a replacement and for that replacement to secure the loyalty of the team and the extent of investment in training. 12.111  In practice, the poaching of staff is something which tends to take place either before employment has ended or shortly thereafter. It is most common in occupations where staff work in teams and, consequently, where other members of the team are necessary to support the key member of the team. Because poaching of colleagues often takes place within a relatively short period of the ex-employee leaving, it is not uncommon to see non-poaching covenants of relatively short duration, for example, three or six months. However, we are not aware of any case in which a non-poaching covenant has been held unenforceable solely on grounds of duration. Generally this type of covenant fails because either the protected pool or the prohibited activity has been too widely cast. In view of concerns expressed by the courts about unduly inhibiting the free movement of labour, normally the maximum duration should be 12 months and the draftsman should not automatically assume that will be appropriate in every instance. In cases of highly skilled employees where the norm is lengthy notice periods and where recruiting a replacement may be a lengthy process, that is arguably a ground for a longer covenant at or near our suggested cap. Defining the staff 12.112 In this section we have deliberately used the word ‘staff’ rather than employees. The reason is that the employer may have individuals working for him 729

12.113  Drafting restrictive covenants

who are not employees, for example, independent contractors, but who are significant in the context of the employer’s business and whom he wishes to retain. 12.113 Where the poaching of those who are not employees is to be prohibited, in our view the draftsman should include a separate covenant dealing only with them or, at the very least, prefix the reference to this category of staff in the covenant with a disjunctive ‘or’ to facilitate the possibility of severance in appropriate cases. Although the inclusion of covenants prohibiting the poaching of independent contractors has become increasingly common, perhaps somewhat surprisingly there is an absence of cases where they have been tested. Since the Court of Appeal has recognised as a protectable interest an employment agent’s connection with its pool of temporary workers: Office Angels Ltd v RainerThomas and O’Connor [1991] IRLR 214 we see no reason why in principle the courts would not afford similar status to the connection with independent contractors especially, where as is often the case in the modern ‘gig’ economy, their connection with the business is akin to that of an employee. However, in view of the emphasis placed by the courts on the free movement of labour we would expect a stringent approach to be taken to a covenant affecting the interests of an independent contractor whose connection with the business will normally, but nowadays certainly not always, be less than that of an employee. 12.114  The definition should cover only those who were employed/engaged at the same time as the ex-employee (ie not individuals who were first employed/ engaged after the ex-employee left). The covenant should be limited to those staff the employer really needs to protect. Precisely who that will be will depend on the particular facts but usually it will not extend to the entire workforce and often junior and support staff can, and should, be excluded from the scope of the covenant. In defining the protected pool we do not advocate the use of general descriptions such as ‘senior employees’. This and a similar formulation have been accepted by the courts: see Dawnay Day & Co Ltd v De Braconier D’Alphen [1997] IRLR 422 (CA) and Alliance Paper Group plc v Prestwich [1996] IRLR 25. However, in both those cases the employees had behaved reprehensibly and the courts were keen to show their disapproval by upholding the covenant. Against a different factual background it is possible that these types of general phrase could be found insufficiently certain. Consequently, in our opinion the description should be as specific as possible. Often it will be, for example, the more senior employees/ independent contractors the employer wishes to protect and definitions linked to job title, grading or salary/fee structure may be appropriate, subject to allowing some degree of flexibility to cover the possibility of change. 12.115  In addition, the covenant should require there to be an identified and reasonably current link between the ex-employee and those he is to be prohibited from poaching. In CEF Holdings Ltd v Mundey & Others [2012] IRLR 912 a six month non-poaching covenant which applied without qualification to all 3,000 employees of CEF was held to be unenforceable. In refusing to uphold the covenant Silber J  found it was a fatal objection to the clause that the exemployee would not know if he was in breach, Because of the breadth of the covenant it would have extended to employees with whom there had been no 730

Drafting the covenants 12.119

contact, about whose work the ex-employee would know little and to whom no loyalty was due. 12.116  The most common basis for the link between the ex-employee and the protected pool is material contact or dealings which should normally be during the final 12 months of employment or, where the-employee may be excluded from the business by being sent on garden leave, the 12 months immediately before any garden leave starts. However, other formulae may be considered, for example defining the protected pool by reference to direct/indirect reports to the ex-employee or the business unit for which the ex-employee was responsible. Prohibited activity 12.117  There are various degrees of prohibition the employer can select. In a similar way to covenants taken to protect customers, the primary distinction is between a prohibition on soliciting/enticing away and a prohibition on dealing, in the sense of not employing/engaging or arranging employment for the exemployer’s staff. The wider non-employment style of covenant is considered at 11.220–11.223. As we predicted in earlier editions of this book on the whole nonemployment covenants have not found great favour with the courts primarily for public policy reasons relating to the impact on employability of colleagues other than the covenanting employee. See, for example, the comments of Tugendhat J in White Digital Media Ltd v Weaver [2013] EWHC 1681 and see also Monster Vision UK  Ltd v McKie [2011]  EWHC  3772 both relying on the obiter comments of Robert Walker J in Dawnay Day & Co Ltd v De Braconier D’Alphen [1997] IRLR 422 (CA). However, since there are reported cases at first instance in which non-employment covenants have been upheld – see TFS Derivatives Ltd v Morgan [2005] IRLR 246 and Hydra v Anastasi [2005] EWHC 1559 (QB) – see 11.221 and 11.225 – the question remains open until resolved by the Court of Appeal. In the meantime, therefore, the employer needs to decide whether he wants to attempt to prohibit both types of activity, ie non-solicitation/enticement and non-employment. Where the employer opts to attempt for both types of protection the draftsman should always use a separate sub-clause for each prohibition and ensure that he drafts each with precision. 12.118  One formulation of the prohibited activity which seems to be becoming increasingly common is to provide that solicitation is only prohibited in the context of a competitive business. Whilst that additional degree of focus may in practice be all that the employer considers necessary, its limitations in terms of the stability of the workforce generally must be recognised. Provided other aspects of a non-solicitation/enticement clause are appropriately narrowly drafted, in our view it is not necessary in every case to limit the prohibited activity in this way. 3(b)(iv)  Non-interference covenants 12.119  Before leaving this section on specific types of covenant it is worth mentioning a type of covenant sometimes used in situations where the connection with 731

12.120  Drafting restrictive covenants

the protected entity/person is weaker than in the traditional categories of customers and employees. Less commonly it may also be used as an additional covenant to protect those traditional categories. This type of covenant provides only that the ex-employee is prohibited from interfering in the employer’s relationship with for example independent contractors or, more usually, suppliers. In some formulations it is qualified so that it is clear that its purpose is merely to ensure that current arrangements, for example a particular contract, are maintained. In other cases the prohibition is broader and in practice little different from a non-solicitation or non-dealing covenant. The enforceability of this type of covenant will be judged in the same way as any other covenant but it is fair to say that at the stage the covenants are being negotiated this formulation is often regarded by the employee as less aggressive and it is therefore more readily agreed. This type of covenant in the context of the relationship with suppliers is considered at 11.230–11.232. 12.120  In selecting and formulating the covenants he will include, the draftsman should consider whether any non-interference covenants are appropriate. In doing so, it is important to look at the bigger picture of the covenants, ie how they will look overall to a court and to what extent an opponent may argue that a narrower covenant undermines the justification of a broader one. In Coppage v Safety Net Security Ltd [2013] IRLR 970 (CA) the Court of Appeal has confirmed that there is no principle that a covenant will be struck down merely because a narrower covenant could have been drafted. Where a narrower covenant has, however, been included, in effect as a type of insurance policy, in practice it is likely that it will be taken in to account by the court and therefore may undermine other broader covenants, if the narrower covenant provides sufficient effective protection. In our experience courts are influenced by the overall effect of the combination of covenants used. For this reason we would usually recommend limiting non-interference covenants to exclusive or highly significant suppliers and to independent contractors and to focus such covenants as narrowly as possible, eg by limiting the prohibited acts to ones likely to cause cessation or diminution of supply or services. 3(b)(v)  Anti-team moves/anti-association covenants 12.121  Another kind of covenant which has started to find its way into contracts of employment (more often in partnership/LLP agreements) is the anti-team move (or in its more extreme form, anti-association covenant). The two different forms of this type of covenant are considered at 11.224–11.226.

3(c)  General drafting points 3(c)(i)  Preambles and recitals 12.122 Preambles or introductory words to covenants which set out the justification for the covenants should be used with caution since covenants will be construed in the light of any preamble. Preambles may serve as a useful 732

Drafting the covenants 12.123

aide-memoire to what was in the mind of the employer, and possibly also the employee, at the time the covenants were entered into, and that can help save a covenant that would otherwise be too broad; see, for example, Arbuthnot Fund Managers Ltd v Rawlings [2003]  EWCA  Civ 518 (CA) and TFS  Derivatives Ltd v Morgan [2005] IRLR 246. In TFS Cox J (at paragraph 46) relied, amongst other things, on the introductory words to a non-competition covenant to limit the activities prohibited by the covenant to those which were competitive with the business activity in which Morgan had been involved for TFS, with the result that the covenant was found to be enforceable. In contrast, however, some preambles can prove to be unduly limiting: see Office Angels Ltd v Rainer Thomas and O’Connor [1991] IRLR 214 (CA) at paragraphs 39–43, where the preamble was one of the reasons a non-competition covenant was held to be unenforceable. In Office Angels the Court of Appeal found that the effect of the preamble was to limit the purpose of the covenant to protecting Office Angels’ trade connections with its clients. However, on the facts of the case, the non-competition covenant was neither appropriate nor necessary to protect those trade connections and Office Angels were precluded by virtue of the preamble from justifying the covenant by reference to another protectable interest, namely confidential information. Similarly in Countrywide Assured Financial Services Limited v Pollard [2004]  EWHC  1214 a three-month non-competition covenant stated to be for the protection of confidential information was not upheld where the employer subsequently sought to justify it by reference to customer connection. 12.123  A distinction may, however, be drawn between wording that expressly sets out the justification for the covenants on the one hand and wording that reflects aspects of the role of the (ex-)employee. In Patsystems v Neilly [2012] IRLR 979 the contract included a clause (clause 8.4) in which Neilly acknowledged that in the course of his employment he was ‘… likely to have dealings with the clients, customers, suppliers and other contacts of the Company’ and agreed that the various covenants were separate and severable and reasonable to protect Patsystems’ legitimate interests. The clause also included an agreement for blue-pencilling and reducing the periods of any covenants found to be too long. Relying on the judgment in Office Angels, Neilly argued that the inclusion of the acknowledgment amounted to an exclusive statement of the covenants’ purpose. Underhill J, (at paragraph 43) rejected that submission. Whilst he said that he reached his conclusion ‘not without some hesitation’ he felt that ‘On balance, I do not think that the words relied on in this case, appearing where they do, can be taken as an explicit agreement that trade connection is the only interest intended to be protected’. The real basis for the distinction between the two cases is, as Underhill J  pointed out, where the words appeared. In Office Angels the relevant words appeared as the introduction to the covenants and immediately under a heading ‘Protection of goodwill’ read ‘In the course of his or her employment the employee has dealings with the clients of the Company and in order to safeguard the Company’s goodwill the employee agrees’, and were then followed by the various covenants. Contrast the wording in Patsystems which albeit similar in some respects lacked the express statement of purpose, ‘in order to …’ and appeared in a standard boilerplate type clause at the end of the covenants. In our view the conclusion reached in Patsystems is correct but the case amply demonstrates the degree of precision required of the draftsman. 733

12.124  Drafting restrictive covenants

12.124 Occasionally, covenants rather than being in the main contract of employment are contained in a separate contract. In those cases it is not unusual for that contract to include recitals setting the scene for the covenants in addition to the operative provisions. In that scenario it is important for the draftsman to bear in mind that whilst recitals cannot trump the express operative provisions, in the event of ambiguity in the operative provisions, the recitals as well as other parts of the contract may be used to resolve the ambiguity – see Chitty (32nd edition), Volume 1 at paragraph 13-068. Clarity of language 12.125  The language used in drafting the covenants should be clear and certain. The prudent draftsman should select the terminology he uses with considerable care to ensure that it is plain on the face of the covenant precisely what is prohibited. Where vague or uncertain terms are used so that the meaning of the covenants is not clear, the draftsman runs the risk that his covenants, or at least parts of them, will be found to be too uncertain to be enforceable. So, for example, in Davies v Davies (1887) 36 Ch D 359 a covenant to retire from business ‘so far as the law allows’ was held to be too vague to be enforced. See also Landmark Brickwork Ltd v Sutcliffe [2011] IRLR 976 considered at 12.91 where the words used to define the area were found to be too uncertain to be enforceable. Similarly, in Norbrook Laboratories (GB) Limited v Adair [2008] EWHC 978 (QB) the court found that the phrase ‘had direct access to’ was too uncertain to be enforceable. In that case the covenant sought, amongst other things, to prevent the (ex-)employee from soliciting/dealing with particular customers or prospective customers whom she had ‘direct access to and/or dealings with’ in a defined period. The court found that the phrase ‘direct access to’ was clearly intended to mean something different from ‘dealings’, but it was wholly unclear precisely what that meaning was. In Norbrook the court was willing to sever the uncertain words and, following severance of other sections of the covenant which would have rendered it too broad, the covenant was upheld. It is unwise, however, for the draftsman to rely on this benign approach from the courts. Norbrook is a useful reminder that when selecting a number of alternative bases for the connection between the (ex-)employee and a pool of customers, it is vital for the draftsman to consider precisely what the difference is intended to be between those different bases. In Norbrook, not only did the court contrast ‘direct access to’ with ‘dealings’, but also thought it unclear what the distinction might be between ‘direct access’ and ‘access’. 12.126  In contrast with Davies and Norbrook are a number of cases in which the courts have rejected arguments of uncertainty. For example, non-poaching covenants were upheld in two cases notwithstanding the use of somewhat vague phraseology to define the protected pool of staff: see Alliance Paper Group plc v Prestwich [1996] IRLR 25 (a prohibition applied in respect of those employed/ engaged ‘in a senior capacity’) and Dawnay Day & Co Ltd v De Braconier D  ‘Alphen [1997]  IRLR  442 (CA), where the protected pool was any ‘senior employee’. For further discussion of defining the protected pool in non-poaching covenants see 11.214–11.219. Similarly, in International Consulting (UK) 734

Drafting the covenants 12.130

Limited v Hart [2000] IRLR 227 the prospective customers were identified as those who had been ‘negotiating’ with International Consulting. The court gave short shrift to an argument that the terminology was too vague to be enforced. The deputy High Court judge, said at paragraph 32: ‘Although it is true there may be borderline cases, in which it is hard to say whether communication with a prospective customer amounts to “negotiations” it does not follow that the provision is too uncertain to be enforced. In most cases it will be clear on the facts whether it does. Where it is not, the court has to make up its mind; this is part of the ordinary process of interpreting a contract.’

12.127 In Le Puy v Potter [2015] IRLR 554 the High Court at the interim stage rejected an argument that the expression ‘deal with’ in a 12 month covenant prohibiting dealings with specified customers was too vague and made the covenant too wide to be enforceable. As the deputy judge pointed out (at paragraph 37) the expression ‘deal with’ appears in the restrictive covenants considered in a large number of reported cases, and he was not aware of any previous suggestion that it, of itself, produced too wide a restriction if the class of persons with whom such dealing was prohibited was properly limited. Definitions 12.128  Because it is often difficult for the draftsman to find a succinct way of expressing precisely what he is intending to prohibit, the use of definitions in covenants is common practice. 12.129  Definitions of particular terms have the dual advantage of making the covenants more readable and potentially more certain. So it is usual to include definitions such as ‘Customer’, ‘Business’ (to define the type of business with which the ex-employee cannot compete) and ‘Relevant Period’ (to set the period within which: (a) an entity must have been a customer, or (b) the ex-employee must have had a connection with the customer: see 11.152–11.155. 12.130 However, definitions should be used with some caution, particularly where the defined term appears in more than one covenant. A useful illustration of the potential dangers for the draftsman can be seen in Francotyp-Postalia Ltd v Whitehead and Others [2011]  EWHC  367 (Ch), a case involving covenants in a franchise agreement. The agreement included one year non-compete and non-solicitation covenants each applying within the same defined ‘Restricted Area’. The definition of Restricted Area had three limbs; the first was the area in which permission to trade was given under the franchise agreement and the other two limbs were significantly more extensive. Before the court the parties agreed that if the non-competition covenant was limited to the first limb of the definition, it would be enforceable, if not, it would be too wide. The parties also agreed that the non-solicitation clause was enforceable as drafted, ie extending to all three limbs of the definition. Against that background the court refused Francotyp-Postalia’s request to sever the second and third limbs of the definition of ‘Restricted Area’. Peter Smith J indicated that he would have been willing to do so had the definition applied only to the non-competition covenant. However, 735

12.131  Drafting restrictive covenants

as the revised definition would then apply to other covenants ‘That means that the court has re-written a part of the contract which is (a) accepted as valid and is thus (b) a variation of what the clause means’ (paragraph 28). Consequently the severance would fall foul of the first condition in Sadler v Imperial Life Assurance Company of Canada Ltd [1988] IRLR 388 – severance is considered generally at 12.46–12.61. 12.131 Accordingly, although a convenient tool in drafting, the draftsman should always consider whether the same definition is appropriate for each of the covenants. Where there is any doubt, separate definitions should be used for particular covenants. As an alternative the full definition could be set out in each covenant. Whilst this would necessarily involve longer covenants and run counter to the rationale for the use of definitions, the indication in Francotyp-Postalia was that severance in those circumstances may well have been permitted to save the non-competition covenant. Flexibility 12.132  As a general rule, covenants should be drafted to include some flexibility, allowing for changes in the facts. For example, a non-competition covenant prohibiting activities by reference to an ex-employee’s former place of work should not simply refer to a specific address. Since the employer may move premises or the ex-employee be relocated to a different office, the covenant should limit activities by reference to premises at which the ex-employee was based in, say, the last 12 months of his active employment, ie  the 12 months immediately before the earlier of the termination of employment or the date the employee is sent on garden leave. In the same vein, limiting the type of business in which the ex-employee may not be involved by reference only to his duties at the time of hire will result in obsolete covenants where the employee’s role changes significantly. Usually the better option is to limit activities by reference to what the ex-employee did during the latter part of his employment. Provisos can also be a useful means of incorporating flexibility in a covenant – see 12.101–12.103 on provisos generally. 12.133  Although very specific covenants are the best if they are kept up to date, invariably they are not, and in addition there is the problem that the employee’s consent is required for any change – see 13.120–13.125 in relation to variation of covenants. 12.134  Some draftsmen attempt to secure flexibility by including provisions to the effect that otherwise prohibited activities will be permitted where: (a) the employer consents, and (b) in more elaborate clauses that the consent will not be unreasonably withheld. Whilst there is probably little harm in including the first type of wording in our view it is likely it will simply be disregarded by the court. The second type of wording is potentially more problematic and could give rise to an argument that the requirement renders the scope of the covenant unclear and therefore void for vagueness. However, in both Chafer Ltd v Lilley [1947] 176 LT 22 and Technograph Printed Circuits Ltd v Chalwyn Ltd 736

Drafting the covenants 12.137

[1967]  RPC  339 the court simply disregarded this type of consent provision. Compare, however, Kerchiss v Colora Printing Inks Limited [1960]  RPC  235 where the same type of provision was one of the factors the court took into account in upholding the covenant. In our view Chafer and Technograph are to be preferred. In practice, points are rarely raised nowadays on these types of provision supporting our conclusion that both permutations are likely to be disregarded by the courts. 12.135  Irrespective of the legal effect of consent provisions, occasionally they may have the practical benefit of avoiding an unnecessary dispute arising. For example, to flush out the likely reaction to his proposed activities the (ex-)employee rather than seeking permission puts the (ex-)employer on notice of what he plans to do and the (ex-)employer then ‘gracefully’ consents. In reality this tactic is only likely to work where the proposed activities will not cause any significant harm to the (ex-)employer’s business but nonetheless in those circumstances it has the benefit of creating certainty for the (ex-)employee and can give the (ex-)employer the basis for a ‘message’ to other employees bound by similar covenants. In effect the message will be that on this occasion the employer has ‘generously’ chosen not to rely on his strict rights but that it sets no precedent for the future. 12.136  Another tactic by which some draftsmen seek to inject a level of flexibility into covenants is by including wording to the effect that the employer can determine when a breach occurs. In Basic Solutions Limited v Sands [2008] EWHC 1388 a 12 month covenant sought to prohibit Sands from holding a ‘Material Interest’ (as defined) in a third party ‘which requires or might reasonably be thought by the Company to require disclosure or use of confidential information to discharge his duties or to further his interest in the third party’. On the facts the issue was academic but Eady J clearly signalled he was not comfortable with the formulation commenting (at paragraph 23) ‘One needs to be very careful about a clause which appears to give the employer stipulating for it the right to determine what shall constitute a breach of contract’. We share Eady J’s reservations and would not recommend that this type of formulation is used in covenants. 3(c)(ii)  Covenants ‘during and after employment’ 12.137  Covenants should not, in our view, be expressed to run during as well as after employment. The protection the employer will and can, by express terms, benefit from in these two periods is in our view quite different. The protection is far broader whilst the employment relationship exists and therefore where the covenants run concurrently with the employment the likely effect will be to cut down, rather than add to, that protection. For example, during employment the employer can legitimately prohibit a full time employee working for any third party and indeed that is a standard express term in contracts (see 5.27). Once employment has ended such a term would be unenforceable. Similarly during employment a prohibition on encouraging any other member of staff to leave is in our view unobjectionable (see 5.35). For the ex-employee, however, the protected pool, of employees must be carefully defined; see 11.214–11.219 and 12.112–12.116. 737

12.138  Drafting restrictive covenants

3(c)(iii)  Garden leave offset 12.138 In our view, the prudent course will normally be to provide that the period of the covenants is reduced by the period for which the employee is excluded from the business by being sent on garden leave but see Credit Suisse Asset Management Ltd v Armstrong [1996] IRLR 450 and Tradition Financial Services Limited v Gamberoni [2017] IRLR 698, and 11.238–11.247 for a fuller discussion of this issue. The exception will be where the aggregate period of maximum garden leave, by way of exclusion from the business, and the covenants is relatively short, for example, 12 months or less. 12.139  One important point to note is that the contract must be clear as to what constitutes ‘garden leave’ for the purpose of the offset provision. Typically garden leave clauses have been drafted to give the employer a range of options including taking away certain duties from the employee, requiring him to undertake entirely different duties or excluding him entirely from the business and from his colleagues, with all of the options falling under the loose description of garden leave. The question then becomes which (if any) of those options trigger the reduction of the length of the covenants. Precisely this point arose in Ashcourt Rowan Financial Planning Limited v Hall [2013] IRLR 637. The relevant clause in the contract included all of the options we have outlined and, separately, time spent on garden leave was expressly to be offset against the period of the non-competition covenant in issue. Following his resignation, Hall was not excluded entirely from the business. Instead he was required to perform duties largely from home and in broad terms to work on handover arrangements for clients which included him being accompanied at client meetings. Hall claimed that these arrangements amounted to his being sent on garden leave thereby triggering the reduction in the length of the covenants. Ashcourt denied that was the case and argued that the reduction would only be triggered if Hall had been totally excluded from the business which was not the case. Andrew Smith J (paragraph 35) accepted that the expression ‘garden leave’ ‘most naturally connotes a time when an employee is not required or permitted to do any work’. On that basis and taking into account the particular drafting of Hall’s contract he ruled that Hall had not been on garden leave and consequently there was no reduction in the period of the covenant. In the event, the non-competition clause was found to be too wide to be enforceable so Ashcourt’s victory on the garden leave point was pyrrhic. However, the case is a clear signal of the need for precision in drafting garden leave clauses and the corresponding offset provision. See 5.123–5.132 in relation to garden leave clauses generally (including a precedent clause) and clause 8 in case study 1 in the Appendix to this chapter for a precedent offsetting provision. 12.140  Finally on the issue of offsetting garden leave, in Associated Foreign Exchange Ltd v International Foreign Exchange (UK) Limited and another [2010] IRLR 964 in considering the reasonableness of the covenants the Court (HHJ Jeremy Cousins QC) declined to offset a period spent on garden leave in excess of that envisaged by the contract. The contract included a six month nondealing covenant and a 12 month non-solicitation covenant. The employment was terminable on two months’ notice and the ex-employee could be sent on 738

Drafting the covenants 12.143

garden leave for the entirety of notice, with any period of garden leave being offset against the length of the covenants. The ex-employee spent three months on garden leave but the court concluded (paragraph 63) that only two months could be taken into account at the time the contract was entered into ‘it was that period of garden leave which was in contemplation’. 3(c)(iv)  Indirect activities 12.141  The ex-employee should always be expressly prevented from carrying out the prohibited activities, not only directly but also indirectly. Whilst it is strongly arguable that a prohibition on a particular activity impliedly includes an obligation not to undertake that activity indirectly, it is far better to put the matter beyond doubt. In the absence of such a provision, the ex-employee may, for example, try to circumvent the restrictions by ensuring that any activities in which he is banned from taking part are carried out by a third party not directly caught by the covenant, for example, a colleague at the new employer. Generally speaking the courts are alive to such ruses and the various bases on which they have been unsuccessful are considered at 11.24–11.27. However, rather than leaving matters to chance there will be no downside in including the wording and indeed it is notable that as Martin Chamberlain QC (sitting as a deputy judge) pointed out in Rush Hair Ltd v Hayley Gibson-Forbes and SJ Forbes Limited [2017] IRLR 48 (considered at 11.24–11.25) at paragraph 38 court orders that forbid specified acts will include as standard that the acts are not to be done ‘directly or indirectly’. 3(c)(v)  Repudiatory breach 12.142  Attempts to provide that the covenants survive an accepted repudiatory breach of an employment contract, for example by saying that the restrictive covenants apply following termination ‘howsoever caused’, are ineffective: Rock Refrigeration Ltd v Jones & Seward Refrigeration Ltd [1996] IRLR 675 (CA). See 11.286 for a consideration of these types of provision, which are still often included in restrictive covenants on the basis they may have some commercial deterrent value, even though they have no legal effect. 3(c)(vi)  Protection for group companies/other connected entities 12.143  Where the covenants are designed to protect the interests of the employing company and other entities (for example subsidiaries, joint venture companies and other organisations), thought must be given to how the covenants will be enforced on behalf of those other entities. Arguably this issue may be of less significance than previously in view of the willingness of the courts to place less importance on corporate personality than on the commercial realities of how corporate groups operate: see, for example Beckett Investment Management Group Ltd v Hall [2007] ICR 1539 (CA) and the discussion at 10.34–10.41. However, in our view it would be dangerous to assume that the courts will always adopt this course. Assuming direct contracts are not to be entered into with each entity 739

12.144  Drafting restrictive covenants

(which would be unusual), two basic options are available which may be used separately or together. The contract can provide that the employing company enters into the covenants as trustee of and agent for the subsidiaries, holds the benefit of the covenants on trust for them and is entitled to enforce the covenants on behalf of the subsidiaries as though they were parties to the agreement. We would always recommend that this formula be included. In addition, an obligation can be included on the part of the employee that, if requested to do so, he will enter into separate covenants with each other entity in the terms of the covenants he has given to his employer. The difficulty with this additional formulation is that covenants in the same terms may not be wholly appropriate. However, in our view, any attempt to retain flexibility, for example by framing the obligation as one to enter into covenants in ‘an appropriate form’ is unlikely to be enforceable. The same may even be true where the rubric ‘substantially the same form’ is used. It may nonetheless be a commercial lever to achieve the employer’s goals. Where this latter obligation is included, to address the issue of consideration it would arguably be prudent to provide for some additional payment to be made to the employee if the right is exercised. 12.144  One important point to note is that the Contracts (Rights of Third Parties) Act 1999 cannot be used to give a third party the right to enforce covenants in a contract of employment against the employee; section 6.3 expressly excludes such an option. 12.145  See also 10.34–10.41 in relation to protection of subsidiaries and connected entities generally. 3(c)(vii)  Acknowledgement of reasonableness 12.146  Including within the covenants an acknowledgement by the parties that they are reasonable has no legal effect, although it may, of course, have a practical impact on the ex-employee. Such a provision was considered by the Court of Session (Outer House) in Hinton & Higgs v Murphy and Valentine [1989] IRLR 519, where it was regarded as ‘probably an illegitimate attempt to oust the jurisdiction of the court’ (Lord Dervaird at paragraph  4). Similarly, in Symbian Ltd v Christensen [2001] IRLR 77 the Court of Appeal described such a provision as ‘… of very little legal value because it is the opinion of the court, not the parties which determine the validity of the covenants’ (Morritt LJ at paragraph 54). 12.147 More recently in Ashcourt Rowan Financial Planning Ltd v Hall [2013]  IRLR  637 at paragraph  38 Andrew Smith J  placed little weight on the acknowledgement of reasonableness pointing out that ‘… the parties cannot by their bargain prevent or limit the enquiry about whether covenants comply with public policy’. Similarly in Dinsdale Moorland Services Ltd v Evans [2014] EWHC 2 (Ch) an argument that the claimant was entitled to summary judgment based on a clause of this sort was unsurprisingly given short shrift by the court. Likewise in First Subsea v Baltec [2014] EWHC 866 (Ch) First Subsea sought to rely on a clause acknowledging reasonableness of the covenants as establishing a contractual estoppel. Rejecting this argument Norris J said (at paragraph 280): 740

Drafting the covenants 12.149

‘Covenants in restraint of trade are not enforceable on public policy grounds (save in particular circumstances). Employers cannot avoid the legal necessity of establishing those circumstances by incorporating a standard term requiring every employee to state that in his or her opinion the terms are fair. What matters is not whether the parties think the terms are fair but whether the law accepts the terms as fair’.

3(c)(viii)  Legal advice 12.148  Where the employee has had separate legal advice in connection with entering into the covenants that is worth recording in the contract. In our experience, it can assist an employer in obtaining an injunction particularly where the ex-employee is attempting to run highly questionable arguments on the interpretation of the covenant. In those types of case, the courts often take the view that the ex-employee knew full well the import of the covenants at the time he entered into them. By running disingenuous arguments on interpretation at a later stage, that may simply reinforce the court’s resolve to hold the ex-employee to his bargain. Consequently, including a reference to the fact that the ex-employee had received separate legal advice is a useful reminder of a potential argument that could otherwise be overlooked because, for example, there has been a long gap between the covenant being entered into and enforcement being sought and, apart from the ex-employee, those originally involved in negotiating the contract have moved on. Where the ex-employee is very senior and was advised by skilled and very experienced legal representatives, reference to the ex-employee having had the benefit of that advice should always be included. In practice these are factors that are likely to carry weight with the court in any matter of contract interpretation. For example, in Tullett Prebon Group Ltd v El Hajjali [2008] IRLR 760 in rejecting an argument that a contract term amounted to an unenforceable penalty Nelson J took into account not only that El Hajjali was a sophisticated individual with equality of bargaining power with Tullett but also that throughout the negotiation of the contract he had the ‘assistance of a skilled and extremely experienced firm of solicitors’ (paragraph 72). 12.149  Of less practical value in our view is the inclusion of a statement that the ex-employee had the opportunity to take legal advice before entering into the covenants. Whilst such statements are not uncommon, where legal advice was not actually taken – normally because the employee is not willing to bear the cost of doing so – the existence of the opportunity is unlikely to carry much weight with the courts. A possible exception to this is where it is important to dispel any suggestion of undue pressure being put on the employee to sign the covenants, for example, where covenants are being entered into in the context of a bigger transaction, such as a company sale being negotiated against a tight timetable and where the employer has offered to meet the cost of the advice but the employee has not taken up that offer. Whilst that information could be given in evidence, it is perhaps convenient to record it within the covenants to avoid it being overlooked when enforcement of the covenants is sought. 741

12.150  Drafting restrictive covenants

3(c)(ix)  Note of rationale 12.150  Once the covenants are drafted, the draftsman (where he is a solicitor) should prepare an aide-memoire for his file setting out the rationale for each covenant and, where he is of the view that any covenant is unenforceable, or borderline, he should give that advice in writing to the client so as to avoid any subsequent negligence claims: see also 12.78. 3(c)(x)  Ancillary clauses 12.151 In addition to drafting the specific covenants and the directly related clauses already outlined above there are a few additional and ancillary clauses which it is worth the draftsmen considering. The first is an entire agreement clause, identifying the document or documents that comprise the arrangements between the parties and recording that they represent the entire agreement between the parties. Including such a clause is helpful in putting beyond dispute the sources of the agreement between the parties. In addition it is also wise to provide that the (ex-)employee, (although such clauses are often mutual), has not entered into the agreement in reliance on any representations made by or on behalf of the (ex-)employer. In the course of negotiation of a contract it is not uncommon for representatives of the employer to make statements/representations about the effect of covenants and the draftsmen should endeavour to limit, if not eradicate the legal effect of those representations. See 5.148–5.149 which also includes a precedent clause. 12.152 As well as statements/representations about covenants being made before a contract is signed it is equally common for that to occur after employment has commenced. Such comments often raise arguments as to whether the covenants have been varied in a way on which the (ex-)employee is able to rely. To seek to minimise that risk it is now quite usual to see clauses that provide the contract of employment (or sometimes just the covenants) may only be varied by written agreement of the parties. The rationale for this is to create a system of control thereby avoiding a multiplicity of ad hoc side agreements and to maintain consistency across a workforce. Following the obiter comments in Globe Motors Inc v TRW LucasVarity Electric Steering Limited [2016] EWCA Civ 396 and the subsequent Court of Appeal decision in MWB Business Exchange Centres Ltd v Rock Advertising Limited [2016] EWCA Civ 553 such clauses so far as they purport to exclude oral variations will not be enforceable. Note, however, that MWB has been appealed to the Supreme Court. The appeal was heard on 1 February 2018 and the judgment is currently awaited. Pending the outcome of the appeal such clauses may still be of some practical value, for example in deterring an (ex-)employee from either seeking a variation or believing that he may rely on comments suggesting a variation has been agreed. In some instances the clause will go further and provide that a variation may only be agreed by a specific job holder, frequently a Companies Act director, or someone immediately below that level, for example the head of Human Resources. Whilst that condition too could be varied, it may well be difficult for an (ex-)employee to persuade a court that 742

Drafting the covenants 12.154

an (ex-)employer having taken the trouble of nominating those with authority to agree variations, had departed from that approach; this is particularly so where the clause is limited to variations of covenants. For a precedent of this type of clause see 5.149. 12.153  One common question asked by draftsmen is whether there is any advantage in providing for payments to be made to the (ex-)employee during the period of a non-competition covenant. Commercially of course, giving the ex-employee a level of income can have the practical effect that he will abide by the covenant. In that situation he is not faced with the alternative of finding work outside the scope of the covenant or being idle with no income. The consequence for the ex-employer, however is the additional costs he will incur. From a legal perspective, on balance and taking into account the current state of the authorities on the adequacy of consideration generally (see 13.94–13.102), whilst making payments will do no harm it is in our view unlikely to carry much weight with a court which is considering whether covenants are reasonable. In Bartholomews Agri Food Limited v Thornton [2016] EWHC 648 McKenna J, referring to the comments of Simon Brown LJ in JA Mont (UK) Ltd v Mills [1993] IRLR 172 (CA) at paragraphs 37–40, and declining to enforce a covenant was not persuaded by the fact that Thornton would be paid and went further in saying: ‘To my mind it is contrary to public policy in effect to permit an employer to purchase a restraint’ (paragraph 26) although he recognised that covenants entered into in the context of severance agreement would be an exception. Whilst public policy considerations are undoubtedly relevant, both as to the general interest in competition and in the proper use of the employee’s skills, in our view McKenna J’s statement goes too far. Occasionally covenants contain provisions to the effect that either they will only apply if the ex-employer pays or that the employer has an option to extend the period of restraint subject to making a further payment or payments to the ex-employee. As a general rule we would not recommend either formulation, although there may be some situations in which these types of arrangement may be appropriate. See also 13.102. 12.154  Finally, it is common practice to include a clause requiring the employee to disclose the restrictive covenants to any prospective employer before any offer of employment is accepted. The purpose of the clause is two-fold. First, assuming it is honoured, it puts the prospective employer on notice of the covenants, a fundamental requirement of any action against the prospective/new employer for inducement of breach of contract. Secondly, it can have the effect of either causing the recruitment to be abandoned if the risks of infringement are assessed as too high or of moderating the competitive activity, thereby reducing damage to the current employer. For an example of this type of clause see clause 13 in case study 1 in the Appendix to this chapter. Further, breach of such a provision may have the effect in any litigation of putting the defaulting employee ‘on the back foot’ or of constituting unlawful means for the purposes of an unlawful means conspiracy claim (see 19.39–19.51).

743

APPENDIX TO CHAPTER 12

Case Studies

CASE STUDY 1:  EXCEL COPIERS (UK) LIMITED AND BRIAN THOMAS Facts Excel Copiers (UK) Limited (‘Excel’) are proposing to recruit Brian Thomas (‘Thomas’). The lettering used below follows that in the Information Checklist at 12.80–12.83.

Nature of business (a) Excel is a company engaged in the sale and servicing of multi-functional devices for printing, copying and scanning (‘MFDs’). The average life of an MFD is five years and the average cost is £30,000. Excel has one wholly-owned subsidiary, Office Supplies & Sales Limited (‘OSS’), which sells office stationery. Excel and OSS are run as though they are a single company using the same regional and national management teams. There are no other parent, subsidiary or associated companies. (b) The relevant customers will be the customers of Excel and of OSS who have any business premises or operations in the South East of England (comprising Kent, Surrey and Sussex). The relevant customers of Excel fall into two categories: occasional customers, who simply buy one or more MFDs, and continuing customers who, having purchased one or more MFDs, enter into an annual service contract. The position is much the same for OSS: some customers are occasional; others have annual supply contracts. In the last year in the South East region: Excel had 1,500 occasional customers and 500 customers on annual service contracts; and OSS had around 2,000 occasional customers and 750 customers on annual supply contracts. The majority of customers of both Excel and OSS use primarily those companies for their relevant requirements and the customers of each company are of mixed longevity. In each case the customers are relatively small local businesses, not part of bigger companies. All the customers are readily identifiable from the electronic customer databases of Excel and OSS which are organised on a regional basis. (c) All those to whom Excel or OSS provide goods or services fall within the ordinary meaning of customers. 744

Case study 1:  Excel Copiers (UK) Limited and Brian Thomas

(d) Excel and OSS deal directly with their customers; there are no relevant intermediaries. (e) Excel and OSS attract new business within their individual regions primarily by mail shots, advertising in local press and on local radio, exhibiting at trade fairs, sponsorship of local events and direct contact with customers/ prospective customers through their regional sales and management teams. The annual marketing budget for each region of Excel is typically around 15% of annual turnover and for OSS it is typically around 10% of annual turnover. (f) Excel has long-standing relationships with its suppliers. Excel sells three different brands of MFDs. Of these, one, manufactured by Easy Copy Inc. (‘Easy Copy’), is sold and serviced by Excel in the UK under an exclusive distribution agreement. Over the last ten years revenue deriving from the sale and servicing of Easy Copy’s machines has consistently accounted for 50% or more of Excel’s turnover. The other two brands of MFDs are sold under non-exclusive distribution agreements. OSS has a multitude of different suppliers; some are long-standing others are not. (g) Excel and OSS operate throughout the UK. Both companies are run on the same regional basis with only very limited exchange of information between the regions. (h) There is a possibility that Excel will extend its operations into Europe although it is unlikely that they will open offices outside the UK in the next three to five years. Subject to this possible exception no material changes are planned to the business of either Excel or OSS as outlined in the information given in points (a) to (g) (above). (i) Neither Excel nor OSS have a formal grading structure. They do, however, have very distinct salary bands. The most senior employees are in Band A and the most junior in Band J. The majority of support staff will be in Bands E to J. Bands C and D apply exclusively to Salesmen and Service Engineers. Thomas and other Regional Directors are in Band B. Basic annual salaries for salary Bands A to D are as follows: Band A Band B Band C Band D

£60,001+ £45,001 – £60,000 £35,001 – £45,000 £30,001 – £35,000

All those working for Excel or OSS are employees retained on contracts of employment. (j) Neither Excel nor OSS has a dedicated HR function; both rely on ad hoc advice from external HR consultants. Employees in salary bands E  and below are on statutory minimum notice. The notice period for those in salary bands B  to D  (inclusive) is three months from either party. The most senior employees in salary band A  are on six months’ notice from 745

Case Studies

either party. All contracts of employment include a standard confidentiality clause, a garden leave clause (applying only after notice has been given by either side) and a salary only payment in lieu of notice clause. There is no consistent approach to post-termination restrictive covenants. Some of the more recently recruited staff in salary bands B to D have restrictions on dealing with/soliciting the business of customers for 12 months, less any period spent on garden leave. The longer serving employees have no restrictive covenants. (k) In so far as there is any industry standard for restrictive covenants, Excel and OSS’ instructions are that non-competition covenants are rare. Covenants prohibiting dealings with customers and the poaching of employees range in duration from 6 to 12 months, depending on the seniority of the individual. (l) Both Excel and OSS have a multitude of competitors. No competitor has a significant market share and it is unlikely that position will change in the foreseeable future. Role of the employee (a) The employer will be Excel. Excel is an operating company and it is envisaged that Thomas will spend around 65% of his time on Excel business and 35% on OSS business. (b) Thomas’ job title will be Regional Director – South East Region reporting to the Managing Director. His remuneration package will be: a salary of £52,000 p.a. with a car, private health insurance, and eligibility to join a defined contribution pension scheme. He will also have the right to participate in a bonus scheme with a maximum potential bonus of 20% of salary. (c) Thomas’ only continuing obligation to his former employer is one of confidentiality, his current contract includes a standard confidentiality clause. He has no post-termination restrictive covenants. He is not being recruited as part of a team. (d) Thomas’ duties will be the co-ordination and management of the businesses of Excel and OSS in the South East of England. He will be the account manager for customers designated by each of Excel and OSS as ‘key’ customers and he will have particular responsibility for acquiring significant new business. He will not have a job description. (e) There are no specific plans for Thomas’ role to expand or change in the foreseeable future. His recruitment is not part of any succession planning. See however, the information in (r) below. (f) Thomas’ skills are essentially those of a salesman and a manager. He has previously held similar positions in the motor trade, in retail clothing and most recently with a company that sells and services industrial 3D printers. With one exception he has always worked in the South East of England and he is well networked with businesses in the region through his membership 746

Case study 1:  Excel Copiers (UK) Limited and Brian Thomas

of chambers of commerce, the rotary club and a local prestigious golf club. It is not envisaged he will bring any customers with him, nor is it a condition of his recruitment that he does so. (g) Thomas will be based at offices in Guildford but required to travel throughout the South East of England. His contract will not provide for his normal place of work to change. (h) The region for which Thomas will be responsible is South East England (comprising Kent, Surrey and Sussex). (i) Thomas will perform services only for Excel and OSS. (j) Thomas’ direct contact with customers will primarily be with those designated ‘key’ customers. His role outside these specific customers will be more a leadership and oversight role, co-ordinating activities across his region and leading on strategy. He will have access to all information relating to activities in his region. (k) Thomas will have direct responsibility for attracting and negotiating with significant prospective customers, being those whose potential initial business is worth £50,000 or more in the case of Excel, and £20,000 or more in the case of OSS. Because these prospective customers are ones who are likely to have annual contracts with other providers, negotiation with them can be a lengthy process often taking many months and the timing of securing them as a customer will usually have to dovetail with the expiry of a current arrangement. (l) Thomas’ only expected contact with suppliers will be with the suppliers of the MFDs to Excel. Because the Chief Executive of Easy Copy is Thomas’ uncle, with whom he has a good relationship, it is proposed to put him in charge of liaison with Easy Copy and the negotiation from time to time of any variations to the exclusive distribution agreement. (m) Thomas will be responsible for supervising the sales and servicing staff of Excel in the South East Region and the sales staff of OSS in the South East Region. Each of those members of staff will have direct contact with customers but not suppliers, all ordering being dealt with through a central supplies department. The regularity of contact with customers will depend on the type of customer but customers other than occasional ones would normally be contacted at least once per month and visited at least quarterly and more frequently in the three months leading up to the expiry of an annual contract. The employment documentation for the sales and servicing staff is relatively short – relevant provisions are as described in paragraph (j) under the heading Nature of Business. (n) The key personnel Thomas will work with are the sales and servicing staff of Excel in the South East Region, the sales staff of OSS in the South East Region and, on a much less regular basis, the other Regional Directors. There are no relevant independent contractors. All the other Regional Directors are long-serving employees and their contracts do not include post-termination restrictive covenants. 747

Case Studies

(o) There are no trade secrets. Excel regard the following information as confidential: financial performance, budgets, operational and marketing strategy; the terms of the distribution agreement with Easy Copy; the terms of the agreements with all other suppliers; details of the planned new product lines proposed by Easy Copy and the two other manufacturing companies whose MFDs Excel sell; the identity, contact names and contact details of and the requirements of all South East Region customers and the arrangements negotiated with those customers in terms of delivery timeframes and pricing structures; details of the identity, contact names and contact details and requirements of prospective customers including the content of all negotiations with those prospective customers, information provided by customers in confidence; details of Excel and OSS’ employees, including terms of employment; Thomas has no access to information relating to customers of other regions (other than financial information about volume of business and profitability which does not identify the customer or pricing policy generally). (p) Thomas will not be a director under the Companies Act 2006. (q) To terminate Thomas’ contract either party must give not less than three months’ notice in writing. Consistent with the contracts of his colleagues in the same salary band Excel have expressly reserved the right once notice has been given by either party to send Thomas on garden leave for all or any part of his notice period or to make a payment of salary only in lieu of all or the balance of his notice period. (r) Excel have no firm idea how long Thomas may stay with them. There are no current plans for his role to change. If a European expansion goes ahead there is a possibility that Thomas could be promoted, join the Board and take responsibility for sales in Germany since he is a fluent German speaker and has previously worked in Germany. However, Excel do not want this potential future move to be factored into the drafting of his employment contract now as they plan to produce a new contract for him if his role changes. If Thomas decided to leave, assuming an external hire it would take around four to five months until a replacement could start. The length of time to consolidate the relationships with customers is difficult to assess but for those on annual contracts Excel and OSS believe it could be up to 12 months to catch the renewal of annual contracts. Likely competitive activity Excel and OSS have three key concerns. First, that Thomas may join an existing competitor in the MFDs market or set up in competition in that market and seek to obtain for that competitor, or himself, the exclusive distribution agreement with Easy Copy. Secondly, that Thomas may join a competitor or set up in competition in the office stationery market. Excel are keen to have a non-competition covenant to discourage these possibilities but want it drawn by reference to the South East region for which Thomas will be responsible and it is in that region that Thomas has his best connections. The third concern is that Thomas may take 748

Case study 1:  Excel Copiers (UK) Limited and Brian Thomas

key customers or key prospective customers with him to a competitor or his new enterprise. Excel’s assessment is that the possibility of Thomas poaching other employees is low risk but they accept the wisdom of having a non-poaching covenant included in their suite of covenants. Excel have asked that the covenants be tightly focussed on Thomas’ proposed role. Drafting In the covenants set out below Thomas is referred to as the ‘Executive’, Excel as the ‘Company’ and OSS as ‘OSS’. To enable the restrictive covenants (and other obligations continuing after termination of employment) to be disclosed to a potential new employer without full disclosure of the contract we have suggested that these provisions be included in a Schedule. Where the employer is not concerned about full disclosure of the contract the provisions can be included in the main body of the contract. SCHEDULE 1.1 In this Schedule the following words and phrases shall have the following meanings unless the context otherwise requires: ‘Capacity’ means as an employee, director, officer, partner, member of a limited liability partnership, consultant, principal, agent, adviser, investor (or other funder or financial backer) or shareholder. ‘Competing Business’ means any business which within the Territory competes or is preparing to compete with any business or activity carried on by the Company or OSS at the Termination Date or at any time during the Relevant Period in which the Executive shall have been directly involved to a material extent in the course of his employment at any time in the Relevant Period. ‘Key Employee’ means any employee of the Company or OSS remunerated at the rate of salary band D or above (or on such equivalent salary bands as the Company or OSS may adopt from time to time) and with whom the Executive had material dealings in the course of his employment at any time during the Relevant Period. ‘Prospective Customer’ means any person, firm, limited liability partnership, company or other organisation who or which was at the Termination Date in negotiations with the Company or with OSS with a view to entering into a contract with the Company or OSS for the supply of Restricted Goods or Services and with which negotiations the Executive had direct and material involvement in the course of his employment. ‘Protected Supplier’ means Easy Copy Inc. and any other supplier of goods sold by the Company or OSS with whom the Executive had direct and material dealings in the course of his employment during the Relevant Period. 749

Case Studies

‘Relevant Period’ means the 12 month period ending on the earlier of the Termination Date and the date (if any) on which the Company exercises its rights under Clause [insert clause number of garden leave provision]. ‘Restricted Customer’ means any person, firm, limited liability partnership, company or other organisation who or which was at any time in the Relevant Period or on the Termination Date a customer of the Company or of OSS and with whom or which (i) the Executive had material dealings in the course of his employment duties at any time during the Relevant Period or (ii) to the knowledge of the Executive any employee reporting directly to the Executive had material dealings in the course of their employment in the Relevant Period. ‘Restricted Goods or Services’ means any goods or services of a type provided by the Company or OSS at the Termination Date or at any time during the Relevant Period and in relation to which the Executive shall have been directly concerned to a material extent in the course of his employment at any time in the Relevant Period. ‘Termination Date’ means the date of termination of the Executive’s employment with the Company. ‘Territory’ means the counties of Kent, Surrey and East and West Sussex. 1.2 In this Schedule reference to clauses shall be to clauses in the Schedule unless the context otherwise requires. 2.1 The Executive shall not, so as to compete with the Company or OSS, during the period of six months immediately following the Termination Date within the Territory be directly or indirectly involved in any Capacity with a Competing Business or in the setting up of a Competing Business, provided always that nothing in this clause 2.1 shall prevent the Executive from owning or being interested directly or indirectly for passive investment purposes only (a) not more than three per cent of the total issued share capital of any company whose shares are quoted on any recognised investment exchange or (b) shares or securities conferring not more than 7.5% of the votes that could be cast at a general meeting of any company not being a Competing Business whose shares are not quoted on any recognised stock exchange. 2.2 For the purpose of clause 2.1, any acts done outside the Territory shall nonetheless be deemed to be done within the Territory where their primary purpose is the obtaining of or fulfilling of orders for Restricted Goods or Services from any person, firm, limited liability partnership, company or other organisation with business premises or operations within the Territory. 3.

750

The Executive shall not, so as to compete with the Company or OSS, during the period of 12 months immediately following the Termination Date directly or indirectly on his own account or on behalf of or in conjunction with any person, firm, limited liability partnership, company or other organisation in connection with any Restricted Goods or Services canvass or solicit or entice away or seek to canvass solicit or entice away from the Company or OSS any Restricted Customer.

Case study 1:  Excel Copiers (UK) Limited and Brian Thomas

4.

The Executive shall not, so as to compete with the Company or OSS, during the period of 12 months immediately following the Termination Date directly or indirectly on his own account or on behalf of or in conjunction with any person, firm, limited liability partnership, company or other organisation (i) enter into or seek to enter into any contract or arrangement relating to Restricted Goods or Services with any Restricted Customer or (ii) by any other means act for, deal with or accept or fulfil orders from any Restricted Customer in relation to Restricted Goods or Services.

5.

The Executive shall not so as to compete with the Company or OSS during the period of 12 months immediately following the Termination Date in connection with the supply of Restricted Goods or Services directly or indirectly on his own account or on behalf of or in conjunction with any person, firm, limited liability partnership, company or other organisation canvass or solicit the business of or by any other means seek to deal with or deal with any Prospective Customer.

6. The Executive shall not during the period of 12 months immediately following the Termination Date directly or indirectly on his own account or on behalf of or in conjunction with any person, firm, limited liability partnership, company or other organisation solicit or seek to entice away from the Company or OSS or induce or seek to induce any Key Employee to leave the employment of the Company or OSS whether or not such Key Employee would commit a breach of contract in leaving his employment. 7. The Executive shall not during the period of 12 months immediately following the Termination Date directly or indirectly on his own account or on behalf of or in conjunction with any person, firm, limited liability partnership, company or other organisation entice or seek to entice away from the Company or OSS any Protected Supplier or otherwise solicit or interfere with the relationship between the Company or OSS and any Protected Supplier with a view to that Protected Supplier ceasing to supply goods to the Company or OSS or reducing the type and/or volume of goods supplied to the Company or OSS or adversely altering the terms on which it supplies goods to the Company or OSS. 8. The period of each of the restrictions in clauses 2–7 (inclusive) shall be reduced by the period, if any, during which the Company exercises its rights under clause [insert clause number of garden leave provision]. 9. The restrictions in clauses 2–7 (inclusive) are held by the Company for itself and as agent and trustee for OSS and shall be enforceable by the Company on behalf of OSS as though it were a party to this Agreement. The Executive shall at the request and cost of the Company [and subject always to the Company paying the Executive a sum of not less than [£ ]] enter into a direct agreement with OSS whereby he will accept restrictions in the same form as those included in clauses 2–7 (inclusive). 10. The restrictions in clauses 2–7 (inclusive) are entered into by the Executive after having had the opportunity to receive independent legal advice. The Executive agrees that the restrictions are reasonable (including in terms of 751

Case Studies

duration, extent and application) and necessary to protect the legitimate interests of the Company and OSS. 11. Each of the restrictions in clauses 2–7 (inclusive) are intended to be separate and severable and independent restrictions and are to be read and construed as such. In the event that any of the restrictions shall be held void but would be valid if part of the wording thereof were deleted such restriction shall apply with such deletion as may be necessary to make it valid and effective. 12. The provisions of clauses 1–11 (inclusive) may only be waived or varied with the express written agreement of the Board or such person as the Board nominates in writing to agree any such waiver or variation. Any purported waiver or variation which does not comply with this clause shall be void. 13. If the Executive receives an offer of employment or request to provide services from a third party who or which is or potentially may be a competitor of the Company or OSS either during his employment (including any period in which the Company has exercised its rights under clause [insert clause number of garden leave provision]) or during the currency of the restrictions set out in clauses 2–7 (inclusive) he shall immediately disclose the offer or request to provide services to [insert details of Company Officer] in writing and before he accepts the offer or agrees to the request provide a copy of this Schedule together with the signature pages of this Agreement to the offeror of employment or proposed recipient of services. (For a precedent of a confidentiality covenant see 5.44.) Rationale for the covenants 1. The covenants are designed to protect only Excel and OSS on the basis that there are no plans for new companies in the group. As to the question of whether a company may protect the legitimate interests of an associated company see 10.34–10.41. 2.

752

A non-competition covenant has been included but the duration has been limited to six months on the basis that: the covenant extends to setting up a business as well as being employed by or joining an established business. The inclusion of this restriction on establishing a competitive business potentially has the indirect effect of extending the period in which Thomas might be an active competitor. If the reference to setting up a business were omitted then arguably the covenant could be longer although it should also be borne in mind that Thomas’ notice period is only three months. To prevent Thomas from circumventing the covenant by establishing or joining a competitive business outside the Territory (as defined) in order to target customers or prospective customers within the Territory the covenant specifically provides that such activities will be deemed to fall within the scope of the covenant. A carve-out has been included in relation to investments to address the Court of Appeal’s recent decision in Tillman v Egon Zehnder [2017] IRLR 906 where a non-compete covenant failed because it precluded Tillman owning

Case study 1:  Excel Copiers (UK) Limited and Brian Thomas

a single share which consequently made the covenant too wide. As noted above, the decision has been taken by Excel not to draft the covenant to anticipate the possible European expansion. 3. In relation to customers the definition of the protected pool is drafted to capture not only those with whom Thomas had direct dealings but also those with whom his direct reports dealt. The scope of the definition reflects the fact that we know Thomas will only have regular contact with a limited number of customers. In a case where there is likely to be close supervision over employees the second limb of the definition is unlikely to make the covenant too wide. Where that is not the case but where it is likely to be relatively easy to show that the covenanting employee will nonetheless be aware of confidential information of the clients with whom his direct reports have material dealings consideration should be given to replacing the second limb with alternative language along the following lines ‘(ii) to the knowledge of the Executive any employee reporting directly to the Executive had material dealings in the course of their employment in the Relevant Period and in either case in respect of whom or which the Executive had knowledge of Confidential Information during the Relevant Period. As is now customary we have split the covenants for the existing customers into separate non-solicitation and non-dealing covenants. The period of twelve months has been chosen to ensure that there is adequate protection vis-a-vis customers with annual service or supply agreements’. 4.

Prospective customers have been separately and fairly specifically defined and a separate covenant included in respect of them to ensure so far as possible that if a court were to find the covenant unenforceable it would simply delete the clause. With regard to terminology the concept of ‘negotiation’ approved by the court in International Consulting Services (UK) Ltd v Hart [2000]  IRLR  227 has been adopted. We have also provided for direct involvement of Thomas to avoid the objection that there is an insufficiently strong connection between Thomas and the potential customer. From the factual background we know that Thomas will only be involved in the negotiations with more significant customers, by making his direct involvement a pre-requisite we have therefore limited the scope of the protected pool to those higher value potential customers. If there was a concern that Thomas might become involved with negotiations with lower value potential customers which could make the covenant too wide an option to limit the protected pool by reference to the value of the contract to be entered into could be utilised. The period of 12 months has been chosen to reflect what we are told is commonly a long lead time to convert a prospect into a customer.

5. In the non-poaching covenant the protected pool of employees has been drawn to exclude the more junior and support staff and to allow a degree of flexibility in the event of change of salary structure. The provision also requires a material link between Thomas and the employees he is not able to poach. A more onerous covenant prohibiting Thomas directly or indirectly making any offer or proposal of employment to or employing or engaging a 753

Case Studies

Key Employee has not been included because such covenants are generally frowned on by the courts as an unreasonable intrusion into the freedoms of third parties and therefore unlikely to be enforceable. See 11.220–11.223. 6.

In relation to suppliers the key relationship Excel is seeking to protect is the very important one with Easy Copy. The definition of ‘Protected Supplier’ is designed to allow for flexibility but still to highlight the importance of Easy Copy. The restriction extends not only to a supplier ceasing to supply goods but also to a reduction in the volume of goods supplied and also an adverse change in the terms of supply which could be as damaging for Excel as a cessation of supply. Consideration was given to including a prohibition on Thomas joining Easy Copy as an employee but Excel felt that could be seen as unduly provocative to Easy Copy. Thomas has previously said that he had considered joining Easy Copy but rejected the idea on the basis they are solely a manufacturing operation based in the US and their rates of pay are poor compared to his salary at Excel.

7.

The covenants provide that credit is given for any period of time spent on garden leave. This prevents any argument that the combined duration of garden leave and the covenants makes the covenants unenforceable. See 5.123–5.132 in relation to garden leave including a precedent garden leave clause. Note the importance of being clear what constitutes garden leave as highlighted in the decision in Ashcourt Financial Planning Limited v Hall [2013] IRLR 637.

8.

The fact that the covenants are held on behalf of OSS is recognised and a provision is included under which Thomas can be required to enter into direct covenants with OSS, with an additional optional provision that he receive payment if asked to do so. These provisions are included to cover the possibility that instead of focusing on the MFDs business, Thomas decides to compete with OSS’ business and attempts to challenge the enforceability of the covenants ie Thomas argues Excel has no interest to protect in OSS’ business, albeit that is an argument unlikely to succeed following the decision in Beckett Investment Management Group Ltd v Hall [2007] IRLR 793 (CA).

9.

We have included a provision to the effect that Thomas had the opportunity to take legal advice on the restrictive covenants. If it is known that the employee has taken legal advice then this wording should be changed to record that advice was taken by him. Similarly if the employer has paid for that advice that can usefully be recorded. Where the employer knows the identity of the adviser it is worth keeping a separate record of that information together with the signed Agreement.

10. Clause 10 also provides that Thomas confirms that the restrictions are reasonable to protect the legitimate interests of the Company and OSS. This will not prevent Thomas disputing the validity of the covenants later on but equally its inclusion will do no harm and may have a useful deterrent effect. 11. The provision in clause 11 is limited to severance, rather than re-writing. As with the acknowledgement of reasonableness its function is more commercial than legal, severance being exclusively a matter in the gift of the courts and not something on which either party can insist. 754

Case study 2:  Smith & Jones HR Services Limited and Ian Simpson

12. Clause 12 requires that any waiver or variation to the covenants will only be effective if agreed in writing by the Board/person to whom that authority is properly delegated. Following the obiter comments in Globe Motors Inc v TRW LucasVarity Electric Steering Limited [2016] EWCA Civ 396 and the subsequent Court of Appeal decision in MWB Business Exchange Centres Ltd v Rock Advertising Limited [2016] EWCA Civ 553 such clauses, at least in so far as they purport to exclude oral variations, are unlikely to be enforceable but nonetheless they may well have some practical deterrent effect. Note: MWB is currently the subject of an appeal to the Supreme Court. The appeal was heard on 1 February 2018 and the judgment is currently awaited. 13. The obligations in clause 13 are firstly to disclose to the employer any offers of employment or requests to provide services from third parties who are or may be competitors thereby giving the employer the opportunity to take appropriate steps to protect his business before it is too late (see 11.227– 11.228 in relation to this type of disclosure obligation), and secondly to disclose the covenants to a prospective employer. The second obligation is included to increase the chances that the new employer is put on notice of the covenants. In a limited number of cases, assuming disclosure is made, this may be enough to deter the new employer from proceeding or at least curb the plans to compete thereby limiting potential damage. Even where it achieves neither of those effects disclosure will put the new employer on notice of the covenants thereby exposing them to a claim for the tort of inducing breach of the covenants. Where the employee ignores the obligation that will be a breach on his part and one which the (ex-)employer can use to their advantage in an ensuing dispute. 14. Finally in line with Excel/OSS’ wishes the covenants are tightly focussed on Thomas’ current role. They don’t, for example, allow for any change in the territory for which Thomas is responsible or for another company joining the Group. It will be important to highlight this fact to Excel/OSS and to advise them of the need to revise the covenants and to ensure that there is consideration for those revisions in the event of any material changes.

CASE STUDY 2:  SMITH & JONES HR SERVICES LIMITED AND IAN SIMPSON Facts Smith & Jones HR Services Limited (‘Smith & Jones’) is proposing to recruit Ian Simpson (‘Simpson’). The lettering used below follows that in the information checklist at 12.80–12.83. Nature of the business (a) Smith & Jones is a relatively small company engaged in the business of providing advice on all human resources (‘HR’) issues including recruitment, employment contracts, handbooks and policies, career development, 755

Case Studies

outsourcing projects, restructurings, acquisitions and mergers (including TUPE), disciplinary and grievance procedures, termination of employment (including redundancy programmes) and trade union/collective issues. Smith & Jones has no parent, subsidiary or associated companies. (b) Smith & Jones’ clients relevant to Simpson will be those to whom he or his team provide services on behalf of Smith & Jones. Some clients will simply require one-off or occasional advice although that one-off/occasional advice may relate to a significant project eg  a major outsourcing. Other clients, many of whom are long-standing clients, will have annual contracts with Smith & Jones under which the minimum service provided will be monthly reviews of their HR issues. The majority of clients use only Smith & Jones for their HR advice, except where they obtain legal advice from their solicitors. Smith & Jones tends to provide advice across an entire client (often, but not always, across a client group) rather than merely a particular division. (c) All those to whom Smith & Jones provide services fall within the ordinary meaning of a client. (d) Smith & Jones deals direct with its clients; there are no relevant intermediaries. (e) Smith & Jones attracts new business primarily by advertising, seminars, newsletters, ealerts, blogs and individual networking. It does not have an extensive marketing budget. Negotiations with prospective clients are dealt with by a specific marketing team led by a Board member. The marketing team is responsible for most marketing activities, although individual Consultants are expected to provide content for ealerts, blogs and seminars. Historic marketing materials and details of upcoming campaigns/initiatives are stored on a knowledge dashboard on the Company’s intranet (which is accessible to all staff). (f) There are no relevant suppliers. (g) The business is carried on in England and Wales. Smith & Jones does not allocate work/clients on a regional basis or sector basis. Much of the advice is given by telephone or email. (h) There are not likely to be any material changes in the foreseeable future to the business of Smith & Jones as outlined in the information given in points (a) to (g) above. (i) Smith & Jones’ workforce is divided into five main categories, the Directors, Senior HR Consultants, Associate HR Consultants, Junior HR Consultants and support staff. Salaries within each level vary but range from £18,000 p.a. for a Junior HR Consultant to a maximum of £50,000 p.a for a Senior HR Consultant. All those working for Smith & Jones are employees retained on contracts of employment. (j) Smith & Jones has grown significantly in the last five years. From an initial workforce of five, the company now employs 70 people of which 60 are 756

Case study 2:  Smith & Jones HR Services Limited and Ian Simpson

providing HR advice. Despite its business being the provision of HR advice, it is only relatively recently that Smith & Jones has introduced garden leave, payment in lieu of notice clauses (basic salary only) and restrictive covenants in their contracts and then only for Associate and Senior HR Consultants. The covenants are either similar to or the same as those drafted below. Notice periods for Associate and Senior HR Consultants and Board members are three months; all other staff are on statutory minimum notice. All contracts include a standard confidentiality clause. (k) Insofar as there is any industry standard approach to restrictive covenants, Smith & Jones’ instructions are that non-competition covenants are very rare and are generally thought to be inappropriate. Covenants prohibiting the solicitation of/dealing with clients and poaching of fellow employees are, however, common and are typically of 6, maximum 12, months duration depending on the seniority of the HR Consultant. (l) Smith & Jones has a multitude of competitors, none of whom currently have a significant market share. Role of the employee (a) The employer will be Smith & Jones which will be the company for whom Simpson performs his duties. (b) Simpson’s job title will be Senior HR  Consultant. He will be one of ten Senior HR  Consultants reporting directly to the Managing Director. His remuneration package will be: a basic salary of £45,000; a commission arrangement under which he could earn up to an additional £25,000, giving him maximum potential earnings of £70,000; a car; and private health insurance. (c) Simpson’s only continuing contractual obligation to his current employer after his employment ends is a standard confidentiality clause. He has no restrictive covenants. He is not being recruited as part of a team. (d) Simpson’s duties will be providing advice on all HR issues to the clients of Smith & Jones allocated to him. Smith & Jones does not issue job descriptions. (e) There are no plans for Simpson’s role to change in the foreseeable future. Simpson is being recruited primarily to take over a portfolio of clients from a retiring employee who was one of the founder members of Smith & Jones. (f) Simpson’s skills are specialised to the extent that he has never done anything other than HR work. He has previously worked in the legal department of a major Trade Union, as a personnel officer in a multinational company and latterly for other HR Consultancy businesses. (g) Simpson will be based at an office in South West London but required to travel throughout England and Wales. He may also be required to work from a client’s premises. 757

Case Studies

(h) Simpson will have responsibility for clients throughout England and Wales. (i) Simpson will work only for Smith & Jones. (j) Simpson will have direct contact with clients. The regularity of contact will vary depending on the type of client and their requirements. In the case of one-off or occasional clients contact will be as and when advice is requested. For clients who have annual contracts the contact will be at least once per month. (k) Attracting new clients will not be a significant part of Simpson’s role although it is anticipated he may acquire new clients through recommendations from existing clients for whom he provides services. In time it is anticipated Simpson may bring some clients with him from his last employment, but Smith & Jones has made it clear that he must not use any confidential information or other property of his current employer in doing so. It is not a condition of Simpson’s recruitment that he brings clients. Simpson will have only very limited dealings with prospective clients as he is not part of the specific marketing team (led by a Board member) which deals with negotiations with prospective clients. (l) Simpson will have no contact with suppliers. (m) Simpson will supervise a team of four other employees, two Associate HR Consultants and two Junior HR Consultants. Each of those members of staff will have direct contact with clients. For administration purposes the team will be supported by a secretary who will work primarily for Simpson. From time to time Simpson may also supervise HR  Consultants outside his team, for example, where a large project requires additional resource. Each of those members of staff will also have direct contact with clients. For details of terms of employment of team members see (i) & (j) under the heading Nature of Business. (n) Simpson will also work with other Senior HR Consultants of Smith & Jones on issues such as agreeing a standard approach to new developments in HR practices to ensure consistent advice is provided to all clients. For details of the terms of employment of Senior HR Consultants generally see (i) & (j) under the heading Nature of Business. (o) Smith & Jones has no trade secrets. The company regards as confidential the following information: the identity of clients (both current and historic) including client lists and the contact names and details of personnel at the client; the terms on which the clients do business with Smith & Jones; the nature of the advice provided and a client’s typical requirements for example whether there are specific recurring tasks with which Smith & Jones assist the client such as bonus awards or annual handbook reviews; financial performance and data, including turnover and pricing information (including details of special arrangements with clients); information provided by the client in confidence, including strategy reports, reorganisation reports and other commercially sensitive or confidential documents relating to their HR needs; details of Smith & Jones’ (current 758

Case study 2:  Smith & Jones HR Services Limited and Ian Simpson

and former) employees, including terms of employment and contact details; template or bespoke materials and advice provided for clients, such as employment contracts, policies and procedures, powerpoint presentations and other training materials; and strategy, operational or marketing materials, including business plans, board papers, historic, current or future recruitment plans, business expansion/restructuring exercises, marketing and publicity campaigns. As a Senior HR  Consultant, Simpson will have access to all confidential information relating to the activities of his team and all activities in which he has involvement or oversight. (p) Simpson will not be a director under the Companies Act 2006. (q) As a Senior HR Consultant Simpson’s terms of employment will be as the standard described in (j) under the heading Nature of Business i.e. three months’ notice to terminate his employment, garden leave and pay in lieu of notice provisions (in each case operating for the whole or any unexpired period of notice) and post-termination restrictive covenants preventing him from soliciting or dealing with clients or poaching staff. On Smith & Jones’ instructions, there will be no non-competition covenants as this would be very unusual in the market. (r) It is unlikely that Simpson will stay with Smith & Jones for more than around five years because there is currently no prospect of promotion. Recruitment of a replacement is likely to take in the region of four to five months. The length of time for a new recruit to consolidate the relationship with a client is more difficult to assess but for those on annual contracts the company believes it could be up to 12 months to catch the renewal of annual contracts. Likely competitive activity The principal competitive threat which Smith & Jones perceive is that Simpson will have the ability to take clients with him when he leaves. Simpson is an experienced and well respected operator in the HR market with the ability to establish a quick rapport with clients. It is this latter characteristic in particular which Smith & Jones feel makes him a strong candidate to take over the portfolio of existing and valuable clients giving Smith & Jones the best chance of retaining those clients. Simpson is also very personable and known to form strong bonds with those who work with him. Smith & Jones are also concerned that to service the clients Simpson may try and take with him other employees who have either worked with those clients or who, like Simpson, are known to be effective HR advisers. They are not concerned about Junior HR Consultants who they feel are too inexperienced to be of interest to Simpson. Also relevant to the drafting exercise is the commercial bargaining position of Simpson. He currently has no covenants in his contract and has made it clear that whilst he will accept reasonable restrictions on not taking clients or encouraging 759

Case Studies

others to leave he will not join Smith & Jones if there is any covenant preventing him from joining another HR consultancy business or setting up on his own when he leaves. Simpson has asked about the covenants of those who would be his peer group and has pointed out that it would in any event be unreasonable to expect him to be more heavily restricted than his colleagues. Smith & Jones are very keen to have Simpson take over the portfolio of the retiring founder and Simpson is the only candidate they have seen who they think will be able to retain all or most of those clients. Drafting In the covenants set out below Smith & Jones is referred to as ‘the Company’ and Simpson as ‘the Executive’. To enable the restrictive covenants (and other obligations continuing after termination of employment) to be disclosed to a potential new employer without full disclosure of the contract we have suggested that these provisions be included in a Schedule. Where the employer is not concerned about full disclosure of the contract the provisions can be included in the main body of the contract. SCHEDULE 1.1 In this Schedule the following words and phrases shall have the following meanings unless the context otherwise requires. ‘Key Employee’ means any employee of the Company whose job title is that of Associate HR  Consultant or Senior HR  Consultant (or such equivalent job titles as the Company may adopt from time to time) and with whom the Executive had material dealings in the course of his employment with the Company at any time during the Relevant Period. ‘Relevant Period’ means the 12-month period ending on the earlier of: the Termination Date and the date, if any, on which the Company exercises its rights under Clause [insert clause number of garden leave provision]. ‘Restricted Client’ means any person, firm, limited liability partnership, company or other organisation who or which was at any time in the Relevant Period a client of the Company in connection with Restricted Services and with whom or which (i) the Executive had material dealings in the course of his employment with the Company at any time during the Relevant Period or (ii) to the knowledge of the Executive any employee reporting directly to the Executive had material dealings in the course of their employment with the Company in the Relevant Period. ‘Restricted Services’ means any services or products of a type provided by the Company at the Termination Date or at any time during the Relevant Period and with which the Executive shall have been directly and materially involved in the course of his employment at any time in the Relevant Period. 760

Case study 2:  Smith & Jones HR Services Limited and Ian Simpson

‘Termination Date’ means the date of termination of the Executive’s employment with the Company. 1.2 In this Schedule reference to clauses shall be to clauses in the Schedule unless the context otherwise requires. 2.

The Executive shall not so as to compete with the Company in connection with Restricted Services for a period of 12 months from the Termination Date directly or indirectly on his own account or on behalf of or in conjunction with any person, firm, company or other organisation solicit or entice away or attempt to solicit or entice away from the Company any Restricted Client.

3.

The Executive shall not so as to compete with the Company in connection with Restricted Services for a period of 12 months from the Termination Date directly or indirectly on his own account or on behalf of or in conjunction with any person, firm, limited liability partnership, company or other organisation (i) enter into any arrangement for the provision of or provide Restricted Services to any Restricted Client or (ii) otherwise deal with any Restricted Client.

4.

The Executive shall not for a period of 12 months from the Termination Date directly or indirectly on his own account or on behalf of or in conjunction with any person, firm, limited liability partnership, company or other organisation induce or attempt to induce or do or say anything which may lead any Restricted Client to cease dealing with the Company or to reduce their dealings with the Company or to alter their dealings with the Company to the detriment of the Company or otherwise in any manner seek to interfere with any current or future arrangements between the Company and any Restricted Client including the offering of future business opportunities to the Company.

5

The Executive shall not for a period of 12 months from the Termination Date directly or indirectly on his own account or on behalf of or in conjunction with any person, firm, limited liability partnership, company or other organisation solicit or seek to entice away from the Company or induce or seek to induce any Key Employee to leave the Company whether or not such Key Employee would commit a breach of contract in leaving the Company.

6. The period of each of the restrictions in clauses 2–5 (inclusive) shall be reduced by the period, if any, during which the Company exercises its rights under clause [insert clause number of garden leave provision]. 7.

The restrictions in clauses 2–5 (inclusive) are entered into by the Executive after having had the opportunity to take independent legal advice. The Executive agrees that the restrictions are reasonable (including in terms of duration, extent and application) and necessary to protect the legitimate interests of the Company.

8.

Each of the restrictions in clauses 2–5 (inclusive) is intended to be separate and severable and independent restrictions and are to be read and construed 761

Case Studies

as such. In the event that any of the restrictions shall be held void but would be valid if part of the wording were deleted such restriction shall apply with such deletion as may be necessary to make it valid and effective. 9. The provisions of clauses 1–8 (inclusive) may only be waived or varied with the express written agreement of the Board or such person as the Board nominates in writing to agree any such waiver or variation. Any purported waiver or variation which does not comply with this clause shall be void. 10. If the Executive receives an offer of employment or request to provide services from a third party who or which is or potentially may be a competitor of the Company either during his employment (including any period in which the Company has exercised its rights under clause [insert clause number of garden leave provision]) or during the currency of the restrictions set out in clauses 2 – 5 (inclusive) he shall immediately and before he accepts the offer or agrees to the request, disclose the offer or request to provide services to [insert details of Company Officer] in writing and provide a copy of this Agreement together with the signature pages of this Agreement to the offeror of employment or proposed recipient of services. (For a precedent of a confidentiality covenant see 5.44). Rationale for the covenants 1.

On the express instructions of Smith & Jones, and because Simpson will not agree to a non-competition covenant, one has not been included. In view of the geographic breadth of Smith & Jones’ practice (the entirety of England and Wales) and the fact that Simpson is likely to operate throughout that area there would be some practical difficulties in crafting a non-competition covenant that did not preclude Simpson from the entirety of England & Wales. However, If Smith & Jones changed their instructions and wanted a non-competition covenant, its range could be cut down by the use of provisos, such as: (i) Permitting Simpson to be a full time employee of an organisation and to provide internal HR advice to that organisation, for example as its Head of HR. (ii) Excluding any county, or other sufficiently well-defined area where Simpson had no significant clients within the Relevant Period as defined, although depending on the facts that may not, in practice, reduce the scope of the covenant much or at all. Alternatively taking into account the size of Smith & Jones, a proviso that carves-out particularly large clients who are more likely to use correspondingly large HR practices could be considered. Neither of these options are, however, without practical risks.

2.

762

An alternative approach, which also indirectly takes into account Smith & Jones’ concerns regarding other employees joining forces with Simpson to compete, might be to prohibit him from: (a) joining a competing business which already employs or engages two or more of former Associate or

Case study 2:  Smith & Jones HR Services Limited and Ian Simpson

Senior HR  Consultants who held those roles in the Relevant Period and with whom Simpson had material dealings in the course of his employment in that period; or (b) otherwise being involved in a competing business with individuals meeting those criteria. However, these types of covenants are of doubtful enforceability and in practice are still relatively unusual. 3. As is customary, we have included separate covenants regarding nonsolicitation of and non-dealing with Restricted Clients. We have also included a ‘non-interference’ provision to address the possibility of Simpson seeking to disrupt relationships with Restricted Clients in a way that does not necessarily involve his seeking to secure that business for himself. We have selected the period of 12 months for the Restricted Client covenants to ensure that there is adequate protection vis-à-vis Restricted Clients with annual contracts. It could be said that 12 months is too long for occasional clients but it could equally be argued that because contact with them is sporadic it would take a replacement consultant longer to embed the relationship and therefore the period is nonetheless reasonable. In relation to Restricted Clients, the protected pool is defined so as to capture not only those with whom Simpson had material dealings but also those with whom his direct reports had material dealings. The scope of the definition reflects the fact that we know the regularity of contact with Smith & Jones’ clients will vary depending on the type of client and their requirements. In a case where there is likely to be close supervision over employees the second limb of the definition is unlikely to make the covenant too wide. Where that is not the case but where it is likely to be relatively easy to show that the covenanting employee will nonetheless be aware of confidential information of the clients with whom his direct reports have material dealings consideration should be given to replacing the second limb with alternative language along the following lines ‘(ii) to the knowledge of the Executive any employee reporting directly to the Executive had material dealings in the course of their employment in the Relevant Period and in either case in respect of whom or which the Executive had knowledge of Confidential Information during the Relevant Period. ‘Restricted Services’ is also limited to activities in which Simpson has been directly concerned, to ensure that the covenant does not become too wide if Smith & Jones expand into other areas in which Simpson is not involved. 4.

A separate covenant in respect of prospective clients has not been included because Simpson is not to have any significant dealings with prospective clients. For guidance on a covenant addressing prospective clients see Case Study 1.

5. The non-poaching covenant, clause 5, has been drafted to catch only Associate and Senior HR consultants of Smith & Jones with whom Simpson has had material dealings in the course of the last 12 months of his employment/or the last 12 months prior to his being sent on garden leave. The protected pool has deliberately been drawn narrowly to capture only those whose loss is likely to cause material damage to the business. Junior HR consultants, as is reflected in their salary, are at the very outset of their 763

Case Studies

careers and are relatively easy to replace. On entry into the restrictions, it was thought wholly unrealistic that Simpson would be able solicit a Director from Smith & Jones, for that reason Directors were deliberately excluded from the definition of Key Employee. As in Case Study 1 we have deliberately not included a more onerous covenant prohibiting Simpson directly or indirectly making an offer of employment to or proposing to employ or employing or otherwise engaging a Key Employee because such covenants are generally frowned on by the Courts as an unreasonable intrusion into the freedom of third parties to contract with each other and therefore unlikely to be enforceable: see 11.220–11.223. 6.

The covenants provide that credit is given for any period of time spent on garden leave. This prevents any argument that the combined duration of garden leave and the covenants makes the covenants unenforceable. See 5.123–5.132 in relation to garden leave including a precedent garden leave clause. Note the importance of being clear what constitutes garden leave as highlighted in the decision in Ashcourt Financial Planning Limited v Hall [2013] IRLR 637.

7.

We have included a provision to the effect that Simpson had the opportunity to take legal advice on the restrictive covenants. If it is known that the employee has taken legal advice then this wording should be changed to record that advice was taken by him. Similarly if the employer has paid for that advice that can usefully be recorded. Where the employer knows the identity of the adviser it is worth keeping a separate record of that information together with the signed Agreement.

8. Clause 7 also provides that Simpson confirms that the restrictions are reasonable to protect the legitimate interests of the Company and OSS. This will not prevent Simpson disputing the validity of the covenants later on but equally its inclusion will do no harm and may have a useful deterrent effect. 9. The provision in clause 8 is limited to severance, rather than rewriting. As with the acknowledgement of reasonableness its function is more commercial than legal severance being exclusively a matter in the gift of the courts and not something either party can insist on. 10. Clause 9 requires that any waiver or variation to the covenants will only be effective if agreed in writing by the Board/person to whom that authority is properly delegated. Following the obiter comments in Globe Motors Inc v TRW LucasVarity Electric Steering Limited [2016] EWCA Civ 396 and the subsequent Court of Appeal decision in MWB Business Exchange Centres Ltd v Rock Advertising Limited [2016]  EWCA  Civ 553 such clauses, at least in so far as they purport to exclude oral variations are unlikely to be enforceable but nonetheless they may well have some practical deterrent effect. Note MWB is currently the subject of an appeal to the Supreme Court. The appeal was heard on 1 February and the judgment of the Supreme Court is currently awaited. 11. The obligations in Clause 10 are firstly to disclose to the employer any offers of employment or requests to provide services from third parties who are 764

Case study 2:  Smith & Jones HR Services Limited and Ian Simpson

or may be competitors thereby giving the employer the opportunity to take appropriate steps to protect his business before it is too late (see 11.227– 11.228 in relation to this type of disclosure obligation), and secondly to disclose the covenants to a prospective employer is included to increase the chances that the new employer is put on notice of the covenants. In a limited number of cases, assuming disclosure is made, this may be enough to deter the new employer from proceeding or at least curb the plans to compete thereby limiting potential damage. Even where it achieves neither of those effects disclosure will put the new employer on notice of the covenants thereby exposing them to a claim for the tort of inducing breach of the covenants. Where the employee ignores the obligation that will be a breach on his part and one for which the (ex-)employer can use to their advantage in an ensuing dispute.

765

CHAPTER 13

Introducing/varying restrictive covenants Kate Brearley, Kiersten Lucas and Jeremy Lewis (TUPE issues) Introduction

13.1

1. Introducing restrictive covenants 13.2 1(a) Introduction of restrictive covenants as part of the offer of employment13.3 1(a)(i) Can/should restrictive covenants be drafted to allow for contemplated changes to the employee’s role/duties over time? 13.4 1(a)(ii) Do restrictive covenants need to be tailored to the particular employee?13.10 1(a)(iii) What issues arise when restrictive covenants are not agreed before employment commences? 13.11 1(a)(iv) What issues arise if restrictive covenants are included in employee handbooks or other ancillary documents? 13.15 1(a)(v) What are the advantages for employers of having restrictive covenants in signed documents and can electronic signatures be used? 13.17 1(a)(vi) Do restrictive covenants need to be brought to the specific attention of employees? 13.22 1(a)(vii) What are the potential benefits of ensuring that the employee takes legal advice regarding the restrictive covenants? 13.25 1(a)(viii) Summary 13.26 1(b) Introduction of restrictive covenants during the currency of the employment13.27 1(b)(i) Unilateral variation clauses 13.30 1(b)(ii) Consent – express/implied 13.41 1(b)(iii) Obtaining consent and consultation 13.62 1(b)(iv) Refusal to give consent 13.71 1(c) Consideration 13.82 1(c)(i) What amounts to effective consideration? 13.83 1(c)(ii) Issues regarding the adequacy of consideration 13.94 1(d) Introduction of restrictive covenants on termination of employment13.103 2. Taxation and restrictive covenants 2(a) Taxation on the introduction of restrictive covenants generally 2(b) Taxation on the introduction of restrictive covenants on termination of employment

13.111 13.111 13.112

767

Introducing/varying restrictive covenants

2(c) Taxation on the renewal of restrictive covenants in severance agreements13.116 3. Variation of restrictive covenants

13.120

4. Reviewing restrictive covenants 4(a) Role of the employee altered 4(b) Acquisition of a business

13.126 13.129 13.130

5. TUPE transfers – special problems with construing, enforcing, varying or introducing restrictive covenants 13.131 5(a) When do the Regulations apply? 13.132 5(b) What do the Regulations do? 13.137 5(c) Can the parties contract out of the Regulations? 13.138 5(d) How do the courts/employment tribunals construe the Regulations?13.139 5(e) Commonly asked questions by employers 13.140 5(f) Interpretation of existing restrictive covenants in the context of a TUPE transfer 13.142 5(g) Introduction/variation of restrictive covenants in the context of a TUPE transfer 13.148 5(g)(i) Restrictions on variations where the sole or principal reason is a TUPE transfer 13.150 5(g)(ii) Exceptions where variations by reason of a TUPE transfer are permitted 13.160 5(g)(iii) Changes made for economic, technical or organisational reasons entailing changes in the workforce 13.164 5(g)(iv) Can changes to contract terms by reason of a TUPE transfer be agreed in the employee’s favour? 13.167 5(g)(v) What is the impact of pre-TUPE transfer dismissals on the employer's scope to revise contract terms? 13.169 5(g)(vi) What is the effect of an invalid variation on the contract as a whole?13.171 5(g)(vii) Summary 13.172 5(h) Dismissal 13.173 5(i) Service provision changes and involuntary TUPE transfers 13.175 5(j) Objections to a TUPE transfer and other pre-transfer terminations13.181 5(j)(i) Pre-TUPE transfer termination other than by objection to a transfer13.181 5(j)(ii) Objection to a TUPE transfer 13.185 Appendix – Guidelines on introducing covenants during employment

768

Introducing restrictive covenants 13.3

INTRODUCTION 13.1 This chapter looks at the various issues that arise in practice when an employer seeks to introduce restrictive covenants or to vary the terms of existing restrictive covenants, often with a view to re-defining the scope of the restrictions and thereby increasing their prospects of enforceability. Special and complex considerations apply when the exercise is being undertaken against the background of an actual or contemplated transfer of a business to which the Transfer of Undertakings (Protection of Employment) Regulations 2006 applies. For that reason, TUPE transfers are considered separately at 13.131–13.189.

1. INTRODUCING RESTRICTIVE COVENANTS 13.2 There are three distinct stages at which restrictive covenants can be introduced: (a) as part of the offer of employment; (b) during the currency of employment; and (c) on termination of employment. Different factors are relevant, depending on when the covenants are to be introduced, and it is therefore essential to look at each stage separately.

1(a)  Introduction of restrictive covenants as part of the offer of employment 13.3  From a legal point of view, this is by far the easiest stage at which to introduce restrictive covenants, since neither party is under any obligation to the other. The prospective employee can evaluate the offer, aware that if he accepts it, his activities will be subject to restrictions after the employment ends. Similarly, the prospective employer is under no obligation to employ the prospective employee without the benefit of the covenants. A prospective employer who includes restrictive covenants as part of the offer of employment does, however, need to take care. There are a number of important considerations for the employer introducing covenants at this stage (several of which are also relevant when restrictive covenants are introduced during employment or on termination) namely: (i) whether the drafting can/should allow for contemplated changes to the employee’s role and/or duties over time (13.4–13.9); (ii) whether the restrictive covenants should be tailored to the particular employee (13.10); (iii) issues arising when the restrictive covenants are not agreed before employment commences (13.11–13.14); (iv) issues regarding the inclusion of restrictive covenants in employee handbooks or other ancillary documents (13.15–13.16); 769

13.4  Introducing/varying restrictive covenants

(v) the advantages for employers of having the restrictive covenants contained in signed documents and the use of electronic signatures (13.17–13.21); (vi) whether the restrictive covenants need to be brought to the employee’s specific attention (13.22–13.24); and (vii) the potential benefits of ensuring that the employee takes legal advice regarding the restrictive covenants (13.25). Finally, the employer must also ensure that there is consideration for the restrictive covenants. What amounts to consideration, and issues regarding the adequacy of consideration, are addressed at 13.82–13.102. 1(a)(i) Can/should restrictive covenants be drafted to allow for contemplated changes to the employee’s role/duties over time? 13.4  Before making the offer of employment, the prospective employer needs to be very clear what the role and duties of the prospective employee are to be and, with that in mind, to have had the covenants drafted so as to be reasonable. As we saw in Chapters 11 and 12 (in particular, 11.1, 11.7 and 12.11–12.16), the reasonableness of restrictive covenants is assessed at the time the covenants are entered into, in accordance with what was in the contemplation of the parties at the time, and not at the time the ex-employer is seeking to enforce them: see, for example, Commercial Plastics Ltd v Vincent [1964] 3 All ER 546 (CA), Gledhow Autoparts v Delaney [1965] 1 WLR 1366 (CA) and, more recently, Patsystems Holdings Ltd v Neilly [2012] IRLR 979 (QB), Coppage and another v Safety Net Security Ltd [2013] IRLR 970 (CA) and Bartholomews Agri Food Ltd v Thornton [2016] IRLR 432 (QB). However, reasonable expectations as to how the prospective employee’s role will develop can and should be taken into account. So, for example, where the prospective employee is being recruited with a view to promotion to a more senior role, subject to initial satisfactory performance, that more senior role can legitimately be reflected in the covenants from the outset of the employment: see Allan Janes LLP v Johal [2006] IRLR 599 (Ch) (which is also discussed at 11.174). Briefly, in Allan Janes, Ms Johal was subject to a one year non-dealing covenant which, on the face of it, prohibited dealings with clients even though Ms Johal may not have dealt with them personally. Despite this, the covenant was enforceable, primarily on the basis that, as at the date of the contract, Ms Johal was seen as a potential partner and had been recruited on that basis. The Deputy Judge was therefore satisfied that: ‘Since the defendant was recruited into a senior position with a mutual hope that it would mature into a partnership offer, it clearly was within the actual contemplation of the parties that the claimant would promote the defendant to all its actual and target clients…’ (at paragraph 39).

See also Croesus Financial Services Limited v Bradshaw & Bradshaw [2013] EWHC 3685 (QB). Essentially, a 12-month non-dealing covenant entered into when the employee was very junior was nevertheless upheld because he had clearly been recruited to progress into a more senior role, taking over the clients 770

Introducing restrictive covenants 13.7

for whom his father, also an employee of Croesus. was responsible. This aspect of the case is also discussed at 11.9 and 12.15. 13.5  The High Court reached a similar conclusion in Pickwell and another v Pro Cam CP Limited [2016] IRLR 761 (QB), a case concerning six month customer non-dealing and non-solicitation covenants which the employees had entered into when they were only trainee agronomists. 13.6 The employees’ argument that the covenants were too broad when they were first entered into – on the basis that they were trainees with none of their ‘own’ customer connections – failed. HHJ  Curran QC was persuaded by Pro Cam’s (uncontested) evidence that it was clearly contemplated, at the time of signing, that the trainees would become fully fledged agronomists in respect of whom the covenants would provide the employer with reasonable protection: ‘At the time they signed the contracts of employment both the Claimants, for their part, and the defendant company had in their contemplation that the Claimants would in due time be dealing with farmer customers as qualified agronomists. That was the very reason for the restrictive covenants’ (paragraph 63).

The fact that the covenants were drafted to cover that ‘future’ phase of employment, when the employees would be fully qualified and ready to take over from more established agronomists, was not fatal to their enforceability. HHJ Curran QC, having referred to Allan Janes v Johal [2006] IRLR 599 (Ch) (see 11.174 and 13.4), stated as follows: ‘…in my judgment any restrictive covenant in a contract of employment involves an attempt by the employer to reach an agreement regulating the activities of the employee after he or she leaves its employment: it is ex hypothesi an attempt to deal with future events, and must therefore involve an exercise in foresight. For it to be enforceable the law confines the exercise to matters which are in the reasonable contemplation of the parties at the time they made the contract’ (paragraph 77).

13.7 In Pickwell, the employees’ suggestion that they should have been given new contracts on qualification also failed. HHJ  Curran QC held that, even on qualification, ‘it would still be a prospective exercise’ (paragraph 77) as the employees would not have had any of their ‘own’ customer connections at the time the new contract was put in place. He further held that, whilst the employees’ day-to-day superiors would decide when they would be allowed to deal with their ‘own’ customers, those superiors ‘could not be expected to judge the appropriate moment to require a new form of contract from the personnel department’ (paragraph 77). The Judge’s findings on this point were necessarily fact-specific. There may well be situations where a new contract is warranted because a trainee has established customer connections that can readily be identified at the point of qualification (or even earlier). A  prudent employer will ensure that his line managers keep his personnel department sufficiently informed of developments so that new contracts can be issued at the appropriate time. (HHJ Curran QC also made findings regarding what amounts to effective consideration for restrictive covenants, which are considered at 13.87 and 13.92.) 771

13.8  Introducing/varying restrictive covenants

13.8  It is important to remember that, in the cases referred to above, the courts upheld the restrictive covenants on the basis that the junior employees’ move into a more senior role was clearly envisaged at the outset of the employment relationship. In contrast, the mere possibility of a promotion, or the fact that an employee is promoted during employment will not, without more, turn a covenant that was void at the outset into one which would be enforceable had it been entered into later in the employment relationship. In WRN Limited v Ayris [2008] IRLR 889 (QB), HHJ Judge Seymour QC stated that: ‘…it would be a very strange position if restrictive covenants which were unreasonable in the context of the position to which Mr Ayris was appointed by the employment contract, if considered on its own, became reasonable because of the chance that he might be promoted to a role in which the restrictive covenants would be appropriate.’ (paragraph 60).

13.9 See also Patsystems Holdings Ltd v Neilly [2012]  IRLR  979 (QB). On promotion, Mr Neilly signed a letter agreeing contract variations (as to salary, pension and notice) reflecting his promotion, coupled with a general acknowledgement that all of his other ‘previous terms remained unchanged’ (which included his restrictive covenants). Underhill J  rejected an argument that, by doing so, Mr Neilly had entered into his covenants afresh at the time of his promotion. Underhill J  ruled, correctly in our view, that the covenant (which Patsystems conceded was unreasonable at the time the contract was entered into) was unenforceable ab initio and ‘should simply be disregarded unless and until it is subsequently and explicitly re-agreed’ (paragraph  39). Patsystems should have required Mr Neilly either to agree explicitly to the covenants afresh, or to enter into a fresh contract containing the covenants at the time of the promotion (and, in either case, supported this with appropriate consideration). Underhill J  believed this approach was right not only in principle but also on grounds of policy and practicality. He pointed out that during the lifetime of an employment contract it will often be varied in a number of different ways and with varying degrees of formality. Emphasising the requirement for certainty for employees, he commented that ‘It would be very undesirable that every such change could in principle have the potential to revive a defunct restrictive covenant’ (paragraph  37). See 13.85 regarding the consideration aspect of the case. 1(a)(ii)  Do restrictive covenants need to be tailored to the particular employee? 13.10 Prospective employers should never use covenants drafted for other employees without first checking that they are appropriate by reference to the employee’s specific role and responsibilities, and how they are likely to change over time (see further at 13.4–13.9). ‘One size’ seldom fits all when it comes to restrictive covenants. If they are not tailored appropriately, the employer may be left with no protection at all, even though the prospective employee would have been willing to enter into reasonable, and appropriately tailored, covenants. 772

Introducing restrictive covenants 13.14

1(a)(iii) What issues arise when restrictive covenants are not agreed before employment commences? 13.11 Agreeing in principle to the inclusion of covenants on the understanding that the precise wording will be dealt with later is fraught with risk for the employer. Very frequently the issue is either forgotten until the employer wants to enforce the non-existent covenants, or the parties find they cannot reach agreement on the wording. Once the employment has commenced, the incentive to agree the wording, especially for the employee, will usually have been lost. 13.12  The prospective employer who is unable to finalise the restrictive covenants at the time of making the offer should, at the very least, make the offer subject to contract, or make the employment conditional on the covenants being entered into (see, for example, Peninsula Business Services Ltd v Sweeney [2004] IRLR 49 (EAT), which is discussed at 13.23). If, prior to the commencement of employment, the condition is not satisfied, the offer of employment will lapse/can be withdrawn. Where it is essential that employment commences before finalisation of the covenants the employer should, if commercially possible, retain the right to terminate by giving a short period of notice. Contracts of employment (certainly for more junior employees) commonly provide for a probationary period (usually three to six months in duration), during which time the employment can be terminated by either party on short notice, sometimes as little as one week. Senior or key hires are likely to resist the notion of a probationary period, but it can provide employers with a useful window in which to resolve any contractual loose-ends. 13.13  Whatever approach the employer adopts, until the covenants are unequivocally accepted, he has little effective protection from unlawful competition after the employment has ended. An unscrupulous employee may seek to exploit this situation in a number of ways. For example, the employee may try to leverage the employer’s weak position to barter for additional pay or benefits in return for accepting the covenants. The employee may also prolong the contract negotiations without having any intention of ever agreeing to the covenants. This may create a window of opportunity for the employee in which to become familiar with the employer’s confidential business information, customers and workforce, knowing that he can walk away (on short notice if he is still in the probationary period) free from any post-termination restrictions (save in respect of any implied obligations regarding the misuse of confidential information or, for senior employees who may also be fiduciaries, diversion of business opportunities). For all of these reasons, employers are strongly advised to agree the wording of restrictive covenants with the employee prior to employment commencing. 13.14 Another reason prospective employers should ensure that the restrictive covenants form part of the offer of employment is to avoid arguments that the covenants amount to a variation of the contract, for which both the employee’s consent and consideration are needed (see further at 13.41–13.102). An illustration of the problems that may arise can be seen in Woodbridge & Sons v Bellamy [1911] 1 Ch 326 (CA). Woodbridge, a firm of solicitors, advertised for a clerk. 773

13.15  Introducing/varying restrictive covenants

Mr Bellamy, who was a qualified solicitor, was interviewed on 29 March and at the interview an oral offer of employment was made to him, subject to satisfactory references. Although the report is not entirely clear, Mr Bellamy appears to have accepted the offer by letter on 1 April. The references were satisfactory and on 4 April Woodbridge wrote to Mr Bellamy confirming that they wished to employ him from 17 April. However, on 16 April Mr Bellamy saw Woodbridge’s junior partner who asked him to sign an agreement which was stated to be ‘In consideration of your agreeing to employ me …’ and which contained a restrictive covenant. Mr Bellamy signed the document and commenced employment but was subsequently dismissed. In an action to enforce the covenant, Mr Bellamy argued that as a concluded agreement was already in existence when he signed the agreement of 16 April, the new agreement was ineffective, there being no consideration for it. Woodbridge argued in response that until 16 April the agreement to employ was inchoate. Although the case went to the Court of Appeal, the point was only dealt with at first instance. Eve J held that the agreement of 16  April did form part of the employment contract. His grounds for so finding appear to have been: (1) that Mr Bellamy was a solicitor who was capable of negotiating on his own behalf and fully aware of the nature of the document that he was signing; and (2) that the agreement was expressed to be in consideration of Woodbridge agreeing to employ him. Neither of these grounds seem to meet Mr Bellamy’s point, but Eve J  felt ‘bound to infer’ (at page 332) that the consideration for the agreement of 16  April would have been Woodbridge’s retention of Mr Bellamy’s services when they would otherwise have terminated the employment relationship at the earliest opportunity. HHJ Curran QC adopted Eve J’s approach in Woodbridge in the case of Pickwell and another v Pro Cam CP Limited [2016] IRLR 761 (QB) (see 13.87). 1(a)(iv) What issues arise if restrictive covenants are included in employee handbooks or other ancillary documents? 13.15  Restrictive covenants do not have to be set out in the employment contract itself; they can be contained in an employee handbook, or other ancillary documents (eg  a separate confidentiality agreement or deed of undertaking). However, the employer must be able to show that they form part of the overall terms of the employment contract. This is best achieved by including an express statement in the main employment contract that the ancillary documents form part of, and are expressly incorporated into, that contract. Care must be taken to ensure that their inclusion is not excluded by an entire agreement clause in the main contractual document. The wording used should also encapsulate (to the extent possible) any later amendments to the ancillary document. However, see further at 13.30–13.40 where we consider the limits on the employer’s ability to introduce restrictive covenants unilaterally in reliance on general or specific variation clauses. 13.16  Some employers have a practice of including covenants in their employee handbook, which is accessible only via a company intranet. Employers sometimes adopt this practice in the belief that acceptance of the covenants is more 774

Introducing restrictive covenants 13.17

likely to be secured because they will go unnoticed as part of a lengthy document, much of which the prospective employee may regard as of limited interest. However, there are real problems with this practice: (a) Restrictive covenants contained in an employee handbook are not always tailored to the specific employee’s role and responsibilities. Instead, they are often cast widely to apply to the broader workforce. As a result, the employer can find himself with no protection at all, even though the prospective employee would have been willing to enter into reasonable, and appropriately tailored, covenants (see also 13.10). (b) The electronic handbook may save paper and the production costs of a hard copy version. However, for the prospective employee to have sight of the handbook, he will either have to be given limited access to the prospective employer’s intranet (a route rarely favoured for technical reasons) or provided with a version printed from that intranet. Possibly because electronic handbooks tend to include a series of drop-down menus and links to other sections/connected documents, providing a full and accurate hard copy tends to present a real challenge for the employer. (c) Evidentially, unless it is properly documented, there is also the problem of proving at a later stage what version of the handbook the employee saw and, consequently, the precise wording of the covenants to which he may have agreed. Electronic handbooks may be easy to update but only very disciplined employers will have retained an accurate audit trail as to what amendments were made and when. Because of these difficulties, even where the employer has a document signed by the employee agreeing to the terms of the employee handbook, that may often not be enough to identify the precise covenants to which he has agreed. It is far safer for the employer to have the covenants in a hard copy document signed by the employee. For two cases illustrating the potential problems that can arise where contractual terms are contained in the employee handbook, see SG & R Valuation Service Co v Boudrais & Ors [2008] IRLR 770 (QB) (regarding a power of suspension – 13.17–13.18) and Credit Suisse Asset Management Ltd v Armstrong [1996] IRLR 450 (CA) (regarding restrictive covenants – 13.47). See also 13.22–13.24 where we consider the extent to which restrictive covenants may need to be brought to the employee's express attention. 1(a)(v) What are the advantages for employers of having restrictive covenants in signed documents and can electronic signatures be used? 13.17  In the absence of fraud or misrepresentation, generally the employee will be bound by the terms of a document which he signs, irrespective of whether or not he has read its contents: L’Estrange v F Graucob Ltd [1934] All ER Rep 16 (KB) (a case involving a contract in writing, signed by the parties, for the sale of an automatic slot machine). For three interesting cases illustrating the 775

13.18  Introducing/varying restrictive covenants

importance of having a signed document, see Peninsula Business Services Ltd v Sweeney [2004] IRLR 49 (EAT) in the context of a commission scheme, SG & R Valuation Service Co v Boudrais & Ors [2008] IRLR 770 (QB) regarding a power of suspension contained in an employee handbook, and Decorus Limited v Penfold and Procure Store Limited [2016] EWHC 1421 (QB) regarding restrictive covenants contained in a signed, but purportedly unread, new employment contract that was presented to the employee during his employment. Peninsula is considered at 13.23. 13.18 In SG & R  Valuation Service Co v Boudrais & Ors [2008] IRLR 770 (QB), the employment contracts expressly referred to an employee manual, even though none existed at the time the contracts were entered into. When the manual was introduced some years later, it contained an addendum that the employees were required to sign confirming that they had read and understood the manual and that, if the contents changed, they might be required to sign again to indicate their awareness and understanding of the changes. There was no evidence that either of the defendants had signed the addendum, although one defendant had worked on the manual itself (but did not recall receiving a copy). In relation to the employees who did not sign that addendum, Cranston J  (at paragraph  16) held that there was ‘no arguable case that they are bound by the manual’ and doubted that the reference to the manual in the employment contracts could be ‘read as incorporating the manual as it exists from time to time’. 13.19  In contrast in Decorus Limited v Penfold and Procure Store Limited [2016] EWHC 1421 (QB), the High Court was not persuaded by Mr Penfold’s assertion that whilst he had signed his new contract of employment, which contained restrictive covenants, he had not read it until after his employment had ended. On the facts, Mr Penfold had: been urged to read the contract before signing; signed it; continued in employment; and accepted the corresponding pay rise. He was, therefore, bound by the new contract. The question whether there had been consideration for the new/varied restrictive covenants in Decorus is considered at 13.90. 13.20 With exponential growth in the use of technology and globalisation of modern business, is it not unusual for parties to seek to agree commercial contracts electronically. There is no reason why, in principle, employment contracts under English law cannot also be agreed by electronic signatures rather than requiring a traditional ‘wet ink’ signature. A detailed examination of the legal regime applicable to the use of electronic signatures is outside the scope of this book, but in summary: (a) The key legislation for employers to be aware of is the Interpretation Act 1978, the Electronic Communications Act 2000, Regulation (EU) No 910/2014 (which has had direct effect in the UK since 1 July 2016) and the Electronic Identification and Trust Services for Electronic Transactions Regulations 2016 (SI 2016/696, which came into force on 22 July 2016). The Electronic Communications Act 2000 deals with the admissibility of electronic signatures. The validity of electronic signatures is based on wider principles of English common law. 776

Introducing restrictive covenants 13.21

(b) In July 2016, the Law Society issued a practice note which helpfully summarises the key principles applicable to the use of electronic signatures (entitled ‘Execution of a document using an electronic signature’, dated 21 July 2016). As explained in that practice note, electronic signatures can take a number of different forms, including: typing a name into a contract or an email containing the terms of a contract; using digitally drawn manuscript signatures; or using a finger, light pen or stylus to write a name on a touchscreen. (c) There are conflicting decisions as to what amounts to effectively authenticating a signature by email. For example, in Hall v Cognos Ltd ET/1803325/97 (Employment Tribunal), it was sufficient that the employee’s name appeared printed at the top of the email. However, in J Pereira Fernandes SA v Mehta [2006] 1 WLR 1543 (Ch), the High Court held that the automatic appearance of the sender’s name in their email address was not sufficient, but commented (obiter) that typing their name at the foot of an email would suffice. The Court of Appeal has also held that typing just a first name at the bottom of an email can suffice (Golden Ocean Group Ltd v Salgaocar Mining Industries PVT Ltd [2012] 3 All ER 842). See also C&S Associates UK Ltd v Enterprise Insurance Company plc [2015] EWHC 3757 (Comm), where Males J applied Golden Ocean in a case involving a contract which contained a clause requiring any variations to be ‘in writing and signed by or on behalf of each of the Parties to the Agreement.’ The judge held that, whilst the clause ensured that the parties would not be bound by ‘oral agreements or even by informal unsigned written documents’, it did not mean that manuscript signatures were required. Males J saw no reason why, as a matter of construction of that clause, ‘documents in electronic form, in particular an exchange of emails, signed on behalf of both parties should not satisfy the requirements of the clause, provided of course that the other requirements of contract formation and variation such as an intention to be bound are also present’ (paragraph 123). See 5.149 and 13.124–13.125 on the effectiveness of clauses that permit only written variations to contract terms. (d) As stated in the Law Society practice note, Leading Counsel also advised the Law Society that if the authenticity of a document signed using electronic signatures were to be challenged, the English court would accept the electronic signature as prima facie evidence of authenticity. The person challenging it would need to prove, on a balance of probabilities, that it was not authentic. 13.21  In our view, a court would likely accept an exchange of emails, or other means of electronic signature, as evidence of acceptance of an employment contract/other document containing restrictive covenants unless there was clear evidence to the contrary. The position is more complex if the covenants are contained in a document executed as a deed because of the need to have the signatures witnessed. The witness would need to be physically present at the time the electronic signature was applied to the deed, and either immediately 777

13.22  Introducing/varying restrictive covenants

apply their own electronic signature or ‘wet ink’ sign a hard copy print out of the relevant document. We are not aware of any authority as to whether the requirement for the witness to a deed to be ‘present’ can be satisfied virtually, eg by video-link. In any event, we advise employers to put the matter beyond doubt and get clear, unequivocal written acceptance of any restrictive covenants. At the very least, a copy of any document accepted electronically should be printed and stored securely on the employee’s personnel file. Similarly, documents executed in hard copy should be scanned electronically and stored securely, as hard copy documents may be misplaced over time. 1(a)(vi)  Do restrictive covenants need to be brought to the specific attention of employees? 13.22  As discussed at 13.17, in the absence of fraud or misrepresentation, generally the employee will be bound by the terms of a document which he signs, irrespective of whether or not he has read its contents: L’Estrange v F Graucob Ltd [1934] All ER Rep 16 (KB). However, the extent to which there is any duty on the employer to alert the employee to specific contract terms when they are introduced, and what constitutes sufficient notice, is something of a moot point. As Denning LJ stated in J Spurling Ltd v Bradshaw [1956] 1 WLR 461 (CA) ‘Some clauses … would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient.’ The current position seems to be that, if a contract term is a particularly onerous or unusual one that would not generally be known to the employee then the employer may have a duty to bring it fairly and reasonably to the employee’s attention: see Chitty on Contracts (32nd edition), Volume 1, Chapter 13 at paragraph 13-011 and Interfoto Picture Library v Stiletto Visual Programmers Ltd [1988] 1 All ER 348 (CA). The claimants in Interfoto ran a library of photographic transparencies; the defendants were engaged in advertising. The parties had not dealt together previously. The defendants made enquiries by telephone about the possibility of borrowing some transparencies for a client presentation. There was no discussion of terms on that call. The claimants subsequently sent the defendants a package of transparencies for their consideration; packed in the same bag was the delivery note which contained certain conditions for borrowing photographic transparencies, including the imposition of a daily holding fee (plus VAT) for late returns. Ultimately, the transparencies were not used, and seem to have been put on one side and overlooked, eventually being returned to the claimants almost a month later. The claimants rendered an invoice for the late return fee, which the defendants disputed. Dillon and Bingham LJJ agreed that the defendants were relieved of the liability to pay the late return fee because the claimants ‘did not do what was necessary to draw this unreasonable and extortionate clause fairly to their attention’. 13.23  Whether the ‘Interfoto principle’ can be applied to situations where the potentially onerous or unusual terms (eg restrictive covenants) are contained in a document that is signed by the employee, is unclear. In Ocean Chemical Transport Inc and another v Exnor Craggs Ltd [2000] 1 All ER (Comm) 519 (CA), the 778

Introducing restrictive covenants 13.23

relevant commercial contract was constituted by an exchange of faxes, which incorporated by reference certain standard terms and conditions. Those terms and conditions included a clause excluding all liability of the defendant unless a claim was brought within six months of the date on which goods were (or were supposed to be) delivered. One of the questions before the Court of Appeal was, therefore, whether the defendant had ‘discharged the duty which lies upon them of bringing the existence of the clause upon which they rely … to the notice of the other party in the circumstances of the particular case’ (Evans LJ, paragraph 48). The Court of Appeal was satisfied that it had, as the claimant had expressly acknowledged the existence of the terms and conditions. It was not necessary, therefore, for the Court of Appeal to consider whether the clause was particularly onerous or unusual. However, the Court of Appeal did accept that the Interfoto principle might apply to clauses contained in a signed contract in ‘an extreme case, where a signature was obtained under pressure of time or other circumstances, and where it was possible to satisfy the Interfoto test; that is to say, that the clause was one which was particularly onerous or unusual for incorporation into the contract in question’ (Evans LJ, paragraph 48). The EAT in Peninsula Business Services Ltd v Sweeney [2004] IRLR 49 (EAT) considered Ocean Chemical, but distinguished Mr Sweeney’s case on two material factual grounds, namely that: (a) the commission terms in question were contained in the document that was signed by the employee, rather than one needing to be incorporated by reference; and (b) there was no suggestion that Mr Sweeney signed in any sort of extreme circumstances (see paragraphs 24 and 25 of the EAT’s judgment). The facts in Peninsula were as follows: the offer letter contained certain details of Mr Sweeney's entitlement to commission payments, but none about when commission would be paid. However, the letter did state that full details of the commission scheme were set out in a separate document, and made it clear that the offer of employment was conditional on Mr Sweeney entering into Peninsula’s standard contractual terms, including the commission scheme rules (which he was told he could inspect at one of Peninsula’s offices should he wish to do so). Mr Sweeney accepted the offer and, shortly thereafter, signed up to the commission scheme rules, which stated that commission would only be paid if Mr Sweeney was in employment at the end of the calendar month following payment by the customer. The Employment Tribunal found, inter alia, that the provisions as to payment of commissions were unduly onerous and should, therefore (relying on the Interfoto principle), have been brought fairly and reasonably to Mr Sweeney’s attention. The EAT disagreed and held that the Interfoto principle does not normally apply to cases in which the disputed term is contained in a written document that has been signed by the employee: ‘It would make for a wholly unacceptable commercial uncertainty if it were open to B, who has signed a written agreement, to say that he was not bound by one of the terms expressly contained in it because A had not first drawn his attention expressly to it. By signing, B is treated as having agreed to that term (and all the others), however onerous it may be and whether he has read it or not’ (Rimer J, paragraph 23).

For the EAT's view on whether the payment terms amounted to an unlawful restraint of trade, see 11.264. 779

13.24  Introducing/varying restrictive covenants

13.24  In our view, on the present state of the law, an employee will be held to (otherwise enforceable) restrictive covenants contained in a document which he has signed, irrespective of whether he has read it. A prudent employer will advise the employee to read the document carefully before he signs it (see, for example, Decorus Limited v Penfold and Procure Store Limited [2016] EWHC 1421 (QB)). The position may be different where (i) the covenants are particularly onerous or unusual and not obvious on the face of the document (eg they are buried deep in the document/a schedule, or contained in an ancillary document, without the employee’s attention being drawn to them); and/or (ii) the employee was unduly pressured or rushed into signing. If, however, restrictive covenants are commonplace in the sector in which the employee works, as they are nowadays in most sectors, it is likely to be more difficult for the employee to argue successfully that a covenant is so unusual that it should have been brought specifically to his attention in order for him to be bound by it. See, for example, Croesus Financial Services Ltd v Bradshaw & Bradshaw [2013] EWHC 3685 (QB) and Tradition Financial Services Ltd v Gamberoni [2017] IRLR 698 (QB), where the court was satisfied that the duration of the covenants in question was commonplace for brokers, regardless of their seniority or experience. These cases are considered further at 11.38–11.39 regarding the impact of unusual or onerous covenants on the assessment of their reasonableness. These questions will doubtless be revisited by the courts at some point. Employers who wish to avoid a debate as to whether an employee is bound by a restrictive covenant contained in a contract of employment or an ancillary document (especially where the covenant is not commonplace), would be well-advised to ensure that the covenant is specifically drawn to the employee’s attention, and that the employee is required to sign to confirm that he has read, understood and accepts the covenant. 1(a)(vii) What are the potential benefits of ensuring that the employee takes legal advice regarding the restrictive covenants? 13.25  The courts have also shown that they are unlikely to be sympathetic to sophisticated individuals who can ably represent themselves in contract negotiations (see, for example, Credit Suisse Asset Management Ltd v Armstrong [1996]  IRLR  450 (CA), which is discussed in detail at 13.47), or who have taken legal advice. The potential impact on contract negotiations (and indeed the assessment of the reasonableness of the covenants) of the position/ seniority of the employee, and whether there is something approximating equality of bargaining position as between the parties, is considered further at 11.8–11.9 and 11.43–11.46. For a recent example, see Tradition Financial Services Ltd v Gamberoni [2017] IRLR 698(QB), where Foskett J gave fairly short-shrift to the proposition that Mr Gamberoni, a trainee broker, was ‘vulnerable’ at the time he entered into his restrictive covenants. At paragraph 139 of his judgment, having listed a number of Mr Gamberoni’s attributes (including his multiple degrees and languages spoken and the fact that he had entered into similar terms with the employer the previous year), Foskett J stated that: 780

Introducing restrictive covenants 13.26

‘This is not the picture of a vulnerable young man. Neither is it the picture ... of a “minnow swimming with sharks” nor of someone who “enjoyed no negotiation power and was extraordinarily vulnerable to abusive contractual terms”.’

As to the taking of legal advice, in J M Finn & Co Ltd v Holliday [2014] IRLR 102 (QB), an interim injunction had been granted to restrain a stockbroker’s competitive activities whilst he was on garden leave, pending speedy trial. When deciding to extend that injunction to the end of the stockbroker’s 12-month garden leave period, Simler J made it clear that she had taken account of the fact that, in agreeing to a mutual 12-month notice period: ‘… Mr Holliday had the opportunity to seek legal advice and availed himself of that opportunity, thereafter agreeing to the clause without any attempt to argue for a shorter period of notice. Moreover, this variation in relation to his notice period was part of the Revised Terms that included a tripling of Mr Holliday’s salary … ‘ (paragraph 72).

See also Tullett Prebon Group Limited v Ghaleb El-Hajjali [2008]  IRLR  760 (QB) (which is considered at 11.283–11.284 and also at 12.148). In that case, the High Court regarded as relevant the fact that Mr El-Hajjali had been legally represented throughout the lengthy contract negotiations and specifically warned by his solicitors of the effect of a ‘no show’ clause (which required him to pay Tullett Prebon a sum of money if he did not start work after signing the contract). His claim that the clause was a contractual penalty failed. See also World Wide Fund for Nature v World Wrestling Federation [2002] FSR 33 (CA), Personal Management Solutions Ltd and another v Brakes Bros Ltd [2014] EWHC 3495 (QB) and (1) Davies (2) Horizon International Cargo Limited v Hart [2015] EWHC 3121 (QB) relating to legal advice taken on covenants contained in settlement agreements or contractual undertakings (or those given to the court) to avoid or end litigation, which are considered in more detail at 11.273–11.277, and 14.117–14.119. 1(a)(viii) Summary 13.26  In summary, we strongly recommend that: (a) restrictive covenants are made part of the offer of employment and the precise wording of them is agreed before employment commences, wherever possible; (b) restrictive covenants are contained in a document provided to the prospective employee in hard copy, rather than in electronic format only, to which the employee is required to confirm his agreement by signing and returning the document to the prospective employer; (c) at the very least, a copy of any document accepted electronically is printed, just as an electronic scan of any hard copy signature should be made as a backup (as hard copies can be misplaced over time). Copies of both should be stored securely on the employee’s personnel file; 781

13.27  Introducing/varying restrictive covenants

(d) restrictive covenants (particularly those contained in employee handbooks or other ancillary documents) are brought to the employee’s specific attention; and (e) employees are encouraged to seek legal advice about the covenants they are being asked to enter into.

1(b)  Introduction of restrictive covenants during the currency of the employment 13.27  The following points, which are considered above, apply equally when restrictive covenants are being introduced after employment has begun: (i) whether the drafting can/should allow for contemplated changes to the employee’s role and/or duties over time (13.4–13.9); (ii) whether the restrictive covenants should be tailored to the particular employee (13.10); (iii) issues regarding the inclusion of restrictive covenants in employee handbooks or other ancillary documents (13.15–13.16); (iv) the advantages for employers of having restrictive covenants contained in signed documents and the use of electronic signatures (13.17–13.21); (v) whether restrictive covenants need to be brought to the employee’s specific attention (13.22–13.24); and (vi) the potential benefits of ensuring that the employee takes legal advice regarding the restrictive covenants (13.25). 13.28  The introduction of covenants after employment has begun will usually amount to a variation of the employee’s existing contract (unless they are made pursuant to a valid variation clause). Employment contracts, like any other contract, cannot usually be varied unilaterally. Unless the employer can rely on an express power to vary the contract unilaterally, he must obtain the employee’s consent and will have to consider: (a) how best to secure that consent, and (b) what the strategy will be if consent is not forthcoming. In extreme cases, where it is imperative to the business that covenants are introduced to stem the damaging effects of competition by former employees, dismissal coupled with an offer of immediate re-engagement and continued employment on the revised terms may be the employer’s only realistic course. In those cases the employer will have an obligation to consult with the employees individually and, where 20 or more employees are proposed to be dismissed at one establishment within a 90 day period, with elected employee representatives or a recognised trade union: section 188 Trade Union and Labour Relations (Consolidation) Act 1992 (see further at 13.66–13.70 and the Appendix to this chapter regarding collective consultation). Even where the employer is not proposing to dismiss, and the statutory consultation procedures are not engaged, the employer must be mindful of the need to consult with employees about the proposed changes and may be 782

Introducing restrictive covenants 13.31

subject to contractually agreed processes for effecting changes to terms and conditions. These may include agreements entered into with staff councils or other internal bodies representing the employees’ interests or, in some industries, consultation processes contained in collective agreements that have been negotiated with a recognised trade union. In all cases, to avoid successful claims of breach of contract or constructive dismissal, appropriate notifications and opportunities for discussion with employees should form part of the process of seeking consent. Finally, the employer must also ensure that there is consideration for the covenants. What amounts to consideration, and issues regarding the adequacy of consideration, are addressed at 13.82–13.102. 13.29  In this section we will therefore look at: (i) the use of unilateral variation clauses (13.30–13.40); (ii) the question of consent (including when it is required and what can amount to consent 13.41–13.61); (iii) the process of obtaining that consent and the employer’s obligations to consult (13.62–13.70); and (iv) the employer’s options when consent cannot be obtained or is refused (13.71–13.81). 1(b)(i)  Unilateral variation clauses 13.30 It has become common practice to insert provisions into employment documentation which purport to give the employer a contractual right to vary the terms of employment unilaterally, simply by informing the employee of the change the employer has decided to make. If the proposed change falls within the ambit of the flexibility clause, then it will not amount to a variation of contract at all. Frequently these ‘flexibility’ clauses are buried in the depths of an electronic employee handbook. Wherever they appear, it is clear that flexibility clauses should be express terms: as Peter Gibson LJ explained in Security and Facilities Division v Hayes [2001] IRLR 81 (CA), ‘It is a strong thing to imply a term into a contract of employment when that term allows the unilateral variation of a contract.’ 13.31  Flexibility clauses can be specific or more general in nature. Specific flexibility clauses apply to one particular area of the employment relationship, such as a mobility clause that entitles the employer to make reasonable changes to the employee’s place of work. Specific flexibility clauses are interpreted very restrictively by courts and employment tribunals: see, for example, Hart v St Mary’s School (Colchester) Ltd UKEAT/0305/14/DM (EAT) which is considered at 13.37). General flexibility clauses seek to give the employer a more wideranging ability to make changes to any aspect of the employment relationship. Unsurprisingly, they are given an even more restrictive interpretation by the courts and employment tribunals. It is clear from the case law that: (a) nothing but the clearest, unambiguous language will suffice; and (b) these clauses will 783

13.32  Introducing/varying restrictive covenants

rarely be effective to change anything other than minor or administrative aspects of the employment relationship (and usually only in respect of the employer’s contractual obligations, rather than the employee’s). 13.32  Such a general flexibility provision was considered by the EAT in United Association for the Protection of Trade Ltd v Killairn (17  September 1985, EAT 787/84, unreported). The clause read as follows: ‘This handbook constitutes your contract of employment. The Association reserves the right to make alterations to the contract of employment. Such changes will be notified to you …’

The EAT held that the clause only empowered the employer to make minor changes of a non-fundamental nature. A similar conclusion was reached, albeit obiter, in Wandsworth London Borough Council v D’Silva [1998]  IRLR  193 (CA), a case concerning unilateral variation of the Council’s Code of Practice on Sickness Absence which the Court of Appeal found to be non-contractual. Lord Woolf MR (delivering the Court of Appeal’s judgment in Wandsworth) accepted that employers (or employees) could ‘reserve the ability to change a particular aspect of the contract unilaterally by notifying the other party’ but that such a contractual right of unilateral variation was an ‘unusual power’ (paragraph 31). The Court of Appeal commented that clear language would be required to confer such a right (see further at 5.57). In addition, any interpretation beyond permitting a variation of the obligations of the party relying on the right to vary, as distinct from the rights of the other party, was unlikely to find favour with the courts. Consequently, had the relevant provisions of the Code been contractual, changes to the levels of sickness absence that would trigger a review or assessment by the Council could probably have been amended unilaterally but alterations to the employees’ rights of appeal could not. The distinction drawn by the Court of Appeal between variation of an employer’s obligations and variation of an employee’s rights will not always be easy to apply in practice. Indeed, even in this case, the variation to the level of sickness absence that would trigger a review would, had it been contractual, arguably have been a variation of Mr D’Silva’s rights not to be subjected to a review. 13.33  Similarly, in Aviation & Airport Services Ltd v Bellfield (14 March 2001, EAT/194/00 unreported) the EAT firmly rejected an argument put forward by the employer that a clause which read ‘any change will be notified to employees in writing and or by displaying a notice at the Company’s office’ gave the employer the right to make changes to the contract, provided that the overall payment to the employee was not reduced. The EAT in Aviation & Airport Services Ltd referred to both United Association for the Protection of Trade Ltd v Killairn (17 September 1985, EAT 787/84, unreported) and Wandsworth London Borough Council v D’Silva [1998] IRLR 193 (CA). 13.34  One of the most significant departures from the restrictive approach usually taken by the courts/employment tribunals to general flexibility clauses is the case of Bateman and others v Asda Stores Ltd [2010] IRLR 370 (EAT) (in which 784

Introducing restrictive covenants 13.35

Wandsworth London Borough Council v D’Silva [1998] IRLR 193 (CA) was considered and applied). In Bateman, the EAT upheld the Employment Tribunal’s decision that Asda could rely on a general flexibility provision contained in the employee handbook to effect a unilateral change to its pay terms without needing express consent from its employees. Asda had two pay regimes in operation and decided that it wanted to bring the small proportion of staff that were still on the ‘old’ regime onto the ‘new’ one. There followed an extensive consultation exercise, during which around 9,300 employees transferred voluntarily to the new regime, leaving some 8,700 on whom the new regime was unilaterally imposed. Around 700 Asda employees brought claims for unauthorised deductions from wages, breach of contract and (in some cases) unfair dismissal. The Employment Tribunal heard six test cases brought by employees who claimed they had not consented to the change to the new pay regime. By the end of the hearing, only one employee claimed that she had suffered any financial loss, the others claimed only declaratory relief. The relevant flexibility clause was contained in the employee handbook (called the ‘Colleague Handbook’) and provided as follows: ‘Changes to the Colleague Handbook [C] The Company reserves the right to review, revise, amend or replace the content of this handbook, and introduce new policies from time to time to reflect the changing needs of the business and to comply with new legislation. A  copy of the handbook is displayed on the colleague communication board in your store and on Pipeline, and replacement copies are available from your People Manager…’ [our emphasis added]

Although changes to pay were acknowledged to be ‘fundamental to the employment relationship’, the EAT was satisfied that the variation provision was clear and unambiguous and that, provided the change fell within the ambit of the provision, it would be effective even if it resulted in financial loss. 13.35  Unsurprisingly, the decision in Bateman and others v Asda Stores Ltd [2010] IRLR 370 (EAT) caused a good deal of excitement amongst employers as it seemed to have increased significantly the scope for making unilateral changes to contract terms, even detrimental ones. It certainly serves as a useful reminder to employers of the potential value in conducting a thorough consultation exercise with employees regarding contract variations. However, Bateman was an exceptional case, both on its facts and the manner in which the case was pleaded and is generally regarded as the ‘high water’ mark in this respect. Some of the distinguishing features of the case were as follows: •

Even though the clause itself allowed the changes to be made, it was highly significant that Asda had given the employees several months’ advance warning of the changes, and carried out an extensive consultation exercise.

•

The Employment Tribunal and the EAT accepted that if the contractual change was imposed without notice, warning or consultation, or if the employer had acted unreasonably, arbitrarily or capriciously, this could amount to a breach of the implied term of mutual trust and confidence. However, as the employees had not argued this point before the Employment Tribunal it was not open to them to raise it before the EAT. 785

13.36  Introducing/varying restrictive covenants

•

Also, by the time the case came to tribunal, only one employee claimed to have suffered any financial loss, and the EAT was satisfied that Asda had taken steps to ensure that the affected employees did not suffer any reduction in pay.

In our view, the Bateman decision is likely to have been very different if Asda had been seeking to introduce a more onerous change to the employees’ detriment (eg the imposition of restrictive covenants) and had the employees then argued breach of trust and confidence. Moreover, subsequent decisions have demonstrated the continued reluctance of the EAT to adopt the more liberal approach taken in Bateman. 13.36  For example, in two decisions of HHJ Hand QC, Norman and others v National Audit Office [2015]  IRLR  634 (EAT), and Hart v St Mary’s School (Colchester) Ltd UKEAT/0305/14/DM (EAT), the EAT found against employers who sought to vary contract terms unilaterally. The cases demonstrate the care that must be taken both when drafting, and then actually relying on, variation clauses. In Norman, following unsuccessful negotiations with the employees’ trade union representatives, the National Audit Office (NAO) imposed unilateral changes to the amount of privilege leave and paid sick pay to which the employees were entitled and notified the employees of the changes in writing. They did so in reliance on the following wording in the employees’ letters of appointment: ‘The following paragraphs summarise the main current terms and conditions of your employment in the NAO. Detailed particulars of conditions of service are to be found in the relevant sections of the HR Manual of the NAO. They are subject to amendment; any significant changes affecting staff in general will be notified by Management Circulars (MCs), Policy Circulars (PCs) or by General Orders (GOs), while changes affecting your particular terms and conditions will be notified separately to you. The HR Manual is available for reference on the NAO Intranet (Merlin) and in Human Resources (HR) at NAO Headquarters.’ [our emphasis added]

coupled with the following statement, contained in the HR Manual, that management and the employees’ trade unions would: ‘Wherever possible,… try to reach agreement before implementing any changes which affect staff. Changes to working practises or terms and conditions will not be implemented whilst negotiations are taking place, or whilst the issue is under referral to ACAS, unless management considers this essential to the operation of the NAO.’ [our emphasis added]

The EAT held that the words ‘They are subject to amendment’ was ‘… nowhere near being clear and unambiguous’ and was not ‘in its language clearly reserving the right to amend unilaterally’ (paragraph 51). Whilst the clause made it clear that unilateral changes could be made (and the process by which they would then be made), it did not reserve a clear right to make unilateral changes. This seems correct on a plain reading of the language used in the appointment letters. The case was, therefore, to be distinguished from Bateman and others v Asda Stores 786

Introducing restrictive covenants 13.40

Ltd [2010] IRLR 370 (EAT) where there was a clear reservation of the right to make unilateral amendments. Moreover, even if the wording had been capable of incorporation into the contracts of employment (which the EAT held it was not), the NAO had not asserted that the changes were considered to be ‘essential to the operation of the NAO’. As a result, the purported amendments were ineffective and the original contract terms prevailed. 13.37  Similarly, in Hart v St Mary’s School (Colchester) Ltd UKEAT/0305/14/ DM (EAT), a part-time school teacher’s contract stated that her part-time hours ‘may be subject to variation depending upon the requirements of the School Timetable’. The school sought to rely on this clause to require Mrs Hart to discharge her total working hours over five days instead of three. HHJ  Hand QC held that the wording relied on did not permit the school to make unilateral variations to the days on which Mrs Hart taught. He substituted a finding that the school’s purported unilateral variation was a repudiatory breach of contract and remitted the case to a differently constituted employment tribunal for re-hearing on the basis that there was no power to make the unilateral change. 13.38 Employers should be advised that, even when seeking to rely on an express variation clause, their actions must also be lawful in all other respects (eg complying with any individual or collective consultation obligations, whether contractual or statutory). There may also be cases where the variation actually amounts to the termination of the existing contract and its replacement by a new one (which gives rise to a dismissal even if the employee has accepted the change and is working to the new contract). See: Hogg v Dover College [1990] ICR 39 (EAT); Alcan Extrusions v Yates and others [1996] IRLR 327 (EAT); and Kumbu v Primelife (2015) UKEAT/0445/14/LA (EAT) (which expressly acknowledged the principle in Wandsworth London Borough Council v D’Silva [1998] IRLR 193 (CA) that an employer can reserve the right to vary contract terms in the future provided that right is spelt out in clear language – see paragraph  8 of HHJ Eady QC’s judgment in Kumbu). 13.39 The operation of flexibility clauses can also be curtailed by the application of implied terms, most notably the implied term of mutual trust and confidence. The leading case on this is United Bank v Akhtar [1989] IRLR 507 (EAT) (which is also referred to at 5.70 and 9.75). Although Mr Akhtar’s contract contained an express mobility clause, the Industrial Tribunal (as employment tribunals were then known) held that by instructing Mr Akhtar to move from Leeds to Birmingham on just a few days’ notice and deciding not to exercise its contractual discretion to pay Mr Akhtar’s relocation expenses, United Bank had breached a number of terms that were implied into the employment relationship. These included the implied term of mutual trust and confidence and an implied term to give reasonable notice of any move when exercising the mobility clause. The EAT (Knox J) upheld the decision of the Industrial Tribunal. 13.40  The cases referred to above highlight some of the problems for employers seeking to rely on express rights to introduce (or vary) contract terms unilaterally. 787

13.41  Introducing/varying restrictive covenants

Although none of the cases involved restrictive covenants, the same principles would apply to an employer seeking to introduce (or vary) covenants unilaterally. It follows that, in practical terms, there is no scope for the employer to introduce (or vary) covenants relying solely on a purported unilateral right to do so. Instead the employer must have secured a prior commitment from the employee to enter into the specific covenants (if requested to do so) or he must obtain the employee's consent and provide consideration for the covenants. Nowadays it is not unusual for the contracts of senior employees to include an obligation that, if asked, they will enter into direct covenants with other group entities for whom they are providing services. Normally the requirement is that the covenants will be identical to those given to the employer but in some cases it is that they will be materially similar. Given the current willingness of the courts to uphold covenants entered into with the employing entity which protect other companies in a group (see 10.34–10.40), it is doubtful whether such provisions are now so relevant. However, where they are to be included they should only require the employee to enter into identical covenants and whilst it is arguable that additional consideration is not required, the safer course is to provide for separate consideration either in the clause itself or, if that has not been done, at the time the request is made. 1(b)(ii)  Consent – express/implied 13.41 The employee’s consent to a contractual variation may be express or implied. Express consent may be written or oral. Express written consent is clearly desirable in order to minimise uncertainty and the scope for arguments. An employer who fails to obtain express consent may be able to argue that the employee impliedly consented by his conduct. However, this is by no means a straightforward argument for the employer. The key questions that the employer will need to address include the following: (a) Has the employee objected to the variation? (b) What impact, if any, does the employee’s seniority have? (c) Is the change detrimental to the employee’s interests and does it have an immediate impact on the employee? (d) Can consent be implied from the employee’s conduct, including the fact that he continues to work? (e) Can the employee seek to take the benefit, but avoid the burden, of a package of contract variations which includes restrictive covenants? Has the employee objected to the variation? 13.42  Consent will never be implied where there is evidence that the employee has objected to the variation. To avoid misunderstandings, or any argument by the employer that implied consent has been given, the protesting employee should always object to the purported variation, making it clear that he will continue to be bound by his existing contract of employment and will perform all his 788

Introducing restrictive covenants 13.45

obligations under that contract. It is ‘not necessary for an employee to embark on systematic or vociferous complaints in order to prevent an agreement from being foisted on him unilaterally by his employer’ (Mummery P in Arthur H Wilton Ltd v Peebles EAT/835/93). That said, the employee’s complaint must be clear and unequivocal; a mere expression of discontent is unlikely to suffice (see Tim Russ & Co v Robertson & Others [2011] EWHC 3470 (Ch), the facts of which are considered at 13.58). However, see also Abrahall & Ors v Nottingham City Council & Anor [2018] EWCA Civ 796, in which the Employment Tribunal, EAT and Court of Appeal held that agreement to unilateral changes to contract terms is not always necessarily to be inferred from silence or the absence of complaint directly from the employees. The facts of the case are quite distinctive and are considered in more detail at 13.53. 13.43  Sometimes the employee agrees to act in accordance with the terms of the varied contract but at the same time registers his protest to the variation. Such a strategy can be dangerous for the employee. In Robinson v Tescom Corporation [2008] IRLR 408 the EAT held that an employee who had agreed to work to new contractual terms, but under protest, was subsequently fairly dismissed when, following an unsuccessful grievance about the new terms, he then refused to abide by the terms of his contract as varied. What impact, if any, does the employee’s seniority have? 13.44 It seems that the courts may also have less sympathy with senior employees who fail to raise issues on contractual variations imposed by their employers, than more junior employees. See, for example, the interim decision of the Court of Appeal in Credit Suisse Asset Management Ltd v Armstrong [1996] IRLR 450, where revised restrictive covenants contained in an updated employee handbook were found to have been incorporated into the employee’s contracts, notwithstanding that there had been no express acceptance of the terms contained in the handbook. The Credit Suisse decision is considered in more detail at 13.47. The court is likely to have even less sympathy with an employee who deliberately conceals the fact that he is not going to agree to varied contract terms, particularly where he does so in order to take the benefit of a negotiated pay increase (see Tim Russ & Co v Robertson & Others [2011] EWHC 3470 (Ch), which is considered in more detail at 13.58). Whilst undoubtedly helpful, in our view it is unwise for employers to place too great a reliance on the principle that sophisticated, or dishonest, employees will always be held to the bargains they make. Good practice remains to seek and obtain the employee’s express consent for all contract variations. See further at 11.8–11.9 on the relevance of the employee’s position/seniority to the assessment of the reasonableness of restrictive covenants. Is the change detrimental to the employee’s interests and does it have an immediate impact on the employee? 13.45 Even where the employee has not objected, the courts have shown considerable reluctance to imply consent where the variation is adverse to the 789

13.46  Introducing/varying restrictive covenants

employee’s interests. For example, in Sheet Metal Components v Plumridge [1974]  IRLR 86 the National Industrial Relations Court (the EAT’s predecessor) approved of the courts’ reluctance to infer ‘consensual variation where an employee has been faced with the alternative of dismissal and where the variation has been adverse to his interests’. See also Khatri v Cooperative Centrale Raiffeisen-Boerenleenbank BA [2010] IRLR 715 (CA), which is considered at 13.51. The courts’ reluctance to infer acceptance in this context is not limited to situations where the change is wholly disadvantageous to the employee. This was recognised by the High Court in Attrill and others v Dresdner Kleinwort Ltd and another; Anar and others v Dresdner Kleinwort Ltd and another [2012] IRLR 553 (QB). 13.46  The courts have also distinguished variations which have no immediate practical impact: see Jones v Associated Tunnelling Co Ltd [1981] IRLR 477, where the EAT expressed the obiter view that it was ‘unrealistic’ to expect an employee to raise an objection to something which would have no immediate effect. In Jones the EAT was considering the case of an erroneous statement relating to a mobility clause in written particulars under what was then section 1 Employment Protection (Consolidation) Act 1978 (now section 1 Employment Rights Act 1996). The obiter view in Jones has been applied in a number of subsequent cases, including Solectron Scotland Ltd v Roper [2004]  IRLR  4, where the EAT held that the employees were not bound by a purported change to enhanced redundancy terms because, although they had not objected to it, the change did not have any impact on the employees until they were actually made redundant. Solectron is considered further at 13.49. See also 9.137–9.138 regarding changes that have/do not have an immediate impact in the context of repudiation. 13.47  In principle the point is the same for restrictive covenants. However, see the interim decision of the Court of Appeal in Credit Suisse Asset Management Ltd v Armstrong [1996]  IRLR  450 (CA), where revised restrictive covenants contained in an updated employee handbook – which could only take effect should the employees be dismissed – were found to be incorporated into the employee’s contracts, notwithstanding that there had been no express acceptance of the terms contained in the handbook. It is worth focusing on the Credit Suisse decision, because the introduction of the new handbook followed a pattern commonly used, particularly in larger companies. The new handbook was issued under cover of an internal memorandum. The memorandum referred to the handbook as ‘largely an update of existing terms and policies’. It said that in some areas changes had been introduced to reflect ‘recent legislation’ or rule changes. A  new death in service widow’s/widower’s pension benefit was also mentioned but no express reference was made to any change in the existing covenants. Employees were asked to acknowledge receipt and were asked to ‘try to find the time to read the Handbook’, which they were told contained ‘important contractual rights and obligations’. The memorandum also asked employees to raise queries or concerns within one month, failing which they were ‘to be treated as having fully accepted the rights and obligations as written’. In the Court of Appeal it was accepted that each of the defendant 790

Introducing restrictive covenants 13.49

employees acknowledged receipt of the handbook. It also seems to be the case that none of the defendant employees had raised any issues on the handbook. The court was referred to Jones v Associated Tunnelling Co Ltd [1981] IRLR 477 (EAT) (above) and to the judgment of Lightman J  in Re Leyland Daf [1995]  ICR  1100 but not, apparently, to Aparau v Iceland Frozen Foods plc [1996] IRLR 119 (EAT) (see 13.48), which had been decided by the EAT seven months previously and held, in short, that some ‘overt act’ of acceptance was required. While stressing that their decision was not a final one, applying the test in Lansing Linde Ltd v Kerr [1991]  IRLR  80 (CA) (for which see 14.75–14.79) the Court of Appeal concluded that there was sufficient likelihood that Credit Suisse would succeed in showing that the revised covenants formed part of the defendant employees’ contracts of employment. In our view, this conclusion is somewhat surprising. The judgment gives virtually no detail as to why the Court of Appeal reached this decision. The only clue given is in a comment of Lord Justice Neill that the defendants were ‘men of experience and sophistication who are used to looking at complex documents’ (see paragraph  29 of the judgment; see also 13.44). However, in our view it is unwise for employers to place too great a reliance on the Credit Suisse decision. Whilst it may assist the employer where changes have been made without consent being sought, good practice remains to seek and obtain the employee’s express consent for all changes. There is also some doubt as to whether the same decision would be reached today in Credit Suisse, particularly given some of the subsequent case law concerning the circumstances in which consent can be implied from the employee simply continuing to work. Some of that case law is considered at 13.48–13.55, in particular the Court of Appeal’s decision in Khatri v Cooperative Centrale Raiffeisen-Boerenleenbank BA [2010] IRLR 715 (CA), which is considered at 13.51. Can consent be implied from the employee’s conduct, including the fact that they continue to work? 13.48  The EAT’s obiter view in Jones v Associated Tunnelling Co Ltd [1981] IRLR 477 (EAT) has been relied on and developed in a number of subsequent cases with a particular focus on whether consent to a contractual variation can be implied simply because the employee continues to work. For example, Jones was applied by the EAT in Aparau v Iceland Frozen Foods plc [1996] IRLR 119 in rejecting an argument that a mobility clause had become part of Mrs Aparau’s contract by implied consent. The fact that Mrs Aparau had worked for over a year without objecting to the change was not enough to infer her acceptance of the new clause; some more overt act of acceptance was required. 13.49 As referred to at 13.46, Jones was also applied in Solectron Scotland Ltd v Roper [2004] IRLR 4. In delivering the EAT’s judgment, Elias J set out (at paragraphs 30 and 31) what has become known colloquially as the ‘only referable’ test: ‘The fundamental question is this: is the employee’s conduct, by continuing to work, only referable to his having accepted the new terms imposed by 791

13.50  Introducing/varying restrictive covenants

the employer? That may sometimes be the case. For example, if an employer varies the contractual terms by, for example, changing the wage or perhaps altering job duties and the employees go along with that without protest, then in those circumstances it may be possible to infer that they have by their conduct after a period of time accepted the change in terms and conditions. If they reject the change they must either refuse to implement it or make it plain that by acceding to it, they are doing so without prejudice to their contractual rights. But sometimes the alleged variation does not require any response from the employee at all. In such a case if the employee does nothing, his conduct is entirely consistent with the original contract continuing; it is not only referable to his having accepted the new terms. Accordingly, he cannot be taken to have accepted the variation by conduct. So, where the employer purports unilaterally to change terms of the contract which do not immediately impinge on the employee at all – and changes in redundancy terms will be an example because they do not impinge until an employee is in fact made redundant – then the fact that the employee continues to work knowing that the employer is asserting that that is the term for compensation on redundancies, does not mean that the employee can be taken to have accepted that variation in the contract. ‘ [our emphasis added]

13.50  The ‘only referable’ test has been applied by the High Court in a number of subsequent cases to varying effect, some of which we consider below. See, for example: F W Farnsworth Ltd & anor v Lacy & ors [2013] IRLR 198 (Ch), considered at 13.59; Attrill and others v Dresdner Kleinwort Ltd and another; Anar and others v Dresdner Kleinwort Ltd and another [2012] IRLR 553 (QB), considered at 13.52 and 13.59; and Pickwell & another v Pro Cam CP Limited [2016] IRLR 761 (QB), considered at 13.5–13.7 and 13.54. 13.51  For three cases in which the courts have declined to infer acceptance from the fact the employees continued to work, see Khatri v Cooperative Centrale Raiffeisen-Boerenleenbank BA  [2010]  IRLR 715 (CA), Attrill and others v Dresdner Kleinwort Ltd and another; Anar and others v Dresdner Kleinwort Ltd and another [2012] IRLR 553 (QB) and Abrahall & Ors v Nottingham City Council & Anor [2018] EWCA Civ 796 (CA). In Khatri, Mr Khatri’s contract of employment provided for a performance-related bonus. The bank issued Mr Khatri with a letter that sought to replace, with immediate effect, his performance-related bonus with a discretionary bonus. The letter also sought to impose restrictive covenants on Mr Khatri, who previously had not been subject to any covenants. The letter stated that Mr Khatri had to sign and return it to indicate his acceptance to the changes. Mr Khatri did not sign the letter (nor was he pressed to) nor did he object to the purported variation: he simply continued to work. The Court of Appeal does not appear to have had the Credit Suisse decision cited to it; however, it had no trouble finding that, applying the Solectron ‘only referable’ test: ‘… it would be quite wrong to infer from all the circumstances that the claimant had accepted changes to his contract, changes which were wholly to his disadvantage both by removing his right to performance related bonus and imposing restrictive covenants’ (Jacob LJ at paragraph 51). 792

Introducing restrictive covenants 13.53

Continuing to work, without more, was insufficient: there needed to be some ‘clear unequivocal act from which one can infer that the claimant was accepting the new terms’ (Jacob LJ at paragraph 44). 13.52  Similarly, in Attrill and others v Dresdner Kleinwort Ltd and another; Anar and others v Dresdner Kleinwort Ltd and another [2012] IRLR 553 (QB), acceptance of an offer of improved contractual terms, which was made by way of an announcement by the employer to its employees, was not to be implied or inferred from the fact that the employees continued to work after the announcement. The Court was not satisfied that continuing to work and discharging their contractual obligations was ‘only referable’ to the employees’ acceptance of the offer made in the announcement. Attrill demonstrates that the courts’ reluctance to imply acceptance of contract variations simply from the fact that the employees continue to work is not confined to cases where the change is disadvantageous to the employee. 13.53  The correct interpretation of the Solectron ‘only referable’ test was also considered in Abrahall & Ors v Nottingham City Council & Anor [2018] EWCA Civ 796. The facts of the case are quite distinctive. Following the introduction of the national ‘single status’ pay framework for local authority employees, the Council informed the employees’ trade unions that it was proposing to save money (and avoid compulsory redundancies) by implementing (amongst other things) a two-year incremental pay freeze. At meetings with the Council, the unions voiced strong opposition to the proposals (including the incremental pay freeze). When the Council nevertheless implemented the pay freeze, the unions consulted their members about strike action but an insufficiently high percentage of members turned out for the consultative ballot to justify a full ballot. Over the next two years: no further formal, or informal, complaints were raised by the union; no grievances were lodged by employees (whether individually or collectively); and nothing was put in writing to the effect that the employees did not accept the pay freeze and/or that they were working under protest. The employees simply continued to work. When the Council proposed extending the pay freeze by a further year, several hundred employees brought claims for unlawful deductions from wages on the basis that they had been contractually entitled to incremental pay increases. Ultimately, the Court of Appeal decided that the employees did have a contractual right to incremental pay increases, but of more relevance to this chapter is the question whether, on the facts, the employees had accepted the varied terms (ie the pay freeze) simply by continuing to work. The Employment Tribunal Judge held that: ‘135. Applying logic, let alone law, it does not remotely follow from the fact that an employee does not for some time do anything about his employer’s breach of contract out of fear of losing his job, nor from the fact that he would in all probability never have brought a claim against the employer had the employer not subsequently compounded the breach of contract in some way, that he has agreed to his contract being varied. 135.1. An employee’s failure to complain about a breach of contract that is referable to his fear of losing his job if he does so is manifestly not, “only referable to his having accepted the new terms imposed by the employer”. 793

13.53  Introducing/varying restrictive covenants

135.2. There are many reasons why someone might decide not to pursue a breach of contract claim and there is no basis for assuming, just because the breach arises in the employment context, that the only reason is agreement to a contractual variation and consequent acceptance that there has, in fact, been no breach of contract. 136. Further, this case cannot sensibly be characterised as one where there was no relevant complaint or protest. The Unions protested vehemently … and through them the claimants, did not agree to the changes being made. I  see no logical basis for concluding that that unequivocal “no” was transformed into an unequivocal “yes” simply by silence over a period of time … Resigned acceptance to the fact that one’s employer has decided to freeze one’s pay in breach of contract is not the same as agreement to the pay freeze …’

The Employment Judge rejected arguments that the contrast between the unions’ initial vehemence and their subsequent silence (paragraph 137) reinforced an inference of acceptance. He also noted an apparent conflict between the Council’s position on acceptance and its claim that no contractual rights were involved (paragraph 139). The EAT (Mitting J)  agreed with the Employment Judge’s reasoning, which he held to be ‘unimpeachable’ (paragraph  33). The Court of Appeal agreed and found that the employees were ‘entitled to arrears of pay equivalent to what they would have earned if pay progression had been operated in each of the years in which it was frozen’ (Underhill LJ, paragraph 105). Having considered the relevant authorities, Underhill LJ identified the following specific points about the ‘proper approach to the question of when continuing to work may constitute acceptance’ (paragraph 86): ‘First and foremost, the inference must arise unequivocally. If the conduct of the employee in continuing to work is reasonably capable of a different explanation it cannot be treated as constituting acceptance of the new terms: that is why Elias J in Solectron used the phrase ‘only referable to’. That is simply an application of ordinary principles of the law of contract (and also of waiver/estoppel). It is not right to infer that an employee has agreed to a significant diminution in his or her rights unless their conduct, viewed objectively, clearly evinces an intention to do so. To put it another way, the employees should have the benefit of any (reasonable) doubt’ (paragraph 87). ‘Secondly, protest or objection at the collective level may be sufficient to negative any inference that by continuing to work individual employees are accepting a reduction in their contractual entitlement to pay, even if they themselves say nothing. This is clear from Rigby v Ferodo ...’ (paragraph 88). ‘Thirdly, Elias J’s use in para. 30 of his judgment in Solectron of the phrase “after a period of time” raises a point of some difficulty. It is easy to see how it may not, depending on the circumstances of the particular case, be right to infer acceptance of a contractual pay-cut as from the day that it is first implemented: the employee may be simply taking time to think. Elias J’s formulation is intended to recognise that a time may come when that ceases to be a reasonable explanation. However, it may be difficult to identify precisely when that point has been reached on anything other than a fairly arbitrary basis. In Khatri Jacob LJ discomforted counsel for the employers by making that very point: see para. 47 of his judgment. But, again, that passage needs to be read in the context of the fact that in that case the variation had not yet bitten, and I do not think that 794

Introducing restrictive covenants 13.55

the difficulty in identifying the precise moment at which an employee should be treated as first accepting a contractual pay-cut means that the question has to be answered once and for all at the point of implementation’ (paragraph 89).

At paragraph 101 of his judgment, Underhill LJ noted with regret that neither the unions nor their members had ‘stated unequivocally at the moment of implementation that they did not accept the proposed cut and that their continuing to work was without prejudice to that position’. Despite this, applying the three points listed above to the facts in Abrahall, Underhill LJ was still satisfied that continuing to work had not, in the circumstances, amounted to acceptance of the pay freeze. The following features of the case were of particular relevance: (a) the proposed variation was wholly disadvantageous to the employees (paragraph 102); (b) the pay freeze was not presented to the employees as something on which their agreement was required (paragraph 103); and (c) the unions had strenuously objected up to and beyond the implementation date and ‘the failure of the unions to take further steps thereafter, or of the Claimants to voice any explicit protest’ did not show that their position had changed (paragraph 104). 13.54  Contrast the above decisions with the findings of the EAT in Cartwright and others v Tetrad Ltd UKEAT/0262/14 (EAT) and the High Court in Pickwell & another v Pro Cam CP Limited [2016] IRLR 761 (QB). In Cartwright, the employer imposed a 5% pay cut on his workforce without their consent. The Employment Judge was satisfied that by continuing to work for many months, during which time no complaint was raised either by the workforce or its recognised trade union (the GMB), the claimants had accepted the variation in pay by their conduct. The EAT (Peter Clark J) – applying the ‘only referable’ principle espoused by Elias J in Solectron Scotland Ltd v Roper [2004] IRLR 4 (EAT) – upheld the Employment Tribunal's decision. Similarly, in Pickwell, HHJ Curran QC held that, in his judgment: ‘… the evidence showed that each of the Claimants, at the time they signed the formal contract of employment, expressly consented to its terms. However, if I am wrong about that, their conduct, by continuing to work under those terms, was only referable to their having accepted the new terms imposed by Pro Cam. An application of the test suggested by Elias J in Solectron cannot produce any other result’ (paragraph 57).

The facts of Pickwell are considered at 13.5–13.7. 13.55 Finally, an employee whose job involves settling terms of employment for other employees should take care that his conduct does not give rise to an argument of implied consent. For example, it has been argued that directors who vote in favour of the introduction of a new service agreement for senior employees (including directors) may be said to be impliedly, or indeed even expressly, consenting to an agreement for themselves in those terms. Such an argument, in our view, may have merit. It is therefore sensible for an employee in this position to make clear his own stance to avoid the point being argued against  him. 795

13.56  Introducing/varying restrictive covenants

Can the employee seek to take the benefit, but avoid the burden, of a package of contract variations which includes restrictive covenants? 13.56  Difficult questions on implied consent arise where the restrictive covenants form part of a new package of terms and where the employee seeks to take the benefit of the package but avoid its burdens. Such a situation commonly arises where a company issues new service agreements introducing covenants at the time of a salary increase to which the employee does not have a pre-existing entitlement or at least an expectation. Quite often the employee fails to sign and return the new agreement but accepts, without protest, the increased salary which is paid by the employer. Sometimes the increased salary is paid under the mistaken belief that the employee has signified his consent to the variation. More often it is paid quite deliberately in order to allow the employer to contend that the employee has consented to the variation by his conduct. Ultimately, the question is one of fact, but the employee’s conduct will be evidence on which the employer can rely. An employee, and particularly a senior employee, who wishes to continue in employment but avoid any risk of the new/varied covenants binding him should reject the covenants in writing and should refuse the salary increase, unless he can show that he is otherwise entitled to it (for example, because of a clause linking his salary to the Consumer Prices Index (CPI) or Retail Prices Index (RPI), or where the employer operates a system of salary bands linked to length of service or level of qualification/seniority). 13.57  It is clear from the relevant case law that the employee cannot unilaterally pick and choose which revisions he will accept. He must accept the revisions as a whole or put forward proposals as to which revisions are acceptable. In the latter case he should reject the covenants in writing and should not accept any improved benefits until he has agreement from the employer. If the contract has not been effectively varied, the old contract terms will apply and the employee has no right to ‘cherry-pick’ any of the new terms he considers favourable or acceptable: North Lanarkshire Council v Cowan [2008]  UKEATS/0028/07. Employees often find this advice unpalatable, since making their position clear may jeopardise their employment. However, the employee who remains silent takes the risk that a court/ employment tribunal may find implied consent, a risk which is rather greater for more senior and sophisticated employees: see Credit Suisse Asset Management Ltd v Armstrong [1996] IRLR 450 (CA) (see 13.44 and 13.47). For three cases demonstrating the difficulties faced by employees who wish to ‘cherry pick’ which terms they are willing to accept see Tim Russ & Co v Robertson & Others [2011] EWHC 3470 (Ch), F W Farnsworth and another v Lacy [2013] IRLR 198 (Ch), and Wess v Science Museum Group UKEA/0120/14/DM. 13.58 In Tim Russ & Co v Robertson & Others [2011] EWHC 3470 (Ch), the employee was held to covenants contained in new contract terms in circumstances where he had deliberately concealed the fact that he was not going to sign the new terms so that he could take the benefit of a negotiated pay increase in the meantime. The Court of Appeal’s decision in Khatri v Cooperative Centrale Raiffeisen-Boerenleenbank BA [2010] IRLR 715 (CA) does not appear to have been cited to the court; however, applying the factors set out in paragraph  31 796

Introducing restrictive covenants 13.59

of Elias J’s judgment in Solectron, Mann J  had no hesitation finding that Mr Robertson had, by his conduct, accepted the entire package of new terms. The Judge was satisfied on the facts (including Mr Robertson’s own evidence) that at all relevant times Mr Robertson knew that: (i) new terms were being promulgated and that he was not happy with some of them (in particular the anti-competition clauses); (ii) the new terms were proposed as ‘part and parcel of the new salary scheme’; and (iii) the company expected him, like all employees, to enter into the new terms but he did nothing to disabuse the company of that belief and, instead, ‘implicitly went along with encouraging [the company] to believe that he would sign’. Mann J went further and found that Mr Robertson ‘deliberately did not, draw attention to his misgivings … and the fact that he was not happy to sign them, because he did not want to have to refuse to sign explicitly and possibly be sacked and lose the benefit of his increased salary package’ (paragraph 11). Mr Robertson’s ‘mere expression of discontent’ (paragraph 18) to a non-partner colleague was not sufficient. It is fair to say that the court evidently did not think very highly of Mr Robertson’s conduct, and the decision is quite fact-specific. 13.59 In F W Farnsworth and another v Lacy [2013] IRLR 198 (Ch), Mr Lacy started employment in 2000 and signed his first contract of employment in 2003. That contract contained no restrictive covenants but did provide for private medical cover, on application, for him (but not his family) and entitlement to join the pension scheme. Mr Lacy was formally promoted in April 2009. It was accepted by the parties that he was not sent a new contract of employment at the time, nor was he told expressly that the promotion was conditional on entering into a new contract. Some months later, in September 2009, Mr Lacy was sent a new contract which did contain restrictive covenants. It also entitled him to private medical cover, on application, this time for himself and his family, and the opportunity to join a different pension scheme. In the interim, Mr Lacy had also been given a pay rise. Mr Lacy never signed the contract, but he did apply for the private medical cover for himself and his family. He admitted that he had read the contract, focussing in particular on the restrictive covenants, but that he never expressed any objection to them or any other term of the new contract. At paragraphs 19 to 27 Hildyard J set out a useful summary of the ‘only referable’ line of cases, including Solectron Scotland Ltd v Roper [2004] IRLR 4 and Khatri v Cooperative Centrale Raiffeisen-Boerenleenbank BA [2010] IRLR 715. Unlike in those two cases, Mr Lacy’s new terms comprised ‘a mixture of the advantageous and the disadvantageous’ (paragraph 28); however, as Attrill and others v Dresdner Kleinwort Ltd and another; Anar and others v Dresdner Kleinwort Ltd and another [2012] IRLR 553 (QB) had demonstrated, the court’s reluctance to infer acceptance from continued employment was not confined to cases where the new/varied term is entirely disadvantageous to the employee(s). In Attrill, the revised terms were not only beneficial but had been offered to persuade the employees concerned not to leave employment (although, on the facts, the court had not been satisfied that the employees’ continued employment was ‘only referable’ to the announcement of the revised terms – see 13.52). In F W Farnsworth, Hildyard J held that Mr Lacy’s acceptance of the new contract could readily be implied from the fact that he had applied for the private medical insurance cover for him and his family, a benefit which was only available to him under the new contract. Finally, in Wess v Science Museum 797

13.60  Introducing/varying restrictive covenants

Group UKEAT/0120/14/DM (which is also considered at 9.138), HHJ Eady QC held that a new role and contract terms, including a reduction in the contractual notice period, were a package of terms, that the employee could not ‘cherry pick’ between the old and the new contracts and the employee had, on the facts, affirmed the new terms in their entirety. 13.60  There will doubtless be further judicial consideration of this issue. Until there is a definitive position, employers are advised to state expressly that the offer (or acceptance) of any pay increases or benefits (to which employees are not otherwise entitled) are conditional on acceptance of the new or revised restrictive covenants. 13.61 The position regarding changes made to contractual terms of employment is different in the context of the sale of a business to which the Transfer of Undertakings (Protection of Employment) Regulations 2006 applies, for which see 13.148–13.172. 1(b)(iii)  Obtaining consent and consultation 13.62 In seeking consent for the introduction of restrictive covenants the employer has two goals – to secure that consent but, at the same time, if the consent is not forthcoming to minimise the risks of any successful claims for breach of contract or statutory claims, either of unfair dismissal or failure to comply with the statutory collective consultation procedures under section 188 Trade Union and Labour Relations (Consolidation) Act 1992. For the purpose of this chapter, the collective consultation procedures are triggered where the employer ‘proposes to dismiss’ 20 or more employees at one establishment within a 90-day period in connection with a refusal to agree revised terms and conditions of employment. The precise requirements of the obligation to consult collectively are set out in the Appendix to this chapter. Breach of contract and constructive dismissal 13.63  Employers seeking to introduce restrictive covenants need to approach the issue carefully. Firstly, the employer’s actions may amount to a repudiatory breach of contract, with the result that he may be unable to rely on any otherwise enforceable restrictive covenants contained in the contract: see General Billposting v Atkinson [1909] AC  118 (House of Lords), which is considered in more detail at 9.49–9.58. Secondly, in respect of employees with the requisite period of continuous service (currently two years), it can also give rise to a constructive dismissal claim, for example, where the introduction of new terms is coupled with a threat of dismissal if the employee does not accept. Where the threat is to give notice of termination, this has been held to amount to an anticipatory breach of contract, giving rise to a constructive dismissal under section 95(1)(c) Employment Rights Act 1996: Greenaway Harrison Ltd v Wiles [1994] IRLR 380 EAT. In Greenaway the new terms were changes to shift patterns which Mrs Wiles could not accept because of family commitments. The correctness of the Greenaway decision is, in the authors’ view, doubtful. Doubts 798

Introducing restrictive covenants 13.65

as to its correctness were also expressed by the EAT in Kerry Foods Limited v Lynch [2005] IRLR 680 (see further at 9.101). 13.64 Whilst, in certain situations, the manner in which an employer seeks to exercise a contractual right can amount to a breach of the implied term of trust and confidence, it is difficult to see how a threat of lawful performance of a contractual term by an employer conducting himself reasonably can be a breach (anticipatory or otherwise) of anything. Indeed, in Coyle v Georgiou (13  December 2001, EAT/535/00, unreported) the EAT, having found that an employee had resigned after being offered two separate choices of new working hours, neither of which was acceptable to her, held that she had not been constructively dismissed. However, because of the constructive dismissal risk, unless the covenants are absolutely necessary for the protection of the business and the employer could immediately cope without the services of the employee, it is normally unwise for the employer to mention the possibility of dismissal at the initial stages. It goes without saying that under no circumstances should an employer threaten to dismiss without proper notice or a payment in lieu of notice where that is provided for in the contract – to do so would, in appropriate cases, invite not only an unfair dismissal claim but also a wrongful dismissal claim. Consultation generally 13.65  The appropriate course for an employer seeking consent to contract variations is to enter into a reasonable period of consultation with the employee during which the employer should: (a) provide the employee with the text of the covenants together with an explanation as to why their introduction is necessary; (b) give the employee a reasonable opportunity to consider the proposal and a means for the employee to raise any queries; (c) consider, and most importantly be seen to consider, carefully any suggestions for alterations made by the employee and, where commercially appropriate, accept the employee’s suggestions; (d) be clear as to the consideration being offered for the new covenants and in cases where it is particularly important that the covenants are in place, consider offering specific and separate consideration for the covenants (ie over and above the additional benefits the employee will receive for the contractual changes generally). See further at 13.82–13.102 regarding the issue of consideration; and (e) consider possibly making a capped contribution to legal fees to enable the employee to take legal advice. See further at 13.25 and 12.148 for the potential advantages for employers when employees are legally represented in any negotiations. See also 11.8–11.9, 11.43–11.46 and 13.44 regarding the impact of the employee’s position/seniority, and whether the parties can be said to have equal bargaining position, on the assessment of the reasonableness of the covenants, and whether implied consent to contract variations has been given. 799

13.66  Introducing/varying restrictive covenants

Whilst none of these steps will guarantee that consent will be given (or can be implied), they will be important factors in successfully defending any breach of contract and/or unfair dismissal proceedings that might be brought. For a case in which the failure to follow a fair procedure led to a finding of unfair dismissal see Willow Oak Developments Ltd v Silverwood [2006] IRLR 607 (CA), which is discussed at 13.77–13.79. The employer must also ensure that any contractually agreed consultation procedures (or those contained in collective agreements that have been negotiated with a recognised trade union) are complied with. Collective consultation 13.66  Any employer proposing to introduce restrictive covenants into the employment contracts of 20 or more employees needs to be aware of the provisions of section 188 Trade Union and Labour Relations (Consolidation) Act 1992. By virtue of section 188, employers are required to consult with recognised trade unions or elected employee representatives where there is a proposal to ‘dismiss as redundant’ 20 or more employees at one establishment within a 90-day period. Two questions arise from this, namely: what is an ‘establishment’ and when does an employer in this position ‘propose to dismiss’? These questions are considered further at 13.67–13.69. As a first step, however, it is vitally important that the employer understands the broad scope of the phrase ‘dismissal as redundant’ in this context. At first sight, the collective consultation obligations may not obviously apply to the introduction of new restrictive covenants. However, section 195 Trade Union and Labour Relations (Consolidation) Act 1992 contains a definition of redundancy that is much wider than that provided in section 139(1) Employment Rights Act 1996. Under section 195, a ‘dismissal as redundant’ is defined as ‘a dismissal for a reason not related to the individual concerned or for a number of reasons all of which are not so related’. The definition ‘a dismissal for a reason not related to the individual concerned’ is wide enough to apply to a situation where an employer seeks to change the terms and conditions of his employees’ employment contracts, coupled with a threat of dismissal if the employees do not accept the changes or where the employees resign in response. The fact that such dismissals count as ‘redundancies’ and can therefore be caught by the collective redundancy consultation obligations was confirmed by the EAT in GMB v MAN Truck & Bus UK Ltd [2000] IRLR 636. The European courts have also been called on to consider what amounts to ‘redundancies’ for the purpose of the Collective Redundancies Directive 98/59/EC (which the Trade Union and Labour Relations (Consolidation) Act 1992 implements in the UK). In Pujante Rivera v (1) Gestora Clubs Dir, SL (2) Fondo de Garantia Salarial, C-422/14, [2016] IRLR 51, the Court of Justice of the European Union (CJEU) confirmed that resignations in response to unilateral changes to essential elements of the employment contract that are not related to the individual and which cause substantial detriment, are caught by the wide definition of redundancy in the Collective Redundancies Directive. Collective consultation – what is an ‘establishment’? 13.67  What amounts to ‘one establishment’ is not defined in the relevant statutes; it is essentially a question of fact for the court or employment tribunal. 800

Introducing restrictive covenants 13.69

However, it is clear from the relevant domestic and European case law that it means the local unit or entity to which the redundant employees are assigned to carry out their duties, but it is not essential that the unit has its own geographical separation from the rest of the business, or management or financial autonomy (see USDAW and another v WW Realisation 1 Ltd (in liquidation), Ethel Austin Ltd and another (C-80/14) [2015] IRLR 577 (ECJ), colloquially known as the ‘Woolworths Case’). Collective consultation – when is an employer ‘proposing to dismiss’? 13.68  Part of the answer to this question can be found in the EAT’s decision in GMB v MAN Truck & Bus UK Ltd [2000] IRLR 636, where it was held that the employer was in breach of section 188 Trade Union and Labour Relations (Consolidation) Act 1992 when it failed to consult with a newly acquired workforce of more than 20 employees regarding changes to their terms and conditions of employment. Following a merger, MAN wished to harmonise the terms of employment of two groups of its employees. Without any prior consultation MAN wrote to all the relevant employees on 29 April 1999 giving notice that their existing employment contacts would be terminated from 1 June but that it was prepared to offer re-engagement under new terms. A further letter stated that the employees would be deemed to have accepted the new terms if they reported for work on 1 June. The GMB union, on behalf of the employees, argued that the employer’s proposal to dismiss and re-engage fell within the meaning of redundancy as defined by section 195 Trade Union and Labour Relations (Consolidation) Act 1992 and they should therefore have carried out a collective consultation process under section 188 Trade Union and Labour Relations (Consolidation) Act 1992. MAN argued that its actions did not fall within section 195 of the 1992 Act and that, in any event, there had not been any proposal to dismiss as everyone had remained employed by the company. Since actual notices of termination had been issued, it is hard to see how MAN’s argument on the latter point could ever have succeeded, nor would it be likely to succeed today. Although the GMB’s argument failed before the Employment Tribunal, it succeeded at the EAT, where it was held (at paragraph 17) that ‘by reason of the proposed dismissals notified to the employees by the letters dated 29 April 1999 the employer was by that date at the latest under a duty to consult appropriate employee representatives in accordance with section 188’. 13.69 The implication of the EAT’s decision in GMB appears to be that if an employer states at an early stage that it ‘proposes’ to dismiss and re-engage on new terms 20 or more employees at one establishment within a 90 day period, section 188 Trade Union and Labour Relations (Consolidation) Act 1992 will apply. Conversely, where an employer merely seeks to consult over a desire to introduce new terms and conditions to such employees without making any reference to dismissal and not having made any decision to dismiss, it is less likely that section 188 will apply. Precisely when the obligation does arise is, however, something of a moot point which has been considered by both the domestic and European courts (the latter considering the question of when an employer is ‘contemplating collective redundancies’ pursuant to Article  2 European Collective Redundancy 801

13.69  Introducing/varying restrictive covenants

Directive 98/59/EC, from which the requirements of section 188 Trade Union and Labour Relations (Consolidation) Act 1992 derive). By his words ‘at the latest’ (see 13.68) Commissioner Howell QC in GMB clearly contemplated that the obligation could have arisen earlier than the point at which notices of dismissal were issued but he gave no further guidance on the point. Subsequently, the EAT in Leicestershire County Council v Unison [2005]  IRLR  920, upholding the decision of the Employment Tribunal, held that the phrase ‘proposing to dismiss’ fell to be construed purposively as meaning ‘proposing to give notice of dismissal’ (HHJ McMullen QC, paragraph 35). The EAT approved the Employment Tribunal’s finding that ‘proposing’ meant ‘something less than a decision that dismissals are to be made and more than a possibility that they might occur’. Once termination notices have been issued an employer will clearly be ‘proposing’ dismissals. It is also clear that it is irrelevant that the employer hopes that affected staff will be re-deployed or re-engaged on new terms: see Hardy v Tourism South East London [2005] IRLR 242 (EAT). What remains unclear is how much earlier than the issue of termination notices the obligation to collectively consult may arise. Two decisions of the Court of Justice of the European Union suggest that, where it is likely from the very outset of any process that some employees may reject a proposed contract variation and ultimately be dismissed (and potentially re-engaged), the obligation to collectively consult is triggered as soon as the employer decides to make the proposed changes – see Socha and others v Szpital Specjalistczny im A Falkiewicza we Wroclawiu (Case C-146/16) [2018] IRLR 72 and Ciupa and others v II Szpital Miejski im. L. Rydygiera w Lodzi, now Szpital GinekologicznoPolozniczy im. dr L. Rydygiera sp. z z.z. w Lodzi (2017) (Case C-429/16). Both cases involved hospitals experiencing financial difficulties and looking to cut costs; in Ciupa by way of a temporary pay reduction, and in Socha by amending the periods of employment which counted towards acquiring length of service awards. The court reaffirmed the principles established in the preceding European case law, in particular Akavan Erityisalojen Keskusliitto AEK ry v Fujitsu Siemens Computers Oy (Case C44/08) [2009] IRLR 944, namely that: for the purpose of the Collective Redundancy Directive, collective consultation must be started by the employer once a strategic or commercial decision compelling the employer to contemplate or to plan for collective redundancies has been taken (Akavan, paragraph 48); and, where a decision entailing an amendment of working conditions may enable collective redundancies to be avoided, the consultation must start when the employer contemplates making such amendments (Akavan, paragraph 47). Applying this reasoning, the CJEU found that the hospitals in both Socha and Ciupa should have commenced collective consultation at the point at which notices of amendment of terms of employment were issued because they ‘should reasonably have expected that some employees would not accept the change to their conditions of employment and that, as a result, their employment contract would be terminated’ (paragraph 32 Socha, paragraph 35 Ciupa). The fact that amendment notices were issued necessarily meant that collective redundancies were contemplated (even in Ciupa where, unlike in Socha, the threat of dismissal for a refusal to accept the changes was not expressly stated). The potential impact of these decisions on when an employer proposes to dismiss under section 188 remains to be seen. For now at least, in their strategy planning employers should (where commercially possible) take care to avoid taking a firm decision at too early a stage in the process 802

Introducing restrictive covenants 13.70

to dismiss if employees refuse to accept the contract variations or, arguably, even a contingent decision based, for example, on a threshold number of acceptances. Any consideration of dismissal and re-engagement should, if at all commercially viable, be delayed until if, and only if, employees refuse to accept the variations and it becomes necessary to issue notices of dismissal and re-engagement. An employer’s desire to introduce or vary restrictive covenants will often be driven by a perceived commercial risk to the business, or a general review of terms in order to benchmark the terms of employment more effectively to the market and assist recruitment. The potential financial liabilities connected with those perceived business risks will need to be balanced against the associated costs (both financial and non-financial, eg management time) of a collective consultation process, and the potential liabilities and penalties for any failures in that process. Collective consultation – what are the penalties for non-compliance? 13.70  Where the collective consultation obligation is triggered, the penalty for failure to comply is in the form of a protective award under section 189 Trade Union and Labour Relations (Consolidation) Act 1992. Claims can be brought by the trade union or elected employee representatives or, in certain circumstances, by the affected employees themselves. Awards are made on the basis of up to 90 days’ actual pay (not capped at the weekly statutory maximum) per employee who was affected by the changes to their contractual terms, or whom the employer originally proposed would be so affected. Although awards are capped at 90 days per employee, the award is intended as a sanction for the employer’s non-compliance and so employment tribunals start with the figure of 90 days and reduce it only where there are compelling reasons to do so (or where there are ‘special circumstances which render it not reasonably practicable for the employer to comply’ with the obligation to collectively consult (section 188(7)). Consequently, where there are significant numbers of employees involved, the potential financial exposure for the employer is significant and the employer is well-advised to keep the following key principles in mind: (a) being unaware that the obligation to consult collectively has been triggered is no excuse: see E Ivor Hughes Educational Foundation v Morris and others [2015] IRLR 696, where the EAT upheld the Employment Tribunal’s decision to make a full 90-day award against the Foundation, despite its claims to have been unaware of its obligations to consult from the point it made the decision to close a school. The EAT upheld the Employment Tribunal’s finding that the failure to consult had ‘resulted from the reckless failure to consult legal experts on the employment implications of the closure’; (b) the employee does not have to suffer any financial loss for a protective award to be made: see E Ivor Hughes Educational Foundation (referred to at 13.70(a)) where the EAT held that ‘it is not open to a Tribunal to treat the fact that one or more employees has not suffered actual loss as a result of the failure to consult as a mitigating factor justifying a reduction in the length of the protective award that would otherwise be just and equitable having regard to the seriousness of the employer’s default’ (paragraph 34); and 803

13.71  Introducing/varying restrictive covenants

(c) even a relatively minor, technical breach of the collective consultation obligations can result in a sizeable protective award: see Unison v Capita Business Services Ltd (ET/2431219/2012). In that case, the Employment Tribunal made a 45-day protective award because the employer had failed to provide information about agency workers. It seems that the Employment Tribunal was only prepared to be lenient because ‘there was not a wholesale disregard of the consultation requirements, this was a new provision, and there was no evidence of loss’. Given that the requirement to provide information about agency workers, and the remainder of the section 188 requirements, have now been in force for a considerable amount of time, it is unlikely that an employer would obtain such a significant reduction again for so-called technical breaches of the regulations. 1(b)(iv)  Refusal to give consent 13.71  What happens where the employee refuses consent? In that situation, the employer has four courses of action open to him: (a) to abandon the proposed new/varied restrictive covenants and continue to employ the employee on his existing terms; (b) to continue the employment as before, but to continue negotiations with the employee in the hope that he will ultimately agree to the new/varied restrictive covenants; (c) to dismiss the employee for failing to agree to the new/varied restrictive covenants; or (d) to dismiss the employee but offer to re-engage the employee on revised terms, including the new/varied restrictive covenants, from the end of the expiry of the notice period. The employer can, and should, also continue negotiations with the employee in scenarios (c) and (d) above to see if agreement can be reached. Dismissal with notice or pay in lieu of notice 13.72  To avoid claims of wrongful dismissal, the employer who chooses to dismiss must give the employee whichever is the longer of his contractual notice or statutory minimum notice in accordance with section 86 Employment Rights Act 1996; where no notice period has been agreed the employer must give reasonable notice which cannot be less than the statutory minimum period. An employer taking this route needs to do so unequivocally to avoid having to pay the notice money twice: Rigby v Ferodo Ltd [1987] IRLR 516 (HL). A lump sum payment in lieu of notice may be made where expressly permitted by the contract or where agreed by the parties. However, it is generally better for the employer to give notice rather than make a payment in lieu of notice; not only does this look more reasonable on the part of the employer, it also allows more time in which to continue negotiations with the employee in the hope of convincing him to agree the new terms. Where 804

Introducing restrictive covenants 13.74

the employer intends to rely on the right to make a payment in lieu of notice, following the majority decision of the Supreme Court in Societe Generale, London Branch v Geys [2013] IRLR 122, it is not enough that the payment is made; the employee must also be notified in clear and unambiguous terms that such a payment has been made and that it is made in the exercise of the contractual right to terminate the employment with immediate effect. For a more detailed discussion on bringing the contract of employment to an end see Chapter 9. Unfair dismissal 13.73  Employees with the necessary continuity of service (currently two years) may allege that the dismissal was unfair if: (a) the dismissal was not for one of the five potentially fair statutory reasons for dismissal (set out in sections 98(1) and (2) Employment Rights Act 1996); or (b) if the reason falls within section 98(1) and (2) and the employer did not act reasonably in treating that as a sufficient reason for dismissal (section 98(4)). The potentially fair statutory reasons for dismissal are the four specific grounds identified in section 98(2), plus the general ground referred to in section 98(1)(b) ie ‘some other substantial reason of a kind such as to justify the dismissal of an employee holding the position which the employee held’ (sometimes referred to as the ‘safety net’ category). Special rules apply to dismissals where there has been a transfer to which the Transfer of Undertaking (Protection of Employment) Regulations 2006 applies and these are set out at 13.173–13.174. Unfair dismissal – some other substantial reason 13.74  There is no statutory definition of what amounts to ‘some other substantial reason’. However, it is clear that the employer must be able demonstrate a reason that is more than ‘whimsical or capricious’ (Harper v National Coal Board [1980]  IRLR  260 (EAT)); it should be ‘a reason which management thinks on reasonable grounds is sound’ (Hollister v National Farmers’ Union [1978] IRLR 161 (EAT), Arnold J at paragraph 33, expressly approved by Lord Denning MR in the Court of Appeal in that case – [1979] IRLR 238 (CA)). Whilst the employer does need to demonstrate that the ‘sound business reason’ had some discernible advantages (Kerry Foods Ltd v Lynch [2005] IRLR 680 (EAT); Banerjee v City and East London Area Authority [1979] IRLR 147 (EAT)), it is not necessary to show that the very survival of the business depended on it (see Catamaran Cruisers Ltd v Williams [1994] IRLR 386 (EAT), which was considered and affirmed by the EAT in Garside & Laycock Ltd v Booth [2011] IRLR 735). For two interesting, albeit fact-specific, cases where the reason advanced for the dismissals was the protection of confidential information, see Skyrail Oceanic Ltd t/a Goodmos Tours v Coleman [1980] IRLR 226 (EAT) and Chandlers (Farm Equipment) Ltd v Rainthorpe UKEAT/0753/04 (EAT). In both cases the dismissals were ultimately held to be unfair on procedural grounds. However, the EAT accepted, in principle at least, that dismissing an employee who was about to marry someone employed in a competitor firm, or whose husband planned to join a competitor, could be justified as ‘some other substantial reason’ where the employer demonstrated reasonable concerns that confidential information may be leaked. What amounts to ‘some other substantial reason’ is also considered briefly at 18.99. 805

13.75  Introducing/varying restrictive covenants

13.75  In the context of dismissals for refusing to agree contract variations (and in particular, the introduction or variation of restrictive covenants), the leading case remains RS Components Ltd v Irwin [1973] IRLR 239 (National Industrial Relations Court, the predecessor of the EAT), in which RS  Components succeeded in justifying the dismissal on the grounds of ‘some other substantial reason’. Since the factual background in RS  Components is a fairly typical example of when employers want to introduce new covenants, it is worth looking in some detail at the case and the process adopted by RS  Components in seeking the consent of its employees. RS  Components were distributors of electrical components in England and Northern Ireland. They operated through a team of 92 salesmen, each of whom worked in an allocated territory and visited customers in accordance with a schedule provided by RS Components. In the two years preceding the dismissal of Mr Irwin, RS Components had lost a number of orders to ex-salesmen. Those ex-salesmen, using knowledge gained in their employment of the names and addresses of customers and the times of calls by RS Components staff, set up their own businesses and called upon the customers to solicit orders shortly before the customer was due a visit by the RS Components representative. This resulted in loss of business and complaints being received from RS Components salesmen, who were paid partly by salary and partly by commission. RS Components took advice and concluded that the appropriate way forward would be to introduce a reasonable covenant restricting the solicitation of customers. RS Components issued new service agreements to its salesmen on 1  February 1973 containing a 12-month non-solicitation covenant. The service agreements contained other alterations, but none was relevant to the unfair dismissal claim. The covering memorandum required the employee to consider the new agreement carefully and to sign and return it by 23 February. Although the memorandum sought the employee’s views it also made it clear that the revised terms were the only terms on which the company could continue to employ and that the new terms would come into effect from 1 March. On 21 February, Mr Irwin wrote to the company saying he would not sign the covenants. Subsequent attempts to persuade him to change his mind, including a personal interview with the Chairman, failed and consequently, at the beginning of March, his employment was terminated by a payment in lieu of notice. Of the 92 salesmen Mr Irwin was one of only four who refused to sign. 13.76  The Industrial Tribunal (as it then was) held that the covenant was reasonable and would probably have been enforceable and that the effect on the future interests of RS Components of Mr Irwin’s refusal to agree to the covenant was so substantial as to justify dismissal. However, by a majority the Industrial Tribunal found Mr Irwin had been unfairly dismissed since, on the proper construction of the phrase ‘some other substantial reason’, it had to be read ejusdem generis (that is, be restricted to the same class of reasons) with the other reasons for dismissal contained in what was then the Industrial Relations Act 1971 (now section 98(2) Employment Rights Act 1996). On appeal, the National Industrial Relations Court (the predecessor of the EAT) allowed RS Components’ appeal, holding that the phrase ‘some other substantial reason’ was not to be construed ejusdem generis and that Mr Irwin’s dismissal was a fair dismissal for ‘some other substantial reason’. Two further points are worth noting. The first, referred to in the Industrial 806

Introducing restrictive covenants 13.78

Tribunal’s decision, was that it recognised a need for uniformity amongst the terms of employment of the sales staff and it placed some reliance on the fact that as there had been an opportunity for ‘consultation and explanation’ it could not be said that Mr Irwin had been treated unfairly. The second is the recognition, as part of the justification of the National Industrial Relations Court’s decision, that cases could clearly arise where it would be essential for an employer to introduce restrictive covenants. The two examples referred to in RS Components are where covenants are necessary to limit the use of knowledge acquired in employment of a new technical process or where a licensing agreement imposed on the licensee an obligation to extract restrictive covenants from its employees. As Brightman J put it (at paragraph 16), ‘It would be unfortunate for the development of industry if an employer were unable to meet such a situation without infringing or risking infringement of rights conferred by the 1971 Act’. 13.77 In Forshaw v Archcraft Ltd [2005]  IRLR  600, the EAT suggested that a dismissal for refusal to accept a new restrictive covenant could not fall within the category of ‘some other substantial reason’ where the proposed covenant was itself unreasonable. In other words, the employer failed to establish one of the five potentially fair reasons for dismissal: see 13.73. In our view, that decision was incorrect and, in Willow Oak Developments Ltd v Silverwood [2006] IRLR 607 the Court of Appeal, disapproving Forshaw, confirmed that the mere fact that the proposed covenant was unreasonable did not preclude the employer relying on the category of some other substantial reason as the reason for dismissal. The Court of Appeal ruled that the question asked by section 98(1)(b) Employment Rights Act 1996 was whether the reason was some other substantial reason ‘of a kind’ such as to justify dismissal, ie it ‘falls within a category of reason that is not excluded by law as a ground for dismissal’, for example because it is ‘whimsical or capricious or dishonest … or is based on an inadmissible ground such as race or sex’ (Buxton LJ at paragraph  15). In Willow the Court of Appeal ruled that refusal to sign a covenant protecting the legitimate interests of the employer was a reason that in law was a valid reason for dismissal and, therefore, the EAT had correctly proceeded to the second stage of assessing whether the employer had acted reasonably in treating that reason as sufficient to justify dismissal under section 98(4). The employer ultimately lost in Willow but it did so because of the procedure adopted in seeking consent or, as the Court of Appeal described it, the ‘aggressively insulting way in which the employer chose to conduct the negotiations’ (Buxton LJ at paragraph 34), including an initial request to sign the covenants within 30 minutes and a failure to warn of the consequences if the employee did not sign. 13.78  For employers proposing to dismiss for refusal to sign a new restrictive covenant, Willow Oak Developments Ltd v Silverwood [2006] IRLR 607 (CA) is an object lesson on how not to undertake the process. However, the case restores the principle that, irrespective of the reasonableness of the proposed covenant (unless it is so obviously excessive that it is ‘whimsical or capricious’ to seek to impose it), dismissal for failure to give consent to the covenant does fall within the category of some other substantial reason in section 98(1)(b) Employment Rights Act 1996. However, the Employment Tribunal must still be satisfied that the employer acted reasonably in treating that reason as a sufficient reason for dismissal under section 807

13.79  Introducing/varying restrictive covenants

98(4) Employment Rights Act 1996. This second stage involves a consideration of: (a) the procedure adopted by the employer in seeking to implement the change of terms; and (b) the reasonableness of the proposed covenant: ‘… it is not easy to determine in advance whether a term in a contract will be unreasonable in all respects and in all circumstances, to the extent that an employer could never, by whatsoever procedure and under whatsoever circumstances, treat failure to accept it as a reason for dismissal. Fairness to both parties is best achieved by looking at the terms of the proposed contract in all the circumstances of the dismissal, as s 98(4) provides and requires. … the possibility that the covenant, if agreed, might not be enforced as a matter of contract is at best only one factor in the determination of whether the process of negotiation and bargaining, and the sanction imposed by the employer, are reasonable’ (Buxton LJ at paragraph 16).

13.79 In Willow Oak Developments Ltd v Silverwood [2006] IRLR 607 (CA) the employer’s procedure for introducing the new covenants was so flawed that the Court of Appeal upheld the finding of unfairness on that ground alone. However the Court of Appeal appeared to endorse (obiter) the approach in Catamaran Cruisers v Williams [1994] IRLR 386 (EAT) (a case not involving the introduction of restrictive covenants but changes to other terms and conditions), where the EAT adopted a ‘balancing act’. Under this approach the Employment Tribunal is required not to look at the advantages and disadvantages of the new terms solely from the employee’s point of view but also to consider and take into account the benefit for the employer in imposing the changes. The approach of Burton P in the EAT decision in Willow Oak Developments Ltd v Silverwood [2006] IRLR 28 (EAT) is instructive in this regard: ‘24.1 If the proposed covenant appears to the tribunal to be plainly unreasonable and (where relevant) was being put forward as all or nothing, or not severable, then it may make it all the easier for a tribunal to conclude that there was unfairness. 24.2 If the proposed contract or covenant or covenants is/are arguably unenforceable (and/or severable) then there will be the greater need to consider the approach of the employer, in particular the amount of time given to consider the proposals and the opportunity given, if appropriate, for legal advice. 24.3 If the covenant is plainly reasonable, then, of course, before a dismissal can be justified there will still need to be consideration of the fairness of the procedure, but the tribunal may well be able to be satisfied that the dismissal was fair.’

In view of its upholding of the decision of the Employment Tribunal on the grounds of unfair procedure alone, it was not necessary for the Court of Appeal to consider the correctness of this passage (which was set out in full in the judgment of Buxton LJ as part of the submissions of the appellant). In our view, the passage provides helpful guidance. Unfair dismissal – internal procedures and the ACAS Code of Practice 13.80  Finally, in addition to any internal consultation procedures (see 13.65), employers implementing dismissals should keep in mind the requirements of 808

Introducing restrictive covenants 13.80

the ACAS Code of Practice 1: Disciplinary and Grievance Procedures (2015), which is supplemented by the (non-statutory) guidance set out in Discipline and Grievances at work: The ACAS guide. The ACAS Code replaced the old statutory dismissal procedures. Employment Tribunals can increase or decrease any unfair dismissal awards made ‘by no more than 25%’ for a failure of either party to comply with the ACAS Code (section 124A Employment Rights Act 1996; section 207A Trade Union and Labour Relations (Consolidation) Act 1992). Any increase cannot, however, take the award above the statutory compensation cap (currently the lesser of 1 year’s gross salary or £80,541 increasing to £83,682 for dismissals taking effect on or after 6 April 2018). The ACAS Code applies to ‘disciplinary situations’, which expressly includes dismissals for misconduct and poor performance but expressly excludes dismissals for redundancy and the non-renewal of fixed term contracts. The ACAS  Code is silent on the matter of dismissals for ‘some other substantial reason’ and there has been conflicting judicial debate on whether it applies to them. Initially the balance seemed to be in favour of the ACAS Code applying: in Lund v St Edmund’s School Canterbury UKEAT/0514/12 (8 May 2012, unreported), the EAT held that the ACAS Code did apply to the ‘some other substantial reason’ dismissal which occurred after the instigation of disciplinary proceedings (to deal with conduct issues) led to the breakdown in the parties’ relationship; in Hussain v Jurys Inn Group UKEAT/0283/15 (3 February 2016, unreported), the EAT observed (albeit obiter) that the ACAS Code should, on a purposive construction, apply to ‘some other substantial reason’ dismissals; and in Holmes v QINETIQ Ltd [2016] IRLR 664, the EAT applied the Lund approach to find that the ACAS  Code applies if an employee is being disciplined for abuse of sickness absence procedures, as opposed to actual incapacity (which is an unsurprising conclusion as abuse of the employer’s procedures is properly to be regarded as a conduct issue). However, in Phoenix House Ltd v Stockman [2016]  IRLR  848, the EAT disagreed with Hussain (although did not have Holmes cited to it). In summary, the EAT held that whilst ‘The Code does not in terms apply to dismissals for some other substantial reason. … Clearly elements of the Code are capable of being, and should be, applied, for example giving the employee the opportunity to demonstrate that she can fit back into the workplace without undue disruption’ (Mitting J at paragraph 21). However, Mitting J further held that the uplift mechanism did not apply to ‘some other substantial reason’ dismissals: ‘In my judgment, clear words in the Code are required to give effect to that sanction, otherwise an employer may well be at risk of what is in reality a punitive element of a basic and compensatory award in circumstances in which he has not been clearly forewarned by Parliament and by ACAS that that would be the effect of failing to heed the Code. …[to] impose a sanction because of a failure to comply with the letter of the ACAS Code, in my judgment, is not what Parliament had in mind when it enacted section 207A and when the Code was laid before it, as the 2009 and 2015 Codes both were’ (paragraph 21)

This matter will inevitably come before the courts and tribunals again, and a definitive ruling from a higher court would be welcome. Until then, whilst a failure to agree to revised terms will not, in our view, ordinarily amount to a disciplinary issue such as to trigger the application of the ACAS Code, employers 809

13.81  Introducing/varying restrictive covenants

would be well-advised to be mindful of, and adhere where possible, to the Code. In any event, to defend an unfair dismissal claim successfully, the employer will still need to show that the nature of and reason for the proposed change was explained to the employee, that the employee understood the consequences of refusing to agree to the change and that discussions took place with the employee prior to dismissal in which the employee had an opportunity to raise his concerns with the employer. The application of the ACAS Code to some other substantial reason dismissals is also considered at 18.98–18.101. 13.81  As will be apparent from what is said above, the introduction of restrictive covenants during the currency of employment can be difficult. Since it is something upon which advice is frequently sought by employers, set out in the Appendix to this chapter is a practical note of the approach that should be adopted.

1(c) Consideration 13.82 The doctrine of consideration is complex. What follows is a summary of the main principles as they relate to employers seeking to introduce or vary restrictive covenants in terms of: (i) what amounts to effective consideration; and (ii) issues regarding the adequacy of consideration. For a fuller discussion of the doctrine of consideration see Chitty on Contracts (32nd edition), Volume 1, Chapter 4. 1(c)(i) What amounts to effective consideration? 13.83 Like any contractual term, restrictive covenants must be supported by consideration in order to create a binding contract. Generally this means that employers will need to show that some benefit has passed to the employee in return for their promise to be bound by the covenants. As discussed in more detail at 13.94–13.102, the extent to which the courts will enquire as to the adequacy of the consideration given is something of a moot point. However, it is clear that consideration must be legal and must constitute ‘something of value in the eye of the law’ (see Chitty on Contracts (32nd edition), Volume 1, (at paragraph 4-003), which cites Thomas v Thomas (1842) 2 QB 851 (KB) and Haines v Hill [2008] 2 All ER 901 (CA)). Consideration must also be capable of estimation in terms of economic or monetary value, even if it cannot be precisely quantified: see Chitty (at paragraph 4.022); R v Pembrokeshire CC Ex p. Coker [1999] All ER 1007 (QB). 13.84  As noted at 13.90, at the inception of the employment relationship there will rarely be a problem: no consideration is usually necessary beyond the agreement to employ the employee on the terms offered (eg as to pay, benefits etc) and which include the restrictive covenants. However, where employment has already commenced, and the covenants are later introduced into the contractual documentation (or existing covenants are being altered), this amounts to 810

Introducing restrictive covenants 13.87

a contract variation for which consideration must be given. We consider briefly below what can amount to effective consideration for these purposes. Money or other benefit/advantage to the employee 13.85  The simplest way for employers to put the matter of consideration beyond any doubt is to offer a sum of money or other benefit or advantage to the employee (to which they are not already entitled) which is clearly expressed to be in consideration of the newly introduced (or varied) covenants. More difficult questions arise where the covenants are introduced as part of a package of new/revised terms, including payments (such as a salary increase) and/or additional benefits, but where no one element is specifically ascribed as consideration for the covenants. Although only a first instance decision, the case of Patsystems Holdings Ltd v Neilly [2012] IRLR 979 (QB) serves as salutary reminder for employers to ascribe specific consideration to new covenants and a good reminder of the need to enter into a new contract of employment where there is a promotion. The contract variations reflecting Mr Neilly’s promotion included a substantial increase in remuneration (salary and pension) and a longer notice period. No corresponding changes were made to Mr Neilly’s existing restrictive covenants, which Patsystems conceded were unenforceable at the time they were entered into. Underhill J  rejected Patsystems’ argument that, by agreeing to the variations reflecting his promotion, coupled with a general acknowledgement that his ‘previous terms remained unchanged’, Mr Neilly had effectively entered into his existing restrictive covenants afresh at the point of his promotion. Patsystems should have required Mr Neilly either to agree explicitly to the covenants afresh, or to enter into a fresh contract containing the covenants at the time of the promotion (in either case, supported by appropriate consideration): see in particular paragraphs 37 and 39 of Underhill J’s judgment. See also 13.88 where we consider the question whether performance of an existing contractual obligation can amount to effective practical, or commerical, consideration particularly in light of the Court of Appeal’s decision in MWB Business Exchange Ltd v Rock Advertising Ltd [2016] 3 WLR 1519. 13.86  As will be apparent from the cases considered below, the position on what amounts to effective consideration for contract variations in the absence of some clearly ascribed payment or other benefit for the employee is far from clear. It is apparent that the courts are willing to accept a variety of different forms of consideration but, unhelpfully for employers, there have been a number of conflicting decisions. Retention of the employee 13.87  The fact that the employer is likely to terminate the employee’s employment if the covenants are not accepted can amount to effective consideration. In Woodbridge & Sons v Bellamy [1911] 2 Ch 326 (CA), Eve J, felt ‘bound to infer’ (at 332) that the consideration for the written agreement entered into by Mr Bellamy would have been Woodbridge’s retention of Mr Bellamy’s services. Had Mr Bellamy not signed the agreement, Woodbridge would otherwise have 811

13.88  Introducing/varying restrictive covenants

terminated the employment relationship at the earliest opportunity. The facts of Woodbridge are set out at 13.14. Similarly, in Pickwell & another v Pro Cam CP  Limited [2016]  IRLR 761 (QB) the employees’ contention that there was no consideration for restrictive covenants in a formal contract (which replaced informal letters of appointment which did not contain such covenants) failed at trial. HHJ Curran QC (adopting Eve J’s approach in Woodbridge) found that he was also ‘… bound to infer from all the evidence that if either Mr Pickwell or Ms Nicholls had refused to sign, and had asserted his or her right to continue to be employed on the terms contained only in the letters of appointment, Pro Cam would have been likely to have given them notice’ (paragraph 59). The fact that it was likely that the employee’s employment would have been terminated had they not signed the formal agreement amounted to consideration for the covenants. 13.88  The question whether performance of a pre-existing contractual obligation (which could include the employer continuing the employee’s employment) can amount to consideration is discussed in detail in Chitty on Contracts (32nd edition), Volume 1, (at paragraphs 4-062 to 4-076). In summary, the starting point is that performance of a pre-existing contractual obligation is unlikely to amount to sufficient consideration: see Stilk v Myrick (1809) 2 Camp 317 (NP) and Chitty (at paragraph 4.067). However, the context of that performance may be relevant and there may be consideration where, for example: (a) a benefit (factual or practical) is conferred on the promisor by the promisee performing the original contract (see Chitty (at paragraphs 4-069 to 4-070); Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1 (CA), Russell LJ (at pages 18 and 19) and Purchas LJ (at page  23); Horwood & Ors v Land of Leather Ltd & Ors [2010]  1 CLR 423 (Comm) Teare J  (at paragraph  41)); or (b) the promisee does or promises to do something more over and above his original contractual obligations (see Chitty (at paragraphs 4-071 to 4-072); Hanson v Royden (1867)  LR  3  CP  47 (Ct of CP)). The position was reviewed in the Court of Appeal decision of MWB Business Exchange Ltd v Rock Advertising Ltd [2017] QB 604 (CA), which emphasised that a practical benefit may suffice. Briefly, the facts were as follows: the defendant company entered into a licence agreement to occupy premises managed by the claimant company; when the defendant fell into payment arrears, it entered into an oral agreement with the claimant to reschedule its payments, and made the first payment the same day. The Court of Appeal held that a clause in the licence agreement permitting only written variations did not prevent a valid oral variation (this aspect of the case is considered at 5.149 and 13.125). Moreover, the revised arrangements conferred practical, commercial benefits on both parties eg: the defendant could stay in the premises and overcome its cashflow problems; and the claimant would receive payments, avoid an unoccupied property and potentially get more money over time from the defendant than if it just sued to enforce the old agreement. Relying on Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1, [1990] 1 All ER 512 (CA), the Court of Appeal was satisfied that these practical benefits constituted sufficient consideration for the oral variation. Arden LJ explained that the promise to carry out an existing obligation must result in the promisor receiving a benefit which he requested or at least indicated that he wanted and, distinguishing Foakes v Beer (1884) 9 App Cas 605, the practical benefit must 812

Introducing restrictive covenants 13.90

be more than just avoiding the trouble of having to sue for payment. Here the revised contract was binding as between the parties for so long as the defendant continued to make the payments in accordance with the revised schedule. An appeal to the Supreme Court was heard on 1 February 2018 and the decision of the Supreme Court is awaited. Packages of new terms/processes including covenants 13.89 The courts have unsurprisingly shown a general reluctance to allow employees to ‘cherry-pick’ terms when covenants are introduced as part of a package of terms, which includes, for example, a pay rise or other benefit to which the employee did not have an existing entitlement or expectation. See, for example, Tim Russ & Co v Robertson & Others [2011] EWHC 3470 (Ch), F W Farnsworth Ltd & anor v Lacy & ors [2013]  IRLR 198 (Ch) and Wess v Science Museum Group UKEAT/0120/14/DM, which are considered at 13.58–13.59. 13.90  Zerolight Ltd v Wolff [2016]  EWHC  487 (QB) is a useful example for employers of how difficult it can be for employees to argue, especially at the interim stage, that there was no effective consideration for the introduction of new covenants as part of a package of benefits. Various new minor terms in favour of the employee (including flexible working hours and the removal of compulsory retirement at 60) were, at least arguably, more than nominal consideration. May J  granted an interim injunction and listed the matter for speedy trial. Similarly, in Decorus Limited v Penfold and another [2016] EWHC 1421 (QB), the High Court held that a three-step process to introduce revised restrictive covenants, which started with an appraisal and included a pay rise and continued employment, amounted to ‘valid consideration’. During employment, Mr Penfold was presented with, and signed, a new contract which contained revised restrictive covenants. A month earlier, Mr Penfold had been given a pay rise, following an appraisal. On the facts, HHJ Molyneux accepted that: ‘… the new contract was always expressed to be a part of a three phase process. Mr Penfold had an appraisal which he had not had before. That was the first part of the process. Thereafter, in April 2013 the accounts department were directed to increase his salary, although under The 2012 Contract the date for salary review was in January. Mr Penfold was provided with a draft contract, urged to read it carefully before signing it and Mr Sheppard’s evidence was that if Mr Penfold had not signed the contract his employment would have been terminated. Mr Penfold did sign the contract and continued in employment at the increased salary. Taken together the appraisal, pay rise and continued employment amount to valid consideration for The 2013 Contract’ (paragraph 72).

(At paragraph  56 of the judgment, HHJ  Molyneux cited the following paragraph from the third edition of this book: ‘11.33 In conclusion, at the inception of employment there will rarely be a problem. No consideration is necessary beyond the agreement on the terms which include the covenant. However, where covenants are later introduced into the contractual documentation, the employer should provide consideration which is substantial and not nominal, eg a pay rise or promotion.’) 813

13.91  Introducing/varying restrictive covenants

13.91  Reuse Collections Limited v Sendall & Anor [2015] IRLR 226 (QB) is a rare example of a covenant being struck down for want of consideration, even though there was a contemporaneous pay increase. Mr Sendall had worked for Reuse since 1980, some 32 years, without a written contract of employment and without any express restrictive covenants. When Mr Sendall did eventually sign a contract in 2013, it contained a suite of post-termination restrictive covenants. Shortly after signing, Mr Sendall left to join a competitor. Reuse’s attempt to enforce the covenants in the High Court failed: in short, the court found that Mr Sendall had not received consideration for the covenants. Reuse claimed that the contract had been introduced as part of a package of benefits, which included life assurance, private medical and a company car, amongst other things. It also included a pay rise. However, on the facts, HHJ Stephen Davies found that the majority of the benefits that Reuse sought to rely on were already enjoyed by Mr Sendall. In relation to the pay rise, not only was it not reflected in the new contract, but Reuse failed to adduce any satisfactory evidence that the salary increase was specific to Mr Sendall, or that it had been made clear to Mr Sendall that it was conditional on him accepting the new contract terms, including the restrictive covenants. Gaining access to customers and confidential information 13.92 In Pickwell & another v Pro Cam CP  Limited [2016]  IRLR 761 (QB) (the facts of which are set out at 13.5–13.7) the prospect of being given access to customers and confidential information in the future (on qualification) was sufficient consideration for the restrictive covenants that two trainee agronomists were asked to accept at the start of their employment – that access to customers would not have been granted had the trainees not agreed to the covenants from the outset. It was also material that the employees would likely have been dismissed had they not accepted the covenants: ‘… acceptance of the terms of the contract of employment provided the Claimants with valuable opportunities both of first-hand experience of observing senior agronomists interaction with customers, and (in due time) of taking over commercially valuable work from colleagues who had retired or left the employment of the defendant company for other reasons, in addition to the opportunity of obtaining customers through their own efforts’ (paragraph 62).

13.93  In conclusion, whilst the above cases show the wide range of matters that can amount to consideration for restrictive covenants, they also demonstrate the potential perils of simply introducing covenants as part of a package of other benefits, such as pay rises, without tying them to the employees’ acceptance of the new covenants. Given the fact-specific nature of these cases, we strongly advise employers to put the matter beyond doubt by offering a specific sum of money or other benefit (to which the employee is not already entitled) as express consideration for the covenants and to make acceptance of the same conditional on agreeing to the covenants. Employers must also make sure that such conditions are enforced, and done so consistently. Finally, it is not uncommon for restrictive covenants to be contained in a document that is executed as a deed, 814

Introducing restrictive covenants 13.95

particularly where the document in question is ancillary to the main employment contract. Sometimes, this is done because of the employer’s mistaken belief that this will cure any lack of separate consideration for the covenants. Unfortunately for those employers, it is a well-established principle that restrictive covenants contained in a deed must still be supported by adequate consideration: Mitchel v Reynolds (1711) 24 ER 347. The consideration need not be set out in the deed, it can be inferred from the agreement itself (Gravely v Barnard (1875) LR Eq 518) or by other extrinsic evidence (Homer v Ashford and Ainsworth (1825) 3 Bing 322). As will be evident, the relevant case law on this issue is very old but we are not aware of any recent cases in which the general proposition has been challenged. It follows that the employer should make sure to provide consideration for restrictive covenants entered into in a deed. 1(c)(ii)  Issues regarding the adequacy of consideration 13.94  Under the law of contract the general rule is that the court need only be satisfied that consideration has been given which is legal and of some value (see 13.83). The courts do not enquire whether the consideration is adequate: Haigh v Brooks (1839) 10 Ad & El 309 (QB) at 320; Gravely v Barnard (1874) LR 18 Eq 518 (Ct of Eq). In other words, the courts do not decide whether the parties have agreed a fair bargain. In the words of Lord Denning MR in Lloyds Bank Ltd v Bundy [1974] 3 All ER 757 (CA) at page 736b, ‘no bargain will be upset which is the result of the ordinary interplay of forces’. A related and more vexed question is whether the courts are entitled to assess the value or adequacy of the consideration given in deciding whether a covenant is reasonable. Regrettably there is not a clear answer; there are two diverging lines of judicial opinion. Authorities against considering the adequacy of consideration when assessing the reasonableness or otherwise of restrictive covenants 13.95  The authorities against the court considering adequacy begin with Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at page 707 (HL), where Lord Parker said: ‘It was at one time thought that, in order to ascertain whether a restraint were reasonable in the interests of the covenantor, the Court ought to weigh the advantages accruing to the covenanter under the contract against the disadvantages imposed upon him by the restraint, but any such process has long been rejected as impracticable. The Court no longer considers the adequacy of the consideration in any particular case.’

This statement was cited as being the correct view in Attwood v Lamont [1920] 3 KB 571 (CA) at page 589 and was relied on by Hodson LJ in M & S Drapers (a firm) v Reynolds [1956] 3 All ER 814 (CA). Rejecting an argument that he should take into account the shortness of the employee’s notice period under the contract, Hodson LJ said: ‘… the court will not inquire into the adequacy of the consideration or weigh the advantages accruing to the covenantor under the contract against the disadvantages imposed on him by the restraint.’ 815

13.96  Introducing/varying restrictive covenants

13.96 Lord Parker’s statement was relied on by Millett J  in Allied Dunbar (Frank Weisinger) Ltd v Weisinger [1988] IRLR 60 (Ch) (at paragraphs 30 to 32) in rejecting an argument by the defendant’s counsel that a restrictive covenant in a practice buy-out agreement was invalid because the restraint was ‘out of all proportion to the benefit obtained by the [claimants]’. Also, in J A Mont v Mills [1993] IRLR 172 the Court of Appeal did not consider as relevant to the question of the reasonableness of the covenant the fact that the ex-employee had received a substantial severance payment under the severance agreement containing that covenant. To similar effect was the decision of the deputy judge in TSC Europe (UK) Ltd v Massey [1999] IRLR 22 (Ch), in which it was held that the fact that the claimants were obliged to make post-termination payments to the ex-employee for as long as the covenants remained in force did not render reasonable covenants which were more than was necessary to protect the exemployer’s interests. The same result was arrived at in Bartholomews Agri Ltd v Thornton [2016] IRLR 432 (QB): the issue of reasonableness of the covenant was not affected by the inclusion of a provision for payment to the employee for the duration of the covenant (see further at 12.153). Authorities in favour of considering the adequacy of consideration in assessing the reasonableness or otherwise of restrictive covenants 13.97  To be contrasted with the above are the authorities in favour of the court considering adequacy. Those authorities begin with Nordenfelt v Maxim Nordenfelt Guns and Ammunition Company [1894] AC 535 (HL) at page 565. Lord Macnaghten dealt with the question of adequacy of consideration in the following way: ‘It was laid down in Mitchel v Reynolds (2) 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 legal consideration of value; though of course the quantum of consideration may enter into the question of the reasonableness of the contract.’

13.98  That opinion was endorsed by several members of the House of Lords in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269, which concerned the enforceability of restrictive covenants given as part of solus agreements (requiring the garage to purchase all its fuel requirements from Esso and to re-sell only Esso products); see Lord Reid at page 300A–B, Lord Hodson at page 318D–F and Lord Pearce at page 323E–F. The position of Lord Hodson is particularly interesting. In Esso, after citing the above passage from Nordenfelt v Maxim Nordenfelt Guns and Ammunition Company [1894] AC 535 (HL), he said: ‘Thus, a restriction as to time may be reasonable or unreasonable according to whether sufficient compensation has been given to the person restrained.’

13.99  However, only three years before, he had rejected precisely that concept in M  &  S  Drapers (a firm) v Reynolds [1956] 3 All ER  814 (CA), relying on the statement of Lord Parker in Herbert Morris Ltd v Saxelby [1916] 1 AC 688 (HL). The adequacy of the consideration was also specifically considered in 816

Introducing restrictive covenants 13.100

assessing the reasonableness of covenants in A Schroeder Music Publishing Co Ltd v Macaulay [1974] 3 All ER 616 (HL); Clifford Davis Management Ltd v WEA Records Ltd [1975] 1 All ER 237 (CA) (both cases concerning agreements between music publishers and composers/performers); Office Overload Ltd v Gunn [1977]  FSR  39 (CA) Lawton J at pages 43–44 (a licensing agreement); and Bridge v Deacons [1984] AC 705 (PC) (a partnership agreement). Also, in Turner v Commonwealth & British Minerals Ltd [2000]  IRLR  114 (CA) the Court of Appeal regarded it as a legitimate factor to take into account that the employees had (in a severance agreement) been paid something extra for the covenants they signed (although it did not relieve the employer of the necessity of justifying the covenant). Again in Cavendish Square Holdings BV and another v Makdessi [2013] 1 All ER (Comm) 787 Burton J proceeded (with agreement of the parties) on the basis that the quantum of consideration was relevant to the reasonableness of the covenants (following Alec Lobb Ltd v Total Oil (Great Britain) [1985] 1 WLR 173 (CA) at pages 179B and 191A & B). In that case the issue arose in the context of a share purchase agreement where there had been multi-million pound payments to the defendant vendors. More recently, in Rush Hair Limited v Gibson-Forbes and another [2017] IRLR 48 (QB) (at paragraph 69), in a case involving a contract of employment, the court accepted that, in principle, it was relevant to take into account the adequacy of consideration when assessing the reasonableness of a covenant. On the facts this did not assist as there was no means of assessing whether the price paid under a share purchase agreement represented market value. Further, in TFS Derivatives Ltd v Morgan [2005] IRLR 246 (QB) (another employment contract case) the court expressed the view (at paragraph 83) that the fact that an employee was being paid for a restraint was relevant to the question of the reasonableness of the restraint. Conclusion regarding the adequacy of consideration 13.100 Since cases on both sides of the argument derive from the House of Lords (eg Herbert Morris Ltd v Saxelby [1916] 1 AC 688 and Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269), it is hoped that the Supreme Court will give definitive guidance. While (at least as far as employment contracts are concerned) the balance of authority favours not weighing up the adequacy of consideration, in practice the courts often appear (if sometimes subconsciously) to be influenced by the level of the consideration received for the covenant. In the words of Lord Pearce in Esso at 323 (HL): ‘… although the court may not be able to weigh the details of the advantages and disadvantages with great nicety it must appreciate the consideration at least in its more general aspects.’

It is to be noted that, while in Turner v Commonwealth & British Minerals Ltd [2000] IRLR 114 (albeit involving a severance agreement and not an employment contract) the Court of Appeal took into account that the employees had been paid something extra for the covenants they signed, it was not suggested that the court should weigh up the amount of the consideration as against the extent of the covenant. Similarly, in TFS Derivatives Ltd v Morgan [2005] IRLR 246 (QB) it was the fact of payment rather than its amount that was significant. 817

13.101  Introducing/varying restrictive covenants

13.101 In conclusion, at the inception of employment there will rarely be a problem in establishing that consideration has been given. No consideration is necessary beyond the agreement to employ the employee on terms which include the covenant. However, where covenants are introduced later into the contractual documentation, the employer should provide consideration which is substantial and not nominal, eg  a pay rise, bonus payment or a promotion. If reliance is placed on continued employment, it is important (evidentially) to make that clear at the time. Where covenants are extensive in their ambit, the provision of significant consideration may tilt the court towards a more favourable view of them in terms of their reasonableness. However, no amount of consideration will rescue a covenant which is obviously too onerous. 13.102  In certain foreign jurisdictions it is necessary, in order to enforce restrictive covenants, that a sum (often his salary or a proportion thereof) should be paid to the employee during the period that the covenant is enforced. That may have led to the practice in certain modern contracts of employment governed by English law, of providing the employer with an option to enforce a particular covenant (usually a non-competition covenant) or to add an additional period to the ‘basic’ period of an existing covenant, by electing to pay to the ex-employee sums equivalent to salary during that period or additional period. See TSC Europe (UK) Ltd v Massey [1999] IRLR 22 (Ch), referred to in Chapter 11. While the fact that the ex-employee is being paid during the covenant period may make a positive impression on the court, this type of provision may cause certain difficulties. It may be argued against such covenants that the fact that they are optional (to the employer) is indicative that they are not necessary to protect the underlying legitimate interest. As against that, the covenant in this form might be explained on the basis of a recognition at the time of entering into the contract that a longer period or more extensive covenant may well prove necessary at the time of termination of employment, but that it is recognised that such additional embargo is onerous, so that it would only be reasonable as between the parties if the employee were paid for it. However, since it is plain that the employer cannot justify the extra restriction by money alone, he would still have to be able to justify to the court the overall period (or the combined effect of all the covenants) as being reasonably necessary at the time the contract of employment was entered into.

1(d)  Introduction of restrictive covenants on termination of employment 13.103  The following points, which are considered above, apply equally when restrictive covenants are being introduced on termination of employment: (i) whether the restrictive covenants should be tailored to the particular employee (13.10); (ii) the advantages for employers of having restrictive covenants contained in signed documents and the use of electronic signatures (13.17–13.21); (iii) whether the restrictive covenants need to be brought to the employee’s specific attention (13.22–13.24); and 818

Introducing restrictive covenants 13.107

(iv) the potential benefits of ensuring that the employee takes legal advice regarding the restrictive covenants (13.25). 13.104 The introduction of restrictive covenants at this stage normally only occurs as part of a negotiated agreement for the termination of employment, most often via a statutory settlement agreement. Covenants may also be introduced at this stage by way of a contractual (or court) undertaking given to avoid or determine legal proceedings (see further at 11.273–11.277 and 13.110). In either scenario, the covenants are necessary, either because there are no covenants in the contract of employment (this is particularly common in the case of long-serving employees who have ‘risen through the ranks’), or because there is doubt about the enforceability of the existing covenants. For example, the covenants may be too widely drawn or it may be unclear whether the employee has consented to them, or it may be asserted that existing covenants have been ‘wiped out’ by an accepted repudiatory breach. See 9.49–9.58 for consideration of the effect of a repudiatory breach on restrictive covenants. 13.105  Covenants given on termination of employment are subject to the same basic requirements as covenants given at any other time. The covenantor must agree to them, he must receive consideration for them (see 13.82–13.102 as to what amounts to consideration and issues regarding the adequacy of consideration) and they must be reasonable at the time they are entered into (see 11.1, 11.7, 12.11–12.16 and 13.4–13.9). Covenants given on termination of employment are not contrary to public policy and therefore void simply because they are given at that stage rather than at the beginning of the employment. This was one of the contentions of the defendant, Mr Spink, in Spink (Bournemouth) Ltd v Spink [1936] Ch 544 (CA). Mr Spink had been an employee, director and shareholder of the company. Disputes had arisen with his fellow directors and, as a result, in consideration of a payment of £100 Mr Spink had agreed to resign his positions and enter into a restrictive covenant. For a separate consideration he agreed to sell his shares. In an action to enforce the restrictive covenant the company succeeded. Luxmoore J rejected Mr Spink’s argument that the covenant was void simply because it was given on termination of employment. He said (at page 548): ‘I cannot appreciate the view that public policy requires that a person who is seeking to be released from his employment should not be able to obtain the release and a payment to himself as consideration for his giving up his service and entering into a proper restrictive covenant as part of the bargain. Such a covenant cannot affect adversely any member of the public or the person who, with his eyes open, takes the consideration and gives the covenant.’

13.106  Covenants given on termination of employment are regularly before the courts: see, for example, Stenhouse Australia Ltd v Phillips [1974] AC 391 (PC); J A Mont (UK) Ltd v Mills [1993] IRLR 172 (CA) and Turner v Commonwealth & British Minerals Ltd [2000] IRLR 114 (CA). 13.107  One question that arises frequently in relation to covenants entered into on termination of employment is whether, in principle, such covenants afford 819

13.108  Introducing/varying restrictive covenants

the employer better protection than covenants given at the commencement of the employment. The case law in this area suggests that, whilst the covenants will still be subject to normal restraint of trade principles, the courts are likely to look more favourably on the enforceability of covenants entered into on termination of employment. For example, in Stenhouse Australia Ltd v Phillips [1974] AC 391, the Privy Council took into account the fact that the covenants were being entered into on termination in assessing whether the lengthy period of the covenant was justifiable. The Privy Council commented that, whereas at the inception of the contract of employment the period of the covenants is necessarily a pre-estimation, at the date of termination the ex-employee (in this case a managing director) was in as good a position as any to appraise the nature and quality of the interest which the employer wished to protect and what was accordingly a suitable period for the covenant to run. Consequently, ‘… unless the period fixed was clearly excessive they [the parties] may be thought to have agreed upon a realistic limitation’ (see Lord Wilberforce at pages 401 and 402). Accordingly, in Stenhouse the Privy Council upheld a five-year prohibition on solicitation of clients. Whilst today a covenant of that duration is likely to be regarded as excessive, nonetheless the underlying basis of the Privy Council’s decision holds good. In practice, therefore, ex-employers should face fewer challenges to covenants entered into as part of a settlement agreement than covenants entered into at the outset of the employment relationship. In part this may be because, at the point of dismissal, it should be much easier to ascertain the precise nature of the competitive threat posed by the (ex-)employee, which can then be reflected in carefully crafted restrictions. Additionally, in some cases, but by no means all, such agreements are heavily negotiated, with both parties being legally represented meaning that there will be something approximating equality of bargaining power between the parties (although the weight to be assigned to this as a factor in assessing the reasonableness of covenants will necessarily be fact-specific). See also 11.43–11.46 , 12.148–12.149 and 13.25. 13.108 However, leaving the introduction of covenants until the end of the employment relationship can be both risky and costly. If the employee refuses to agree to the covenants, the employer will be left with little or no protection against unlawful competition. Depending on the circumstances of the employee’s departure, the employer’s bargaining position at the point of dismissal may be significantly weaker than at the start of the employment relationship, and this is likely to be reflected in the ‘price paid’ for the covenants. 13.109  Although only a first instance decision, (1) Davies (2) Horizon International Cargo Limited v Hart [2015] EWHC 3121 (QB) serves as a useful reminder of some of the key principles in this respect, particularly in the context of restrictive covenants entered into in settlement agreements. Mr Hart was a former employee and statutory director of Horizon. It was agreed that he had entered into (albeit not signed) a service agreement, which contained 12-month post-termination restrictive covenants preventing him from competing with Horizon, from soliciting certain customers and from endeavouring to entice away certain categories of employees. When his employment ended – in acrimonious circumstances – Mr Hart entered into a settlement agreement with Horizon under which he accepted 820

Introducing restrictive covenants 13.109

that he would continue to be bound by the restrictive covenants contained in his service agreement. He also entered into a share sale agreement (under which he sold his minority shareholding in Horizon) which contained: a 12-month noncompetition covenant; restrictions on soliciting/accepting the custom of certain customers; and restrictions on endeavouring to entice away certain employees. The non-solicitation covenants were stated to run for 24 months. When Horizon learned that Mr Hart was acting in breach of those covenants, it sought – and obtained – an interim injunction. Mr Hart did not appear at the interim hearing, nor did he file the affidavit required of him (committal proceedings in that respect were eventually settled). Proceedings were eventually served on Mr Hart, which he neither acknowledged nor defended and Horizon obtained judgment in default. Wilkie J refused Mr Hart’s application to set aside the default judgment, primarily on the basis that there was no real prospect of him being able to show that the restrictive covenants in the service agreement, the settlement agreement or the share sale agreement were void and unenforceable: ‘28. … the restrictive covenants … are not only contained in the service agreement … but they were reaffirmed by the defendant … in the form of the settlement agreement under which he was paid some £21,000 odd, and in respect of which he had legal advice. 29. I  have regard, in particular, to Thurstan Hoskin & Partners v Jewill Hill & Bennett [2002]  EWCA  Civ 249, and Gerrard v Reed [2001] All England Reports 355, and World Wide Fund for Nature v World Wrestling Federation [2002] FSR 33; in each of which the court said that where a party has the benefit of legal advice and where the terms have been entered into, as a result of a settlement agreement, the presumption is that the restraints are reasonable and there are dicta to the effect that go so far that it would be contrary to public policy to allow their enforceability to be reopened. … 31. I am also satisfied that there is no real prospect for the defendant showing that the restrictive covenant, as contained in the share sales agreement, is void and unenforceable. …the duration of those restrictions is longer in the share sales agreement than the equivalent ones in the settlement agreement and in the director’s service agreement. But …as has been long established since the decisions in Allied Dunbar (Frank Weisinger) Ltd v Weisinger [1988]  IRLR  60 and Office Angels Ltd v Rainer-Thomas [1991]  IRLR  214, particularly at paragraph 22, and Dawnay Day & Co v De Braconier d’Alphen [1997]  IRLR  442, … there is a different standard of scrutiny to be imposed where what is in question is the sale of a business or goodwill or a share sale agreement, than where it is a restrictive covenant imposed on an employee’s part, and part of an employer/employee agreement’.

It was material that the 24-month period in the share sale agreement had been the subject of specific debate during the negotiations, and that Horizon had paid circa £35,000 for those covenants (which was the value placed by Horizon on twoyears’ worth of goodwill). The fact that Mr Hart had the benefit of legal advice regarding the various documents, and the manner in which he had conducted himself throughout the various proceedings were also material. The case is also considered in this context at 11.274. The special position of the employee-vendor is considered at 10.17, 10.45–10.54, 11.78–11.90 and 12.59. 821

13.110  Introducing/varying restrictive covenants

13.110 The decision in (1) Davies (2) Horizon International Cargo Limited v Hart [2015] EWHC 3121 (QB) should be contrasted with that in Capgemini India Ltd and another v Krishnan [2014]  EWHC  1092 (QB). In that case, the former employees entered into contractual undertakings under which they agreed to be bound by certain post-termination restrictions contained in their contracts of employment to ‘avoid the financial risks of their threatened proceedings’. Within a month of giving those undertakings, they sought to withdraw them. Unsurprisingly, Capgemini issued proceedings seeking injunctive relief, damages and relief in respect of the breach of the undertakings. HHJ Owen QC accepted (at paragraph 75 of his judgment) that the fact that the employees had: ‘… with the benefit of independent legal advice and no longer being in an employer/employee relationship … willingly entered into the undertaking in question. That election engaged a powerful public policy, namely, that such agreements to compromise either actual or threatened litigation is to be encouraged by the court and thus, unless for good reason, supported also.’

The Judge noted several ‘highly unusual’ features of this case, including the fact that: Capgemini had lost a key client contract through no fault of the exemployees, or their new employer; there was no question of Capgemini having any realistic prospect of regaining that contract if the ex-employees were held to the undertaking; and the lack of evidence that the ex-employees had wrongly disclosed confidential information or acted unlawfully. Accordingly, the Judge found that whilst there was a serious issue to be tried, the balance of convenience did not warrant the grant of injunctive relief and that damages would be an adequate remedy (see in particular paragraphs 81–83 of the judgment). It is worth noting that, on the specific facts of Capgemini, it may be that the decision would have been the same even if the undertakings had been given to the court. Given that there was a triable issue regarding the enforceability of the covenants, a finding that there was more than a triable issue (because an undertaking had been given to the court) might not have changed the court’s view of the balance of convenience pending trial, so as to result in interim enforcement of the undertakings. Capgemini, the inclusion of covenants in termination or settlement agreements, contractual undertakings and undertakings to the court are considered further at 11.273–11.277.

2. TAXATION AND RESTRICTIVE COVENANTS 2(a) Taxation on the introduction of restrictive covenants generally 13.111  The tax consequences of any payment given for entering into restrictive covenants should be considered carefully. Under sections 225 and 226 Income Tax (Earnings and Pensions) Act 2003, income tax is charged on any payment made in respect of the giving of a restrictive undertaking or the total or partial fulfilment of the same (for example, any payment made by an employer to an employee for entering into a covenant restricting him from competing). Tax is 822

Taxation and restrictive covenants 13.114

charged under these sections and national insurance contributions are payable under the Social Security Contributions and Benefits Act 1992.

2(b) Taxation on the introduction of restrictive covenants on termination of employment 13.112  Sections 225 and 226 Income Tax (Earnings and Pensions) Act 2003 apply whenever consideration is paid for a restrictive covenant, even where the covenants are entered into after the termination of employment. See, for example, RCI Europe v Woods (HM Inspector of Taxes) [2004] STC 315 (Ch). In that case, covenants were given on termination to apply for an initial period of one year. The severance agreement provided that Mr Woods could elect to extend the covenants for two separate but consecutive periods each of one year in return for further substantial payments. In all, Mr Woods received £2.2 million as consideration for three years of restrictions. Income tax and national insurance contributions were held to be payable on the entire amount. 13.113  Normally the tax charge raises no problems since the employer is deducting tax at source from the employee’s income. Where, however, the employment is being terminated, problems can arise because of the special tax treatment of payments made to employees to compensate them for the loss of their employment. Under section 401–404A Income Tax (Earnings and Pensions) Act 2003 the first £30,000 of such payments are generally free of tax (excluding payments otherwise chargeable to tax including contractual payments, for example a payment made in accordance with a contractual payment in lieu of notice clause: EMI  Group Electronics Ltd v Coldicott (Inspector of Taxes) [1999]  IRLR 630 (CA)). So the employer who makes such a payment of £30,000 or less deducts no tax, whereas the employer making such a payment of more than £30,000 deducts income tax only (and no national insurance contributions) on the excess. Reforms to the tax treatment of termination payments come into force from 6 April 2018. The rules in relation to contractual payments in lieu of notice stay the same but where there is no contractual right for the employer to pay in lieu of notice the new rules split an employee’s termination payment into two types of payment, those that can benefit from the £30,000 tax free threshold and those that cannot. The rules introduce a concept of ‘post-employment notice pay’ which will be subject to income tax and national insurance contributions as earnings. Post-employment notice pay is to be calculated in accordance with the formula set out in section 402D Income Tax (Earnings and Pensions Act) 2003 and see HMRC Employment Income Manual updated 16 April 2018. The new rules also limit and/or clarify certain reliefs, such as foreign service relief which will not be available on termination payments for UK resident individuals. From 6 April 2019, an employer will also be required to pay Class 1A national insurance contributions on any part of a termination payment that exceeds the £30,000 threshold. 13.114  As section 401 Income Tax (Earnings and Pensions) Act 2003 does not override section 225 of the same Act, an employer who merely pays a global sum to the employee on termination of employment utilising the tax free element, 823

13.115  Introducing/varying restrictive covenants

without attributing some amount to any new restrictive covenants, will arguably have failed to deduct the necessary tax pursuant to section 225. As a result, all or some of the payment made to the employee is at risk of being charged to tax by HM Revenue & Customs. To avoid this risk, the employer should expressly attribute a sum as consideration for the covenants and account for tax on that sum in the ordinary way. 13.115 There has been some debate amongst Revenue practitioners, whether the sum attributed can simply be a nominal figure of, for example, £1 or whether HM Revenue & Customs could legitimately attribute a more realistic value to the covenants for the purpose of assessing the tax charge. For the moment we understand that HM Revenue & Customs’ approach is not to challenge a nominal figure being attributed to the covenants although, as always with HM Revenue & Customs, there is no guarantee that will continue. Another question the employer will need to consider is whether attributing a low figure to a restrictive covenant might have an impact on the likely enforceability of the covenant and the prospects of obtaining an injunction to restrain breach of the covenant. On balance, the preferable course is to attribute a reasonable amount of consideration to the restrictive covenants. See 13.82–13.102 on the questions of what amounts to effective consideration and issues regarding the adequacy of consideration.

2(c) Taxation on the renewal of restrictive covenants in severance agreements 13.116 Often, as part and parcel of severance arrangements the employee is required to confirm that following the termination of his employment he will be bound by the restrictive covenants in his contract of employment. Sometimes the covenants are repeated in full, but more commonly they are identified by an express reference to the original clause numbers in the contract of employment. Where the confirmation is genuine, since no new promise is being made separate consideration is not required, nor should it be given, and no charge to tax under section 225 Income Tax (Earnings and Pensions) Act 2003 arises. Similarly, national insurance contributions are not payable. A  Statement of Practice (SP  3/96) published by HM  Revenue & Customs confirms that HM  Revenue & Customs will not usually attribute any part of a termination payment made in settlement of employment claims for restrictive covenants which formed part of the pre-existing terms of employment and are re-affirmed in the settlement. 13.117  Where there has been a repudiatory breach by the employer accepted by the employee, it is arguable that any restrictive covenants that are confirmed in a settlement agreement are, in truth, fresh restrictions. If that approach is taken, a charge to income tax would arise under section 225 Income Tax (Earnings and Pensions) Act 2003 and, strictly speaking, the issue of allocation of consideration to the covenants discussed at 13.112–13.115 should be addressed. However, to do so will alert the employee and, more to the point, his adviser, that the covenants may be unenforceable. If, alternatively, the view is taken that there has been no repudiatory breach and so the restrictive covenants are simply being re-stated (without them ever having fallen away) then there will not be a tax liability. 824

Variation of restrictive covenants 13.120

13.118  Ultimately, it is a commercial decision for the employer whether to reject the claim that there has been a repudiatory breach and risk a potential tax liability if he is wrong, or raise a question over the enforceability of the covenants (see 13.122 for the potential risks associated with alerting the employee/his legal advisers to concerns regarding the enforceability of the covenants). In each case it will be a matter of weighing up the realistic risks, but those acting for the employer need to be particularly alive to the point. Careful language should be used in recording the confirmation to avoid highly technical arguments that the promise was ‘writ in water’, because there were no covenants to confirm. 13.119  Whichever approach is taken, tax indemnities are commonly given by employees in settlement agreements. Any tax indemnity given by the employee should be sufficiently widely drawn to allow for recovery from the employee of any income tax payable and employees’ national insurance contributions on any of the payments made, or benefits provided to the employee. Employers’ national insurance contributions should not be included in the indemnity, as they are not recoverable from the employee: Schedule  1, paragraph  3A(2) Social Security Contributions and Benefits Act 1992.

3. VARIATION OF RESTRICTIVE COVENANTS 13.120  The employer cannot unilaterally vary an existing restrictive covenant; he must obtain the employee’s express or implied consent (as to the limitations on using express provisions permitting unilateral variation of contracts see 13.30–13.40). In effect, therefore, the employer seeking to vary an existing covenant is in broadly the same position as an employer looking to introduce covenants after employment has commenced: see 13.27–13.102 and the Appendix to this chapter. The following points therefore apply equally when restrictive covenants are being varied: (i) whether the amended drafting can/should allow for contemplated changes to the employee’s role and/or duties over time (13.4–13.9); (ii) whether the amended restrictive covenants should be tailored to the particular employee (13.10); (iii) issues regarding the inclusion of the amended restrictive covenants in employee handbooks or other ancillary documents (13.15–13.16); (iv) the advantages of having the amended restrictive covenants contained in signed documents and the use of electronic signatures (13.17–13.21); (v) whether the amended restrictive covenants need to be brought to the employee’s specific attention (13.22–13.24); and (vi) the potential benefits of ensuring that the employee takes legal advice regarding the amended restrictive covenants (13.25). Finally, the employer must also ensure that there is consideration for the restrictive covenants. What amounts to consideration, and issues regarding the adequacy of consideration, are addressed at 13.82–13.102. 825

13.121  Introducing/varying restrictive covenants

13.121 Whether the position of the employer seeking to vary covenants is to all intents the same as the employer introducing covenants for the first time will depend on whether the existing covenants are arguably enforceable and the degree of variation he proposes. If, for example, the existing covenants are obviously unenforceable, there is no real distinction between the employer seeking to introduce enforceable covenants by variation and the employer introducing them for the first time. 13.122  What if the position is not so clear cut? For example, the employer may have covenants that are on the borderline of being enforceable, but he wants to improve the prospects of enforceability by reducing their duration or scope. This employer faces a difficult choice: on the one hand, the desire to improve the prospects of enforceability is understandable but, on the other, the employer risks undermining such protection as he has. Departing employees who have not accepted the varied covenants will almost invariably argue that the mere fact that the employer is willing to agree narrower covenants is a recognition that the wider covenants go beyond what is reasonably necessary to protect the employer’s legitimate interests. Arguments along these lines have been successful: see Dairy Crest v Wise (24 September 1993, unreported) QBD – IDS Brief, Vol 515, discussed at 11.30, 11.199, 11.290 and 12.6. 13.123  It follows that, whilst an employer seeking to vary covenants is broadly in the same position as an employer seeking to introduce covenants for the first time in terms of following required procedures and securing consent, there is a significant commercial difference where the existing covenants are at least arguably enforceable. The employer in this position must make a very careful assessment of the risks involved before commencing a process to vary existing covenants. However, just as there are risks in seeking to vary covenants, so in certain circumstances are there risks in not doing so. In the next section we look at why and when covenants should be reviewed. 13.124  It has become common practice to include a standard clause in employment contracts that variations can only be made in writing (see further at 5.149). In addition, it is not unusual for employers to have agreed internal consultation processes, which apply to potential changes to terms and conditions of employment. These may have developed over time by custom and practice, or be more formalised, for example, an agreement with a staff council or other internal body representing the employees’ interests. Employers should always therefore check the employment documentation for any such provisions before seeking to make contractual variations. 13.125  In the context of a dispute about arrears of licence fees between a landlord and tenant, the Court of Appeal held that a clause permitting only written variations to the contract did not prevent a valid oral variation: see: MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016]  EWCA  Civ 553 (CA) (endorsing the Court of Appeal’s obiter comments to this effect in Globe Motors, Inc and others v TRW Lucas Varity Electric Steering Ltd and another [2017] 1 All ER (Comm) 601 (CA), a case involving an agreement for the exclusive supply 826

Reviewing restrictive covenants 13.128

of products). The decision in MWB has been relied on as having established the definitive position on clauses prohibiting oral variations of contract (see, for example, Four Marketing Ltd v Bradshaw [2016] EWHC 3292 (QB) and Zvi Construction Co LLC v University of Notre Dame (USA) [2016] EWHC 1924 (TCC)). However, MWB has been appealed to the Supreme Court; the appeal was heard on 1 February 2018 and the judgment is currently awaited. Pending that decision the position is that whilst anti-oral variation clauses may have some deterrent effect in the sense of dissuading parties from trying to secure an oral variation of their contracts, such a clause will not prevent a subsequent oral variation being validly concluded. In our view, this applies equally to employment contracts (including those executed as a deed, provided that there was consideration for the variation: see Chitty on Contracts (32nd edition), Volume 1, Chapter 1 (at paragraphs 1-143)), which are now regarded as no different from other contracts.

4. REVIEWING RESTRICTIVE COVENANTS 13.126  It is essential that the wording of restrictive covenants is reviewed regularly and, in any event, where there is a material change in the facts upon which the covenants were prepared, whether that is a material change in the nature of the business itself (eg following an acquisition), or the scope of the employee’s role. The more specific the wording of the covenants, the greater the need to review them. Often a review will reveal the need for a variation of the covenants. How variation can be achieved is considered at 13.27–13.81, 13.120–13.125 and in the Appendix to this chapter. 13.127  Review is necessary primarily to ensure that the covenants accurately reflect the current facts (which may have changed significantly since the date on which the covenants were first entered into – see Patsystems v Neilly [2012]  IRLR  979) which is considered at 13.9 and 13.85), thereby providing the best chance of appropriate protection for the employer. It is common for the ex-employer, faced with competition from a key ex-employee to turn to the restrictive covenants only to find that they will afford him limited protection or, even worse, none at all, because they were drafted when the ex-employee was a much more junior employee and regarded as relatively insignificant. See further at 13.4–13.9 for consideration of the extent to which restrictive covenants can be drafted to reflect contemplated changes to the employee’s role/duties over time. 13.128 Two situations where review of the restrictive covenants is of vital importance are where: (a) the role of the employee, including his location and/or responsibilities, is altered; and (b) a business is acquired, or there are other material changes in the nature of the business. 827

13.129  Introducing/varying restrictive covenants

4(a)  Role of the employee altered 13.129 This will occur most commonly where the employee is promoted, or there is a change in his responsibilities or location not involving a change in status. Whatever the cause of the alteration in the employee’s role, his restrictive covenants should be looked at carefully to see whether they remain appropriate. For example, on promotion an employee may become entitled to a longer notice period from his employer and have access to significantly more confidential information – factors potentially necessitating and justifying a change in his existing covenants. Similarly, if an employee moves to another location, that may necessitate revision of a non-competition covenant either because the area is defined by reference to the previous location or the area is too narrow or too wide in the context of the new location. For example, the area may be too narrow because the original location of the employee was in a city or town whereas the new location is in a rural setting, where a much wider area is necessary to afford protection and can be justified. Too often where contractual changes are made to reflect changes in the employee’s role, employers simply confirm the amended clauses in writing coupled with a statement to the effect that ‘all other terms remain unchanged’. Where the change includes the introduction or variation of restrictive covenants this approach is to be avoided, and an entirely fresh agreement should be given to the employees, supported by consideration (for a good example of the consequences when an employer failed to do this, see Patsystems v Neilly [2012] IRLR 979 (QB) – which is considered at 13.9 and 13.85).

4(b)  Acquisition of a business 13.130  There are many ways in which a business, or part of a business can be acquired. For example, a new business may be acquired by way of a share sale, or a new business line may be acquired by recruiting a team from a competitor. Where a business (or part of a business) is acquired in circumstances in which any of its employees will be part of what is acquired (whether by operation of law or by agreement), the acquirer should review the restrictive covenants of those employees and the covenants of any of his existing employees whose roles or status will be affected by the acquisition. Any proposed changes to their terms and conditions – including the introduction or variation of restrictive covenants – should be carried out in line with the general principles discussed at 13.2–13.110. For the special rules that apply, in addition to these general principles, in connection with a TUPE transfer see 13.131–13.189.

5. TUPE TRANSFERS – SPECIAL PROBLEMS WITH CONSTRUING, ENFORCING, VARYING OR INTRODUCING RESTRICTIVE COVENANTS 13.131  The Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) (the ‘Regulations’) are, like their predecessor, the Transfer of Undertakings (Protection of Employment) Regulations 1981, designed to 828

TUPE transfers 13.133

implement the European Union Acquired Rights Directive (originally 77/187/EEC, and now Directive 2001/23). The Regulations were amended by the Collective Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations 2014 (SI 2014/16). For the purpose of this chapter, the main amendment to the Regulations (which came into effect on 31 January 2014, subject to some more detailed provisions for the commencement of some aspects) relates to the circumstances in which changes can be made to terms and conditions of employment (see 13.148–13.172). Readers should also note that some of the cases referred to below pre-date both the 2006 version of the Regulations and the 2014 amendments. Where appropriate, we will note the relevant legislative changes and whether we believe cases would have been decided differently under the later version(s) of the Regulations. It is possible that older versions of the Regulations may still be relevant for employers seeking to introduce or vary restrictive covenants, but this becomes increasingly unlikely as more time passes.

5(a) When do the Regulations apply? 13.132  The Regulations apply where there is a ‘relevant transfer’, namely: (a) a transfer of a business as a going concern pursuant to regulation 3(1) (a), meaning that there is the transfer of an ‘economic entity’ situated immediately before the transfer in the United Kingdom which retains its identity. Regulation 3(2) defines ‘economic entity’ as an organised grouping of resources which has the objective of pursuing an economic activity; or (b) a ‘service provision change’ pursuant to regulation 3(1)(b), namely where certain activities or services are outsourced to a contractor for the first time, re-assigned to a new contractor, or brought back in-house (see further at 13.175–13.180). The transfer of part of a business may also be caught by the Regulations, particularly where the part being transferred is a separate identifiable portion of the whole. Depending on the particular facts, the Regulations can also apply (a) to the transfer of a partnership (eg the transfer of a general partnership’s business to a limited liability partnership, or the transfer of dissolved partnership’s business: see Rose v Dodd [2005] IRLR 977 (CA)); or (b) where a franchise is taken over by a new franchise owner: see LMC Drains Ltd v Waugh [1991] 3 CMLR 172 (EAT). 13.133  The Regulations do not usually apply where the ownership of a business alters purely because of the sale of shares in a company. For the Regulations to apply there needs to be a change of employer. Generally there is no change in the identity of the employer in a share sale. As a result, the legislature was of the view that employees affected by a share sale neither needed nor, arguably, should they be entitled to, any special protection under the Regulations. Consequently, from an employment law perspective, where commercially practical, there can be distinct advantages to the purchaser if the acquisition is achieved by a share sale/purchase rather than a TUPE transfer (particularly in terms of construing 829

13.134  Introducing/varying restrictive covenants

and enforcing restrictive covenants and/or changing terms and conditions of employment post-sale). 13.134  One note of caution: prospective purchasers should not assume that an acquisition by share purchase will avoid the Regulations entirely. Often, following an acquisition, the purchaser carries out a reorganisation to integrate the acquired business into the purchaser’s group of companies. Frequently these types of reorganisations/integrations involve intra-group TUPE transfers, and that possibility should always be addressed at an early stage of any proposed acquisition and before any substantive or irreversible steps are taken. Cases will turn on their facts and whether the employer can evidence a genuine intention to run the newly acquired business as a separate company. The Regulations are likely to be triggered if the group parent/holding company effectively assumes the day-to-day management of the newly acquired business and, in doing so, bypasses the governing organs of the acquired business. For example in Print Factory (London) 1991 Ltd v Millam [2007] IRLR 526 (CA), the parent company had, on the facts, effectively taken control of the day-to-day management of the newly acquired subsidiary’s business, including attempting to change terms and conditions, handling most of the subsidiary’s management and other steps consistent with holding itself out as the employer. Similarly, in Jackson Lloyds Ltd and Mears Group Plc v Smith & ors UKEAT/0127/13/LA (EAT), the outward appearance maintained for commercial purposes was that, following the acquisition, Jackson Lloyds remained an autonomous, separate business within the Mears group: no assets were transferred (apart from the shares purchased by one of the group subsidiaries, Mears Ltd) and Jackson Lloyds retained its customer contracts. However, in reality, with immediate effect from the acquisition date, Mears Group Plc exercised control over and imposed significant changes on Jackson Lloyds, and (crucially), in doing so, bypassed the Jackson Lloyds board (which it replaced with Mears group nominees). For example: Mears Group Plc announced to Jackson Lloyds’ workforce that it had acquired Jackson Lloyds and would be embarking on an integration process; it appointed an integration manager who was, at all times, answerable to, and followed the policies and strategies given to him by, the Mears group Chief Executive Officer; and it imposed the Mears group systems and policies on Jackson Lloyds without recourse to its own internal systems for effecting such changes. Essentially, the initial share transaction was found to be the context and means by which Mears Group Plc (the parent company) gained control of and began to operate Jackson Lloyds’ business, so as to trigger a TUPE transfer. 13.135  However, as emphasised in ICAP Management Services Ltd v Berry and BGC Services (Holdings) LLP [2017] IRLR 811 (QB), ultimately the key test is whether, as a matter of fact, the business in which the employees are employed has been transferred to another person. The question of whether the business has been integrated into the transferee’s business may be highly relevant to the assessment of whether this has occurred, but it is not ultimately the test. There will be no transfer merely on the basis of a degree of integration or shared services unless there has been a transfer of responsibility for the day-to-day running of the business. Applying this approach, the court rejected an argument that there had 830

TUPE transfers 13.135

been a TUPE transfer in a share sale scenario. The claimant was a service company providing services to companies in the ‘ICAP Global Broking Business’. Its shares were owned by ICAP Holdings Limited, whose shares were owned by ICAP Global Broking Holdings Limited and whose shares were in turn owned by ICAP plc (the ultimate parent company). ICAP plc entered into a Share Purchase Agreement under which it agreed to separate the commercial organisation of the ICAP Global Broking Business so that it (a) operated on a standalone basis and (b) all the relevant companies became subsidiaries of ICAP Global Broking Holdings Limited. On that basis, Tullett Prebon plc purchased the majority of the shares in ICAP  Global Broking Holdings Limited and renamed itself TP ICAP plc. Prior to the transfer, Mr Berry (the former Chief Executive Officer of ICAP Management Services Ltd) resigned and was placed on garden leave. He claimed that the acquisition would amount to a TUPE transfer, to which he objected (pursuant to regulation 4(7) of the Regulations – see 13.185–13.189), meaning that (if there was a TUPE transfer) his employment would end on the date of the transfer, releasing him from the balance of his notice period. He initially started working for his new employer, BGC Services (Holdings) Limited, until the claimant secured an injunction to enforce his garden leave. Garnham J rejected each of the eight factors relied on by the defendants in support of their argument that there had been a TUPE transfer and concluded that: ‘… although the two companies … now have a common ownership, they remain two distinct, competing brands. … the claimant, IMSL, continues to be responsible for its own business and continues to bear the obligations of employer of its staff, including the first defendant. … There is no new owner who has stepped into the shoes of the claimant’ (paragraph 101).

The judge’s findings in support of that conclusion included the following: (a) ‘Changes taking place above or behind the level of the day-to-day management (such as strategic targets, targets being set on a group wide basis) or behind the day-to-day management (such as de-duplications in corporate support services provided across the group) do not demonstrate a parent plc intending to take over the management of day-to-day operations.’ (paragraph 91). (b) The imposition of the new company’s governance and management structures were just an ‘obvious manifestation of change in legal ownership’ that said ‘nothing about responsibility for the day-to-day business or the identity of the body who had incurred the obligations of employer’ (paragraph 93). (c) The evidence heard did not support a number of the contentions made, eg  that desks and broker compensation had been merged (paragraphs 96 and 97). (d) The incomplete plans to integrate certain back office functions was consistent with asking subsidiaries to make costs savings, rather than demonstrating that TP ICAP plc had become responsible for running the business or incurred the obligations of employer (paragraph 98). 831

13.136  Introducing/varying restrictive covenants

13.136  Garnham J suggested (at paragraph 83 in ICAP Management Services Ltd v Berry and BGC Services (Holdings) LLP [2017] IRLR 811 (QB)) that ‘the critical elements of the test are whether the new party (i) has become responsible for carrying on the business, (ii) has incurred the obligations of employer and (iii) has taken over day-to-day running of the business.’ However, in Guvera Limited v Butler and Blinkbox Music Ltd and others UKEAT/0265/16/DM, 21 November 2017, Lavender J commented that these should not be seen as necessary conditions of a transfer as opposed to important elements of the multi-factorial test of whether there has been a transfer. As illustrated by the decision on the facts in Guvera, that caution is apposite in relation to the criterion of incurring the obligations of the employer, but the focus remains on assuming responsibility for day-to-day running of the business. Guvera had purchased the shareholding in Blinkbox, which carried out a music streaming service. The Employment Tribunal found that this had not initially involved a TUPE transfer as the business remained with Blinkbox whilst it was under the control of a Mr de Vere, who was one of Guvera’s directors and was also the sole director of Blinkbox. However, there was found to have been a transfer when Mr de Vere resigned and then left the business. Control was then assumed by a Guvera appointee who acted on the instructions of Guvera’s Chief Executive Officer. Guvera exercised control over key business decisions including in relation to whether to make payments to creditors, implementing redundancies and generally assuming day-to-day control of Blinkbox’s business in a way which went beyond mere ordinary supervision or information gathering between parent and subsidiary. Consistently with the approach emphasised in ICAP, the focus was therefore on whether Guvera had exercised day-to-day control of the business, bypassing Blinkbox. In the EAT it was argued that this was insufficient because Guvera did not exercise the responsibilities of an employer. Notably, wages continued to be paid by Blinkbox. Rejecting that argument, and upholding the Employment Tribunal’s decision, the EAT emphasised that whilst assuming direct payment for salaries could indicate a transfer, it was not a necessary condition of it. That would be inconsistent with the multi-factorial approach and the fact that assuming responsibilities of the employer is an automatic consequence of a transfer.

5(b) What do the Regulations do? 13.137  For the purpose of this chapter, the main effects of the Regulations are threefold: (a) employees employed (immediately before the transfer) by the transferor in, and assigned to, the business which is being transferred automatically become employees of the transferee. Their contracts are regarded as though originally made with the transferee (regulation 4(1)). In other words, unless the employees exercise their right to object to the transfer (regulation 4(7)), the transferee acquires the employees on their existing terms and conditions with their attendant rights and liabilities. Where such employees are dismissed prior to the transfer, but solely or principally ‘by reason of’ the transfer, the employment does not transfer but rights and liabilities in relation to the employment contracts transfer to the transferee (regulation 4(1), (3)); 832

TUPE transfers 13.139

(b) subject to some limited exceptions, any purported variations to a contract of employment that is, or will be, transferred to the transferee are void if the sole or principal reason for the variation is the transfer (regulation 4(4)) – see further at 13.148–13.172; and (c) subject to two exceptions, any dismissal which is solely or principally ‘by reason of’ the transfer will be automatically unfair (regulation 7(1)), as long as the employee has sufficient continuity of service to present a claim (currently two years). This is so whenever the dismissal takes place and whether the dismissed employee is an employee of the transferor or the transferee – see further at 13.173–13.174). The exceptions to the automatically unfair rule are: (a) where the dismissal is for an economic, technical or organisational reason, entailing changes in the workforce (regulation 7(2) – see 13.164–13.166; 13.174); and (b) where the transfer took place when the transferor was under an insolvency liquidation procedure falling within regulation 8(7).

5(c)  Can the parties contract out of the Regulations? 13.138  Agreements purporting to exclude or limit the operation of, or preclude the bringing of any proceedings under, the Regulations are automatically void (regulation 18). Regulation 18 operates by applying the restrictions on contracting out contained in section 203 Employment Rights Act 1996, subject only to the exceptions set out in the Regulations themselves. The restriction applies whether the parties have knowingly or unknowingly entered into an offending provision. At first sight, regulation 18 might suggest that variations to the pretransfer terms of employment could be achieved through a settlement agreement under section 203 Employment Rights Act 1996 without there being any dismissal. Unfortunately that is not so. This is because the excepted cases in section 203(2), ie where a valid settlement agreement (formerly a ‘compromise’ agreement) is permissible (and in particular section 203(2)(f), which cross refers to section 18(1)(d) Employment Tribunals Act 1996), are not wide enough to catch claims arising from variations of contract by reason of a TUPE transfer without a corresponding dismissal. Similarly, whilst an agreement entered into with the assistance of a conciliation officer (usually referred to as an ACAS COT3 agreement) can settle contractual claims, it will only cover such claims that arise on termination of employment, not whilst employment continues. For a fuller explanation on this point see Transfer of Undertakings, General Editor Jeremy Lewis (Thomson, Sweet & Maxwell) Sections A8.1, A8.2, A8.5.1 to A8.5.2.

5(d)  How do the courts/employment tribunals construe the Regulations? 13.139  Courts and employment tribunals are required to give regulations 4(1) and 7(1) a purposive construction so as to accord with the Acquired Rights Directive (originally 77/187/EEC, and now Directive 2001/23). A key underlying purpose is to secure the protection afforded to employees, but more recent 833

13.140  Introducing/varying restrictive covenants

authority indicates that a more nuanced approach may be required. In AlemoHerron v Parkwood Leisure Ltd (C-426/11) [2013] IRLR 744, the Court of Justice of the European Union (CJEU) emphasised that the Acquired Rights Directive is not solely concerned with the safeguarding of employee rights but also, in the light of Article 16 Charter of Fundamental Rights of the European Union: (a) it must be interpreted having regard to the need for a fair balance between the interests of employer and employee; and (b) any interference with ‘freedom of business’ should be proportionate to a legitimate aim. On that basis, as now reflected in regulation 4A, the CJEU concluded that a clause which incorporated collective agreements into employment contracts was not to be construed as having ‘dynamic effect’ so as to apply to collective agreements entered into after the transfer where the transferee employer could not participate in the collective bargaining. The CJEU reasoned that the transferee employer: ‘… must be able to assert its interests effectively in a contractual process to which it is a party and to negotiate aspects determining the changes in working conditions of its employees with a view to its future economic activity’.

The implications of this approach in relation to the proper construction of the Regulations are yet to be fully explored in the authorities, but it potentially has very great significance in the context of this book. In particular, it provides support for an argument that the Regulations should not be construed in a manner such as to prevent a transferee employer being able to agree contractual variations so as to apply restrictive covenants that are necessary to protect his legitimate business interests post-transfer.

5(e)  Commonly asked questions by employers 13.140  In the context of restrictive covenants the following specific questions commonly arise where there is an actual/contemplated TUPE transfer: (i) What is the correct interpretation of pre-transfer restrictive covenants posttransfer? (13.142–13.147) (ii) Can restrictive covenants be introduced or varied in the context of a TUPE transfer? (13.148–13.172) (iii) What are the implications of dismissing an employee who refuses to agree to new/varied restrictive covenants in the context of a TUPE transfer? (13.173–13.174) (iv) What, if anything, can the transferor employer do to protect his remaining business against unlawful competition from ex-employees following a service provision change? (13.175–13.180) (v) What is the effect on restrictive covenants of an employee exercising his right under the Regulations to object to a TUPE transfer or other pre-TUPE transfer terminations? (13.181–13.189) 834

TUPE transfers 13.143

13.141  In considering these questions it is important to keep the following points in mind, which are often overlooked by advisers: (a) Regulation 7(1), which is the provision that makes dismissal automatically unfair, applies not only to the employees who transfer to the transferee (or who would have transferred had they not been dismissed in the circumstances described in regulation 7(1)), but also to existing employees of the transferee and the employees of the transferor who do not transfer. It also applies irrespective of whether the dismissed employee was assigned to the transferring business (regulation 7(4)). (b) In contrast, the regulation 4 restrictions on making changes to contract terms do not prohibit changes being made to the employment contracts of any of the transferor’s existing employees who are not transferring, or to the contracts of the transferee’s pre-transfer employees. (c) The requirements of the Regulations are relaxed to a certain extent where the transferor is insolvent (for a fuller explanation on this point see Transfer of Undertakings, General Editor Jeremy Lewis (Thomson, Sweet & Maxwell) A1.84 to A1.88 and A9).

5(f)  Interpretation of existing restrictive covenants in the context of a TUPE transfer 13.142  Perhaps a little surprisingly, there have been very few cases in which the question of the correct interpretation of pre-TUPE transfer restrictive covenants has been argued before the courts. The starting point is regulation 4(1) which provides that the contract of employment has effect post-transfer as if originally made between the employee and the transferee employer. In McCall v Initial Supplies Ltd (2 May 1990, unreported), the Court of Session, in refusing an application by Initial Supplies Ltd for an interim interdict (interim injunction), doubted whether regulation 5 1981 Regulations (the predecessor of regulation 4(1) 2006 Regulations) transferred the benefit of the restrictive covenants. Lord Coulsfield said that in many situations the effect of substitution of the new employer for the former employer would be to make a radical alteration in the rights and obligations of the parties. For example, the practical scope and effect of a restrictive covenant may be altered if regard has to be had to the customers of the new employer instead of, or as well as, the former employer. 13.143 However, the Regulations themselves provide no support for any such exception relating to post-termination restrictive covenants. In Morris Angel & Son Ltd v Hollande [1993] IRLR 169 (CA) (in which McCall was not referred to) the Court of Appeal did grant an interim injunction to the transferee of a business to enforce a restrictive covenant contained in the employment contract of Mr Hollande. Mr Hollande was the managing director of a company called Altolight Ltd, which transferred its business to Morris Angel. Immediately after the transfer Morris Angel dismissed Mr Hollande. Subsequently Mr Hollande sought to compete with Morris Angel in breach of a restrictive covenant in the contract he 835

13.144  Introducing/varying restrictive covenants

had signed with Altolight Ltd. The relevant covenant prohibited Mr Hollande for one year after the termination of his employment from soliciting or doing business with anyone who had been a customer of the ‘group’ within the year preceding that termination. The term ‘group’ was defined as Altolight Ltd and its subsidiaries. Morris Angel sought an interim injunction to restrain Mr Hollande from doing business with customers of the acquired business (Altolight) which they argued was in breach of the covenant. At the initial hearing, ex parte on notice (which would now be referred to as on informal notice), Turner J held that the effect of regulation 5 (now regulation 4) was that Mr Hollande’s contract was to be read as if originally made with Morris Angel, ie as relating to the customers of Morris Angel (irrespective of whether they had been customers of Altolight prior to the transfer). Consequently, since it was not customers of Morris Angel which Mr Hollande was seeking to do business with, but customers of Altolight Ltd, there was no covenant under which injunctive relief could be granted. That decision was followed by Judge Laurie QC (sitting as a Deputy High Court Judge) at the inter partes hearing. The Court of Appeal, however, rejected Turner J’s interpretation of regulation 5, Dillon LJ explaining their reason for doing so (at paragraph 23) as follows: ‘The difficulty about that approach to my mind is that it turns the obligation on the employee under clause 15(1) into a quite different and possibly much wider obligation than the obligation which bound him before the transfer, that is to say an obligation not to do business etc. with the persons who had done business in the relevant year with [Morris Angel] not the company. Such an obligation was not remotely in contemplation when the service agreement was entered into and I can see no reason why the regulation should have sought to change the burden on the employee.’

Dillon LJ (at paragraph 24) found that the more reasonable construction of regulation 5 was: ‘… the words “[the contract] shall have effect” are to be read as referring to the transferee as the owner of the undertaking transferred or in respect of the undertaking transferred. The effect therefore is that clause 15(1) can be enforced by the plaintiffs if Mr Hollande within the year after 29 April 1992 does business with persons who in the previous year had done business with the undertaking transferred of which the plaintiffs are deemed as a result of the transfer retrospectively to have been the owner. The plaintiffs are thus given locus standi to enforce the restriction.’

As a result, Morris Angel could enforce the covenant to restrain Mr Hollande from doing business with any customers who had done business with Altolight Ltd (the business Morris Angel had acquired) during the preceding year. The TUPE transfer did not mean that the covenant was expanded to also restrict Mr Hollande from doing business with any separate customers of Morris Angel in that same period. 13.144  Morris Angel & Son Ltd v Hollande [1993] IRLR 169 (CA) was considered and endorsed by the EAT in Tapere v South London and Maudsley NHS Trust [2009] IRLR 972, which concerned the interpretation of a mobility clause following a TUPE transfer. Ms Tapere’s contract provided for a designated place of 836

TUPE transfers 13.145

work, but also contained a clause stating that ‘there may be occasions when you are required to perform your duties either temporarily or permanently at other locations within the Trust’ (our emphasis added). The issue therefore arose as to whether a reference in the contract to the transferor (in this case ‘the Trust’) could be read as referring to the transferee Trust. The Employment Tribunal held that it could; Ms Tapere could be relocated to any location of the transferee Trust. The EAT rejected that interpretation: ‘the words “within the Trust” cannot be regarded as surplus or meaningless [the Employment Tribunal had held that they were otiose]. … they are plainly words of definition, which restrict the geographical area. Moreover, it seems to us that the contract falls to be construed at the time that it was entered into. After all, the parties are making an agreement at a point in time and while circumstances may need to be considered when construing the words of an agreement in order to ascertain the intention of the parties, plainly it must be the circumstances pertaining immediately before and at the time of the agreement and not later circumstances. This we take to be an elementary premise in relation to the construction of contracts. … What the employment tribunal did here was to increase the scope of the geographical area in which the employee could be required to work. This altered the terms of her contract to her disadvantage and resulted in her employment being less protected after the transfer than it was before. Such an interpretation is the antithesis of the purpose of the Directive 2001/23/EC and, thus, of TUPE 2006…’ (HHJ Hand QC at paragraphs 32 and 38).

The correct interpretation of the clause was that it would only permit Ms Tapere’s relocation to sites operated by the transferor Trust. The transferee Trust had, therefore, breached Ms Tapere’s contract by insisting that she relocate to one of its separate locations. 13.145 In Tapere v South London and Maudsley NHS Trust [2009] ICR 1563 (EAT), HHJ Hand QC also rejected arguments that the principle in Morris Angel was qualified by the concept of ‘substantial equivalence’ relied on by the EAT in Mitie Managed Services Ltd v French and others [2002] IRLR 512. In Mitie the EAT held that whilst the transferee could not provide the transferred employees with benefits under the transferor’s profit sharing scheme, the employees were entitled to a substantially equivalent scheme. HHJ Hand QC held in Tapere that: ‘Where there is a contractual term, which can be continued without practical difficulty, the benefits and obligations remain the same; this is what Morris Angel establishes. In such cases, there is no need to consider “substantial equivalence”. Where, however, there are practical impediments, as was the case in MITIE, and the clause cannot be implemented with precisely the same benefits and obligations, then equivalent benefits and obligations can be substituted, so long as neither benefit nor burden is increased or enlarged’ (paragraph 37).

In our view, the principle of substantial equivalence could not be relied on to justify the variation of existing restrictive covenants, or the imposition of new ones, following a TUPE transfer. Consistent with the principle that exceptions to the rights in the Acquired Rights Directive are to be construed narrowly, it is 837

13.146  Introducing/varying restrictive covenants

a limited principle that has been invoked where it is not otherwise practicably possible to replicate the benefits an employee enjoyed with the transferor, and provided that neither the benefit nor the burden is increased or enlarged. In Mitie it was said to be applicable where the transferor’s profit sharing scheme would, if applied to the transferee, be ‘impossible to perform and, accordingly, a construction which produces such a result is absurd and unjust’. It provides no basis for re-writing a restrictive covenant entered into with the transferor so as to apply it to the transferee where that cannot otherwise be the result achieved as matter of construction of the relevant provision. 13.146  The following important aspects of the decision in Morris Angel & Son Ltd v Hollande [1993] IRLR 169 (CA) and its implications are worth highlighting: (a) The business transferred was still identifiable in the hands of the transferee. Where that is no longer the case, the transferee employer’s position is much more difficult. (b) Mr Hollande’s employment terminated immediately after the transfer. The decision therefore did not raise directly the question of how such a covenant might apply to dealings on behalf of the transferee employer with customers after the transfer. Instead the court was concerned with who was a ‘customer of the group’ in the period before the transfer. In contrast in Tapere v South London and Maudsley NHS Trust [2009] ICR 1563, the EAT was concerned with how the phrase ‘locations within the Trust’ was to be construed in the period after the transfer. It concluded that references in the relevant clause to ‘the Trust’ continued to refer, in the period after the transfer, to the transferor Trust only, and not the transferee Trust. Suppose that same approach was applied to the construction of covenants, eg such that references in a covenant to ‘the employer’s customers’ continued to refer only to customers of the transferor employer or those who were such prior to the transfer. In many cases it would deprive the transferee employer of any meaningful protection in relation to customer connections built up in the post-transfer period unless the post-transfer contact was with someone who also happened to be a customer of the transferor employer pre-transfer. There would, for example, be no protection in relation to customers secured by the transferee employer post-transfer, irrespective of the nature and depth of the transferred employee’s dealings with that customer on behalf of the transferee. However, the reasoning which drove the Court of Appeal’s conclusions in Morris Angel, based on avoiding a construction which would be ‘quite different and possibly much wider’ than that originally entered into, does not support that approach. That is reinforced when taking into account a third aspect of the decision in Morris Angel which is considered at 13.146(c) below. (c) In Morris Angel, the relevant customer non-dealing/solicitation covenant contained no limit by reference to any requirement for ‘personal dealings’ between the employee and the customer. It was for this reason that, if the covenant simply applied as if reference to the transferor’s customers was to be read, post-transfer, as if it referred to customers of the transferee, the obligation could be quite different and possibly wider than could have been 838

TUPE transfers 13.146

contemplated when entering into the contract. Based on Morris Angel and Tapere, and the principles underlying the Regulations, where covenants are not limited by reference to personal dealings, the courts may be unwilling simply to read the covenants as applying to customers of the new employer. Morris Angel may be distinguished on the basis that it was only concerned with the customers in the one year period prior to the transfer and should not apply to restrict the meaning of customers post-transfer. However, the reasoning in Tapere indicates that this distinction will not necessarily succeed. Further, where the acquired business becomes part of a much larger organisation, the new employer will invariably be seeking to apply the employee’s covenants to, for example, a significantly increased customer base, increasing both the transferee’s benefit and the transferred employee’s burden. If, post-transfer, the covenant is construed as referring to the transferee’s customers, this may lead to the covenant being too wide to be enforceable even if that was not the case pre-transfer. However, the position is different, where the clause is selflimiting by reference to a personal dealings requirement (see 11.161–11.171). In those circumstances we suggest the clearly preferable construction will be that the covenant should be applied post-transfer (a) not only to customers of the transferor with whom the employee had personal dealings prior to the transfer during the personal backstop period, but also (b) to customers of the transferee, with whom the employee had personal dealings post-transfer during the backstop period. This is likely to accord most closely with the objective of preserving the position post-transfer, without imposing a more onerous obligation on the employee or depriving the employer of the protection for the business in place pre-transfer. (d) The decision in Morris Angel, and the approach taken in Tapere, raise (but did not address directly) the question of when the restricted period commences following a TUPE transfer. As to this: (i) Typically, post-termination covenants will be expressed to apply from the date of termination of the employment with the ‘employer’ (as defined in the contract of employment). Regulation 4(1) has the effect that the transfer will not operate to terminate the contract of employment (unless there is an objection to transfer – see 13.185–13.189). However, whilst the contract of employment will continue, that still leaves a question of whether the date of termination referred to in the contract is to be construed as meaning the end of employment with the transferor employer, or termination of employment with the transferee employer. (ii) The decision in Morris Angel (at least in relation to covenants that are not self-limiting, which are discussed in 13.146(c)), and indeed the approach in Tapere, provides some support for the view that references in the contract to the transferor company cannot simply be read after the transfer as meaning the transferee company. If instead the contract is to be read as referring to termination of employment with the transferor then (unless employment terminated earlier) the period of restriction would run from the date of the transfer. Some further support for that view can be gathered by analogy with the approach to limitation periods 839

13.146  Introducing/varying restrictive covenants

in Sodexo v Guttridge [2009]  IRLR  721. There the Court of Appeal construed the limitation period for equal pay claims, expressed to run from the termination of employment, as running from the date of the transfer in relation to claims relating to the period of employment with the transferor (even in relation to employees who transferred to the transferee and even though the liability transferred to the transferee). Concerns of the nature expressed in McCall v Initial Supplies Ltd (2 May 1990, unreported) and Morris Angel to the effect that the transfer should not make any change to the scope of covenants might further support this approach in that it would ensure that the covenant was limited to that which was reasonably contemplated at the time it was entered into (ie the protection of the original employer’s business for a defined period after his relationship with the employee ended). (iii) It might be said against this approach to construction that it would have the effect of removing the practical value of the covenant in a case where employment continues with the transferee and, as such, could not have been within the reasonable contemplation of the parties. However the decision in Spotless Facility Services (Uxbridge) Ltd v Jones and others [2012] EWHC 4391 (QB) suggests that there is limited scope to have regard to the effect of the Regulations on the practical value to the employer of the covenant. The court rejected such an argument in the context of a covenant restricting employment with a competitor (in relation to ‘that part of the business with which you were involved’) for 12 months after termination of employment. It was argued that if the covenant only applied to competition at a specific venue where the employees had worked, it would have no value if the employer lost the contract in relation to that venue and the employees were transferred under the Regulations to the successor. The argument was rejected, in part, because it would be the transferee who would have the rights and obligations in relation to the contracts of the employees who transferred. The covenant would still benefit the transferor in relation to employees who ceased employment prior to the transfer and might have practical value in preventing the employees providing services for the competitor at the venue. Additionally HHJ Seymour QC commented (at paragraph 16) that the Regulations should not be taken into account in construing the clause in circumstances where there was no mention of the Regulations in the contract. (iv) We suggest however that the dicta in Spotless in relation to ignoring the impact of the Regulations when approaching issues of contractual construction is to be read subject to the important principle that the Regulations are intended to have the effect of preserving rights rather than improving the position of either party: see Computershare Investor Services plc v Jackson [2008] ICR 341 (CA). This argument has particular force where it is possible to see a construction which broadly preserves the pre-transfer position, as may be the case where the covenants are self-limiting (see 13.146(c)). Further, it can be said that, objectively, the parties are unlikely to have contemplated the 840

TUPE transfers 13.148

covenant period starting to run whilst the employment relationship was continuing (and that must be taken as including continuation of the employment relationship by operation of law under the Regulations). In all, the better view, we suggest, consistent with the principle that the transfer should preserve the respective rights of employer and employee, and that the transfer does not operate to terminate the employment, is that references to the date of termination of employment with the transferor are to be read in the light of the Regulations as meaning termination of employment with the transferee employer. 13.147 In large part the difficulties of construction of restrictive covenants in the light of the Regulations arise because, ordinarily, no express provision is made in the contract for how the covenants are to be construed in the event of a TUPE transfer. Instead the covenants will typically be framed in terms which refer to the transferor, whether in relation to referring to the date of termination of employment with the transferor or in other respects such as customers or suppliers of the transferor. That raises the difficult question as to how such provisions are to be construed in the light of the Regulations, and in turn gives rise to the risk of a narrow construction which provides inadequate protection post-transfer. A possible approach to seek to negate that risk is to set out expressly in the contract how the covenants are to apply in the event of a relevant transfer (or transfers). To that end it might be stipulated that in the event of a transfer (or successive transfers), references to the employer or employment are to be applied in relation to the period post-transfer as if references to the employer include the transferee and as if references to defined terms in respect of the transferor employer, such as definitions of the ‘customer’, include customers of the transferee and of the transferring business. For this approach to be effective, it will be vital to have appropriate personal dealing limits built into the covenants, and for the geographic scope of any non-competition covenant to be defined by reference to where the employee works from time to time, so as to address the risk of the transfer leading to the covenants being unreasonably wide as a result of extending to the transferee’s customer base (see 13.146(c)) and area of operations. Similarly there may be express provision that non-poaching covenants are to be applied post-transfer as including employees of the transferee business. For completeness it might also be provided that the employee agrees to execute such documents (if any) as may be required to give effect to this provision. This would be akin to the now common practice of including an express obligation to enter into restrictive covenants with other group entities in the same or (although we do not recommend this wider formulation) materially similar terms (see 13.40). In each case though it will be necessary to check for any unwanted anomalies arising from that approach in the context of the specific terms of the contract.

5(g)  Introduction/variation of restrictive covenants in the context of a TUPE transfer 13.148  On a TUPE transfer one of the most frequently asked questions by the prospective transferee is how best to protect the newly acquired business from 841

13.149  Introducing/varying restrictive covenants

employee competition and, specifically, the extent to which restrictive covenants can be introduced or varied. Often the question is prompted by a due diligence report which reveals that key employees either have no covenants or their covenants are of doubtful enforceability. In other instances the concern stems from uncertainty as to how existing covenants will be interpreted after the transfer, for which see 13.142–13.147. Prior to the amendments made to the Regulations in 2014, the combined effect of the Regulations, and the limited case law interpreting the Regulations, indicated that the transferee had very limited options and those that existed were often of very limited practical use. The revised wording of the Regulations after the 2014 amendments, together with the reasoning in Alemo-Herron v Parkwood Leisure Ltd (C-426/11) [2013]  IRLR 744 (CJEU), provides new scope to contend that a variation is permissible, but these arguments are as yet untested. 13.149  In this section, we will consider: (i) restrictions on variations where the sole or principal reason is a TUPE transfer (13.150–13.159); (ii) exceptions where variations by reason of a TUPE transfer are permitted (13.160–13.163); (iii) changes made for economic, technical or organisational reasons entailing changes in the workforce (13.164–13.166); (iv) whether changes to contract terms by reason of a TUPE transfer can be agreed in the employee’s favour (13.167–13.168); (v) the impact of pre-TUPE transfer dismissals on the employer’s scope to revise contract terms (13.169–13.170); and (vi) the effect of an invalid variation on the contract as a whole (13.171). 5(g)(i)  Restrictions on variations where the sole or principal reason is a TUPE transfer 13.150  The starting point is regulation 4(1) which provides that the contracts of the transferring employees are treated post-transfer as though they were originally made between the employee and the transferee (see further at 13.137). Regulation 4(4) renders void any variation of a transferred contract where the sole or principal reason for the variation is the transfer itself. The old restriction in regulation 4(4) on changes made for ‘a reason connected with the transfer that is not an economic, technical or organisational reason entailing changes in the workforce’ was removed by the 2014 amendments to the Regulations (see 13.131). It is now possible, therefore, to argue that contractual variations which are only connected with the transfer, rather than being by reason of the transfer, are permissible. It is clear, as was as expressly set out in the government’s Response to Consultation of September 2013, that the change made in 2014 was intended to remove the risk of the Regulations being more restrictive than required under the Acquired Rights Directive. To that end, the change was intended to mirror more closely the language used by the Court of Justice in 842

TUPE transfers 13.152

Foreningen af Arbejdsledere v Daddy’s Dance Hall [1988] IRLR 315 (ECJ), and the line of cases following it, that there cannot be a variation where it is solely by reason of the transfer. However the implications of this statutory change have yet to be fully explored in the authorities. 13.151 The consultation document in relation to the 2014 amendments to the Regulations and the January 2014 guidance issued by the Department for Business, Energy and Industrial Strategy (BEIS) entitled Employment Rights on the Transfer of an Undertaking, indicate that some reasons that were previously only ‘connected with’ a transfer may now be regarded as ‘by reason of’ the transfer (see page 22). However, the Court of Justice authorities do not necessitate a broad approach to this. In Martin v South Bank University [2004]  IRLR  74 (ECJ), the court referred interchangeably to the reason being the transfer or a reason connected with it, but in a context where there was no other reason advanced for the variation other than harmonisation of terms post-transfer. The decision therefore leaves ample scope for an argument that where the change furthers some wider end, the variation is not to be regarded as solely or principally by reason of the transfer (as opposed to being merely connected to it). Specifically in the context of covenants, this opens the door to an argument that changes are not solely or principally by reason of a transfer, but are principally for the purpose of providing protection which is no wider than reasonably necessary to protect the legitimate business interests of the transferee, whether in relation to the protection of customer connections, confidentiality or staff stability. Some further support might be drawn from the decision in Boor v Minisstre de la Fonction Publique et de la Reforme Administrative (C-425/02) [2004] ECR I-10823 where the CJEU concluded that a contractual change was valid despite having the effect of substantially reducing an employee’s salary on a transfer (which entailed entering into State employment, and where the revised terms were required to comply with the terms for State employees). The decision is consistent with the argument that where there is a compelling wider purpose, the variation is not to be regarded as solely or principally by reason of the transfer; however, it might also be explained on the basis of qualifying the application of the Acquired Rights Directive in relation to State employment. 13.152 Strong support for this line of argument, distinguishing between the transfer itself and the wider business protection purpose, can be derived from the reasoning of the CJEU in Alemo-Herron v Parkwood Leisure Ltd (C-426/11) [2013] IRLR 744, based on Article  16 Charter of Fundamental Rights of the European Union (see 13.139). Further the decision in Foreningen af Arbejdsledere v Daddy’s Dance Hall [1988] IRLR 315 (ECJ) itself emphasised that the transferee should have the same ability to agree contractual changes as the transferor subject to this not solely being by reason of the transfer. In one sense that begs the question of what is meant by the restriction on being ‘by reason of the transfer’. However, more broadly it can be said that it would be contrary to the underlying intention of the Directive and of the Regulations if, whilst the transferor was able to agree covenants framed by reference to the organisation of its business to protect its legitimate interests, the transferee was not able to respond to the possibly different circumstances after the transfer to protect its legitimate interests. 843

13.153  Introducing/varying restrictive covenants

13.153  It is helpful, we suggest, to distinguish three differing scenarios in which the transferee may wish to agree revised covenants. In the first case, the transfer itself might not involve any significant change to the business, and the problem may simply arise because of the failure of the transferor to put in place covenants that were adequate to protect the business. It is clear that the fact that the transferee takes a different view to the transferor as to the need for covenants or what other terms are required, and therefore agrees revised terms with the employees, does not make the variation by reason of the transfer: see Smith and others v Trustees of Brooklands College (UK EAT/0128/11). Nor does the fact that the variation ultimately results in the harmonisation of terms mean that ‘harmonisation’ was the reason for the change: see Boor v Minisstre de la Fonction Publique et de la Reforme Administrative (C-425/02) [2004] ECR I-10823 and Enterprise Managed Services Ltd v Dance & others [2011]  UKEAT/0200/11 (where changes to pay and hours were made to improve productivity and efficiency). It may still be that there was some distinct, compelling reason/objective for the change other than harmonisation. In each case it is necessary to focus on the factors operating on the mind of the employer (or possibly in the case of a variation, the parties to it): see The Co-Operative Group Ltd v Baddeley [2014] EWCA Civ 658 (Underhill LJ at paragraph 41), applying the equivalent test in the context of unfair dismissal by reason of protected disclosures. 13.154  One consequence of the focus on the reasons for the variation is that the timing of the variation is not necessarily decisive. A variation agreed at the time of the transfer may not be by reason of the transfer. The transfer may merely be the occasion for the change: see Whitehouse v Charles A Blatchford & Sons Ltd [2000] ICR 542 (CA). Equally the fact that the change is agreed a considerable time after the transfer, whilst evidentially relevant, is not inconsistent with the transfer being the reason for the change. In Taylor v Connex South Eastern Ltd EAT/1243/99, a case in which the employee’s rejection of new contract terms was still connected to the TUPE transfer that had taken place two years previously, Wilkie J held that: ‘… there is no particular time limit as to what can be considered as being connected with a transfer. … but the weakening of the chain of causation with passage of time is simply because there is greater opportunity for intervening events to occur which break the chain of causation. The mere passage of time without anything happening does not in itself, constitute a weakening to the point of dissolution of the chain of causation’ (paragraph 26).

The reference to ‘the chain of causation’ is to be read with caution, given that the test of being connected to the transfer no longer applies. The focus is squarely on identifying the reasons for the variation (or dismissal where the change is effected by dismissal and re-engagement). That said, as emphasised in Hare Wines Limited v (1) Kaur and (2) H&W Wholesale Limited (Dissolved) UKEAT/0131/17/JOJ (17 October 2017), it remains the case that proximity of a variation to the time of the transfer may be a very important evidential factor when it comes to inferring the sole or principal reason for a variation. In Hare Wines, Ms Kaur was dismissed, shortly before a transfer, after a meeting where she had discussed her strained relationship with a colleague. The employment judge noted that the fact 844

TUPE transfers 13.157

of having discussed the strained relationship was consistent with the transferee having anticipated that there would be ongoing difficulties in the working relationship between Ms Kaur and the colleague and therefore deciding that it did not want her employment to transfer. The EAT rejected a submission that, because of the reference to the strained working relationship, the dismissal should have been regarded as only connected to a transfer rather than by reason of it. Choudhary J commented that ‘in a situation where an employer had not taken action to resolve an ongoing relationship difficulty prior to the transfer, but does so only at the point of transfer by dismissing one of the parties in that difficult relationship, it is open to the Tribunal to conclude that the reason for the dismissal was transfer’. By parity of reasoning it may be argued that where an employer has not acted to address a weakness in covenants but only does so at the point of the transfer, it may be inferred that the transfer was the sole or principal reason for doing so. However, we suggest that it should still be available (if supported by the facts) to say that whilst the transfer brought into focus the need to consider the adequacy of the restrictive covenants, the reason for the change was the need to take steps to protect the business irrespective of the transfer. Conversely, it may be that the transferor seeks to improve covenants principally to make the business more attractive for sale and, as such, solely or principally by reason of a transfer. Clearly therefore, in each case careful analysis will be required of the reasons advanced on the particular facts. 13.155  A second scenario is where the covenants may have been adequate prior to the transfer, but some change is required for a reason connected with the transfer. That may arise because, as a result of the way the transferee’s business is organised or where it is based, the pre-existing covenants do not provide adequate protection. 13.156  Alternatively, in a third scenario, the need for the covenants may arise not because of any particular differences in the transferee’s business, but precisely because of the transfer. The purchaser of a business may be concerned that the very fact of the transfer may entail de-stabilisation of his staff and give rise to the need to agree revised restrictions or notice periods and offer a corresponding incentive (as in the Credit Suisse cases below: see 13.157–13.158). 13.157  It is in these second and third scenarios that the above argument as to the limits of the new test post the 2014 amendments to the Regulations, and the limits of what is required under the Acquired Rights Directive, are potentially crucial. Standing in the way of the above line of reasoning (at 13.151–13.152) that a distinction may be drawn between the reason being the transfer and the broader business protection aims, are the decisions in Credit Suisse First Boston (Europe) Ltd v Padiachy [1998] IRLR 504 (QB) and Credit Suisse First Boston (Europe) Ltd v Lister [1998] IRLR 700 (CA). The cases concerned new restrictive covenants introduced (in advance of a transfer) in connection with Credit Suisse’s acquisition of the business of Barclays de Zoete Wedd Services Ltd. In both cases consideration was given for the new covenants and, in particular, Mr Lister stood to benefit by an amount exceeding £625,000. Instead of the previous provision for a 12 month non-solicitation covenant, there was agreement to three 845

13.158  Introducing/varying restrictive covenants

month non-compete and non-solicitation covenants. At the time of the transfer the defendant employees were still employed by the business. On applications for interim relief, the transferee (Credit Suisse) was refused an injunction to restrain the employees from taking up employment with a competitor. The varied terms were held to be invalid having been entered into by reason of the transfer. Following the approach in Foreningen af Arbejdsledere v Daddy’s Dance Hall [1988] IRLR 315 (ECJ), nor was it open to the employer to argue that overall the terms were more favourable to the employees than prior to the transfer. Further, the decisions were made under the 1981 version of the Regulations which did not include an express restriction on TUPE variations. As such they did not turn on the pre-2014 wording of the 2006 Regulations which included an express reference to restricting variations ‘in connection’ with the transfer. Rather the decisions were based on an interpretation of the Regulations so as to accord with the Acquired Rights Directive, having regard to the Daddy’s Dance Hall line of cases. 13.158  On the facts in Padiachy and Lister (falling within the third scenario identified at 13.156 above) the connection with the transfer was particularly close, both in terms of timing and because it was found in Padiachy that the covenants were seen as being required precisely because of the concern that the transfer might lead to employees wishing to leave. That left less room than might sometimes be the case for a distinction to be drawn between the reason for the variation and something merely connected to it. Indeed in Lister it was common ground that the transfer was the reason for the variation, and in Padiachy there was also no argument that a distinction could be drawn between the transferee acting by reason of the transfer and the higher level objective of protecting the legitimate business interests of the transferee. More fundamentally, however, the decisions also preceded the decision in Alemo-Herron v Parkwood Leisure Ltd (C-426/11) [2013] IRLR 744 (CJEU), with its emphasis on the implications of Article 16 Charter of Fundamental Rights of the European Union and achieving a fair balance between the rights of employees and employers. This provides strong support for the argument that the Regulations should not be construed so as to prevent employers taking reasonable steps to protect their legitimate business interests in response to potential instability brought about by a prospective transfer. We suggest that the approach in Credit Suisse is ripe for review in the light of that development, and indeed the better view is that the Regulations are not to be construed as meaning that a variation entered into solely or principally in order to make such provision as is considered necessary to protect the employer’s business (eg by introducing covenants or revised notice periods) is ‘by reason of’ the transfer, even if it is a reason connected with the transfer which entails the need for this. However at present there is a lack of clear authority fully exploring the scope of the restriction on variations, either under the Acquired Rights Directive or specifically in relation to the scope of the post2014 Regulations. As such, the position remains uncertain. In many cases the safer course will be for the transferee, even if able to agree changes consensually, to adopt a process of dismissal and re-engagement under a new contract (possibly accompanied by a binding settlement agreement) in order to effect the changes (see 13.170). 846

TUPE transfers 13.163

13.159 For a more detailed consideration of these issues, see Transfer of Undertakings, General Editor Jeremy Lewis (Thomson, Sweet & Maxwell) Chapter A3, Sections A3.15–A3.18 and A3.24.4. 5(g)(ii)  Exceptions where variations by reason of a TUPE transfer are permitted 13.160  In practice, in most cases the issue of whether the transfer was the sole or principal reason for the variation is likely to be decisive as to whether or not it is valid. If the transfer was the sole or principal reason, then in relation to employees employed in the part of the undertaking transferred (or who would have been but for being dismissed solely or principally by reason of the transfer), with the exception of cases of insolvency (see 13.161) the only variations expressly permitted under the Regulations are where: (a) the changes are not by reason of the transfer; or (b) the sole or principal reason for the variation is an economic, technical or organisational reason entailing a change in the workforce (which includes a change in workplace location – regulation 4(5A), inserted by the 2014 amendments), provided that the employer and employee agree the variation (regulation 4(5)(a)); or (c) the terms of the existing contract entitle the employer to make the variation (regulation 4(5)(b), inserted by the 2014 amendments); or (d) variations are made to terms which are incorporated from collective agreements, subject to certain conditions (regulation 4(5B), inserted by the 2014 amendments). 13.161  For the sake of completeness, where the transferor is subject to relevant insolvency proceedings, by virtue of regulation 9 variations to the contractual terms of employees assigned to the transferring business can be agreed with the employees’ appropriate representatives where: (a) the sole or principal reason for the variation is the transfer (and not a reason referred to in regulation 4(5) (a)); and (b) it is a variation designed to safeguard employment opportunities by ensuring the survival of the transferring undertaking or business (or part thereof). 13.162 The exception contained in regulation 4(5B) is unlikely to be of any practical assistance to most employers since restrictive covenants are seldom, if ever, contained in collective agreements. In practice the same will ordinarily apply to regulation 4(5)(b) since it is rare for a contract to provide for a unilateral right to vary the covenants, save for limited flexibility such as to require an employee to enter into restrictive covenants with other group entities (see 13.40). Where flexibility is needed, such as to cover new geographical areas, the usual approach is to use more general wording in the covenant itself, such as to refer to the employer’s place of business or premises where the ex-employee worked (see 12.132–12.135 and, in relation to unilateral variation clauses, 13.30–13.40). 13.163  Even where the introduction or variation of contract terms is permissible under the Regulations, it is important to remember that (save in insolvency 847

13.164  Introducing/varying restrictive covenants

situations) any purported variation must be binding based on ordinary contractual principles aside from the application of the Regulations (regulation 4(5C), inserted by the 2014 amendments). The circumstances in which contractual terms and conditions can be introduced or varied at common law is considered at 13.2–13.110 and 13.120–13.125. 5(g)(iii)  Changes made for economic, technical or organisational reasons entailing changes in the workforce 13.164  There is no statutory definition of what amounts to an ‘economic, technical or organisational reason entailing a change in the workforce’. It has been interpreted by the courts as requiring a change in the numbers of the workforce, or their job functions: Delabole Slate v Berriman [1985] IRLR 305 (CA); Crawford v Swinton Insurance Brokers Ltd [1990] ICR 85 (EAT), Gibson v Ciro Citterio (Menswear) Plc, Unreported 8  June 1998 (EAT), and London Metropolitan University v Sackur (EAT/0286/06). A sufficiently significant change in skills or qualifications needed might also suffice: RR Donnelly Global Solutions v Besagni [2014]  ICR  1008 (EAT). Prior to the 2014 amendments to the Regulations, a change in workplace location was held not to amount to a ‘change in the workforce’: RR  Donnelly. However, regulation 4(5A) now expressly includes ‘a change to the place where employees are employed by the employer to carry on the business of the employer or to carry out work of a particular kind by the employer’, ie a change in workplace location. 13.165  The economic, technical or organisational reason etc must also relate to the employer’s own workforce: Hynd v Armstrong [2007] IRLR 338 (Court of Session). On that basis a transferor could not make changes in anticipation of and by reason of the proposed transferee’s post-transfer plans. (For a critique of the decision in Hynd see Transfer of Undertakings, General Editor Jeremy Lewis (Thomson, Sweet & Maxwell) A4.8.) The reason must also be one concerning the running or conduct of the business in question, rather than to achieve a sale: Spaceright Europe Ltd v Baillavoine [2012] IRLR 111 (CA), (paragraph 47). It is therefore not sufficient that the changes are for the purpose of protecting the business if the reason for doing so is to make it suitable for a sale. However a distinction can be drawn between the proximate reason and the ultimate objective: Kavanagh and others v Crystal Palace FC Limited [2014] ICR 251 (CA). As such it would be arguable that restrictive covenants were introduced with the immediate aim of protecting the business in the hands of the transferor employer, even if the ultimate aim is to achieve a sale. It would though still be necessary to establish that this entailed changes in the workforce. 13.166  Ordinarily, it is unlikely that there will be a ‘change in the workforce’ when contractual variations are being made, as it is usually retention and not loss of employees that the transferee employer is seeking to achieve. Exceptionally, though, the defence may arguably be available as follows: (a) In some circumstances, it may be arguable that the introduction or variation of covenants is due to a change in job function or content. For example, 848

TUPE transfers 13.167

a transferred employee’s promotion may be by reason of the transfer, but if it involves taking on an expanded role (eg  with new managerial responsibilities), this could be enough to bring it within the economic, technical or organisational etc defence. However in order to qualify as a change in the workforce, any change in functions would need to be sufficiently substantial or significant (Miles v Insitu Cleaning Co Ltd UKEAT/0157/12/KN,  Unreported 2  October 2012). Indeed it has been suggested that it must amount to different employment: Osborne and 29 others v Capita Business Services Ltd and others UKEAT/0048/16/RN, 17 June 2016 at paragraphs 6, 10 and 13. Further, the change in the workforce must affect the claimant employee’s own position: Hazel & Anor v The Manchester College [2014] ICR 989. It would not be sufficient if, alongside redundancies elsewhere in the business, covenants were introduced into the contracts of the remaining employees who were not being made redundant with a view to better protecting the core remaining workforce. (b) Regulation 4(5A) may have the effect that it is possible to vary a covenant because of a change to the transferred employee’s workplace location. However, this is only likely to be of assistance in relation to a non-competition covenant defined by reference to geographic area, and then only in relation to changes to the relevant geographical scope of the covenant. It would not, in our view, justify broader variations to the area covenant eg to the duration. In practice the difficulty of satisfying criteria for the ‘economic, technical or organisational reason entailing a change in the workforce’ defence will usually mean that the key issue is whether it can be said that the changes were not solely or principally by reason of a TUPE transfer. 5(g)(iv)  Can changes to contract terms by reason of a TUPE transfer be agreed in the employee’s favour? 13.167 As noted above (at 13.157–13.158), in Credit Suisse First Boston (Europe) Ltd v Lister [1998]  IRLR  700 (CA), following the approach in Foreningen af Arbejdsledere v Daddy’s Dance Hall [1988] IRLR 315 (ECJ), it was held that it is not open to the employer to argue that, on an overall balance, the detrimental changes to an employment contract by reason of the transfer were offset by advantages to the employee. However, in Power v Regent Security Services Ltd [2007] IRLR 226, the EAT, in a decision later adopted by the Court of Appeal ([2008]  IRLR  66), ruled that the decisions in Daddy’s Dance Hall and the Credit Suisse cases merely establish that the employee has the option of relying on either a transferred term or the varied term in the new agreement and that it is for the employee, on a subjective basis, to decide for which term to elect. Power was a case involving a single amendment, consisting of the increase of the employee’s contractual retirement age from 60 to 65. Both the EAT (Elias J) and the Court of Appeal (Mummery LJ) held that Mr Power was entitled to elect to rely on the higher age agreed. He was therefore able to pursue his dismissal claim, which would otherwise have been statute barred as a result of his being beyond the ‘normal retiring age’ for the purposes of the Employment Rights 849

13.168  Introducing/varying restrictive covenants

Act 1996 as it applied at the time (section 109 Employment Rights Act 1996, which was repealed as from 1 October 2006 by the Employment Equality (Age) Regulations 2006 Schedule 8, paragraph 25). In contrast, no corresponding entitlement to elect between rights from the transferred contract and rights from the varied contract are afforded to the transferee employer (Elias J at paragraph 61). In short, the decisions in Power highlighted the weakness of the transferee employer’s position. 13.168  However the decision in Power v Regent Security Services Ltd [2007] IRLR 226 (EAT) was made in relation to the 1981 Regulations. Although when the case reached the Court of Appeal ([2008] IRLR 66, where the appeal was dismissed) Mummery LJ commented (obiter) in Power that the terms of the 2006 Regulations were ‘not materially different on the particular points raised on this appeal’ (paragraph 7), the 1981 Regulations did not contain the express prohibition on variations by reason of (or connected to) the transfer: that was only introduced by the 2006 Regulations (the ‘transfer-connected’ prohibition being subsequently removed by the 2014 amendments to the Regulations). Despite this, government guidance issued by the then Department for Business Innovation and Skills in January 2014, suggested that it continues to be the case under the 2006 Regulations that a variation is permissible if the changes are entirely positive for the employee, on the basis that the underlying purpose of the Regulations is employee protection. A similar view was expressed (obiter) by the EAT in Xerox Business Services Philippines Inc Ltd v Zeb UKEAT/0121/16/DM 24 July 2017 (at paragraph 31). We suggest that the better view is that in the light of the express provision in regulation 4(4), the approach in Power would not now be followed. The statutory language is clear in rendering void all variations by reason of a transfer subject to the limited express exceptions. The reasoning in Alemo-Herron v Parkwood Leisure Ltd (C-426/11) [2013] IRLR 744 (CJEU) (see 13.139) is also relevant here in respect of its reference to a fair balance between the interests of employer and employee. If a variation is only voidable at the employee’s election, this would lead to considerable uncertainty for employers as to the precise contractual position of the parties. This is particularly true where the relevant change is to a restrictive covenant and the ‘election’ is deferred until the employee leaves, which could be several years later. Further, if the restrictions did not apply to variations in favour of the employee, that would leave an entirely free hand for an outgoing contractor to agree ‘poison pill’ provisions with the workforce, which might include agreeing a release from all covenants with the workforce, with the aim of prejudicing the competitor transferee to whom the contract was lost. Given that scenario, it was (at least) permissible for the 2006 Regulations to provide that the restrictions on variations apply to variations generally, without any exception for variations in favour of the employee. 5(g)(v) What is the impact of pre-TUPE transfer dismissals on the employer's scope to revise contract terms? 13.169  Where there has been a dismissal, whether prior to or after the transfer, the transferee is free to negotiate and agree new terms with the dismissed 850

TUPE transfers 13.170

employee: British Fuels Ltd v Meade; Baxendale and Wilson v St Helens Borough Council [1998]  IRLR  706 (HL). The dismissal is still effective in law: see Hazel & Anor v The Manchester College [2014] ICR 989 (CA), Lord Justice Underhill at paragraph  28). Liability for the dismissal passes to the transferee as a result of regulation 4(3) (which has the effect that an employee who is dismissed in breach of regulation 7(1) is deemed to have been dismissed by, and liability automatically transfers to, the transferee). However, the transferee who re-engages a dismissed employee is under no obligation to honour the pre-dismissal terms and conditions of employment. One exception to this would be where an employment tribunal makes an order for the employee to be re-instated on his original contractual terms (albeit ultimately in the event of a failure to comply with an order for re-instatement or re-engagement on different terms, the employee’s remedy is an additional award of compensation between 26 and 52 weeks’ pay rather than specific enforcement of the original contract). The employment tribunal’s power to order re-instatement or re-engagement – however infrequently it is used – can also be brought to bear where the transferee has effected the dismissal, eg  as part of a programme of dismissals and re-engagement in order to introduce or vary contractual terms. In Hazel, the two claimant employees had been dismissed by the transferee and offered new terms and conditions which included a pay cut. They accepted the new terms save for the reduced rates of pay, continued to work under protest and brought successful claims for unfair dismissal. The Court of Appeal upheld the Employment Tribunal’s decision to order re-engagement of the employees with effect from the date of dismissal but not on their original terms in their entirety: only their original rates of pay were preserved (albeit frozen, or ‘redcircled’, until their colleagues’ pay caught up over the years through the usual pay reviews). As they had clearly agreed to the other changes made to their contracts, the court felt it was appropriate to hold them to those revised terms. 13.170  Given the lack of clear authority as to the scope of the restriction on contractual variations solely or principally by reason of a transfer, and the narrow scope of the exceptions, usually the only course open to give a transferee any certainty that restrictive covenants will apply is to proceed by way of dismissal and re-engagement. This avoids the risk that what might at the time have been a variation to which employees were willing to agree, could later be challenged under the Regulations when the employer seeks to rely on the new/varied posttermination covenant. Typically, at least in the context of a sale (rather than where the transferee has no direct contractual relationship with the transferor, as may be the case upon the loss of a contract on a service provision change), the transferee will seek to obtain financial cover. That may be, for example, either through a reduction in (or deferral of part of) the purchase price or an indemnity against the risk of statutory claims. In addition, as part of the process of dismissal and re-engagement, claims arising from dismissal may be settled by entering into a binding settlement agreement: Solectron Scotland Ltd v Roper [2004]  IRLR  4 (EAT). Usually, both the transferor and the transferee will want a full waiver of claims and the ability to enforce that waiver. For that reason, extra care must be taken when identifying the parties to the settlement agreement and defining its scope. We recommend that tripartite settlement agreements are entered into by 851

13.171  Introducing/varying restrictive covenants

the transferor, transferee and the relevant employee. The agreement should clearly state which parties are released from which claims, and who is able to enforce the agreement pursuant to the Contracts (Rights of Third Parties) Act 1999. For examples of cases where a non-party to a settlement agreement in a TUPE transfer situation found themselves without any protection see Thompson v Walton Car Delivery and BRS  Automotive Ltd [1997]  IRLR  343 (EAT) and Tamang v Act Security Ltd UKEAT/0046/12, 31 August 2012. In cases where the dismissal and re-engagement is not consensual, clearly the benefit of certainty in insisting on this course needs to be weighed against the risks of a potential unfair dismissal claim. Further, particularly where the employee has sufficient qualifying service (currently two years), it is not an option likely to promote good industrial relations or staff morale. In addition, if the proposal to dismiss and re-engage (in order to effect a change in contractual terms) applies to 20 or more employees at one establishment in a 90-day period, it would also be necessary to comply with collective redundancy obligations, relating to the provision of information and consultation, under section 188 Trade Union and Labour Relations (Consolidation) Act 1992 – see further at 13.66–13.70 and the Appendix to this chapter. 5(g)(vi) What is the effect of an invalid variation on the contract as a whole? 13.171  In the event that a variation is found to be invalid, a key issue may then arise as to whether the employee is required to repay or relinquish any consideration received for the invalid variation. Tantalisingly, in Credit Suisse First Boston (Europe) Ltd v Lister [1998] IRLR 700 (see 13.157–13.158) the Court of Appeal recognised that difficult questions arose but then gave no assistance on possible answers. In Credit Suisse First Boston (Europe) Ltd v Padiachy [1998] IRLR 504 (QB), albeit a first instance decision, the judge simply indicated that he could see no basis on which Mr Padiachy could retain the consideration received for the covenants. Similarly, in Power v Regent Security Services Ltd [2007] IRLR 226 (EAT) Elias J  indicated (at paragraph  53) that there is a ‘powerful argument’ that the employee would have to give credit for the benefits derived under the contract on which he is relying. However, again that was not an issue in the case. Where the consideration was paid specifically in return for changes which are held to be invalid, in principle there would be an entitlement to repayment on the basis of a total failure of consideration, subject to a defence of change of position or possibly arguments based on estoppel, given the failure of the basis for the payment: see Chitty on Contracts (32nd edition), Volume 1, Chapter 13 (at paragraphs 29-057 to 29-061). The position is more complicated where there have been other changes, some of which are not by reason of the transfer, in which case it might be that there has not been a total failure of consideration. 5(g)(vii) Summary 13.172  Pending clarification from the courts, employment lawyers are called on to be creative and to find methods to effect variations not involving the draconian measure of dismissal. The optimum course remains finding a reason or objective for the introduction or variation of covenants that is not by reason of the transfer, 852

TUPE transfers 13.173

or so closely connected with it that it can properly be regarded as by reason of the transfer. However, in the context of restrictive covenants that will often be impractical. On the contrary, the transfer is often precisely the reason for the variation, and the two Credit Suisse cases referred to at 13.157–13.158 are good examples. The changes made to the Regulations in 2014 offer the hope of a narrower construction to the restriction on variations so that a transferee is not prevented from agreeing changes considered necessary to protect the business. We consider that there are good arguments to support such an approach. However, given the absence of specific authority the position remains uncertain. At least where agreement can be reached to such a course, the safest approach will be to proceed to effect the variation by way of dismissal and re-engagement, together with entry into a settlement agreement, subject to the need to comply with collective redundancy consultation if the proposed dismissal and re-engagement applies to 20 or more employees at one establishment within a 90-day period (see 13.170). Where the employer is a company, one other alternative route, which in our view has prospects of succeeding, is what might be described as the ‘shareholder route’. Under this option the relevant employees are made shareholders post-sale and enter into new covenants in their capacity as shareholders rather than in their capacity as employees. The number of shares owned by the employees needs to be more than nominal to support the argument that the shareholder covenants are genuine and not simply a device to circumvent the Regulations. However, if the employees are sufficiently important to the business being acquired, the employer’s investment will be justified. While this approach is by no means watertight, for the moment it is certainly an option worthy of consideration. See further on the position of employer-vendors at 10.45–10.54, 11.78–11.90 and 12.59.

5(h) Dismissal 13.173  Pursuant to regulation 7(1), the dismissal of an employee of the transferor or transferee with sufficient continuous service (currently two years) will be automatically unfair where the sole or principal reason for the dismissal is the transfer. The old restriction in regulation 7(1) on dismissals for ‘a reason connected with the transfer’ was removed by the 2014 amendments to the Regulations. The same issue as discussed above (at 13.150–13.159), arises as to the scope of the revised restriction. The question may arise where the employer adopts a process of dismissal and re-engagement to introduce covenants considered necessary to protect the business (see 13.169–13.170). The employer may now seek to argue that even if the need for the variation arises from the circumstances of the transfer, the changes are by reason of the need to protect legitimate business interests, such as in relation to customer connections, rather than being solely or principally by reason of the transfer. If however that argument fails, then other than where the transfer takes place during an insolvency liquidation process (within regulation 8(7)), the only exception to the automatically unfair dismissal principle is regulation 7(2). This provides, in essence, that dismissals for economic, technical or organisational reasons entailing changes in the workforce will be potentially fair, either on the grounds of redundancy or some other substantial reason (though this leaves open the question of whether the dismissal 853

13.174  Introducing/varying restrictive covenants

is in fact fair under section 98 Employment Rights Act 1996). Regulation 7(1) applies regardless of whether the dismissal takes place before or after the transfer or whether the employee is assigned to the relevant business that is transferring (regulation 7(4)). Employees are also protected under regulation 7(1) where they resign in response to a repudiatory breach of contract (regulation 4(11)) or (in relation only to employees assigned to the relevant business transferred) in response to a substantial change in working conditions to the employee’s material detriment (regulation 4(9)). 13.174  Accordingly, where the introduction or variation of covenants is by reason of the transfer, the combined effect of regulations 4(1) (which provides for the automatic transfer of contractual rights to the transferee), 7(1) and 18 (the restriction on contracting out of the Regulations) is to make the dismissal of an employee with sufficient continuous service to bring an unfair dismissal claim (currently two years) an extremely risky option unless proceeding by agreement with a view to re-engaging on revised terms, and entering into a settlement agreement. It is conceivable that the exception in regulation 7(2) might apply where the restrictive covenants are in response to a sufficiently substantial change in job functions or a change in work location (see 13.164–13.166). However it is otherwise unlikely to do so because the introduction of restrictive covenants would not usually involve a change in the workforce as that phrase has been interpreted by the courts ie in terms of job numbers or possibly job functions or content or, following the 2014 amendments to the Regulations, a change in workplace location (new regulation 7(3A)). See Delabole Slate Ltd v Berriman [1985] IRLR 305 (CA); Crawford v Swinton Insurance Brokers Ltd [1990]  ICR  85 (EAT), Gibson v Ciro Citterio (Menswear) Plc, Unreported 8  June 1998 (EAT), and London Metropolitan University v Sackur (EAT/0286/06) and the other cases referred to at 13.164–13.166. Just as with variations to contract terms, there must be a distinct, compelling reason or objective for the dismissal other than the transfer itself (Enterprise Managed Services Ltd v Dance & others [2011] UKEAT/0200/11; Boor v Minisstre de la Fonction Publique et de la Reforme Administrative (C-425/02) [2004] ECR I-10823 (CJEU) – see 13.151; and the mere passage of time between the TUPE transfer and the dismissal, whilst evidentially relevant, will not of itself sever the link between the two (see 13.154).

5(i)  Service provision changes and involuntary TUPE transfers 13.175 Regulation 3(1)(b) deals with the circumstances in which a ‘service provision change’ may amount to a relevant transfer. The Regulations apply to service provision changes where, before the change, there was an organised grouping of employees (which must be situated in Great Britain and could be comprised of a single employee: Rynda (UK) Ltd v Rhijnsburger [2015] ICR 1300 (CA)), which has as its principal purpose the carrying out of the activities concerned on behalf of the client to which the service is provided. To be an ‘organised grouping’ it is not enough that, by chance, employees spend most, or all, of their time on a particular client’s services: the employees must intentionally/deliberately be organised by reference to that particular client’s services, and 854

TUPE transfers 13.177

readily identifiable as members of the relevant client team (Eddie Stobart Ltd v Moreman and others [2012] IRLR 356 (EAT), approved by the Court of Appeal in Rynda; see also Amaryllis Ltd v  McLeod UKEAT/0273/25 and Tees Esk and Wear Valleys NHS Foundation Trust v Harland [2017] IRLR 486 (EAT)). If (a) there is such an organised grouping with the requisite principal purpose, (b) following the service provision change fundamentally the same activities are carried out by the original service provider/client (regulation 3(2A)), (c) immediately before the service provision change the client intends that the activities will be carried out by the transferee other than in connection with a single specific event or task of short-term duration (regulation 3(3)(a)(ii)), and (d) the activities concerned do not consist wholly or mainly of the supply of goods for the client’s use (regulation 3(3)(b)), then this will be a relevant transfer. 13.176  Essentially, there is likely to be a service provision change where a particular activity or service is outsourced by a client for the first time, on a second generation outsourcing, or where activities/services are taken back in-house by the client though complications arise where the nature of the services changes on the transfer or the service is fragmented between more than one service provider: see for example (1) London Care Ltd (2) Carewatch Care Services Ltd and others v Henry and others UKEAT/10219/17/DA, UKEAT 10220/17/DA 21 February 2018. The consequences of the Regulations, including the restrictions on contractual variations and dismissals, apply equally to business transfers under regulation 3(1)(a) and service provision changes under regulation 3(1)(b). However, a feature of the service provision change type of transfer, other than where it relates to the initial outsourcing or taking a service back in-house, is to make it more likely that the Regulations will apply in the context of the loss of a contract to a rival service provider (though regulation 3(1)(a) types of transfer might also apply in the context of an involuntary transfer to a competitor). 13.177  As a consequence, where the Regulations apply any employees who have effectively been assigned to servicing the client will move to a competitor. As illustrated by the scenario in Spotless Facility Services (Uxbridge) Ltd v Jones and others [2012] EWHC 4391 (QB) (which is considered at 13.146(d)(iii)), whilst the former employees will have transferred to the competitor on their existing terms and conditions, including any restrictive covenants, the contractual rights under those covenants will transfer to the transferee, and the rights and liabilities of the transferor under the contract will be extinguished: Stirling District Council v Allan [1995] IRLR 301 (CS). A non-competition covenant in the employment contract originally entered into with the transferor employer would therefore not prevent the employee taking up employment with the transferee competitor, even where the covenant was valid due to the need to protect the transferor’s legitimate business interests. Irrespective of whether the transferor employer continues to have a need for protection of its customer connections, staff stability or confidential information, the Regulations have the effect that all the rights and liabilities under or in connection with the contract transfer. This applies equally to those rights designed to protect parts of the business that do not transfer. Subject to the possible arguments considered below, even if the covenants are drafted in such a way as to encompass areas of the business other than that which has transferred out, that will 855

13.178  Introducing/varying restrictive covenants

not assist the transferor in relation to employees who transfer (or would have done but for being dismissed by reason of the transfer), since the rights and liabilities under the contract transfer to the transferee employer. 13.178 What, if anything, can the ‘passive transferor’ employer do to protect its remaining business against ex-employees who have been transferred out to a competitor? Might the transferor include a provision within all its contracts of employment (or in separate contracts) that in the event of a service provision change, and as soon as that transfer takes effect, the departing employee will be deemed to have entered into new covenants with the ex-employer. The underlying idea would be for the covenants to be drafted in such a way as to prevent the departing employee from dealing with the employee’s retained customers (or staff) for a specified period post the service provision change. However, in spite of the manifest intention of the provision, these rights, being in connection with the employment, would also transfer under regulation 4. It is no answer that the rights would be contingent only (see Martin v South Bank University (C-4/01) [2003] ECR I-12859; [2004] ICR 1234 ECJ; Baker v British Gas Services (Commercial) Limited [2017] EWHC 2302 (QB)). Equally, even if not contained in the employment contract, the provisions would be likely to be regarded as in connection with it, and as such caught by the automatic transfer provisions: see Bernadone v Pall Mall Services Group [2001] ICR 197 (CA). A similar point might be made if the covenants are drafted so as to provide for the transferor to be protected as a third party to the contract post-transfer. Here the idea would be to enable the transferor to benefit in that capacity, rather than as the employer. However, in addition to the same difficulty in relation to contingent rights being caught by the automatic transfer provisions, here there would be the additional obstacle arising from the transferor not being a party to the contract. Whereas under the Contracts (Rights of Third Parties) Act 1999 it is generally the case that a third party may enforce a contractual term if the contract expressly provides for this, under section 6 of that Act there is an exception so far as concerns enforcement by any third party of a contract of employment against an employee. An alternative approach, similar to that suggested at 13.172 may be available where employees are given a shareholding in the employer entity or group. Relevant covenants might be contained in the shareholder agreement, possibly modelled on those in the contract of employment. Even then there would still be the risk of it being found that in substance the covenants amounted to rights or liabilities in connection with the contract of employment. Ultimately the difficulty in finding a route to preserve the transferor’s protection in such a case is the inevitable consequence of the automatic transfer of rights and liabilities pursuant to, and the restriction on contracting out of, the Regulations. 13.179  Some different arguments may apply in relation to how the provisions of the Regulations fit with the need for protection of confidential information. The transferor will be unable to rely on a contractual duty of confidence contained in the contract of employees who transfer, irrespective of whether the confidential information relates to the part of the business that transfers. The same would apply if the duty was set out in a separate agreement given that it is not only rights and liabilities under the contract of employment, but also 856

TUPE transfers 13.181

those in connection with it that transfer: Bernadone v Pall Mall Services Group Limited [2001] ICR 197 (CA). However, can the transferor employer still rely on the equitable duty of confidence? On one view that might seem problematic given that the rights and liabilities in connection with the contract of employment may include non-contractual rights such as claims in tort (Bernadone). But we suggest that the better view is that there would continue to be an equitable duty to the transferor at least in relation to information concerning the parts of the business that have not transferred. Any other conclusion would be wholly inconsistent with the principle emphasised in Alemo-Herron v Parkwood Leisure Ltd (C-426/11) [2013] IRLR 744 (CJEU) as to the need for a fair balance between the interests of employer and employees. It would also be in tension with the principles underlying EU Directive 2016/943, which requires Member States to provide remedies to prevent unlawful acquisition, use or disclosure of their trade secrets. Although there is some tension with the reasoning in Bernadone, we suggest that this may be reconciled with the wording of the Regulations and the Acquired Rights Directive on the basis that the obligation not to misuse the confidential information arises from it having been imparted in circumstances of confidence which would arise irrespective of the employment contract. 13.180  In some instances the ‘loss’ of the employees may be welcome, notably where the employees assigned to the business were underperforming (which may in turn have led to the loss of a client). In others, however, it may be a serious blow, and the fact that the employees have transferred by operation of law to a rival may pose a serious competitive threat to the transferor employer. In certain circumstances, it may be possible to transfer key employees to a part of the business that is not going to be transferred, although there is an unresolved controversy as to whether a re-assignment of employees which is by reason of the transfer (and is not merely a temporary assignment) is effective: see Royal Mail Group Ltd v Communication Workers Union [2009] ICR 357 (EAT) at paragraph 120 (and for a fuller consideration of this issue see Transfer of Undertakings, General Editor Jeremy Lewis (Thomson, Sweet & Maxwell), Section A3.5.8). In practice the situation may in some cases be addressed by agreeing with the incoming service provider that particular employees are not ‘in scope’ to transfer (although whether that is, in fact, the case is a matter of law rather than a matter of the parties’ choice or agreement).

5(j)  Objections to the TUPE transfer and other pre-transfer terminations 5(j)(i)  Pre-TUPE transfer termination other than by objection to a transfer 13.181  As noted above (13.169–13.170), where an employee’s employment ends prior to the transfer, other than where the dismissal is by reason of the transfer (and not for an economic, technical or organisational reason entailing changes in the workforce) there is no transfer of rights and liabilities under the Regulations. That raises a potential issue in relation to the enforcement of restrictive covenants given that the benefit of the covenants does not pass under the Regulations to the 857

13.182  Introducing/varying restrictive covenants

transferee employer. One possibility, where there is a co-operative relationship between transferor and transferee, would be for the legal and equitable benefit of the covenants to be assigned to the transferee. In principle an assignment would be permissible as this would not simply be an assignment of a bare cause of action but rather an assignment of a benefit in which the transferee has a very real interest, namely protection of the business that he is to acquire: see Trendtex Trading Corp v Credit Suisse [1982] AC 679 (HL). 13.182  Whilst it is preferable, in the interests of certainty, to make express provision for assignment of the benefit of the covenant, at least in the context of a business sale (in contrast to a service provision change) it may be possible even without this to rely upon an implied assignment of the benefit of the covenants. In Jacoby v Whitmore (1883) 49 LT 335 the Court of Appeal ruled that on the sale of a business the restrictive covenant in the employee’s contract formed part of the goodwill bought by the purchaser (Mr Jacoby) and could be enforced by him even in the absence of an express assignment of the covenant in the sale agreement. See also Townsend v Jarman (1900) 2 Ch 698 (Ch) which supports the principle of implied assignment of restrictive covenants in the absence of an express term to the contrary, provided that the covenant is capable of being construed as applying to the business in the purchaser’s hands. 13.183 The above decisions were applied in a modern setting in Dunwoody Sports Marketing v Prescott [2007] 1 WLR  2343 (CA). Here injunctive relief had originally been granted in favour of a partnership to enforce covenants contained in a partnership agreement against Mr Prescott, who was a former partner. Shortly after the initial without notice injunction was obtained, the assets of the partnership were transferred to a company. After the claimant partnership had obtained a permanent injunction, it obtained a without notice order for the transferee company to be substituted for the partnership. On an appeal against that order, the issue arose (albeit, because the covenants had expired, only relevant to the cross-undertaking in damages) as to whether the transferee company was entitled to the benefit of the covenants despite not having been a party to the partnership agreement. The court rejected the argument in relation to the covenant concerning solicitation of customers of the partnership, since it could not be applied to the company without re-writing the covenant (because, amongst other reasons, it referred to customers of the partnership whereas it had none after the date of the transfer). However, the court upheld the argument in relation to the injunction in favour of the company regarding the two year restriction against soliciting or employing any employees of the partnership as at the date of Mr Prescott’s resignation from the partnership, since there was no difficulty in applying the wording of the provision to the transferee. 13.184  Alternatively, the transferor may seek to enforce the covenants, whether because of some commercial interest or contractual obligation to a purchaser of the business to do so. Clearly this may be of little practical relevance to the transferor in a context where the benefit of a contract has been lost to a competitor. But in other contexts, such as business sales or intra-group transfers, it may be a valuable option. Indeed the sale transaction might contain express stipulations 858

TUPE transfers 13.186

requiring the transferor to take steps to enforce the covenants and/or indemnities consequential on failure to do so. As noted by Cox J in Towry EJ Ltd v Bennett [2012] EWHC 224 (QB), since the validity of the covenants is to be determined at the time of the transfer, it cannot be affected by the fact the transferor may be said to have no continuing legitimate interest in enforcing them after the transfer (in respect of employees whose employment terminated prior to the transfer). It might be relevant to whether the discretion should be exercised to enforce the covenants, though that did not arise in Towry which concerned a claim for damages for breach of contract in respect of the covenants rather than for injunctive relief. 5(j)(ii)  Objection to a TUPE transfer 13.185  Some more difficult issues arise in the particular case of an employee who exercises the right under regulation 4(7) to object to a transfer. Usually this is done because the employee wants to use the opportunity to join a competitor organisation. In that situation the employee’s contract is terminated by operation of law by virtue of the transfer and none of the ‘rights, powers duties and liabilities under or in connection with’ the contract transfer to the transferee (regulations 4(7) and 4(8)). As a consequence, on the wording of the Regulations it would seem that the transferee who has purchased a business is not only deprived of the services of the objecting employee but also has no means of protecting the business he has acquired from competition by that individual. Generally, the transferor also loses the benefit of being able to place the departing employee on garden leave for the duration of his notice period. For the benefits to the employer of being able to place the employee on garden leave see 5.123–5.128. Since it is a fundamental principle that an employee is free to choose for whom he works, the fact that the Regulations release the objecting employee from his notice period, during which he might otherwise be required to work for the transferee with whom he did not contract, is unsurprising. However, it is a quite different proposition that the objecting employee should be able to undermine the goodwill of a business for which the transferee has paid. 13.186  One untested issue is whether, despite an objection to a transfer, there might still be either an implied or express assignment of the transferor’s rights in respect of the covenant to the transferee. As noted in 13.181–13.184, the better view in relation to an employee who is dismissed prior to the transfer (other than by reason of the transfer) is that there can still be an assignment of the transferor’s rights under the covenant to the transferee. However where there is an objection to the transfer, the Regulations provide not only that the employment ends but also that the contract is terminated (regulation 4(8)). At least on a literal construction, the effect would be that any otherwise enforceable covenants which apply upon the termination of employment would not be available. That approach may be explained on the basis that the right of objection is intended to preserve the common law position, and at common law a change of employer would amount to a repudiatory breach of contract: see Humphreys v Oxford University [2000]  ICR  405 (CA) Potter LJ at pages 409–410. The authorities 859

13.187  Introducing/varying restrictive covenants

considered above (at 13.183–13.184) do not directly assist. The Regulations were not considered in Dunwoody Sports Marketing v Prescott [2007] 1 WLR 2343 (CA) (since Mr Prescott was a former partner rather than an employee). The decisions in Jacoby v Whitmore (1883) 49 LT 335 (CA) and Townsend v Jarman (1900) 2 Ch 698 (Ch) both precede the Regulations in time and are arguably directly contrary to the express terms of the statutory instrument which provides that the transfer shall not operate to transfer rights and liabilities in the event of an objection to transfer. 13.187  As against that, it may be questioned why an employee who objects to a transfer should be in a better position than one whose contract was lawfully terminated in advance of the transfer. The underlying principle of the Regulations is to protect the employees where the business in which they work is being transferred, not to give them a windfall advantage to the detriment of the seller or the purchaser. In the circumstances, we consider that there are grounds on which the courts could, and arguably should, interpret the Regulations purposively to protect the goodwill being acquired and to permit the transferee to enforce covenants against the objecting employee. Again, support for this proposition can also be gleaned from the CJEU’s reasoning in Alemo-Herron v Parkwood Leisure (C-426/11) [2013] IRLR 744 (see 13.139), to the effect that the Acquired Rights Directive is to be construed not only so as to safeguard employee rights, but also so as not to upset the fair balance between employer and employee or unduly infringe the employer’s freedom to conduct his business. That may be regarded as a somewhat strained construction of regulation 4(8), which refers not merely to termination of the employment but to termination of the contract of employment. But it may be supported by a purposive construction; clearer language would be expected if a provision designed to prevent the automatic consequences of a transfer was to have the sweeping effect of removing post-termination protection for which the employee had contracted. Alternatively, it may be arguable that the objective intention of the parties was that (in a similar way to arbitration clauses) the obligation would subsist post-termination of the contract, at least other than in cases of repudiatory breach. 13.188  It remains to be seen whether a court can be persuaded to interpret the Regulations so as to permit the express or implied assignment of goodwill to take precedence over the express words of regulation 4(8). In New ISG  Ltd v Vernon [2008] IRLR 115 (Ch), the only reported case in which, as far as we are aware, the argument of implied assignment of restrictive covenants has been run in recent times in relation to an employee, the court declined to uphold the covenants. However, the court did so on the basis that the goodwill remained vested in the vendor due to non-payment of the full purchase price. It is, therefore, unsurprising that the court gave short shrift to an argument of implied assignment and New ISG therefore advances matters little. But for the same reasons as set out at 13.187 as to the construction of the effect of the right to object, there are good arguments to support that approach. Clearly though it is preferable from the transferee’s perspective for the sale agreement to provide expressly for assignment of the benefit of the covenants. 860

TUPE transfers 13.189

13.189  It is unfortunate that in preserving employees’ rights to object to a change of employer, the Regulations have, possibly inadvertently, left open arguments that the effect has been to terminate all post-employment obligations, which would grant those employees a significant potential windfall in terms of facilitating their release from otherwise legitimate restrictive covenants. Until such time as the dilemma is resolved we can expect to see both employees and poaching employers seeking to use the unresolved issues to their advantage.

861

APPENDIX TO CHAPTER 13

Guidelines on introducing covenants during employment A.1 Employers contemplating introducing covenants during the currency of employment frequently seek advice as to how to do so. The purpose of these guidelines is to assist the adviser and the employer in formulating a strategy. The guidelines apply equally where the employer is seeking to vary existing covenants. Because of the specific problems associated with introducing covenants in the context of a transfer of a business to which the Transfer of Undertakings (Protection of ­Employment) Regulations 2006 applies, these guidelines do not cover such a situation. For the purpose of the guidelines it is assumed that a TUPE transfer has neither happened nor is contemplated.

1. DECIDING WHETHER TO INTRODUCE COVENANTS A.2  The first step the adviser should take is to assist the employer in deciding whether the potential benefits to be gained justify the cost and disruption of the exercise. Reaching this decision involves weighing up a number of factors and seeing where the balance falls. The following points need to be considered: (a) Is the employer introducing covenants for the first time, or seeking to vary existing covenants? (b) Is the employer seeking to vary existing covenants because the existing ones are only on the borderline of being enforceable? What is the likelihood of an (ex)-employee using the fact that the employer is willing to agree narrower covenants as recognition that the wider covenants are unenforceable? (c) What is the employer seeking protection against? (d) Why is the employer seeking protection and what are the likely consequences of not obtaining it in terms of impact on the employer’s business? (This will be key in justifying any subsequent dismissals of those who refuse to accept the new covenants.) (e) The grades and number of employees from whom covenants would be required. (f) The likelihood of covenants which will achieve the employer’s aims being enforceable. (g) What incentive (consideration), if any, the employer is willing/likely to need to offer to obtain consent and the likely level of consents? 862

Formulating a strategy for introducing/varying covenants A.6

(h) Whether any employees, and particularly key ones, are likely to argue that the introduction of the covenants is a repudiatory breach of the contract, accept the breach and leave? (i) How practical it will be to continue to employ employees who refuse to give their consent (ie run a two-tier system with some employees on the old terms and some on the new). (j) The cost of any possible dismissals; costs include direct costs, namely notice payments and possible compensation awarded by the employment tribunal, and indirect costs, such as the likely cost of the employee who refuses to consent being dismissed and doing exactly what the employer is seeking to prevent, namely competing with the employer, and the potential adverse impact of dismissals on employee relations (including the staff who do accept the new terms). A.3 With the answers to these questions the employer will be able to decide whether the exercise is likely to be worthwhile.

2. FORMULATING A STRATEGY FOR INTRODUCING/VARYING COVENANTS A.4  Where the employer decides to go ahead with the introduction/variation of covenants, the next step is for the adviser to draft appropriate covenants and to help the employer determine his strategy. The more employees involved in the exercise, the greater the degree of precision required, but in every case the strategy will need to cover the following points: (a) When the matter is to be put to the employees. (b) How the matter is to be put to the employees. (c) What arrangements there are to be for consultation/discussion between the employees and management. (d) The timescale for acceptance. (e) How employees who do not accept are to be dealt with. (f) How employees who do not respond are to be dealt with. A.5  The following points should be borne in mind in settling the strategy.

2(a) Timing A.6  Aside from any commercial factors that may be driving the need to introduce/ vary covenants timing is not usually of crucial importance. However, employers should avoid popular holiday periods and should ensure that dates specified as the deadline for acceptances do not fall on public holidays. Although not directly 863

A.7  Guidelines on introducing covenants during employment

a timing issue, care must also be taken to ensure that any employees who are on extended leave (for example maternity or sickness absence) are not forgotten and are given sufficient time to respond to any proposals. A.7  Where the collective consultation obligations under section 188 Trade Union and Labour Relations (Consolidation) Act 1992 apply, the statutory timetable set out in that section must be followed as a minimum: see 2(g) below.

2(b) Method A.8  The process adopted by the employer may well be key to the success of the exercise. In all circumstances, to avoid successful claims of breach of contract or constructive dismissal appropriate notifications and opportunities for discussion with employees should form part of the process of seeking consent. For that reason it is important that, at the outset, the employer considers and plans carefully what his strategy will be, although, as already pointed out, he should where possible avoid taking early decisions about possible dismissals to avoid the triggering of formal consultation requirements (see 13.66–13.70). A.9  As a first step, the employer must confirm whether the introduction/variation of the covenants is subject to any contractually agreed processes for effecting changes to terms and conditions. These may include agreements entered into with staff councils or other internal bodies representing the employees’ interests or, in some industries, consultation processes contained in collective agreements that have been negotiated with a recognised trade union. A.10  Except in cases of real urgency or where it is necessary to gain leverage in discussions, generally the process should be commenced with a light touch. The employer should therefore provide the employee with the text of the covenants together with an explanation as to why their introduction is necessary. Provided there are cogent reasons for the introduction of the covenants (and if there are not, why is the employer seeking to introduce them?) the employer is welladvised to set out those reasons in detail. It is those reasons he will have to rely on before the employment tribunal if any unfair dismissal claims are presented, and/or the courts/employment tribunals in relation to any claims for breach of contract. Indications, including veiled indications, that dismissal will result if the employee does not accept should be avoided. A.11 The employer should give the employee a reasonable opportunity to consider the proposal and a means for the employee to raise any queries. The employer should also consider, and be seen to consider, carefully any suggestions for alterations made by employees and, where commercially possible, accept the employees’ suggestions. A.12  To avoid future arguments, and especially in cases where it is particularly important that the covenants are in place: (a) the express written consent of the employee should be sought; and (b) specific consideration should be ascribed to 864

Formulating a strategy for introducing/varying covenants A.15

the new/varied covenants, which ideally should take the form of a conditional cash payment (perhaps a salary increase) or other benefits to which the employee does not have a pre-existing entitlement or expectation (see 13.82–13.102). The employer should also consider making a capped contribution to fees to enable the employees to take independent legal advice (see 13.25 for the benefits this can bring the employer). In certain circumstances, it may be appropriate to consider appointing an independent firm of lawyers to advise the employees as a group, which may include preparing a note on the new covenants, making a presentation to the employees about the changes and preparing ‘Q & A’ documents which deal with any employee queries made. A.13  Where dismissals are contemplated, eg because the employer feels that it is untenable for the business to continue to employ individuals without the benefit of the covenants, or to operate a two-tiered system with some employees on the old contracts and some on the new ones, then the employer must comply with any individual regimes (including any contractually agreed internal dismissal processes and, where appropriate, the ACAS Code of Practice 1: Disciplinary and Grievance Procedures (2015), as supplemented by the (non-statutory) guidance set out in Discipline and Grievances at work: The ACAS guide), and the collective consultation regimes: see 13.80 and 13.65–13.70.

2(c) Consultation/discussion A.14  The employer should discuss the restrictive covenants with the employee and listen, with an open mind, to any representations the employee may make. To do so will indicate that the employer has acted fairly and reasonably. In RS  Components Ltd v lrwin [1973] 1 All ER  41 (NIRC) the fact that such an opportunity was afforded to Mr Irwin was a point which, in the opinion of the Tribunal, was evidence that Mr Irwin had been treated fairly. For a fuller discussion of RS Components see 13.75–13.76.

2(d) Timescale for acceptance A.15  This will be dictated by the degree of urgency the employer attaches to the exercise and whether he is proposing to dismiss employees who refuse to consent but offer them the opportunity of continued employment on revised terms. In cases where the collective consultation regime is not engaged, an employer who is proposing this course, and wishes to do so immediately, will be unable to introduce the revised terms until the expiry, in each case, of that employee’s notice period (payments in lieu of notice could, of course, be made, but may be less reasonable). In all other cases, that is where there is no intention to dismiss or the employer is undecided, the employer should set a reasonable time-scale. The optimum is usually around three to four weeks, which is sufficient time to allow the employee to consider the proposal, take advice if he chooses, and discuss the position with the employer, but not so long that the matter is forgotten about. 865

A.16  Guidelines on introducing covenants during employment

A.16  In cases of collective consultation specific timetables are set out in section 188 Trade Union and Labour Relations (Consolidation) Act 1992: see 2(g) below.

2(e)  Dealing with objectors A.17  Assuming he has not already made this decision, the employer will have to decide in principle how he will react to objectors. There may be several alternatives, eg further discussions, agreeing a revised form of covenants, offering an additional or revised form of incentive or consideration, or abandoning the exercise and waiting for a more propitious moment. The employer should not assume that he has at this stage to take a decision to dismiss and offer employment on revised terms. A.18  If the employer is not to dismiss, the employment simply continues on the existing terms, ie without the covenants. In the absence of the employees’ agreement to the new/varied covenants, there is unlikely to be any gain to the employer in providing the incentive/consideration offered. In the face of a clear objection the likelihood of the court implying consent is remote. A.19  If the employer is to dismiss, it is only a matter of when and whether a further opportunity to accept the covenants is to be offered. Where there is no collective consultation obligation the employer proposing to dismiss will still need to go through any individual regimes (including any contractually agreed internal dismissal processes and, where appropriate, the ACAS Code of Practice 1: Disciplinary and Grievance Procedures (2015) (see 13.80). A.20  In some cases the employee may make the employer’s decision for him by treating the employer’s conduct as a repudiation of the contract. In such circumstances the employer has to evaluate the strength of the employee’s claim and respond appropriately. That response may either be rejecting the employee’s claim and seeking to keep the contract alive or, whilst denying that the proposed introduction of the covenants amounted to a repudiatory breach, accepting the employee’s wish to bring the contract to an end but this time by the employee. Whilst, in certain situations, the manner in which an employer seeks to exercise a contractual right can amount to a breach of the implied term of trust and confidence, it is difficult to see how a threat of lawful performance of a contractual term by an employer conducting himself reasonably can be a breach of anything (anticipatory or otherwise) (see 13.63–13.64).

2(f)  Dealing with those who do not respond A.21  Here the employer has two choices: to press the employee for an answer or not to do so but to provide the incentive/consideration offered immediately, hope the employee accepts it, and then argue implied consent at a later date. This will only be possible if the incentive/consideration is something that has an immediate impact, for example a salary increase, and not if it is something 866

Formulating a strategy for introducing/varying covenants A.26

that will not have any impact until much later in, or possibly even at the end of, the employment relationship (for example, enhanced pension benefits). An argument that the employees’ acceptance of the incentive/consideration offered and continuing in employment (without clearly objecting to the new/varied covenant) is at least tenable and may have reasonable prospects of success, depending on the particular circumstances of the case (such as the sophistication or honesty of the employee). However, as illustrated by the cases discussed at 13.41–13.61, the outcome of such an argument is by no means certain, and employers are advised not to leave matters such as consent to chance.

2(g)  Collective consultation obligations A.22  Where the collective consultation obligation is triggered (see 13.66–13.70), then, in brief, the obligations are to consult with the recognised trade union or employee representatives of the affected employees. If representatives are not in place, then they must be elected in accordance with section 188A(1) Trade Union and Labour Relations (Consolidation) Act 1992. A.23  Consultation must begin ‘in good time’ and in any event at least 30 days before the first dismissal takes effect where 20–99 employees are proposed to be dismissed at one establishment, or 45 days before the first dismissal takes effect where the number is 100 or more at one establishment: section 188(1A). An ‘establishment’ is, essentially, the local unit or entity to which the redundant employees are assigned to carry out their duties, but it is not essential that the unit has its own geographical separation from the rest of the business, or management or financial autonomy (see USDAW and another v WW  Realisation 1 Ltd (in liquidation), Ethel Austin Ltd and another (C-80/14), ECJ, colloquially known as the ‘Woolworths Case’). A.24  Section 193 Trade Union and Labour Relations (Consolidation) Act 1992 requires written notification of the proposed redundancies to be given to the Secretary of State (for BEIS), copied to the trade union or employee representatives, within the same timeframe. Notification is currently on Form HR1 which includes guidance as to the information required. Failure to file a Form HR1 without good cause is a criminal offence which may result in prosecution and a fine, on summary conviction, for the company and/or officers of the company. There have been a number of high profile failings reported in the press, including by the former Chief Executive of retail giant Sports Direct, who faced both a potential fine and a ban from acting as a director for a number of years. A.25  The consultation must be undertaken with a view to reaching agreement and must include consultation about ways of avoiding the dismissals, reducing the numbers to be dismissed and mitigating the consequences of the dismissals: section 188(2). A.26  Consultation begins with the provision of the following mandatory information in writing to the representatives: 867

A.26  Guidelines on introducing covenants during employment

(a) The reason for the proposals. (b) The numbers and descriptions of employees whom it is proposed to dismiss. (c) The total number of employees of such description employed at the establishment in question. (d) The proposed method of selecting employees who may be dismissed. (e) The proposed method of carrying out the dismissals with due regard to any agreed procedure, including the period over which dismissals are to take effect. (f) The proposed method of calculating the amount of any ‘redundancy’ payments to be made (otherwise than in compliance with an obligation imposed by or by virtue of any enactment) to employees who may be dismissed. (g) The number of agency workers working temporarily for and under the supervision and direction of the employer. (h) The parts of the employer’s undertaking in which those agency workers are working. (i) The type of work those agency workers are carrying out. (Section 188(4) Trade Union and Labour Relations (Consolidation) Act 1992.)

868

CHAPTER 14

Interim remedies: general Selwyn Bloch QC, Adam Solomon QC and Alexander Robson Introduction

14.1

1. Jurisdiction

14.6

2. Exercise of discretion 14.7 2(a) Serious issue to be tried 14.10 2(b) Balance of convenience 14.11 2(b)(i) Whether damages would be an adequate remedy 14.12 2(b)(ii) Whether the applicant is good for damages on the cross-undertaking14.16 2(b)(iii) The balance of harm 14.17 2(b)(iv) The status quo 14.18 2(b)(v) Strength of the evidence 14.20 2(b)(vi) Other factors 14.23 2(c) The position under the Civil Procedure Rules 14.28 2(d) The importance of compliance with Rules, Practice Directions and Court Orders 14.30 3. The range of interim remedies

14.32

4. Preliminary considerations 4(a) Pre-action correspondence/notice to respondent? 4(a)(i) Without notice 4(a)(ii) With notice 4(a)(iii) With informal notice 4(b) The return date 4(c) Which court? 4(d) Cross-undertaking as to damages 4(d)(i) Generally 4(d)(ii) Fortification of the cross-undertaking 4(d)(iii) Undertaking to respondent/other persons 4(e) Which respondents?

14.33 14.33 14.38 14.51 14.52 14.55 14.56 14.58 14.58 14.60 14.63 14.65

5. The evidence: strength of the case 14.67 5(a) Introduction 14.67 5(b) Detail 14.72 5(b)(i) Long covenants: Lawrence David v Ashton14.72 5(b)(ii) Short covenants: Lansing Linde v Kerr14.75 5(c) Section 12 Human Rights Act 1998 14.80 5(d) Practical conclusions 14.83 869

Interim remedies: general

6. Obtaining the evidence14.84 7. Witness statements or other evidence in writing 14.87 7(a) Form 14.87 7(b) General contents checklist 14.88 7(c) Witness statements/statements of case/court records/hearings in breach of confidence cases – maintaining confidence 14.89 7(c)(i) Particularity needed in witness statements/statements of case 14.89 7(c)(ii) Particularity required in a restrictive covenant case – as distinct from a breach of confidence case 14.93 7(c)(iii) Confidentiality club undertakings 14.97 7(c)(iv) Use of disclosed documents – court sitting in public/private14.98 7(c)(v) Transcripts/redacted judgments/orders restricting publication of names etc/court records 14.99 8. Documentation generally 8(a) A claim form 8(b) An application notice 8(c) Particulars of claim 8(d) A witness statement or witness statements (or affidavit, in the case of freezing or search orders) 8(e) Draft minute of order 8(f) Skeleton arguments/chronologies/cast lists/authorities/time estimates/court bundles 8(g) Costs schedules 8(h) Acts required of a respondent to an application for an interim injunction

14.102 14.103 14.104 14.105

9. Procedure for obtaining interim injunctions 9(a) Without notice 9(b) On notice

14.112 14.112 14.113

10. Undertakings by respondent 10(a) Undertakings to the court 10(b) Contractual undertakings by respondent

14.114 14.114 14.117

11. Order for speedy trial

14.120

12. Interim declarations

14.123

13. Summary judgment

14.124

14. Pre-action disclosure 14(a) Pre-action disclosure against the prospective defendant 14(b) Pre-action disclosure against third parties 14(b)(i) Norwich Pharmacal orders 14(b)(ii) The device used in Khanna 14(c) Tactical considerations: pre-action disclosure/questions as against prospective respondent/third parties

14.125 14.125 14.129 14.130 14.131

870

14.106 14.107 14.108 14.110 14.111

14.132

Introduction 14.1

14(d) Orders for early provision of witness statements and disclosure of evidence 14.133 14(e) Correspondence seeking pre-action or early disclosure/ information14.140 15. Stay in favour of mediation

14.142

16. Serving interim orders

14.143

17. Committal proceedings

14.147

18. Trial or settlement

14.150

19. Costs orders 19(a) Costs of interim hearing 19(b) Payment on account of costs 19(c) Basis of assessment of costs 19(d) Part 36 offers/other offers 19(e) Costs liability of third parties

14.152 14.152 14.155 14.157 14.158 14.162

20. Appeals

14.167

21. Litigants in person

14.171

INTRODUCTION 14.1  In this chapter we consider in particular: •

The jurisdictional and discretionary elements of the grant of interim injunctive relief (14.6).

•

The range of interim remedies (14.32) and preliminary issues (14.33).

•

Which parties should be added to the proceedings (14.65).

•

The merits of the case at the interim stage (14.67).

•

Obtaining the evidence (14.84) and witness statements/statements of case/ documentation (14.87).

•

Undertakings until trial, and orders for speedy trial (14.120).

•

Other remedies such as pre-action disclosure orders (14.123).

Generally, we use the expressions ‘applicant’ and ‘claimant or ‘defendant’ and respondent’ interchangeably, since the usual (but not invariable) position is that it is the claimant in the action who makes an application for an injunction – and the defendant in the action who is the respondent to the application. Generally, where we refer to the claimant in his capacity as applicant, ie as applying to the court for interim relief, we refer to him as the ‘applicant’ but in relation to his position more generally in the action we refer to him as the ‘claimant’. The same is true as to the use of the expressions ‘defendant’ and ‘respondent’. This chapter 871

14.2  Interim remedies: general

is intended to provide an overview of topics most likely to arise in cases within the scope of this book. For more detail the White Book should be consulted. 14.2  In the usual course of events, pre-trial procedures and the state of the lists of cases awaiting trial mean that litigants cannot expect (except in exceptional circumstances) to have their cases heard for some considerable time after proceedings have been started. Typically, an employment dispute in the High Court (our principal focus in this chapter) may take 12 months or more to come to trial. Evidence at trial will nearly always be by way of ‘live’ oral testimony, and follow disclosure (exchange of all relevant documents in the possession or under the control of the parties relevant to the dispute), exchange of experts’ reports (if any), the answering of requests for information (if any), and exchange of witness statements setting out the evidence which the witnesses intend to give at trial. 14.3  In the kinds of disputes with which this book deals, the parties will often need immediate assistance from the court which cannot await trial, and the courts have developed procedures to enable relief to be granted pending trial. The range of interim remedies is discussed below, but they are normally in the form of orders (injunctions) to perform or, more usually, not to perform certain specified acts on pain of being committed to prison for contempt of court or, in the case of a company, imprisonment of responsible officers or sequestration of its assets. That said, it is quite rare in cases of the kind covered by this book for the contemnor to be imprisoned; more often he will be fined or ordered to pay costs. Where, however, there is flagrant or persistent breach, the court may imprison the contemnor. For a recent example see OCS Group UK Limited v Dadi and Os [2017] EWHC 1727 (Ch) discussed at 14.149. 14.4  In these interim applications, evidence is almost always by way of written statements, without the court having the benefit of seeing the evidence tested by cross-examination. The court is required to ‘hold the ring’ as best it can on the basis of this less satisfactory form of testimony. In order to obtain an interim injunction the person seeking it must pay a price. He must give to the court an undertaking, known as a ‘cross-undertaking in damages’, that in the event of the court later, on hearing all of the evidence at trial, concluding that the relief ought not to have been granted, he will compensate the party against whom the relief was obtained for any losses he has suffered by the grant of the injunction. 14.5  As cumbersome as full trial procedure may appear to lay litigants, so the speed with which interim proceedings are dealt with by the courts often takes litigants by surprise; all the more so when the decisions of the court taken at the interim stage are often so significant so as to dispose of the issues between the parties for all practical purposes. This may be because the parties do not wish to incur the substantial costs of a full trial and so are prepared to abide by a preliminary determination by the court, or because the grant of interim relief may render the decision at trial largely academic. For example, if an ex-employee is restrained by interim injunction from soliciting customers of the ex-employer for (say) six months, unless a speedy trial is ordered, that decision will govern the position in the six-month period and full trial of the question of whether 872

Exercise of discretion 14.8

the ex-employer was entitled to that relief will be academic (but not as to questions of damages and legal costs). That said, in recent years it has become quite common for the court to order speedy trial (usually in relation to the injunctive aspects of the case, or for declarations of enforceability or unenforceability of restrictive covenants), which may be held within as little as five to eight weeks of the matter first coming before the court: see 14.120–14.122.

1. JURISDICTION 14.6  The jurisdiction of the High Court to grant interim injunctions is set out in section 37(1) Senior Courts Act 1981, which gives the High Court power to grant injunctions (whether interim or final) in all cases in which it appears to the court to be just and convenient to do so. Section 37(1) is supplemented by CPR, r 25.1(1)(a), which refers specifically to the grant of interim injunctions. The county court has jurisdiction to grant injunctions: section 38 County Courts Act 1984 (as amended). That jurisdiction is, however, limited in relation to search orders and freezing injunctions to certain limited types of proceedings or certain specified courts (or, for example, where a High Court judge is sitting in the county court): see the County Courts Remedies Regulations 1991 (SI  1991/1222) (as amended) – see the White Book, Vol 2. That said, most cases of the kind covered by this book are brought in the High Court and, accordingly, this book focuses on High Court litigation.

2. EXERCISE OF DISCRETION 14.7  The grant of an interim injunction is a matter of the exercise of the court’s discretion. It is not granted as of right. Some employment contracts – often those drafted by US employers – contain clauses whereby the employee purports to agree in advance that the employer will be entitled to an injunction in the event of the employee’s breach. Such clauses are by no means determinative: injunctive relief is always a matter of the court’s discretion to be exercised on a case by case basis. Contracts also regularly contain clauses by which the employee expressly agrees to the reasonableness of any covenant. The existence of such a clause will be given little if any weight by the court when assessing the question of whether or not to enforce, although they can have a useful deterrent effect particularly for less sophisticated employees. 14.8 The court’s objective when exercising its jurisdiction to order interim injunctions may be summarised in this way: ‘… to seek to protect rights and expectations which appear at least arguably enforceable and the breach of which cannot properly be compensated by damages, whilst at the same time endeavouring to avoid the potential injustice of intervening before the evidence can properly be tested and before the facts and legal issues are clear’ (Allfiled UK  Ltd v Ellis and others [2015]  EWHC  1300 (Ch), at paragraph  66 per Hildyard J). 873

14.9  Interim remedies: general

14.9  Factors which may preclude the grant of a permanent injunction are dealt with at 16.64. The same factors apply to the grant of interim injunctions. Further, the courts have developed particular principles to be applied in applications for interim injunctions. These are known as the American Cyanamid guidelines: American Cyanamid Co v Ethicon Ltd [1975] AC 396 at pages 407–409 per Lord Diplock. First, the applicant must establish that he has a good arguable claim to the right which he seeks to protect, that there is a ‘serious issue to be tried’. Secondly, if the applicant succeeds in showing a serious issue to be tried the court will have regard to the balance of convenience.

2(a)  Serious issue to be tried 14.10  As to this first hurdle, the court must not try to decide the claim on the basis of the witness statements (or affidavits, where applicable). Under the American Cyanamid guidelines, an application will be determined on the balance of convenience, unless the applicant is unable to establish that he has ‘any real prospect of succeeding in his claim for a permanent injunction at the trial’: American Cyanamid Co v Ethicon Ltd [1975] AC 396 at page 408. Patten J (as he then was) commented on the low level of the hurdle to be overcome in BSW Ltd v Balltec Ltd [2006] EWHC 822 (Ch): ‘This is a minimalist approach which sets the threshold at a level which does little more than exclude claims which might be characterised as frivolous or vexatious. In particular, the court is not called upon to resolve serious issues of fact or law.’

2(b)  Balance of convenience 14.11 The ‘balance of convenience’ test requires consideration of a number of factors, considered in turn below. Overall, the task for the court has been described as determining ‘the balance of the risk of doing an injustice’: Cayne v Global Natural Resources plc [1984] 1 All ER 225 at 237H. 2(b)(i) Whether damages would be an adequate remedy 14.12 An award of damages may not be adequate where the respondent is unlikely to be able to pay them or they will be difficult to quantify. If damages would be an adequate remedy, an interim injunction will not ordinarily be granted. Where a claimant seeks to enforce non-solicitation/dealing or non-competition covenants or to restrain the misuse of confidential information, damages will rarely be an adequate remedy. This is because of the difficulty of proving causation and amount of loss at trial and also (in many cases) the unlikelihood of the (ex-)employee being able to pay substantial damages, unless supported by a third party (such as a (prospective) new employer). Causation and loss are notoriously difficult to prove in relation to non-solicitation covenants (eg proving whether the (ex-)employee approached the customer, or vice versa), but even in a 874

Exercise of discretion 14.15

non-dealing or non-competition covenant, it may be difficult to show that (absent the breach of covenant) the lost business would have been likely to come to the (ex-)employer. In D  v P  [2016]  IRLR  355 (now given its full name of Dyson Technology Limited v Pellerey), when considering the award of an injunction as a final remedy after trial, it was held that ‘… the starting point in the consideration of a claim by an employer to enforce an employee’s negative covenant is that the ordinary remedy is an injunction’ (paragraph 21). However, at the interim stage, it remains the case that an injunction will not ordinarily be granted if damages would be an adequate remedy. 14.13  The two arguments most commonly deployed by the (ex)employer seeking relief are: (i) that quantification of loss will be impossible; and (ii) that that the (ex)employee is unlikely to have the means to pay any award of damages subsequently made against him. Underhill LJ commented on these arguments as follows in Sunrise Brokers LLP v Rodgers [2015] IRLR 57 at paragraph 53: ‘… In a case of this kind there are evident and grave difficulties in assessing the loss which an employer may suffer from the employee taking work with a competitor: even where it is possible to identify clients who have transferred their business (which will not always be straightforward, particularly where the new employer is outside the jurisdiction) there may be real issues about causation and the related question of the length of the period for which the loss of the business could be said to be attributable to the employee’s breach. If the sums potentially lost are large they will not be realistically recoverable from the employee in any event: in the present case no claim was advanced against [the new employer]. There may be other intangible but real losses to the employer’s reputation. I do not say that there may not be particular cases in which relief should be refused on the basis that damages are an adequate remedy […] but unless a specific case to that effect was explicitly advanced, the judge was in my view fully entitled to proceed on the assumption that injunctive relief was the appropriate remedy.’

14.14  Underhill LJ (also at paragraph 53) referred to Phoenix Partners Group LLP v Maurice Asoyag [2010] EWHC 846 (QB) as a potential example of a case where the Court found that damages would be an adequate remedy for the (ex-) employer. In Phoenix, Sir Charles Gray (sitting as a Judge of the High Court) found at paragraph  44 that any damages ‘would be limited’ and ‘in any event capable of quantification’. The limited duration of the restraints – only three months remaining after three months set-off during garden leave – was said to be an ‘important factor’; conversely, the court found that damages would not be an adequate remedy for the employee because any damage would be hard to quantify. 14.15  Liquidated damages clauses are increasingly being introduced into employment contracts, particularly in professional service contracts such as accountants. Can the presence of a liquidated damages clause be relied upon to say that damages are an adequate remedy, and therefore an injunction should not be granted? The Court of Appeal has now twice answered that question in the negative. See AB v CD [2015] 1 WLR 771 per Underhill LJ at paragraph 27 (approving the reasoning and decision of the Court of Appeal (per Mance LJ) in Bath and North East Somerset DC v Mowlem plc [2003] EWCA Civ 115 at paragraph 15): 875

14.16  Interim remedies: general

‘The primary obligation of a party is to perform the contract. The requirement to pay damages in the event of a breach is a secondary obligation, and an agreement to restrict the recoverability of damages in the event of a breach cannot be treated as an agreement to excuse performance of that primary obligation. I share Mance LJ’s rejection of the position advanced […] that, even where a provision limited the victim of a breach to damages which bore no relation to its loss, those damages had nevertheless to be regarded an adequate remedy […]. Mr Bergin’s stance was the same before us […]: even in the case of the most gross and cynical breach of contract, if—as was likely to be the case—the only losses suffered which would sound in damages were of a kind which were excluded by the contract, no injunction would lie and the contractbreaker would be able to walk away from his obligations with impunity. That does not seem to me to be just. The rule—if “rule” is the right word—that an injunction should not be granted where damages would be an adequate remedy should be applied in a way which reflects the substantial justice of the situation: that is, after all, the basis of the jurisdiction under section 37 [(1) of the Senior Courts Act 1981].’

2(b)(ii) Whether the applicant is good for damages on the cross-undertaking 14.16 An applicant for interim injunctive relief will be expected to undertake to the court to pay the respondent whatever the court may later order by way of compensation if it is later held that the interim injunction was wrongly granted. This is known as the cross-undertaking in damages. If the applicant is unlikely to be able to pay damages under the cross-undertaking or they would be difficult to quantify, this points towards not granting an interim injunction. This topic is dealt with in greater detail at 14.58–14.64. 2(b)(iii) The balance of harm 14.17  It will generally be material to consider whether more harm will be done by the granting or refusal of an interim injunction: Cayne v Global Natural Resources plc [1984] 1 All ER 225 (CA) at page 237H. An injunction may be refused if it would be oppressive: Ocular Sciences Ltd v Aspect Vision Care Ltd [1997]  FSR  289. However, the balance of convenience is rarely a significant issue in employment covenant cases. In Underwriting Exchange Ltd v Newall [2015] EWHC 948 it was held (at paragraph 33): ‘It would be an unusual case in which a former employer was seeking to enforce against former employees restrictive covenants in a contract of employment in which the court came to the conclusion that the balance of convenience favoured the employees. The reason is that the court to have got to the stage of considering the balance at all, it must have reached the conclusions, as I have, that, insofar as there were disputes about it between the parties, there were serious questions to be tried in relation to the allegations of the claimant, and that damages would not be an adequate remedy in the event that injunctions were not granted. So whilst not excluding a wholly exceptional case in which, those conditions, having been satisfied, nonetheless, the balance of convenience favoured the former employees, it would have to be, as it seems to me, a quite extraordinary case in which that was the situation.’ 876

Exercise of discretion 14.21

2(b)(iv) The status quo 14.18  Where the balance of convenience is unclear, the court will favour maintenance of the status quo: Garden Cottage Foods Ltd v Milk Marketing Board [1984] AC 130. In this case Lord Diplock discussed the meaning of ‘status quo’ at page 140: ‘The status quo is the existing state of affairs; but since states of affairs do not remain static this raises the query: existing when? In my opinion, the relevant status quo to which reference was made in American Cyanamid is the state of affairs existing during the period immediately preceding the issue of the writ claiming the permanent injunction or, if there be unreasonable delay between the issue of the writ and the motion for an interlocutory injunction, the period immediately preceding the motion. The duration of that period since the state of affairs last changed must be more than minimal, having regard to the total length of the relationship between the parties in respect of which the injunction is granted; otherwise the state of affairs before the last change would be the relevant status quo.’

14.19 In Graham v Delderfield [1992] FSR 313, where there had been no letter before claim and there was delay after the issue of the writ before service, Dillon LJ stated that in such circumstances it was the service of the writ (now claim form) rather than the issue of the writ which fixed the status quo. There is likely to be little difference in practice between the two approaches, since service of the claim form is in almost all cases where injunctive relief is sought likely to occur very soon after issue. In ESL Fuels Ltd v Stephen Fletcher & Anor [2013] EWHC 3726 (Ch), however, the court (at paragraphs 17–19) limited the Graham v Delderfield approach to cases in which there had been delay in bringing the matter to court, and held that status quo in other cases meant the state of affairs before the most significant recent change, which the judge held was in accordance with the approach taken by Lord Diplock in the Garden Cottage Foods case. 2(b)(v)  Strength of the evidence 14.20  The court may examine the respective strengths of the evidence, but only as a last resort: American Cyanamid Co v Ethicon Ltd [1975] AC 396 at page 406. According to the American Cyanamid principles, it is not part of the court’s function at this stage of the litigation to try to resolve conflicts of evidence on the basis of written evidence. That is a matter for trial, as the Court of Appeal (again) confirmed in Sukhoruchkin v Van Bekestein [2014] EWCA Civ 399. Sir Terence Etherton C noted that it is well-established as a general principle that, on an application for an interim injunction, the court should not attempt to resolve ‘critical disputed questions of fact or difficult points of law’ on which the claim of either party may ultimately depend, particularly where the point of law ‘turns on fine questions of fact which are in dispute or are presently obscure’ (paragraph 32). 14.21 In Series 5 Software v Clarke [1996] 1  All ER  853 Laddie J  sought to challenge the proposition that the court should not examine the respective 877

14.22  Interim remedies: general

strengths of the evidence, stating that if the court is able to come to a view as to the strength of the parties’ cases on credible evidence, then it can do so. This has received very little judicial support; see eg Berry Birch and Noble Financial Planning v Berwick [2005] EWHC 1803 (QB) (a restrictive covenant case). In that case, however, Cox J  concluded that there was no serious question to be tried – arguably by setting the bar too high in this regard. See also Epoch Co Ltd v Character Options [2015] EWHC 3436 (IPEC) (a patent dispute) where HHJ Hacon expressly declined to follow the ‘more radical’ approach espoused by Laddie J  in Series 5 and preferred a ‘traditional’ reading of American Cyanamid. That can be seen to be in contrast with Barnsley Brewery Co v RBNB  [1997]  FSR  462 (Ch), in which (in a passing off case) Robert Walker J  expressed the view that the decision of Laddie J  in Series 5 was neither surprising nor heretical. 14.22  The decision in Series 5 has not been endorsed by the Court of Appeal, let alone the Supreme Court, and it is likely to be regarded by most judges as heretical. However, where the merits point strongly in one direction, there is always the prospect that the judge may find comfort in the Series 5 decision, as justifying taking the merits into account. Some support for that approach is to be found in the Court of Appeal decision in Guardian Media Group Plc v Associated Newspapers Ltd (unreported, 20  January 2000), where Walker LJ, with whom Henry LJ and Scott Baker J agreed, pointed out that the principles in American Cyanamid did not prevent the court from giving proper weight to a clear view on merits, provided that it does not require a mini-trial on copious evidence. This was particularly so when the grant or withholding of interim relief was likely to influence the ultimate commercial outcome. 2(b)(vi)  Other factors 14.23 There may be other relevant factors. For example, delay may contraindicate the grant of relief, as in CMI-Centers for Medical Innovation GmbH v Phytopharm pic [1999]  FSR  235. In Computer Associates plc v Larner (15 December 2000, unreported) (QBD) the principal reason for refusal of an injunction was that there was some three months’ delay in seeking relief after the applicant was aware of the respondent’s intentions. Part of the relief sought was enforcement of a 12-month non-competition covenant. Significantly, two months of this period had elapsed after the applicant had become aware that the respondent had actually started his new employment. 14.24 Other equitable factors such as lack of ‘clean hands’ may prevent the applicant from obtaining relief. That may take the form of some ‘trickery’ in the way in which the case has been presented (eg deliberate material non-disclosure). General misbehaviour is not enough – there must be a sufficiently immediate relationship between the misconduct and the relief sought: Fiona Trust & Holding Corp v Privalov [2008] EWHC 1748 (Comm) at paragraph 18, referring to the often quoted dictum of Eyre CB in Dering v Earl of Winchelsea (1787) 1 Cox 818, 319–320, ER Vol 29 at page 1184: ‘… a man must come to a Court 878

Exercise of discretion 14.27

of Equity with clean hands; but when this is said, it does not mean a general depravity; it must have an immediate and necessary relation to the equity sued for; it must be a depravity in a legal as well as a moral sense’. 14.25  It is often alleged by outgoing employees, when faced with an employer who is attempting to enforce a restrictive covenant, that the current employer had previously encouraged the employee to breach prior restrictive covenants owed to a former employer when first joining. Courts are, however, rarely impressed by such arguments at the interim stage, especially since they will often relate to now historical matters. 14.26  The fact that an injunction might prevent the departing employee from earning a living during the period of restraint may be a material consideration, but will by no means be determinative. Another factor sometimes relied upon by employees is the possibility that the employee is left with no job at the end of the period of restraint. This may arise where the putative new employer decides that it no longer wishes to be associated with the employee if he is to be the subject of a court order and required to stay out of the market for a number of months. The prospect of an employee being without any employment at the expiry of the injunction will, if that is established on the evidence, be a factor to be weighed in the balance; but, it may be a factor of little if any weight in circumstances where the employee has behaved in a manner inconsistent with his obligations. The court may well take the view that any blame should be laid at the employee’s own door. 14.27  What is the relevance of a new employer already having entered into contracts with customers on the assumption that the employee will be able to commence employment? The effect of any injunction on third parties will be a matter to be taken into account in the court’s discretion. However, it will rarely be determinative, even if the (new) employer is entirely innocent. In PSM International Ltd v Whitehouse [1992] F.S.R. 489, the employee had left his then employer (the claimant), and started work at a competitor. The competitor won certain contracts with a third-party client which had previously been a client of the claimant. It was alleged by the claimant that the contracts were won by misuse by the employee of the claimant’s trade secrets and other confidential information. One issue before the Court of Appeal was whether an injunction should be ordered to prevent the new employer performing contracts it had entered into with former clients of the previous employer. The position was summarised by Lloyd LJ in this way (at page 498): ‘I agree that the courts should be chary of granting an equitable remedy which would have the effect of interfering with the contractual rights of innocent third parties. But that equity has power to do so in an appropriate case, I  do not doubt. Take the ordinary case of an employee who enters into a fresh contract of employment for, say, five years in breach of a valid covenant in restraint of trade. The new employer may be entirely innocent. Yet an injunction to restrain the ex-employee from continuing with his new contract of employment would undoubtedly affect the new employer’s rights. He would be deprived of the services of the ex-employee which he had obtained by contract. I do not see 879

14.28  Interim remedies: general

any differences in principle between that case and the present. Although a court would no doubt be readier to restrain [the new employer] from entering into future contracts with [third parties] in breach of the plaintiffs’ right to protect their trade secrets, I do not think that the equitable jurisdiction is confined to future contracts. The arm of equity is not so short.’

2(c) The position under the Civil Procedure Rules 14.28  While the American Cyanamid approach is not expressly adopted by the CPR, the courts have continued to apply that approach since the CPR came into force. That said, in exercising the power to grant an interim injunction (given under CPR, r 25.1(1)(a)), the court must seek to give effect to the overriding objective (set out in CPR, r 1.1). The American Cyanamid principles are consistent with the overriding objective of enabling the court to deal with cases justly and at proportionate cost as well as with many (if not all) of the specified elements of the overriding objective, namely: •

Ensuring that the parties are on an equal footing – an interim injunction is aimed at preventing harm to the applicant which cannot be compensated in damages but is counterbalanced by the cross-undertaking in damages to protect the respondent.

•

Saving expense – often interim injunctions involve the outlay of substantial legal costs over a short period, but the grant of relief may save the costs of a full trial, which may be pointless if irremediable damage has been suffered in the meantime.

•

Dealing with cases in ways which are proportionate to the amount of money involved, the importance of the case, the complexity of the issues and the financial position of each party – in most restraint of trade, breach of confidence or garden leave injunction cases (see Chapter 15) the applicant should have no difficulty in satisfying this objective. In general terms the courts have long had regard to the concept of proportionality: see, for example, Lock v Beswick [1989] I WLR 1268, in which Hoffmann J stressed that the form of relief should be proportionate to the harm (reasonably) apprehended. As to the last element (financial position of each party) it will usually be the case that the employee or ex-employee (unless supported by a new employer) will have poor financial resources in comparison with the (ex-)employer. This fact will, under American Cyanamid, often favour the grant of an injunction.

•

Ensuring that the case is dealt with expeditiously and fairly – expedition and fairness have always been vital factors in the exercise of discretion to grant or withhold interim relief; the ‘balance of convenience’ is founded on the idea of a fair ‘holding of the ring’ until trial.

•

Allotting to the case an appropriate share of the court’s resources, while taking into account the need to allot resources to other cases – this should not affect cases properly presented. This objective can be seen to confirm

880

Exercise of discretion 14.31

the existing practice of the court in the case of long covenants which are arguably enforceable (see paragraphs 14.72–14.74) of encouraging the respondent to offer up undertakings until speedy trial, so as to avoid unnecessary interim wrangles. The low threshold of proof (triable issue) under American Cyanamid is, of course, also designed to prevent long debates on the merits at the interim stage. •

Enforcing compliance with rules, practice directions and orders – consistent with all other areas of civil litigation, it is imperative that parties to applications for injunctive relief are particularly diligent in their compliance with the CPR and with court orders. Failure to do so will, at a minimum, be a factor which will be taken into account by the court against the defaulting party when exercising its discretion.

14.29 Accordingly, the introduction of the CPR did not substantially affect the way in which discretion in relation to interim injunctions had previously been exercised. However, in its governance of the procedural side to litigation, the CPR is becoming increasingly detailed. Moreover, the rigour with which its rules and practice directions are now imposed is more exacting than ever. The procedural requirements of the CPR must be respected and followed with diligence.

2(d) The importance of compliance with Rules, Practice Directions and Court Orders 14.30 Failure to comply with a rule, practice direction or court order may, depending on the nature of the default, require an application for relief from sanction pursuant to CPR  3.9. That rule was amended in April 2013 as a result of the Jackson reforms. It now provides a general discretion for the court to grant relief from sanctions and requires the court to consider ‘all the circumstances of the case, so as to enable it to deal justly with the litigation’ (CPR 3.9(1)). However, two factors are specifically mentioned by CPR 3.9(1) and (2), namely the need (1) for litigation to be conducted efficiently and at proportionate cost; and (2) to enforce compliance with rules, practice directions and orders. 14.31  The language of CPR 3.9 must now be read in the context of the Court of Appeal’s judgment in Denton v TH White Ltd [2014] EWCA Civ 906. That case was decided after a flurry of litigation triggered by the Court of Appeal’s earlier decision in Mitchell v News Group Newspapers Ltd [2013] EWCA Civ 1537. In Denton the Court of Appeal recognised that Mitchell had been misunderstood and misapplied, and expressed the view that it should no longer be necessary to resort to Mitchell. An application for relief from sanction should be considered by the court in three stages: (i)

What is the seriousness and significance of the default? If the default is neither serious nor significant, this is likely to be the end of the enquiry: relief will 881

14.32  Interim remedies: general

usually be granted. However, the concepts of seriousness and significance are not hard-edged. For example, a delay of two days in complying with an order for exchange of witness statements may be ‘insignificant’ if the trial date is three months hence; but it may be highly significant if the trial is shortly due to commence, and the trial is jeopardised by the delay. (ii) Why did the default occur? The Court of Appeal declined to give examples of what may amount to reasons which offer a good explanation and those which do not. In Mitchell the Court of Appeal had noted that mere overwork on the part of legal advisors would not constitute a good reason, but that a debilitating illness probably would. Whilst that analysis will still prove persuasive, matters are more nuanced in view of Denton. (iii) Consider all the circumstances of the case. Here, the factors listed at CPR 3.9(1) and (2) are of particular (but not paramount) importance. Also relevant are the need to consider (i) whether the application for relief was made promptly; (ii) whether there is a history of non-compliance by the applicant; and (iii) whether the sanction imposed is proportionate to the breach in question. It is now well-established that the guidance of the Court of Appeal on relief from sanction cases in Mitchell and Denton informs the court’s approach to compliance of parties generally, including its approach to out-of-time applications for extensions of time (R  (Hysaj) v Secretary of State for the Home Department [2015] 1 WLR 2472).

3. THE RANGE OF INTERIM REMEDIES 14.32  Where there have been breaches of the employment contract by the (ex-) employee, the principal interim remedies which may be available to the (ex-) employer are: •

Prohibitory injunctions to restrain breaches of specific restrictive covenants of the employment contract, in particular non-competition covenants, nonsolicitation/dealing (of or with customers or suppliers) or non-enticement (of employees) covenants.

•

Injunctions to enforce ‘garden leave’ provisions of the contract of employment: relief aimed at keeping the contract alive.

•

Prohibitory injunctions to enforce (express or implied obligations) relating to confidential information and, in particular, ‘springboard injunctions’.

•

Injunctions against third parties to restrain knowing inducement of breaches of restrictive covenants or other terms of the contract of employment (such as the notice period) or to restrain breaches of confidence or other tortious conduct by such third parties.

•

Orders for affidavit evidence (or evidence on witness statement), for example as to misuse of confidential information.

882

Preliminary considerations 14.34

•

Delivery-up orders against the (ex-)employee or third parties in relation to documents (or other property) belonging to the (ex-)employer.

•

Search orders (previously known as ‘Anton Piller orders’) against the (ex-) employee or third parties.

•

Interim declarations (CPR, r 25.1(b)).

•

Pre-action disclosure (CPR, r 31.16) and disclosure orders against nonparties (CPR, r 31.17).

•

Summary judgment – by the applicant or respondent (CPR, r 24) (although this is not truly an interim remedy, it arises at an early stage of proceedings, so it is convenient to refer to it here).

The first seven of these remedies, being particularly pertinent to the subject areas of this book, are considered in more detail in Chapter 15.

4. PRELIMINARY CONSIDERATIONS 4(a)  Pre-action correspondence/notice to respondent? 14.33  An important initial consideration is whether the application for interim relief should be made on notice to the respondent. A related question is whether it is appropriate to engage in pre-action correspondence. In most cases, where it is decided to proceed without notice, there will be no pre-action correspondence. Accordingly, we will consider the question of notice first. There are three possibilities: •

Application without notice to the respondent (previously known as ‘ex parte’).

•

Application with notice being given to the respondent (previously known as ‘inter partes’).

•

Application on short informal notice (previously known as ‘ex parte on notice’), where the respondent is given a limited amount of notice, usually insufficient for him to have enough time to prepare witness statements or affidavit evidence for the hearing, although he can be present and make representations. Although this hybrid form of proceeding is not specifically referred to in the CPR, it is sanctioned (indeed, favoured) over applications without notice: see PD 23A, paragraph 4.2, which provides that, except in cases where secrecy is essential, the applicant should take steps to notify the respondent informally of the application.

14.34  Occasionally, the applicant will decide to seek some of the proposed relief without notice and the balance of the relief on notice, eg a confidentiality injunction and injunction restraining destruction of confidential or proprietary documents without notice followed up by a with notice application for delivery up of confidential or proprietary documents and interim enforcement of restrictive 883

14.35  Interim remedies: general

covenants. Indeed, in Capita plc v Darch [2017] IRLR 718 (at paragraph 30), Richard Spearman QC, sitting as a deputy judge, commented that he ‘would have expected’ an application for an order preventing destruction, tampering or parting with possession of specified items to be made on a without notice basis. Making only certain elements of an application on a without notice basis is often a more proportionate and reasonable way to proceed than to seek the entirety of the relief without notice. 14.35 There are no specific protocols directly covering the kinds of disputes which are the subject of this book. Parties should, however, have regard to the general Practice Direction on Pre-action Conduct and Protocols, which came into force on 6 April 2015 (the ‘Pre-Action PD’). As explained at 18.155, the Pre-Action PD replaced the general Practice Direction on Pre-Action Conduct (the ‘PDPAC’) and the detailed information and guidance on pre-action conduct that was contained in Annex 2 to the PDPAC. Although that guidance was not replicated in the Pre-Action PD, much of its content remains good practice to this day. The paragraph immediately below provides a summary of the relevant principles. 14.36  The governing principles relating to pre-action conduct for the types of dispute covered by this book are: (a) exchanging sufficient information to enable the parties to understand each other’s position and make decisions about how to proceed; (b) attempting to settle the issues without starting proceedings; and (c) supporting the efficient management of proceedings and reducing the costs of resolving the dispute. So, the claimant in setting out his claim in writing in a formal letter before claim should set out concise details about the claim, the basis for the asserted claim and a summary of the facts, and details of the outcome he expects (and, if that is money, how the amount is calculated). He should, where possible, provide copies of the essential documents on which he intends to rely. Where those documents contain confidential or commercially sensitive information, or the personal data of third parties who have not consented to the disclosure, it should suffice to describe the evidence by classes of documents without revealing their full contents. He should also set out details of the relevant documents he believes the defendant may be able to provide. Although not a strict requirement of the Pre-Action PD, it remains good practice to set out any proposals in terms of alternative dispute resolution he considers suitable (even if only to explain why there was insufficient time to consider this, eg because an urgent application was necessary). The letter before claim should state when the claimant believes it would be suitable for the defendant to respond. For the types of dispute covered by this book, we recommend asking for a response within no more than a working week. In any event, pursuant to the Pre-Action PD the defendant should respond substantively within 14 days in straightforward cases and no more than three months in complex ones. When responding the defendant should state whether and to what extent the claim is accepted and set out any facts/parts of the claim which are in dispute and the reasons the claim is not accepted. He should, like the claimant, provide copies of the essential documents on which he intends to rely and address any disclosure request by the claimant and provide information of any counterclaim or contributory fault 884

Preliminary considerations 14.39

alleged against the claimant. He should also address the claimant’s proposal (if any) regarding alternative dispute resolution. The claimant should as soon as practicable address any disclosure requests by the defendant and any counterclaim/contributory fault allegations raised by the defendant. Letters before claim are considered in detail at 18.152–18.221 and copies of the Pre-Action PD and Annex A to the PDPAC appear at Appendix 8 to Chapter 18. 14.37  When considering whether there has been compliance with the Pre-Action PD the court is concerned with compliance in substance rather than minor or technical infringements. The court also considers the proportionality of the steps taken compared with the size, importance and urgency of the matter. Examples of non-compliance with the Pre-Action PD include not providing sufficient information to enable the other party to understand the issues, not acting within a prescribed time limit, unreasonably refusing to consider alternative dispute resolution or failing without good reason to disclose requested documents. Failure to comply with the Pre-Action PD without good reason may result in costs being awarded against the party at fault (potentially on an indemnity basis), an increase or reduction in the interest payable on an award of damages or even staying the litigation until the appropriate steps have been taken. The reality is, however, that in most cases in which interim relief is sought, there is a degree of urgency, and this is specifically provided for in the Pre-Action PD and the relevant Court Guides (see further at 18.156). Even if a party goes to court on notice, it will often have commenced proceedings under time pressure. A  failure to comply with any pre-action protocol in those circumstances is rarely, if ever, a good reason for refusing to grant interim relief. 4(a)(i) Without notice 14.38  Within this section, we consider the following: •

The circumstances in which a without notice application is appropriate.

•

When to notify the respondent to the application.

•

The effect of delay.

•

The duty of full and frank disclosure.

14.39  CPR, r 25.3(1) provides in relation to interim remedies that the court may grant an interim remedy on an application made without notice if it appears to the court that there are ‘good reasons for not giving notice’. PD 23A, paragraph 3 sets out the circumstances in which an application can be made without notice, the most significant in practice being ‘where there is exceptional urgency’. Such cases are usually limited to where there is real urgency (eg  where the (ex-)employee is about to pass a secret document he has removed to a rival) or where (as in applications for search orders) it is essential to maintain secrecy: see paragraph  13.1.2 of the Queen’s Bench Guide; and see also paragraphs 16.2–16.6 of the Chancery Guide in similar, but more detailed, terms (the White Book, Vol 2). 885

14.40  Interim remedies: general

14.40  Where an application is made without notice, the applicant should take steps to notify the respondent informally of the application, except in cases where secrecy is essential: PD  25A, paragraph  4.3(3). If the applicant makes an application without giving notice, the evidence in support of the application must state the reasons why notice has not been given: CPR, r 25.3(3), eg that it is feared (for the reasons explained to the court) that the respondent will delete the applicant’s proprietary material from the respondent’s computer or destroy his laptop computer if given notice that the applicant intends to seek an order for inspection or delivery up of the computer. 14.41  The circumstances in which an application may be made without notice were addressed by the Court of Appeal in CEF  Holdings Limited v Mundey [2012] IRLR 912. The following passage merits emphasis (paragraph 235): ‘Generally, a without notice injunction should be granted only in circumstances where to give notice would enable the defendant to take steps to defeat the purpose of the injunction, such as in the case of many search or freezing orders, or where there is some exceptional urgency, which means literally there is no time to give notice.’

14.42  Further, in that case, it was held that a case is ‘without notice’ even if some notice has been given (albeit less than the minimum three clear days required by CPR 23.7(1)(b)) and even when counsel for the respondent is present in court and makes submissions. Even in such circumstances, the applicant retains the obligation of full and frank disclosure. This obligation is discussed at 14.45. 14.43  An application without notice may be refused if there has been delay in bringing the application which has not been properly explained: Bates v Lord Hailsham of St Marylebone [1972] 1 WLR 1373 at page 1380. It is the duty of counsel and solicitors to prepare and provide to all affected parties a full note of the without notice hearing (Interoute Telecommunications (UK) Ltd v Fashion Gossip Ltd [1999] TLR 762); it is wrong as a matter of principle not to do so and instead to expect that a transcript of the application will be available: Cinpres Gas Injection Ltd v Melea [2006] FSR 36. 14.44  Normally, the fact that the respondent is represented by solicitors, and the fact that there has been correspondence between the solicitors for the parties, is an indication that an injunction should not be sought without notice. 14.45  Against the advantage of obtaining relief with maximum speed must be weighed the corresponding responsibility on the part of the applicant and his legal advisers to ensure that full and frank disclosure is made of all relevant matters. Although the duty is not expressly referred to in the CPR, it plainly survives, being a matter of substantive law and is certainly inherent in the overriding objective. PD 25A, paragraph 3.3 provides that the applicant’s evidence must include ‘all material facts of which the court should be made aware’, which is clearly intended to include adverse evidence and could also include evidence obtained by unlawful means – Fiona Trust Holding Corp v Privalov [2007]  EWHC  39 (where it was alleged that the only way the investigator could have obtained private 886

Preliminary considerations 14.49

information relating to a credit card account was by unlawful hacking into the account through the internet or bribery or deception). The duty is not limited to matters actually within the knowledge of the applicant, but includes also a duty to make reasonable investigation: in Memory Corporation plc v Sidhu [2000] 1 WLR 1443 at page 1460 Mummery LJ described the duty as a ‘high duty to make full, fair and accurate disclosure of material information to the court and to draw the court’s attention to significant factual, legal and procedural aspects of the case’. The duty will not be fulfilled by ‘burying’ material information in exhibits to witness statements; rather, the court’s attention must be specifically drawn to the adverse material: Sectrack NV v Satamatics Ltd [2007] EWHC 3003 (Comm) at paragraphs 90–96. Furthermore, the existence or even content of without prejudice communication will be necessary ‘if it is clear that without it the court may be misled’: see Linsen International Limited and Os v Humpuss Sea Transport PTE Ltd [2010] EWHC 303 (Comm) per Christopher Clarke J at [55]. 14.46  Failure in this duty, even if the failure is inadvertent rather than intentional, may result in the injunction being set aside and the applicant being made responsible for damages in respect of loss suffered by the respondent as a result of the (initial) grant of the injunction as well as the legal costs (of both sides): see eg  Brink’s Mat Ltd v Elcombe [1988] 1  WLR  1350. However, proving a breach of the duty is not in itself sufficient to ensure that the injunction will be set aside. Defendants should be wary of making an application alleging material non-disclosure ‘on rather slender grounds, as representing substantially the only hope of obtaining the discharge of injunctions in cases where there is little hope of doing so on the substantial merits of the case or on the balance of convenience’ (see Brink’s Mat at 1359 per Slade LJ). 14.47  In deciding what should be the consequences of any breach of duty, the court must take account of all the relevant circumstances, including the gravity of the breach, the excuse or explanation offered, and the severity and duration of the prejudice occasioned to the respondent (which will include the question whether the consequences of the breach are remediable and have been remedied). It is not necessary to show that the applicant deliberately breached the duty of full and frank disclosure, though as Brink’s Mat confirms (at 1356–1357) the degree of culpability of the applicant and its legal advisors will be a relevant factor. Above all, the court must bear in mind the overriding objective and the need for proportionality: Memory Corporation plc v Sidhu (No 1) [2000] 1 WLR 1443 at page 1455 (per Robert Walker LJ). See further 15.207–15.211. 14.48 The disclosure obligation continues until the first hearing on notice: Commercial Bank of the Near East plc v A [1989] 2 Lloyds’ Rep 319. 14.49  A respondent to an application who alleges that there has been material non-disclosure by the applicant at an ex parte hearing, should normally take that point at the first opportunity. A failure to do so is not necessarily fatal and the point can be taken later, but doing so might affect the extent to which the respondent can argue that the non-disclosure should adversely impact on the remedy: see Brandeaux Advisers (UK) Ltd v Chadwick [2011] IRLR 224 at paragraph 26. 887

14.50  Interim remedies: general

14.50  Parties should give particularly careful consideration to the potential effects of the requirements of disclosure of evidence before proceeding without notice. Even an unsuccessful applicant must, following an application without notice, serve on the previously un-notified respondent a copy of the application notice and any evidence in support unless the court orders otherwise: CPR, r 23.9(2). A copy of the notice of hearing should also be served. If the application fails at the without notice stage, and the applicant proceeds to a with notice hearing, disclosure to the respondent of the papers on which the failed without notice application was based, which (by virtue of the duty to make full and frank disclosure) refers to apprehended arguments favourable to the respondent, may present the respondent with a bonus of being provided with arguments that it might not itself have thought to raise. It may be possible to avoid having to serve such papers by applying to the court for an order to that effect. This might arise, for instance, where such service would involve the disclosure of confidential information. Alternatively, the court may be persuaded to make no order at all (since the obligation to serve documents under CPR, r 23.9(2) applies only ‘Where the court makes an order’). However, the tactical disadvantage of being required in ordinary circumstances to disclose even the mere fact that an application was (unsuccessfully) made might be sufficient in some cases to dissuade potential applicants from making an application without notice, or to delay the making of such applications until the applicant is more confident of success. For a recent summary of the legal principles to be applied when making an application without notice and the consequences of having failed in those obligations see Frenkel v Lyampert et al [2017] EWHC 3121 (at paragraphs 107–112 and 122–127). 4(a)(ii) With notice 14.51 An application with notice for an injunction will normally involve the giving of three clear days’ notice, together with any evidence in support, to the respondent. Accordingly, an application served on a Monday would be for no earlier than Friday of that week. CPR, r 6.26 contains various rules as to when certain documents are deemed to have been served by various specified methods of service, eg a document served personally after 4.30 pm on a business day or at any time on a Saturday, Sunday, or Bank Holiday is deemed to be served the next business day. The rule that evidence should also include all material evidence of which the court should be made aware applies equally to applications with notice (PD 25A, paragraph 3.3), although the stricter obligation of full and frank disclosure does not. 4(a)(iii) With informal notice 14.52  In view of the amount of notice required for with notice hearings, under the former Rules of the Supreme Court there developed the peculiar ‘hybrid’ of proceeding ‘ex parte on notice’ (seemingly a contradiction in terms). This practice has continued under the CPR. As set out above, the strongly preferred position is that, except where secrecy is essential, at least informal notice should be given: PD 25A, paragraph 4.3(3). In practice, the respondent will be present 888

Preliminary considerations 14.56

by solicitor or counsel (or sometimes in person), but will not have been given sufficient (or any) time to consider the applicant’s evidence in order to enable him to present evidence in reply, although if he manages to do so, he will normally be allowed to rely on it. The application is technically without notice, and thus the applicant remains under a duty to make full and frank disclosure: CEF Holdings Limited v Mundey [2012] IRLR 912. 14.53  An alternative way of dealing with lack of time for service of notice is to apply prior to or at the hearing to abridge time under CPR, r 23.7(4) and/or CPR, r 3.1(2)(a). In addition to removing the obligation of full and frank disclosure, this may have the practical effect of removing the need for a return date, if matters can be disposed of at the initial hearing. 14.54  Where proper notice has been given for the hearing of an application with notice, the court can nevertheless grant an interim injunction without notice if the application cannot, because of pressure of business in the court, be brought on: Beese v Woodhouse [1970] 1 WLR  586. The respondent may wish to put in evidence to oppose the application. If the application has to be adjourned to enable a party to file further evidence, and the respondent will not give appropriate undertakings until the effective hearing of the application (where both sides’ evidence will be before the court), the court may grant interim relief until the full hearing, provided urgency can be demonstrated.

4(b) The return date 14.55  The return date is the day on which the court considers with notice to all parties whether relief granted without notice should be continued. The return date will usually be a date a few days after the first hearing. The Queen’s Bench Guide (paragraph 14.3) states, for instance, that an injunction granted without the other party being present will normally be for a limited period (one or two weeks). In all divisions of the High Court, interim injunctions made without notice must contain a return date: PD 25A, paragraph 5.1(3).

4(c) Which court? 14.56  An application for an injunction in the context of a contract of employment may be made in either the Queen’s Bench Division or the Chancery Division of the High Court (the latter now forming part of the Business and Property Courts – see 14.57 below).The decision whether to proceed in one or the other division of the High Court depends on a range of factors. For instance, other relief sought in the action may make proceedings in one division mandatory. For example, if breaches of copyright (or patent, trademarks, registered design or database right) are alleged, the proceedings must be brought in the Chancery Division: Schedule  1 Senior Courts Act 1981. Another consideration will be the state of the list in the different divisions and hence the speed with which one can obtain a with notice hearing. In the Chancery Division a 889

14.57  Interim remedies: general

hearing of up to two hours may be obtained relatively quickly – it is only if the hearing is estimated as being in excess of two hours that an application by order (special appointment) is required. In the Queen’s Bench Division, if the hearing is estimated as longer than one hour a special appointment is necessary. Thus, if it is thought that the likely length of the hearing is between one hour and two hours, this might (all other things being equal) make proceedings in the Chancery Division desirable. Normally, counsel’s clerks will liaise with the court’s listing department (and each other) to arrange convenient dates and times of hearings. All hearings are now ordinarily held in public: CPR, r 39.2(1). There is no longer a distinction between Queen’s Bench Division and Chancery Division practice in this regard. (However, the court always has the power to order all or part of the hearing to be in private: see generally 14.98–14.101.) The comparative state of the trial lists in Queen’s Bench and Chancery Division may be an important factor where the parties seek a speedy or early trial. The CPR allows in certain instances for the case to be transferred from one division to another and from county court to High Court: CPR, Part 30. Section 40 County Courts Act 1984 deals with transfers from the High Court to the county court. 14.57  Most injunction cases of the sort described in this book are brought in the High Court. The High Court has far greater experience in these matters and its procedures are such that hearings can be arranged very swiftly, so that practitioners will usually prefer to bring their cases there. For the sake of completeness, however, it should be noted that the county court has jurisdiction to grant injunctions (except that there is limited power to grant search orders or freezing injunctions: see 14.6). Further, there is no monetary limit on the jurisdiction of the county court to award damages in relation to actions in contract and tort. However (as stated at 14.6), the focus of this book is on High Court litigation, where the great majority of cases of the sort covered by this book are brought. If proceedings are sought to be issued in the Chancery Division, practitioners should note the changes introduced by the formation in 2017 of the Business and Property Courts (see Practice Direction – Business and Property Courts; The Business and Property Courts Advisory Note; and the Chancery Guide at Chapter 1). For most disputes of the sort described in this book, the appropriate list is likely to be the Business List, but practitioners will need carefully to consider the factual and legal issues to which each case gives rise.

4(d)  Cross-undertaking as to damages 4(d)(i) Generally 14.58  The price for being granted an interim injunction (without a full dress trial) is that the party seeking the injunction must undertake to the court that if it later be found (on fuller consideration) that the injunction ought not to have been granted, he will compensate the other party for any damage which he has suffered as a result of the injunction having been (wrongly) granted. An offer of such an undertaking is implicit in the request for an injunction (SmithKline Beecham Plc v Apotex 890

Preliminary considerations 14.60

Europe Ltd (No 3) [2005] FSR 44 at paragraph 30 (appealed on other grounds at [2006] 3 WLR 1146), and must be offered unless the court orders otherwise: PD 25, paragraph 5. This is a point of great importance. It will, of course, depend entirely on the facts of the particular case what the extent of ‘exposure’ under the cross-undertaking may be. For instance, where the employer seeks merely the return of documents which belong to him, the potential liability under the crossundertaking may be nil (indeed, where there is no dispute as to ownership, he may be required to give no cross-undertaking: see Fenner v Wilson [1893] 2 Ch 656, where it was held that if the order is in the nature of a final order, no undertaking will be required). However, in the case of a non-dealing or springboard injunction the respondent may be restrained from concluding lucrative contracts or, indeed, be put out of business altogether, in which case the potential liability under the cross-undertaking may be very substantial. 14.59  If an applicant for an injunction declares an inability to provide a crossundertaking in damages, that is not necessarily fatal to the application but it is an important factor to take into account. For example, in Allen v Jambo Holdings Ltd [1980] 1 WLR 1252 the Court of Appeal considered whether a Mareva injunction could be awarded in favour of a legally-aided widow bringing a personal injury claim following the death of her husband. The Court concluded (see per Denning LJ at at 1256–7) that the fact that an applicant with no assets would not be good for the cross-undertaking in damages should not of itself prevent the grant of an injunction. See also R (Ellson) v London Borough of Greenwich [2006] EWHC 2379 (Admin) at paragraphs 10–14. It will, however, be a very rare case where an injunction is ordered without any cross-undertaking. The burden will rest on the applicant to prove and explain its position. 4(d)(ii)  Fortification of the cross-undertaking 14.60  The party seeking an interim injunction will normally be required to provide evidence of his financial position so as to demonstrate that he will be good for any damages which he may be required to pay under the cross-undertaking. If the financial position of the applicant is inadequate, he may be required to fortify the cross-undertaking, eg by a bank guarantee or the undertaking of a third party such as a director or associated company of the applicant. This should be considered with the applicant at an early stage, so that, prior to the court application, the necessary steps can be taken, for example, to obtain authorisation from another company in the group to make it party to the cross-undertaking, if the court requires fortification of the cross-undertaking. The relevant principles to be addressed in considering whether the respondents have made out a case for fortification of the cross-undertaking in damages were summarised by Michael Briggs QC (sitting as a deputy judge of the High Court) in Harley Street Capital Ltd v Tchigirinski [2005] EWHC 2471 (Ch) and applied in Sectrack NV v Satamatics Ltd [2007] All ER (D) 312: •

Although the loss itself, and its quantification, will lie in the future, the court must make an intelligent estimate of the likely amount of the 891

14.61  Interim remedies: general

•

•

loss: Re DPR  Futures Limited [1989] 1  WLR  778 at page 786 per Millett J and Brainbox Digital Limited v Backbord Media GmbH and os [2017] EWHC 2465 (QB) per Mr John Howell QC at paragraph 27. It is for the applicant for fortification to show a sufficient level of risk of loss to require fortification: Sinclair Investment Holdings v Cushnie [2004] EWHC 218 (Ch) at paragraphs 24–25. Loss will not qualify for compensation under the cross-undertaking unless it has been caused by the grant of the injunction. Although normally that is an issue decided on an enquiry as to damages in due course, the causation issue must also be examined in forming an intelligent estimate of likely loss at the fortification stage. A mini-trial on the question is to be avoided at the interim stage.

14.61  The decision in Harley Street Capital Ltd was approved and applied by the Court of Appeal in Energy Venture Partners Ltd v Malabu Oil and Gas Ltd [2014] EWCA Civ 1295 (see especially paragraphs 13–14, 17 and 52–54) (a case concerning a freezing order.) The Court of Appeal confirmed (in relation to bullet point 2 above) that there is no need for an applicant for fortification to prove a risk of loss on the balance of probabilities; the appropriate question is whether there is a good arguable case (the appropriate test in the case of freezing orders) that it will suffer loss in consequence of an injunction (paragraph 52). The principles in Energy Venture Partners were applied in Brainbox Digital (paragraphs 22–47). 14.62 In Brainbox Digital the applicant, a company which was winding down its business and which, accordingly, had no or few assets, obtained a freezing injunction at an ex parte hearing. The applicant offered fortification of its unlimited cross-undertaking by a payment of £100,000, to be held by its solicitors to the order of the court. This was later increased to £125,000. At the return date, the respondent agreed (without admission of liability) to the continuation of a freezing order against it, but sought an order that a further undertaking should be given by a third party with sufficient means to meet any loss or damage the respondent may suffer if at trial the injunction transpired wrongly to have been granted. The basis of the request was the applicant’s admitted impecuniosity. In the course of a helpful review of the relevant principles (paragraphs 22–28), the judge concluded (at paragraph  26) that, in an appropriate case, the court may require, as a condition for granting or continuing an injunction, that the crossundertaking given by the applicant is fortified by the provision by someone other than the applicant of an unlimited, or a limited, undertaking, or by the making of some other form of limited provision, to meet any loss that the injunction may cause. This might be justified in circumstances where the applicant itself is of limited means. On the facts of the case before him, however, the judge found (at paragraph 44) that the respondent had provided insufficient evidence to establish a good arguable case that any loss it had suffered, or might suffer, as a result of the injunction would exceed the £125,000 that had already been paid into court as fortification of the cross-undertaking in damages. Accordingly, the respondent’s request was declined. The court did however order that the applicant make a payment of £125,000 into court as security for the respondent’s costs through to the first case management conference (paragraphs 56–60). 892

Preliminary considerations 14.65

4(d)(iii)  Undertaking to respondent/other persons 14.63  An injunction must contain an undertaking by the applicant to the court ‘to pay any damages which the respondent sustains which the court considers the applicant should pay’ (unless the Court orders otherwise): PD 25A, paragraph 5.1. Where a respondent provides undertakings to the Court instead of submitting to an injunction, it is advisable for him to insist on an express cross-undertaking since it is not entirely clear whether the cross undertaking will always be implied in such circumstances. It is often the case that an order for an injunction also contains an undertaking protecting third parties on whom it is served (such as a new employer who is not a party to proceedings but who will be affected by the order). The Court may well make such an undertaking the cost of obtaining the interim relief. The Court has the obligation to consider this issue pursuant to PD 25A, paragraph 5.2: ‘[…] when the court makes an order for an injunction, it should consider whether to require an undertaking by the applicant to pay any damages sustained by a person other than the respondent, including another party to the proceedings or any other person who may suffer loss as a consequence of the order.’

14.64  The wording of this provision gives rise to various questions. The applicant (especially in a without notice application) should raise with the court the possibility of harm to third parties, who may not even be parties to the claim, eg the (prospective) new employer, who will be deprived by enforcement of a restrictive covenant against the departing employee of the services of his (prospective) new employee. There is no clear indication of the circumstances in which the applicant will be required to extend the cross-undertaking to the new employer, who is not a party. In Miller Brewing Co v Mersey Docks and Harbour Co [2003] EWHC 1606 (Ch) (a trade mark dispute) it was held that ‘it would be a strong thing’ to require an applicant ‘to sign a series of blank cheques in favour of third parties of whose very existence and interest he may be unaware’ (paragraph 44). However, in cases where the link between the applicant and the third party is more proximate (such as where the third party is the defendant’s new employer) the courts typically will expect the broader form of cross-undertaking. Absent this broader form of cross-undertaking, the new employer would have to apply to be added as a respondent under CPR, r 19.2(2) in order to claim damages or costs caused by the injunction, or apply to vary the injunction for that purpose. The latter course was adopted in Project Development Co Ltd SA v KMK Securities Ltd [1982] 1 WLR 1470, where a bank affected by a freezing order intervened to vary the order.

4(e) Which respondents? 14.65 The (ex-)employer will need to decide whether he wishes to proceed against only the (ex-)employee or also against others, who have procured breaches of contract by the (ex-)employee or who have otherwise been implicated in wrongdoing of the (ex-)employee or been involved in related wrongdoing. Actions for inducement of breach of contract (or other wrongdoing) lie 893

14.66  Interim remedies: general

typically against the (prospective) new employer and also other (ex-) employees acting in concert who induce breaches of the contracts of employment of each other. Other examples of third parties who may be liable for inducing breaches of the contract of employment are recruitment agencies or financial backers of the new employer (eg where they plan or are engaged in a recruitment campaign which they know involves breaches of contract or fiduciary duties by existing employees/directors). The inducement action may even lie against (ex-)employees for inducing a breach of a contract between the (ex-)employer and a customer (eg  an exclusive long-term supply agreement), or even against customers for inducing a breach by the (ex-)employee of his contract of employment (eg  a post-termination non-dealing covenant). 14.66  The basis of the claim against such third parties is most typically the civil wrong or ‘tort’ of wrongfully inducing a breach by the ex-employee of his contract of employment. This tort and similar or related torts are usually referred to as the ‘economic torts’. Whilst economic torts do arise where a single employee is moving to a competitor, they more commonly feature in disputes arising from team moves. We therefore deal with the economic torts in Chapter 19.

5. THE EVIDENCE: STRENGTH OF THE CASE 5(a) Introduction 14.67 The principles to be applied in applications for interim injunctions, explained by Lord Diplock in American Cyanamid Co v Ethicon Ltd [1975] AC 396 (HL), are referred to at 14.7–14.22. Once the applicant has established a serious issue to be tried, the court will not (save as a matter of last resort) ordinarily consider the respective strengths of the witness statement evidence (but see 14.21 regarding Series 5 Software v Clarke [1996] 1 All ER 853). The Cyanamid principles apply to many types of cases, including (for example) cases of breach of confidence: the (ex-)employer who seeks to restrain the use of confidential information must merely establish a serious issue to be tried that the information is confidential or a trade secret, as the case may be; see, for instance: Johnson & Bloy (Holdings) Ltd v Wostenholme Rink plc [1987] IRLR 499; Lock International plc v Beswick [1989] 3 All ER 373; and PSM International Limited plc v Whitehouse [1992] IRLR 279. However, there are circumstances in which the court requires the applicant to establish more than a mere serious issue to be tried, notably where: •

The grant or refusal of an interim injunction would effectively dispose of the whole or a substantial part of the action: see 14.72–14.79, in which we discuss, in particular, the position in relation to restrictive covenants of long duration (at 14.72–14.74) and short covenants (at 14.75–14.79).

•

Section 12 Human Rights Act 1998 applies (confidential information injunctions): see 14.80–14.82.

•

Mandatory injunctions: see 14.83.

894

The evidence: strength of the case 14.72

•

(Arguably) in certain other situations where the court is able to form a strong view of the merits (see 14.20).

14.68 The courts will consider the applicant’s chances of succeeding at trial (beyond the low threshold of a serious issue to be tried), where the grant or refusal of an interim injunction would effectively dispose of the whole or a substantial part of the action: NWL Ltd v Woods [1979] 1 WLR 1294 (HL); see also Lansing Linde Ltd v Kerr [1991] 1 All ER 418, Cayne v Global Natural Resources plc [1984] 1 All ER 225 (CA), Business Environment Group Ltd v Wendy Fair [2005] EWCA Civ 1230 and CEF Holdings Ltd v Mundey [2012] IRLR 912 (at paragraphs 25–30). 14.69  The approach in NWL Ltd v Woods is particularly significant in relation to applications for injunctions to enforce covenants in restraint of trade which are of short duration, for example of six months or less. In the case of such covenants, it may not be possible for there to be a trial until after all or a substantial proportion of the period has elapsed. Accordingly, since the interim proceedings will for practical purposes be decisive as to the position of the parties during the whole or substantially all of the covenant period, the court will take the strength of the case of the respective parties into account. In particular, this means that the court may need to be persuaded that more likely than not the covenant will be regarded at trial as being enforceable (rather than simply being satisfied that it is arguably enforceable). 14.70  In the case of Allfiled UK Ltd v Ellis and others [2015] EWHC 1300 (Ch), the court noted that cases where the grant of an injunction will ‘foreclose’ the issue in question and thereby make further proceedings ‘useless or redundant’ would be unusual and as a general rule the American Cyanamid test is to be departed from only in exceptional circumstances, and where a trial is otherwise rendered ‘plainly and obviously otiose’ (paragraphs 71–79). 14.71  If the covenant is in excess of six months, it should normally (depending on when the alleged breaches were discovered) be possible to arrange a speedy trial well before expiry of the covenants, in which case ordinary American Cyanamid principles will apply. It should, however, be noted that where breaches of covenant are discovered early, it has become possible (depending on the state of the lists of pending cases and the time of year) to obtain trial dates within as little as five to eight weeks, so that a trial can take place well before the expiry of the covenants even where they are of short duration. This may result in ordinary American Cyanamid principles applying even in relation to interim enforcement of short covenants.

5(b) Detail 5(b)(i)  Long covenants: Lawrence David v Ashton 14.72  After some doubt (see eg Fellowes & Son v Fisher [1976] 1 QB 122 and Office Overload v Gunn [1977] FSR 39), the Court of Appeal in three decisions 895

14.73  Interim remedies: general

unequivocally stated that the American Cyanamid principles are applicable to injunctions to enforce restrictive covenants in employment contracts. In Dairy Crest Ltd v Pigott [1989] ICR 92 (a case involving a two-year non-solicitation/ dealing covenant) Balcombe LJ stated that since the grant or refusal of the injunction would not effectively dispose of the action (there was clearly going to be a trial), American Cyanamid principles were applicable. Likewise, in Lawrence David Ltd v Ashton [1989]  IRLR  22 (a case involving a two-year area covenant) the Court of Appeal held that American Cyanamid principles, governing the grant of interim injunctions, are applicable where either there is an unresolved dispute on the affidavit evidence (now usually witness statement evidence) or a question of law to be decided, and also apply in cases of interim injunctions in restraint of trade cases, just as in other cases. Balcombe LJ stated that covenants in restraint of trade are not a special category and the legal profession should be disabused of the (then) widely-held view that the American Cyanamid approach is not relevant where an interim injunction is sought to enforce a contractual obligation in restraint of trade. He went on to express the view that cases in which an employer seeks to enforce a restrictive covenant in a contract of employment are singularly appropriate for speedy trial. Further, he gave guidance that a respondent who has entered into a contractual restraint should seriously consider offering an appropriate undertaking until the hearing of the action, provided that a speedy hearing of the action can then be fixed and the applicant is likely to be able pay damages on his cross-undertaking. This dicta has become a powerful tool in the armoury of applicants for relief. Applicants would be well advised to inform respondents of this dicta in preissue correspondence, and respondents ignore it at their peril. In Underwriting Exchange Ltd v Newall [2015] EWHC 948 at paragraphs 40 to 41, indemnity costs were awarded following an interim hearing, on the basis that the respondent had ignored Balcombe LJ’s notorious guidance. 14.73  It is only if a speedy trial is not possible and the action cannot be tried before the period of restraint has expired or has run a large part of its course, that the case will fall within the exception to the rule in American Cyanamid, such as was considered in NWL v Woods. It is then that the judge may appropriately go on to consider the prospects of the applicant succeeding in the action. Balcombe LJ continued that another way of reaching the same conclusion is to say that the longer the period of the interim injunction, the more likely it is that the respondent may suffer damage (if the injunction is wrongly granted) which is uncompensatable by the applicants on their cross-undertaking, and therefore it becomes necessary to consider the relative strengths of each party’s case under the last stage of American Cyanamid. This latter comment is inconsistent with practice, because the ordering of a speedy trial (to which the court will readily accede) undermines the argument. (See also Dyno-Rod plc v Reeve [1999] FSR 148 for a case dealing with a franchisee.) 14.74 Applying the American Cyanamid approach, the Court of Appeal in Lawrence David allowed the appeal (in part) and granted an injunction in terms of the area covenant (which had most of the period of two years still to run) since: 896

The evidence: strength of the case 14.76

•

there were serious questions to be tried as to: >

whether the ex-employer had acted in repudiatory breach of contract so as to destroy the covenant relied on by it,

>

the validity of the covenant, which was not ‘obviously bad’,

>

issues of fact such as the nature of the trade secrets and confidential information, and the area of restraint;

•

damages would not be an adequate remedy for the ex-employer;

•

the ex-employer was good for damages on its cross-undertaking; and

•

the long-term damage to the ex-employee through being kept out of the employment market could be minimised by ensuring a speedy trial.

It was accordingly not necessary to compare the relative strengths of the respective cases. The injunction was granted for a period of about three-and-a-half months, by when it was expected the matter would be ready for trial. 5(b)(ii)  Short covenants: Lansing Linde v Kerr 14.75 In Lansing Linde Ltd v Kerr [1991] 1 All ER 418 (a case of a 12-month area covenant), in which the trial would not take place until the period of restraint had expired or nearly expired, the Court of Appeal (applying Balcombe LJ’s dictum in Lawrence David) held that the judge below was right to require the ex-employer to satisfy him that not only was there a serious issue to be tried, but also that it was more likely than not that he would succeed at trial. Since the delay in obtaining a trial date meant that the likely effect of the grant of an injunction would be finally to decide the dispute against the ex-employee, some assessment of the merits, more than merely that there was a serious issue to be tried, was required. It should, however, be noted that the Court of Appeal were of the view that it would have been wrong to regard the likelihood of success as the sole consideration (even though it had apparently been the determinative factor in that particular case). Staughton LJ (at pages 424a–b) emphasised that there should in such cases be only ‘some assessment’ of the merits, because the courts constantly seek to discourage prolonged interlocutory battles on witness statement evidence – it was for the judge to control the extent of this assessment. 14.76 Faced with an application for an interim injunction which was bound to be dispositive of the proceedings (in circumstances where the relevant covenants were six months in duration, and three months had already expired by the date of the interim hearing) the court in 1st Choice Recruitment v Hancock [2003]  EWHC  2332 (QB) agreed with the parties’ submissions that the ‘full rigors’ of the American Cyanamid test ‘could not satisfactorily be fully applied’ (paragraph 7). The court did not identify exactly how the test to be applied differed. It granted partial relief to the applicant, permitting the defendant to continue in her employment with her new employer, but with the qualification that she must abide by the non-dealing and non-solicitation provisions of her contract with the claimant. 897

14.77  Interim remedies: general

14.77  Notwithstanding the increasing regularity of orders for speedy trial, cases do still arise in which delay to trial is a significant factor in granting relief. In Phoenix Partners Group LLP  v Asoyag [2010]  IRLR  594, the ex-employee’s contractual restraint had just three months left to run by the time the former employer made its application to court to restrain his joining a competitor. The judge found that, given that a trial was very unlikely to be heard before the end of the expiry of the covenants, it was appropriate to give some consideration to the merits of the case. The judge refused to grant the injunction. 14.78 In CEF  Holdings Ltd v Mundey [2012]  EWHC  1524 (QB) a claim to restrain breaches of post-termination covenants could not be tried until the very end of the period of the contractual restraint. The judge considered that there was then likely to be a further passage of time until the judgment was handed down. In those circumstances, it was held that the proper approach was not to apply the American Cyanamid test on the application, but instead to consider whether it was more likely than not that the applicant would succeed at trial (see paragraphs 25–29). 14.79 By contrast, in Le Puy Ltd v Potter [2015]  IRLR  554, judgment on an interim application was made just less than three months into a 12-month restrictive covenant. It was estimated that a speedy trial and judgment would have taken a further three–four months, meaning that approximately five–six months of the 12-month covenant would still be left to run. The judge found (paragraph  22) that this timetable did not make the American Cyanamid approach inapplicable: the decision on the interim application ‘would not dispose of the action finally’ nor would the relevant covenants, by the time of judgment after trial, have ‘substantially expired’ (quoting respectively Lord Diplock in NWL  v Woods and Staughton LJ in Lansing Linde v Kerr). The judge therefore approached the matter on the basis that the appropriate question remained whether there was a serious question to be tried, but did consider that the passage of time before trial to be a relevant consideration when considering the balance of convenience (paragraph 23). See also Dorma UK Ltd v Bateman [2016] IRLR 616, in which the judge also declined to follow the Lansing Linde approach on the facts.

5(c)  Section 12 Human Rights Act 1998 14.80  In cases involving interim injunctions restraining the misuse of confidential information, regard has to be had to section 12 Human Rights Act 1998, which provides: ‘(1) This section applies if a court is considering whether to grant any relief which, if granted might affect the exercise of the Convention right to freedom of expression. (2) If the person against whom the application for relief is made (“the respondent”) is neither present nor represented, no such relief is to be granted unless the court is satisfied— 898

The evidence: strength of the case 14.81

(a) that the applicant has taken all practicable steps to notify the respondent; or (b) that there are compelling reasons why the respondent should not be notified. (3)

No such relief is to be granted so as to restrain publication before trial unless the court is satisfied that the applicant is likely to establish that publication should not be allowed.

(4)

The court must have particular regard to the importance of the Convention right to freedom of expression and, where the proceedings relate to material which the respondent claims, or which appears to the court, to be journalistic, literary or artistic material (or to conduct connected with such material), to— (a) the extent to which— (i) the material has, or is about to, become available to the public; or (ii) it is, or would be, in the public interest for the material to be published; (b) any relevant privacy code.’

14.81  Following earlier controversy regarding the meaning and effect of this section, and in particular the degree to which the words ‘likely to establish’ required the applicant to establish the merits of his case, the House of Lords in Cream Holdings Ltd v Banerjee [2005] 1 AC 253 held at paragraphs 20–22 that the correct approach to ‘likely to establish’ is as follows: ‘[20] These considerations indicate that “likely” in s  12(3) cannot have been intended to mean “more likely than not” in all situations. That, as a test of universal application, would set the degree of likelihood too high. In some cases application of that test would achieve the antithesis of a fair trial. Some flexibility is essential. The intention of Parliament must be taken to be that “likely” should have an extended meaning which sets as a normal prerequisite to the grant of an injunction before trial a likelihood of success at the trial higher than the commonplace American Cyanamid standard of “real prospect” but permits the Court to dispense with this higher standard where particular circumstances make this necessary. [21] Similar problems have arisen with other statutory provisions imposing a statutory threshold on the grant of relief by a Court. Two instances may be mentioned. A prerequisite to making a care order under s 31 of the Children Act 1989 is that the child in question is suffering or “is likely to suffer” significant harm. Your Lordships’ House has held that in this context “likely” is used in the sense of a real possibility, a possibility that cannot sensibly be ignored having regard to the nature and gravity of the feared harm in the particular case: see Re H (minors) (sexual abuse: standard of proof) [1996] 1 All ER 1 at 14–15, [1996] AC  563 at 585. So the degree of likelihood differed according to the circumstances of the case. Again, a prerequisite to making an administration order under s 8(1) of the Insolvency Act 1986 is that the court considers making such an order “would be likely to achieve” one of the statutory purposes. Following the lead given by Hoffmann J  in Re Harris Simons Construction Ltd [1989]  BCLC  202, [1989] 1  WLR  368, in Re Primlaks (UK) Ltd 899

14.82  Interim remedies: general

[1989] BCLC 734 at 742 Vinelott J held this required the court to be satisfied there is a “prospect sufficiently likely in the light of all the other circumstances of the case to justify making the order”. [22] In my view section 12(3) calls for a similar approach. Section 12(3) makes the likelihood of success at the trial an essential element in the court’s consideration of whether to make an interim order. But in order to achieve the necessary flexibility the degree of likelihood of success at the trial needed to satisfy s 12(3) must depend on the circumstances. There can be no single, rigid standard governing all applications for interim restraint orders. Rather, on its proper construction the effect of s  12(3) is that the court is not to make an interim restraint order unless satisfied the applicant’s prospects of success at the trial are sufficiently favourable to justify such an order being made in the particular circumstances of the case. As to what degree of likelihood makes the prospects of success “sufficiently favourable”, the general approach should be that courts will be exceedingly slow to make interim restraint orders where the applicant has not satisfied the court he will probably (“more likely than not”) succeed at the trial. In general, that should be the threshold an applicant must cross before the court embarks on exercising its discretion, duly taking into account the relevant jurisprudence on art 10 and any countervailing convention rights. But there will be cases where it is necessary for a court to depart from this general approach and a lesser degree of likelihood will suffice as a prerequisite. Circumstances where this may be so include those mentioned above: where the potential adverse consequences of disclosure are particularly grave, or where a short-lived injunction is needed to enable the court to hear and give proper consideration to an application for interim relief pending the trial or any relevant appeal.’

This passage has been frequently cited and approved, not least by the Supreme Court in PJS v News Group Newspapers Ltd [2016] UKSC 26 in which it was said to contain the proper approach to likelihood (paragraphs 19 and 54). 14.82 Accordingly, in most breach of confidence cases the applicant will have to show that he will probably succeed at trial, but there may be circumstances in which a lesser threshold will suffice, eg where the potential adverse consequences of disclosure are particularly grave, or where short holding relief is required until the court can consider the matter more fully.

5(d)  Practical conclusions 14.83  Despite emphasis by the Court of Appeal that American Cyanamid principles apply to restrictive covenant injunctions, in the witness statements lodged on behalf of the applicant, care should be taken, not merely to set up serious issue to be tried on the merits, but (within reasonable limits) to show the strength of his case. This may arise because: •

900

There is a tendency in modern practice for the period of the covenants not to be long, and it may be that, despite the modern tendency to opt for a speedy trial, the parties and the court will not be ready for trial before the expiry

The evidence: strength of the case 14.83

of the covenant. In many cases the grant or refusal of the injunction may effectively dispose of the action; therefore the court will often have regard to the merits. •

Conversely, where the covenants are long and a trial cannot be held within a short time, damages may not adequately compensate the respondent, and this may result in the court referring to the merits (see the statement of Balcombe LJ in Lawrence David, referred to at 14.72).

•

The court may conclude that the issues are simple, or do not require further investigation, and therefore decide the matter on the merits: see Business Seating (Renovations) Ltd v Broad [1989] ICR 729 and Mainmet Holdings pIc v Austin [1991]  FSR  538. Under its case management powers, the court may strike out a statement of case if it concludes that it discloses no reasonable grounds for bringing or defending the claim, or is an abuse of the court’s process, or is shown to be likely to obstruct the just disposal of the proceedings (CPR, r 3.4(2)), or it may give summary judgment where a party has no real prospect of succeeding in his claim or defence (CPR, r 24.2).

•

In a breach of confidence case the applicant must identify properly the confidential information on which he relies. In a restrictive covenant case it should be borne in mind that the court (even when applying American Cyanamid) will not hesitate to strike out covenants which are plainly bad.

•

Section 12 Human Rights Act 1998 applies to breach of confidence cases.

•

In relation to mandatory injunctions there is authority to the effect that the court may require a higher degree of assurance than the low American Cyanamid threshold of a serious issue to be tried: Leisure Data v Bell [1988]  FSR  367 (CA); compare Locabail International Finance Ltd v Agroexport, The Sea Hawk [1986] 1  All ER  901 (CA) and Films Rover International Ltd v Cannon Film Sales Ltd [1987] 1 WLR 670. In Zockoll Group Ltd v Mercury Communications Ltd [1998]  FSR  354, the Court of Appeal made clear (at page 365), that semantic arguments over the characterisation of an injunction as ‘mandatory’ or ‘prohibitory’ are barren. What matters most is what the practical consequences of the actual injunction are likely to be: National Commercial Bank Jamaica Limited v Olint Corp. Limited [2009] 1  WLR  1405 (paragraph  20). The court in Zockoll Group also approved the statement of the applicable principles set out in Nottingham Building Society v Euro­ dynamics Systems plc [1993] FSR 468 at page 474, namely that: >

the overriding consideration is which course is likely to involve the least risk of injustice if it turns out to be ‘wrong’ (in the sense of failing correctly to predict whether or not the relevant right to an injunction would be established at trial);

>

the court must keep in mind that an order which requires a party to take some positive step at an interlocutory stage may well carry a greater risk of injustice if it turns out to have been wrongly made than an order which merely prohibits action, thereby preserving the status quo; 901

14.84  Interim remedies: general

>

it is legitimate to consider whether the court does feel a high degree of assurance that the applicant will be able to establish his right at a trial – that is because the greater the degree of assurance that the applicant will ultimately establish his right, the less will be the risk of injustice if the injunction is granted;

>

even where the court is unable to feel any high degree of assurance that the applicant will establish his right, there may still be circumstances in which it is appropriate to grant a mandatory injunction at an interim stage – those circumstances will exist where the risk of injustice if the injunction is refused sufficiently outweigh the risk of injustice if it is granted.

6. OBTAINING THE EVIDENCE 14.84  Usually the witness statements necessary to support an application for an injunction are provided by the (ex-)employer and his present employees. Sometimes witness statements are provided by customers, although for obvious reasons there is often a reluctance on the part of (ex-)employers to draw their customers into the fray. 14.85  Sometimes the evidence of enquiry agents is required to bolster a case in which the evidence of breach of covenant or confidence is too sketchy or anecdotal. There is no objection in principle to using enquiry agents for this purpose. Using an agent provocateur to place trap orders is also permissible, but the applicant must make full disclosure in his application: Walt Disney Productions Ltd v Gurvitz [1982] FSR 446. The court may, however, look askance at such evidence – it should be used judiciously. Where the identity of informants cannot be revealed, the judge must be told that this information cannot be given to him. It will be for the judge to decide to what extent he is prepared to rely on information coming from anonymous and unidentifiable sources: WEA  Records Ltd v Visions Channel 4 Ltd [1983] 1 WLR 721 at page 724. These cases pre-dated the introduction of the CPR, as well as the incorporation into English law of Article 8(1) European Convention for the Protection of Human Rights (right to respect for private and family life) and Fundamental Freedoms 1950 (as set out in Schedule 1 Human Rights Act 1998). 14.86  The interaction between the CPR and the Human Rights Act was considered in the context of enquiry agents being used in personal injury cases in Jones v University of Warwick [2003] 3 All ER 760 (a personal injury claim) where, on the facts, covertly obtained video evidence was held to be admissible. In that case, an enquiry agent, acting for the defendant’s insurers, obtained access to the claimant’s home on two occasions by posing as a market researcher, and, using a hidden video camera, recorded the claimant without her knowledge. The defendant’s expert, having viewed the video recordings, was of the opinion that the claimant had an entirely satisfactory function in her right hand. On an application for directions by the insurers as to the admissibility of this evidence, the district 902

Witness statements or other evidence in writing 14.87

judge ruled the evidence inadmissible on the basis that court ‘should not in any way give approval to the methods used by the defendant’s agent in misleading the claimant and gaining improper entry to her home’. The decision was successfully appealed to the High Court. There, Judge Charles Harris QC reasoned that the court should not be ‘too astute to prevent effective investigation by defendants of the claims against them’, and concluded that the public interest that defendant insurers should be able to prevent and uncover an unjustified, dishonest and fraudulent claim outweighed the claimant’s right to privacy. The Court of Appeal regarded the approach that had been adopted by the High Court to the question whether the evidence was admissible as consistent with that which would have been adopted prior to the coming into force of the CPR and the Human Rights Act, when the achieving of justice in the particular case before the court was the paramount consideration. That approach, however, did nothing to promote the observance of the law by those engaged or about to be engaged in legal proceedings, which was also a matter of real public concern. If the conduct of the insurers went uncensured, there would be a significant risk that practices of the type which they had adopted would be encouraged, and that would be highly undesirable. Proactive management of civil proceedings, which was at the heart of the CPR, was not only concerned with an individual piece of litigation which was before the court, but was concerned with litigation as a whole. Where the respondent’s insurers had been responsible for trespass and for contravention of a claimant’s privacy, in violation of Article 8 European Convention on Human Rights, that was a relevant consideration for the court in the exercise of its discretion in making orders as to the management of the proceedings. The conduct of the insurers had, however, not been so outrageous that the defence should be struck out, and it was artificial and undesirable for evidence which was relevant and admissible to be excluded. Accordingly, the Court of Appeal declined to interfere with the decision of the High Court. The court, however, reflected its disapproval of the insurers’ conduct by ordering that the defendant pay the costs of the proceedings relating to the admissibility of the evidence. The principles set out in Jones are of general applicability. The duty to make full and frank disclosure will require the applicant to disclose the fact that he has used enquiry agents, and probably also the means whereby they have obtained their information.

7. WITNESS STATEMENTS OR OTHER EVIDENCE IN WRITING 7(a) Form 14.87  The rules relating to the form and content of written evidence are set out in the Practice Direction to CPR, Part 32. Applications for an interim remedy should generally be supported by evidence in the form of a witness statement, although for applications for search orders or freezing injunctions an affidavit must be used (PD 32, paragraph 1.4). Aside from where an affidavit is required, the CPR enables a party to rely upon his statement of case or application notice at a hearing other than the trial if that document is verified by a statement of truth: see CPR, r 32.6. Statements of information and belief (ie information not within the personal knowledge of the person signing the witness statement) are 903

14.88  Interim remedies: general

admissible in witness statements and affidavits, but PD 32, paragraphs 4.2 and 18.2 require that the affidavit or witness statement indicate which statements are from the witness’s own knowledge and which are matters of information or belief, and that the source of such information or belief be identified. This provides a solution to the problem which arises where (as is often the case) the (ex-)employer does not wish to embroil customers in giving witness statements: an employee of the (ex-)employer can relate the information which the customer has given to him – provided the source is identified. If the source of the information is not identified, or if there is any other failure to comply with the requirements of Part 32 and PD 32, the court may refuse to admit it as evidence and may refuse to allow the costs arising from its preparation (PD 32, paragraph 25.1).

7(b)  General contents checklist 14.88  The witness statements will need to cover: •

Each of the elements of the particular cause of action in order to show a serious issue to be tried; in cases based on contract, this involves identification of the contract, particular terms relied on, the facts constituting breach, and reference to the loss or expected loss flowing from the breach. Where the injunction sought is to enforce a non-solicitation/dealing covenant or noncompetition covenant, all the facts relevant to show the reasonableness of the covenant must be covered, including the specific interest which the covenant is intended to protect. In breach of confidence cases it is necessary to set out all the facts relied on as proving that the information is a trade secret or confidential (see Chapter 6).

•

The facts generating a claim for injunctive relief, in particular where the injunction is on the basis of threatened (not actual) breach (quia timet), the grounds for such apprehension must be set out.

•

The elements relevant to the balance of convenience, for example: >

the nature of the potential harm to the applicant, if the injunction is not granted, and the reasons why such harm is not compensatable in damages; what is known about the financial position of the respondent and (where appropriate) that the harm which the applicant might suffer is not easily quantifiable;

> the reasons why the cross-undertaking in damages will provide adequate protection to the respondent; the financial position of the applicant and (where appropriate) that any loss to the respondent is easily quantifiable. •

Where the party is under a duty to make full and frank disclosure, all other facts which are required to comply with that duty.

•

If the application is made without notice, the facts justifying this course.

For an example of a witness statement, see Chapter 18, Appendix 5. 904

Witness statements or other evidence in writing 14.91

7(c) Witness statements/statements of case/court records/hearings in breach of confidence cases – maintaining confidence 7(c)(i)  Particularity needed in witness statements/statements of case 14.89  Particular difficulties may be experienced in the preparation of witness statements in confidential information cases. The employer will need sufficiently to identify the secrets or confidential information to persuade the court that there are genuine trade secrets or items of confidential information and the reasons why the information is regarded as confidential (see Chapter 6). Against this is the need not to refresh the (ex-)employee’s knowledge of the confidential information or trade secrets in question – or indeed (in cases of uncertainty as to precisely which of a range of secrets the (ex-)employee has learnt) not to disclose the full range of secrets to him. Normally in the case of commercial secrets it is easy enough to describe the class of documents (eg customer list) without revealing its contents. In cases of technical secrets it is usually also possible to describe the class of secrets and the reasons why the information or particular elements of it are secret or confidential without divulging the detailed contents – but not always. The dilemma is described by Graham J  in Diamond Stylus Co Ltd v Bauden Precision Diamonds Ltd [1973] RPC 675: ‘[The applicant’s] difficulty is that if he does disclose in detail what his process is, he thereby gives away secrets, which is the one thing he does not want to do, though he may in such a case be able to make out his prima facie case by showing that the respondent has used part or the whole of that process. If on the other hand he is not prepared to disclose his secret then he is in obvious difficulty in showing that what the respondent has done is to take that secret, because there is not ex hypothesi sufficient identification of the latter to enable a satisfactory conclusion to be drawn.’

14.90 In Under Water Welders & Repairers v Street and Longthorne [1968] RPC 498 Buckley J said that: ‘It is not to be expected that a [applicant] who is seeking to protect some commercial secret will disclose the nature of that secret, particularly in interlocutory proceedings.’

Buckley J (somewhat surprisingly) granted an injunction despite finding that the applicants had not in their evidence condescended to any details as to precisely which characteristic of the process for which they were seeking protection gave it a confidential character. 14.91 However, in Diamond Stylus Graham J  distinguished Under Water Welders, saying: ‘… each case must be judged in the light of its own particular facts and the governing principle in each case is that the [applicant] must make out a prima facie case if he is to be entitled to an interlocutory injunction. It may be in some cases that a [claimant] is able to do that without disclosing much in the way of detail about his particular process in which he claims secrecy or confidence. On the other hand there are other cases where it seems to me, depending on the 905

14.92  Interim remedies: general

surrounding circumstances and the state of knowledge generally in the art [state of the art], that he may have to go further and disclose at any rate the essential features of his process which he says have been taken.’

See also ESL Fuels Ltd v Stephen Fletcher & Anor [2013] EWHC 3726 (Ch) at paragraphs 39–40 (referring to a previous edition of this book) which holds that the issue is always fact specific and depends on the sufficiency of knowledge of the defendant and their ability to comply with the order. 14.92  Although, since the decision of the House of Lords in American Cyanamid Co v Ethicon Ltd [1975] AC 396, the applicant need only show a serious question to be tried as to the existence of a trade secret, we suggest that it remains unwise not to provide adequate evidence in this regard. In Lock International pIc v Beswick [1989] 3 All ER 373 at page 378h–j Hoffmann J said: ‘It is of course tempting in an action such as this, concerned with the technicalities of electronics, to say that the questions at issue can only be investigated at the trial and that for Cyanamid purposes the applicant must be treated as having an arguable case. It would however, be unjust to the respondents simply to allow the [applicant] to blind the court with scientific banalities.’

In CMI-Centers for Medical Innovation GmbH v Phytopharm pIc [1999] FSR 235 Laddie J reiterated the importance even at the interim stage of the applicant identifying precisely the information on which he relies. In Amber Size & Chemical Co Ltd v Menzel [1913] 2 Ch 239 Astbury J held that where the court is satisfied that there is a secret process and that the employee has learnt it in the course of his employment, but the court does not know the full nature and extent of the secret process, it can still grant an injunction – despite the normal rule that the court will not make an order the performance of which it cannot enforce. In the event of alleged breach of the order the claimant could supply to the court ­details of the process, subject to proper safeguards against disclosure. It seems u­ nlikely that a court would nowadays permit matters to be conducted in this way, preferring the procedures described at 14.97–14.101. 7(c)(ii) Particularity required in a restrictive covenant case – as distinct from a breach of confidence case 14.93 In accordance with the decision of the Court of Appeal in Faccenda Chicken Limited v Fowler [1986] 3 WLR 288, it is necessary, in the absence of an express non-solicitation/dealing or non-competition covenant, to show a serious issue to be tried that the information is a trade secret and not merely confidential (unless there has been a breach of confidence during employment, eg removal of confidential documents): see Johnson & Bloy (Holdings) Ltd v Wostenholme Rink plc [1987] IRLR 499; it is essentially a question of degree: PSM International plc v Whitehouse [1992] IRLR 279 at page 282 (see Chapter 6). 14.94 The position is different where a restrictive covenant (usually a noncompetition covenant) is sought to be enforced on the basis that it is supported by an interest in confidential information. Here, the court must be satisfied that the 906

Witness statements or other evidence in writing 14.96

employer has given sufficient detail of the confidential information to establish that he has a legitimate interest to protect – but no more is necessary: Scully UK Ltd v Lee [1998] IRLR 259 (CA) at paragraph 23 per Aldous LJ. This view is to be preferred to that expressed in FSS  Travel and Leisure Systems Ltd v Johnson [1998] IRLR 382 (CA) at paragraph 34 by Mummery LJ. In that case Mummery LJ concluded that the confidential information relied upon by the applicant was ‘too vague and indefinite to constitute trade secrets protectable by the restrictive covenant’ (see penultimate paragraph of the judgment). Mummery LJ appeared to rely in support of his view on cases which were not covenant cases. Indeed, if the covenantor were to be required to prove the existence of trade secrets to the same extent as if he were not the holder of a covenant, much of the advantage of having such a covenant (as explained in Littlewoods Organisation v Harris [1978] 1 All ER 1026 (CA) – see 11.53) would be lost. The approach in Scully was approved by the Court of Appeal in Thomas v Farr plc and others [2007] ICR 932 at paragraphs 41–42 (following trial of the action), and has been applied since (see for example UK Power Reserve Ltd v Read and others [2014] EWHC 66 (Ch) at paragraph 74). 14.95 In Manchester v IBM United Kingdom Ltd [2006] EWHC 39 (Ch) (following an order for a speedy trial as to the enforceability of restrictive covenants in a business sale agreement said to be justified by confidential information) the court ordered (pursuant to a request) provision of further information to elicit exactly the categories of information upon which the applicant proposed to rely. This was required to be spelt out in answer to the request before the process of witness statements was embarked upon. 14.96  In respect of confidential information, Hoffmann J  (as he then was) in Lock International Plc v Beswick [1989] IRLR 481 held that in a claim against an employee for misuse of confidential information it is of the essence that the employer should be able to identify with particularity the trade secret to which he lays claim. The terms of any injunction must also be capable of being framed in sufficient detail to enable the defendant to know exactly what information he is not free to use on behalf of his new employer: see Ocular Sciences Limited v Aspect Vision Care Limited [1997]  RPC  289 (although that was a claim for final relief at trial). That case also sets out the need for full and proper particulars of all the confidential information on which a claimant intends to rely in a claim for breach of confidence, and also on the extent of an employee’s right to use his acquired skill and expertise. On this latter aspect, see also the decisions of Brightman J in United Sterling Corporation Ltd v Felton & Mannion [1974] IRLR 314 and the Court of Appeal in FSS Travel & Leisure Systems Ltd v Johnson [1998] IRLR 382. The latter decision emphasised the need to identify and establish, by sufficiently specific, precise and cogent evidence, a body of objective knowledge qualifying for protection as a trade secret quite separate from the skill, experience, know-how and general knowledge inevitably acquired by a previously professionally qualified employee before and during the course of his employment. The need for a claimant to provide particulars of the information said to be confidential was robustly emphasised by the Court of Appeal in Caterpillar Logistics Services (UK) Ltd v de Crean [2012] EWCA Civ 156. 907

14.97  Interim remedies: general

7(c)(iii)  Confidentiality club undertakings 14.97 As in cases where it is necessary to reveal secrets to the court in order to discharge the duty to make full and frank disclosure (referred to at 14.45), a practical solution in many cases may be to include the details of the secret information in a separate witness statement to the main witness statement, or by way of an exhibit which will be disclosed to the respondent’s solicitors and counsel (and, where necessary, any expert witnesses), but not to the respondent, except in controlled conditions. Each such document should be marked as confidential and numbered, and a specific undertaking (sometimes referred to as a ‘confidentiality club undertaking’) extracted from the respondent’s solicitor not to ‘read’ such documents onto its computer system, not to disclose the contents, except for the sole purposes of the litigation, eg to legal advisers and expert witnesses, and to the litigant (but only in the presence of his solicitors or counsel). The undertakings may also extend to preventing or limiting the taking of notes or extracts from the documents, and for only a fixed number of copies to be made (for the use of counsel and experts) and providing at the end of the proceedings for the return to the applicant’s solicitors of all the documents (and any copies): see Warner-Lambert Co v Glaxo Laboratories [1975] RPC 354. Where proceedings are served on litigants who are not represented, the applicant may seek as part of the order from the court a provision that confidential exhibits/statements will not be served on the respondents until suitable confidentiality club undertakings are provided by the litigant personally and (if appropriate) by any legal representatives he intends to appoint. Similar confidentiality undertakings should, of course, be obtained where it is necessary to disclose confidential information in the course of negotiations. 7(c)(iv)  Use of disclosed documents – court sitting in public/private 14.98 Even without express safeguards such as a confidentiality club undertaking, the applicant will be protected by the rule that a party who obtains disclosure may use the documents disclosed to him only for the purpose of conducting his own case (except where the document has been read or referred to in a public hearing – save where the court otherwise orders – or the court gives permission, or the parties agree): CPR, r 31.22. Particular consideration should be given to the fact that once documents are read in open court they are considered to be in the public domain. However, under CPR, r 31.22(2) the court may make an order prohibiting or restricting use of a document which has been disclosed, even where it has been read to or by the court or referred to at a hearing which has been held in public. An application for such an order may be made by a party or the person to whom that document belongs: CPR, r 31.22(3). Further, documents read by the court as part of pre-trial preparation are likely to be treated as if they had been read out in open court (subject to the need to protect the ability of the court to do justice in a particular case): SmithKline Beecham Biological SA  v Connaught Laboratories Inc [1999] 4 All ER 498; Barings plc (in liquidation) v Coopers & Lybrand [2000] 3 All ER 910; R. (Guardian News and Media Ltd) v City of Westminster Magistrates’ 908

Witness statements or other evidence in writing 14.100

Court [2012]  EWCA  Civ 420. See also Robert Bunn v BBC  [1997]  FSR  70. Accordingly, if it is sought to maintain confidentiality in particular documents, those documents should be placed in a separate confidential file and, where necessary, references to those documents should be contained in a separate confidential part of the skeleton argument. The court should then be asked to deal with all matters relating to those documents in private. The general rule is that hearings are to be in public. Amongst the exceptions to this rule are cases where publicity would defeat the object of the hearing, or cases involving confidential information (including information relating to personal financial matters) and publicity would damage that confidentiality (see CPR, r 39.2(3) and see Practice Direction – Miscellaneous Provisions Relating to Hearings (PD  39A, paragraph  1)). Paragraph  1.4 of the Practice Direction provides that the decision as to whether to hold a hearing in public or in private must be made by the judge conducting the hearing, having regard to any representations which may have been made to him. Paragraph 1.8 of the Practice Direction provides that nothing in this Practice Direction prevents a judge ordering that a hearing taking place in public shall continue in private, or vice-versa. 7(c)(v) Transcripts/redacted judgments/orders restricting publication of names etc/ court records 14.99  One consequence of hearings in public is an automatic right to a transcript, subject to payment of the appropriate fee, whereas, if the hearing is in private, a member of the public who is not a party to the proceedings must seek the permission of the judge before obtaining a transcript of the judgment (PD 39, paragraphs 1.11 and 1.12). Where appropriate, the court should also be requested to render its judgment in a redacted form: see D  v P  [2015]  EWHC  3152, and [2016]  EWCA  87. In practice, this can be achieved by the parties’ legal representatives agreeing with the court which particular passages in the draft judgment should be redacted. See ESL  Fuels Ltd v Stephen Fletcher & Anor [2013] EWHC 3726 (Ch) for an example of a case in which this procedure was adopted. 14.100  It should be noted too that the court has power under section 11 Contempt of Court Act 1981 to give directions prohibiting publication of a name or other matter in connection with proceedings before it (the White Book, Vol 2). Parties should also have regard to CPR, r 5.4 relating to accessibility of court records. Under CPR, r 5.4C non-parties may without permission from the court obtain from the court records statements of case and judgments. Under CPR r 5.4C, paragraph 4 the court may order that such documents may not be disclosed to a non-party, or that it may only be disclosed to a limited class of persons, or may only be disclosed if edited under the direction of the court. For such an order the person applying for it must file an application notice in accordance with Part 23. CPR, r 5.4B to 5.4D provide parties to proceedings with the right without application to court to apply for quite a wide range of documents from the court records and, with the permission of the court, to apply for any other documents, files or correspondence between the court and a party or another person. 909

14.101  Interim remedies: general

14.101  It should not be thought that the CPR provides an exhaustive list of the circumstances in which documents filed at or relied upon in court will be made available to non-parties. The breadth of a non-party’s right to copies of written evidence, written arguments and correspondence relied upon but not read out in open court was examined by the Court of Appeal in R. (Guardian News and Media Ltd) v City of Westminster Magistrates’ Court [2012] EWCA Civ 420 (at paragraphs 69 to 91) per Toulson LJ). The Court of Appeal confirmed that the basis of such a right is the principle of open justice: ‘a constitutional principle to be found not in a written text but in the common law’ (paragraph 69). It is for the courts to determine its requirements, subject to any statutory provision. The Court of Appeal concluded that the courts therefore have an inherent jurisdiction to determine how the principle should be applied. For a recent example of a successful application by a non-party for access to court documents, in which the court took the opportunity to review the principle of open justice and the scope of its jurisdiction to permit public access to documents disclosed in litigation, see Dring v Cape Distribution Limited [2017] EWHC 3154.

8. DOCUMENTATION GENERALLY 14.102  For the purpose of obtaining an interim injunction it is necessary to produce a number of separate documents, often in short order. In this section the following documents are considered: •

Claim form (14.103).

•

Application notice (14.104)

•

Particulars of Claim (14.105).

•

Witness statement(s) or affidavit(s) (14.106).

•

Draft minute of order (14.107).

•

Skeleton Argument, court bundles etc (14.108).

•

Costs schedule (14.110).

Examples of these documents can be found at the Appendices to Chapter 18. At 14.111, the acts required of a respondent are considered.

8(a)  A claim form 14.103  An application may be made before issue of proceedings, but the applicant will have to demonstrate either that the matter is urgent or that it is otherwise necessary in the interests of justice to grant a remedy before a claim has been made: CPR, r 25.2. In such circumstances, and subject to the court making a different order, the court will require the applicant to undertake to issue and 910

Documentation generally 14.105

serve a claim form immediately (PD  25A, paragraph  4.4(1)), or it will direct that proceedings be commenced pursuant to its power under CPR, r 25.2(3), which states that where it grants a remedy before a claim has been commenced, the court should give directions requiring a claim to be commenced. Where possible, the claim form should be served with any order obtained (PD  25, paragraph  4.4(2)). Because of the requirements of urgency and frequent lack of knowledge of the full details of the claimant’s case, it will often be wise not to serve particulars of claim with the claim form at the outset – but then the particulars of claim must be served in accordance with CPR, r 7.4(1)(b), within 14 days of service of the claim form, unless an extension of time is obtained from the defendant or the court. In Hytrac Conveyors Limited v Conveyors International Limited [1983] 1  WLR  44 the applicant’s claim was struck out through failure to serve the Statement of Claim (as it was then known) within the time limits, despite having executed a search order. The claim form must be verified by a statement of truth: CPR, r 22.1. The statement of truth must be signed by the party or the legal representative on behalf of the party: CPR, r 22.1(6). Generally, it is preferable that the client signs the statement of truth. This may help to concentrate the mind of the client on the accuracy of what is being put forward on his behalf.

8(b)  An application notice 14.104  The notice must set out the order sought and (briefly) the grounds relied on, as well as the date, time and place of the hearing (CPR, r 23.6(b); PD 25, paragraph 2.1). It must also be verified by a statement of truth pursuant to CPR, Part 22. In some circumstances, such as exceptional urgency, the court may dispense with the need for an application notice (CPR, r 23.3(2)(b) and see PD 23A, paragraph  3 for a list of other circumstances in which an order may be made without service of an application notice. Subject to a contrary order from the court, the application notice and evidence in support must be filed with the court on the same or next working day after the hearing (PD 25A, paragraph 4.3(2)) and the applicant must undertake to do this and to pay the appropriate fee as part of the order (PD 25A, paragraph 5.1(4)).

8(c)  Particulars of claim 14.105  Applicants for interim relief should note the imperative of prompt service of particulars of claim. The Court of Appeal has expressly warned claimants that the interests of justice and efficient and fair conduct of proceedings in respect of confidentiality injunctions demand that the claimant’s case be fully pleaded as soon as possible, so that the defendant and the judge know precisely what case needs to be met: Caterpillar Logistics Services (UK) Ltd v de Crean [2012] EWCA Civ 156 (paragraphs 72–73). Quite how soon particulars of claim can be drafted and served will vary from case to case. The realities of a fast-paced application for interim relief will mean that the assimilation of witness statements may have to take priority in the first instance. 911

14.106  Interim remedies: general

8(d) A witness statement or witness statements (or affidavit, in the case of freezing or search orders) 14.106  A witness statement is necessary, signed or in draft, unless the applicant proposes to rely on the contents of his application notice or particulars of claim (provided that such notice or particulars are verified by a statement of truth in accordance with CPR, Part 22); as in the case of the claim form, it is often preferable that the client signs the statement of truth. This may help to concentrate his mind on the accuracy of what is being put forward on his behalf. Applications for a search order or freezing injunction must be supported by affidavit evidence: see PD25A, paragraph  3.1. The evidence must set out the facts on which the applicant relies for the claim being made against the respondent, including all material facts of which the court should be made aware. Where an application is made without notice to the respondent, the evidence must also set out why notice was not given. See PD25A, paragraphs 3.3–3.4.

8(e)  Draft minute of order 14.107 In Memory Corporation v Sidhu [2000] 1  WLR  1443, Mummery LJ stressed (at page 1460) that, save in exceptional circumstances, an application should not be made unless the advocate is able to produce a draft order for the judge to read before the hearing starts. This requires careful drafting: any order for an injunction must set out clearly what the respondent must or must not do (see PD 25, paragraph 5.5). A draft of the order should also be available to the court ‘on disk in a format compatible with the word processing software used by the court’ (PD 25, paragraph 2.4); in practice this is usually achieved by sending to the Court the draft Order in .doc or .docx format, attached to an email. Standard form precedents for interim injunctions were set down in Practice Direction (Interlocutory Injunctions: Forms) [1996] 1 WLR  1551, and should continue to be used with modification to reflect the CPR (in particular PD 25A, paragraph 5). Standard forms for search and freezing orders are contained in the White Book Forms Volume. The standard form freezing injunction also appears as an annex to PD 25.

8(f) Skeleton arguments/chronologies/cast lists/authorities/time estimates/court bundles 14.108  Additionally, the advocate should provide the court with a skeleton argument and (where appropriate having regard to the complexity of the matter) with a dramatis personae (or cast list) and/or chronology. The Guides (Chancery and Queen’s Bench Division and other specialist courts such as the Commercial Court) should be consulted as to the different courts’ specific requirements in relation to the timing and contents of skeleton arguments, the requirement for accurate time estimates of hearings, the need for chronologies and cast list and the provision of legal authorities to the court, as well as agreement and provision of bundles of the relevant documents. See generally Chapter 12 of 912

Documentation generally 14.111

the Queen’s Bench Division Guide (the White Book, Vol 2) and Chapter 16 of the Chancery Guide (the White Book, Vol 2). As to the requirement for the advocates to provide to the court realistic time estimates for the hearing, the need to revise such estimates where necessary, and the sanctions for non-compliance, see paragraph 12.3.1 of the Queen’s Bench Guide (the White Book, Vol 2) and paragraphs 16.16–16.17 of the Chancery Guide (the White Book, Vol 2). As to the citation of legal authorities see the Practice Direction on Citation of Authorities (the White Book, Vol 2). There are also Practice Directions on Form and Citation of Judgments and neutral citation of legal authorities (the White Book, Vol 2). 14.109  Practitioners drafting skeleton arguments should be mindful of the Court of Appeal’s decision in Inplayer Ltd & Anor vs Thorogood [2014] EWCA Civ 1511 (see paragraphs 52–57). In comments directed towards skeleton arguments in the Court of Appeal but applicable more widely, Jackson LJ issued a strong rebuke to those responsible for the ‘poor quality and excessive length of some skeleton arguments’. It was noted at paragraph 55 that: ‘As anyone who has drafted skeleton arguments knows, the task is not rocket science. It just requires a few minutes’ clear thought and planning before you start. A good skeleton argument (of which we receive many) is a real help to judges when they are pre-reading the (usually voluminous) bundles. A  bad skeleton argument simply adds to the paper jungle through which judges must hack their way in an effort to identify the issues and the competing arguments. A good skeleton argument is a real aid to the court during and after the hearing. A bad skeleton argument may be so unhelpful that the court simply proceeds on the basis of the grounds of appeal and whatever counsel says on the day.’

In exercising its discretion the Court of Appeal disallowed the successful appellant its costs of drafting the skeleton argument on the basis that it was ‘35 pages of rambling prolixity through which the reader must struggle to track down the relevant facts, issues and arguments’ (paragraph 56). Advocates face the same potential result in the lower courts.

8(g)  Costs schedules 14.110  If it is intended to have the court assess costs at the end of the hearing (which it will ordinarily be prepared to do in a case not lasting more than one day) it will be necessary to prepare and serve a costs schedule not later than 24 hours before the hearing: see 14.154.

8(h) Acts required of a respondent to an application for an interim injunction 14.111  A respondent to an interim injunction application should act with expedition upon being given notice of the applicant’s intention to apply. Unless notice is abridged (as to which see 14.53 above) solicitors, and usually counsel, 913

14.112  Interim remedies: general

will need swiftly to be chosen and then instructed. The steps that the court will expect a respondent to have taken before any interim hearing include the following: •

The filing and service of evidence, by way of witness statement or affidavit (in either case with accompanying exhibit). The respondent’s evidence should identify and set out the factual response to the assertions made by the applicant in support of the injunction.

•

Reasonable responses to correspondence sent by the applicant’s solicitors. This would normally include a summary of the respondent’s legal position, for example by identifying any points that are to be taken as to the unreasonable nature of any restrictive covenants.

•

Consideration as to whether an offer can be made of undertakings through to a return date or even trial. If no such offer can be made, the respondent should be prepared to explain why. See further 14.114–14.119.

•

Filing a skeleton argument setting out the basis on which the application is opposed, along with any authorities relied upon.

•

If it is intended to have the court assess costs at the end of the hearing, a costs schedule should be filed and served not less than 24 hours before the hearing.

9. PROCEDURE FOR OBTAINING INTERIM INJUNCTIONS 9(a) Without notice 14.112 The procedure for making urgent applications (including applications by telephone) and applications without notice is set out in CPR, r 25 and PD 25, paragraph 4 (set out in the Appendix to this chapter together with CPR, r 23 and PD 23).

9(b)  On notice 14.113  Not later than three clear days before the hearing, the application notice and evidence in support must be served on the respondent (CPR, r 23.7) in accordance with the rules governing service in CPR r.6.

10.  UNDERTAKINGS BY RESPONDENT 10(a)  Undertakings to the court 14.114  Frequently, a respondent faced with an application for injunctive relief will offer to the court undertakings pending trial, at least in relation to some of 914

Undertakings by respondent 14.117

the relief claimed (or he may consent to all or part of the interim order sought by the applicant). For the sake of clarity these should only be offered against an express cross-undertaking in damages by the applicant. It may be convenient for the respondent to offer such undertakings where: •

the respondent believes that the chances of defending the interim application are poor (eg where an express covenant in restraint is not obviously bad), and the period of the covenant is long enough for there to be trial well before the expiry of the restrictions; or

•

there is no inconvenience in offering the undertaking (eg  the respondent has no intention of using the applicant’s trade secrets or confidential information).

14.115  It should be noted that the consent by the respondent to an interim order does not prejudice the respondent’s entitlement to claim damages under the cross-undertaking, if at trial it is found that the order ought not to have been granted (at all or in such wide terms): Universal Thermosensors Ltd v Hibben [1992] 1 WLR 840 at page 857. That is precisely the purpose of including the cross-undertaking in damages. The same should apply where the respondent gives an undertaking in the form sought by the applicant, but the safer course for the respondent is always to ensure that the cross-undertaking is recorded in the relevant order. 14.116  An undertaking to the court is as good as an injunction: breach of either may amount to contempt of court – see 14.147. The party giving such an undertaking may not apply to vary or discharge it without a change of circumstances: see Chanel Ltd v FW Woolworth & Co Ltd [1981] 1 WLR 485, approved by the Supreme Court in Thevarajah v Riordan and others [2017] 1 All ER 329. The respondent who is prepared to give interim undertakings, but wishes to reserve to himself the possibility (for example, once he has gathered his evidence) to apply to vary or discharge the undertakings, should insist on the inclusion in the order of a ‘liberty to apply without showing change of circumstances’. A ‘change of circumstances’ does not include matters which could properly have been raised first time around: The Leadmill Ltd v Omare [2002]  All ER (D) 145 (Apr). A ‘change of circumstances’ is unlikely to be held to have occurred where there were facts of which the applicant was aware at the time but he becomes aware only later of their true significance.

10(b)  Contractual undertakings by respondent 14.117  Frequently, instead of offering an undertaking to the court, a respondent will offer a so-called ‘contractual undertaking’, ie an undertaking offered to the applicant. This happens frequently where proceedings are threatened but have not yet been issued. It is unclear what the precise status and effect of this sort of undertaking may be, in particular whether an (ex-)employee who gave such an undertaking (for example, not to carry on business in a certain area defined in an area covenant) would thereafter still be able to argue that the covenant was too 915

14.118  Interim remedies: general

broad. In our view, at least where the ex-employee is legally advised, the courts would be likely to enforce the undertaking. Otherwise it would mean that in all cases it would be necessary to go through the formality of issuing proceedings and making an application to the court, a matter which is hardly in the public interest. At the very least the (ex-)employer may be able successfully to argue that the fact that the (ex-)employee has confirmed the covenants after employment (and on advice, if that be the case) is further evidence of the reasonableness of the covenants. This was the approach taken in East England Schools CIC v Palmer [2014] IRLR 191, where although the (ex)employee had signed a document containing what were said to be undertakings, this document had not formally been accepted by the (ex)employer, who sought undertakings to the court. The court held (at paragraphs 39–40) that the undertakings were not enforceable but could be taken into account, if appropriate, in considering the reasonableness of the similar restrictions contained in the contract of employment. 14.118  Support for the point of view that confirmation of restrictive covenants in the face of litigation makes them more difficult to challenge later can be found in Thurstan Hoskin & Partners v Jewill Hill & Bennett [2002] EWCA Civ 249, where restrictive covenants were confirmed by a departing salaried partner in a settlement agreement scheduled to an order dismissing by consent his claim for wrongful dismissal. The scheduled agreement varied in part the covenants as originally agreed. The Court of Appeal’s view that the covenant was enforceable was strongly influenced by the fact that the covenant in the schedule was ‘an overt part of an agreement compromising litigation’. Although not deciding the point, Jonathan Parker LJ was of the view that once the ex-employee had agreed to the revised covenant by way of compromise, it would be contrary to public policy to allow the matter to be re-opened. 14.119  This is to be contrasted with the decision in Gerrard v Michael Read (2002) Times, 17 January, in which Blackburne J held that, although the court had the power to set aside a consent order as being unreasonably in restraint of trade, there was a considerable burden on the covenantor in this regard, since there was a public interest in holding a party to the terms of a consent order to which he was, with the benefit of legal advice, willing to be bound. In similar vein is the decision in WWF-World Wide Fund for Nature v World Wrestling Federation Entertainment Inc [2002] FSR 33 (CA) (a trade mark dispute), where the Court of Appeal regarded the conflict between the principles of restraint of trade and of the public policy need to respect settlement agreements as more apparent than real. Where an applicant had been party to a settlement of a genuine dispute designed to define the boundaries of his trading rights as against the respondent, he was entitled to expect that settlement to be enforced. It was not for him to prove that it was reasonable. The presumption was that the restraints, having been agreed between the parties involved, represented a reasonable agreement in respect of their respective interests. It was for the respondent, seeking to avoid the agreement, to show that there was something that justified such a course because the dispute was ‘contrived’, because there was no reasonable basis for the rights claimed, or because it was otherwise contrary to the public interest – for example, going beyond the legitimate purpose of seeking to ‘avoid 916

Order for speedy trial 14.121

confusion or conflict’ between the parties. In reliance on these dicta from the WWF case, HHJ  Owen QC held, in Capgemini India Ltd & Anr v Krishnan [2014]  EWHC  1092 (QB), that the mere fact that undertakings were given to avoid threatened proceedings does not create an unassailable bar preventing a defendant from making submissions as to the validity or width of the clause under consideration or, indeed, as to the ultimate question of whether it would be appropriate to grant an interim injunction in any event. Rather, the court is bound to consider all of the circumstances, including, in particular, the fact of the agreement or undertaking reached between two parties with the benefit of independent legal advice.

11.  ORDER FOR SPEEDY TRIAL 14.120  The power to order a speedy trial falls within the court’s general powers of case management (see The Admiralty and Commercial Court Guide, paragraph J1 (referred to as an ‘expedited trial’) and the power of the court to fix the date of trial (CPR, r 29.2(2) and to bring forward the date of any hearing which has been fixed: CPR, r 3.1(2)(b)). One of the dangers of obtaining an order for speedy trial is illustrated by the case of EDO Technology Ltd v Hills [2006] EWHC 598, in which Walker J discharged an interim injunction on the basis of a ‘woeful failure’ on the applicant’s part to prepare for a speedy trial. 14.121 In Lawrence David Ltd v Ashton [1989] IRLR 22 Balcombe LJ said (at page 27) that cases where it is sought to enforce restrictive covenants in employment contracts are singularly appropriate for speedy trial, and that a respondent who has entered into a contractual restraint should seriously consider, when the matter first comes before the court, offering an appropriate undertaking until the hearing of the action, provided that a speedy hearing of the action can then be fixed, and the applicant is likely to be able to pay any damages on his crossundertaking. In this case (heard in the Court of Appeal on 4 July 1989), directions were given for the action to be tried in October 1989. Directions may include that the witness statements stand as pleadings (usually where a party is unrepresented). Speedy trials are becoming increasingly common, although in Ifone Ltd v Davies [2005] EWHC 1504 (at paragraph 10) Laddie J stated that the court would not order a speedy trial unless it was convinced that there were pressing reasons that justified such a course, ie reasons which show that the party applying for the speedy trial needs unusually speedy resolution of the dispute so as to avoid injustice. The court had also to bear in mind the needs of other litigants. In that case, unexplained delay on the part of the party applying for speedy trial led to a refusal of an order for speedy trial. The language of Laddie J may set the hurdle somewhat too high. In practice, while in recent times the list of cases has not been particularly heavy, the courts are often prepared to grant speedy trials in restrictive covenant and confidential information cases, particularly where both parties agree on this course. The court may look askance at an (ex-)employer who, having obtained the benefit of an interim injunction, is loath to proceed to a speedy trial, on the basis that he cannot ‘have his cake and eat it’. 917

14.122  Interim remedies: general

14.122 In Petter v EMC  Europe Ltd & EMC  Corporation [2015]  EWCA  Civ 480 the Court of Appeal considered the circumstances in which a speedy trial would be ordered. The following key principles emerge (see paragraphs 10–17): •

The court exercises its discretion to expedite proceedings against the backdrop that the courts are busy and that expediting one case will often slow the progress of others. For that reason, the overriding objective requires that there should be a good reason for expedition.

•

Expedition was not ‘a question of choosing a slightly faster over a slightly slower method’ of proceeding to trial, but could ‘only be justified on the basis of real, objectively viewed, urgency in the case’ which justified giving preference over other cases in the court’s list.

•

The categories of case in which expedition is appropriate are not closed. There may be many and varying situations in which expedition will be held to be just and appropriate, taking into account all aspects of the overriding objective and the court’s resources, and the interests of other court users in particular.

•

The 4 factors identified by Neuberger LJ in WL  Gore and Associates GmbH  v Geox SpA [2008]  EWCA  Civ 622 are relevant, namely: (1) whether the applicants have shown good reason for expedition; (2) whether expedition would interfere with the good administration of justice; (3) whether expedition would cause prejudice to the party; and (4) whether there are any other special factors.

12.  INTERIM DECLARATIONS 14.123  Interim declarations were, until the introduction of the CPR, unknown to English law. However, CPR, r 25.1(1)(b) provides that a court may grant such a remedy. Its use within the kinds of cases covered by this book remains unclear. Declarations may be useful, for example, to an (ex-)employee who cannot find alternative employment because others will not risk litigation against the exemployer who makes it known that he will enforce restrictive covenants in the contract of employment, which the ex-employee believes are unenforceable. Usually an (ex-)employee will be able to obtain from the court an order for a speedy trial as to the enforceability of the covenant. This is still the favoured route. By contrast, litigants in the kinds of employment cases covered by this book have not taken to the remedy of an interim declaration. This is no doubt because of the efficacy of the speedy final declaration route. Further, it is unclear whether an interim declaration would provide sufficient reassurance to third parties until trial.

13.  SUMMARY JUDGMENT 14.124  Although summary judgment provides a final rather than interim resolution of cases, since the possibility of applying for summary judgment arises at 918

Pre-action disclosure 14.126

an early stage of litigation, it is convenient at this stage to refer to this potential remedy. Under the CPR it is possible for a claimant or defendant to obtain summary judgment where there is no real prospect of the claimant succeeding in his claim (or defendant succeeding in his defence) and there is no other compelling reason for a trial: CPR, r 24.2. In TSC (Europe) v Massey [1999] IRLR 22 the respondent obtained the dismissal of an action under RSC Ord 14A (the predecessor to CPR  24.2) on the basis that the covenant was unenforceable. However, it is important to note that the court reached its conclusion on the suitability of RSC Ord 14A on the basis that the respondent accepted as accurate the evidence of the applicant such that there was a comprehensive factual basis for the issue to be determined under Ord 14A, and the evidence so elicited put the matter in a way which was as favourable to the claimant as it could reasonably have hoped. Accordingly, although the enforceability of the covenant was an issue ‘sensitive to the facts’ and issues of fact were ‘interwoven’ with the legal issue of enforceability, the court felt able to decide the issue. Summary judgment remains a remedy rarely sought in the kinds of employment disputes covered by this book.

14.  PRE-ACTION DISCLOSURE 14(a)  Pre-action disclosure against the prospective defendant 14.125  Pre-action disclosure (previously limited to only certain kinds of cases) is now available in all kinds of proceedings: Civil Procedure (Modification of Enactments) Order 1998 (SI 1998/2940). The relevant rule of the CPR is 31.16. An application for pre-action disclosure may only be made: •

where the applicant and the respondent are likely to be parties to the subsequent proceedings if proceedings are subsequently issued; and

•

if proceedings had been started, the respondent’s duty by way of standard disclosure would extend to the documents or classes of document of which the applicant seeks pre-action disclosure: (CPR, r 31.16(3)(a), (b) and (c)); and

•

disclosure before proceedings have been started is ‘desirable in order to dispose fairly of the anticipated proceedings, assist the dispute to be resolved without proceedings or save costs’ (CPR, r 31.16(3)(d)).

This involves a two-stage process: Black v Sumitomo Corpn [2002] 1 WLR 1562; Smith v Secretary of State for Energy and Climate Change [2013] EWCA Civ 1585. The first stage requires consideration of whether the jurisdictional thresholds at CPR  31.16(3)(a)–(d) are met. If (and only if) they are met, the court proceeds to a second stage to consider whether as a matter of discretion the order for disclosure is appropriate to be made. The jurisdictional threshold is low: Mitsui & Co Ltd v Nexen Petroleum UK Ltd [2005] EWHC 625 (Ch). The real dispute tends to be at the discretionary stage. 14.126  A party is ‘likely to be a party to the subsequent proceedings’ where it is established that they may well be a party if subsequent proceedings are issued: Sumitomo. 919

14.127  Interim remedies: general

14.127  CPR 31.16 was used to secure disclosure of documents relating to issues as to quantum in Big Bus Company Ltd v Ticketgo Ltd [2015]  EWHC  1094 (Pat). In ED&F  Man Capital Markets LLP  v Obex Securities LLC and Os [2017] EWHC 2965 (Ch) it was decided that, in principle and subject to consideration of the facts of each case, applications for pre-action disclosure could be served out of the jurisdiction pursuant to CPR, r 6.2(c). 14.128  Accordingly, an applicant may use this procedure to ascertain whether or not he may have a good cause of action at all; the applicant need only show a prima facie case of entitlement to the substantive relief: Mars UK Ltd v Waitrose [2004]  EWHC  1786 (QB). On the other hand, the courts are wary to ensure that these new provisions are not used as ‘fishing expeditions’. There are three methods of control. First, an order for pre-action disclosure must specify the documents or class of documents to be disclosed (CPR, r 31.16(4)(a)), so that an application simply seeking ‘standard disclosure’ will be likely to fail: see Total & E&P  Soudan SA  v Edmonds [2007]  EWCA  Civ 50. The more specific and more narrow the request, the more likely the court will be to order disclosure. Certainly the applicant should show that it is more probable than not that the documents are within the scope of standard disclosure should an action commence: Hutchinson 3G UK Ltd v O2 (UK) Ltd [2008] EWHC 55 (Comm). In Hays Specialist Recruitment (Holdings) Ltd v Ion [2008] All ER 9 (D) 216 the claimants’ claim to disclosure of the defendants’ entire database so that they could identify dealings with those clients which might give it a claim for breach of the restrictive covenants was denied as being a ‘fishing expedition’, but the claimants succeeded in obtaining disclosure limited to communications with those contacts whose names and addresses the first defendant had taken from his email address book while still an employee of the claimants. Secondly, the court is likely to insist on an appropriate level of evidence being before it, to ensure that the application is not being used oppressively, speculatively or simply to subvert normal time limits for disclosure. Thirdly, by imposing costs on the applicant (see CPR, r 46.1(2)). The general rule is that costs are awarded to the party ordered to make disclosure. See, however, CPR, r 46.1(3) for circumstances in which the prima facie rule may be displaced. In SES Contracting Ltd v UK Coal plc [2007]  EWCA  Civ 791 the Court of Appeal held that CPR  48.1(2) (now CPR 46.1(2)) implicitly recognises that it will not usually be unreasonable for the respondent to require that the applicant satisfy the court as to his entitlement to the relief sought.

14(b)  Pre-action disclosure against third parties 14.129  Disclosure may also be made against non-parties under the provisions of CPR, r 31.17. The application must be supported by evidence and may only lead to an order where the documents which are sought are ‘likely’ to support the case of the applicant, or adversely affect the case of another party, and disclosure is necessary to dispose fairly of the claim or to save costs (CPR, r 31.17(2) and (3)). The word ‘likely’ in this context means ‘may well’ rather than ‘probably will’: Three Rivers DC v Bank of England (No 4) [2003] 1 WLR 210. Further, 920

Pre-action disclosure 14.132

the test of necessity is higher than that of desirability of disclosure under CPR, r 31.16. An order will accordingly not be made if there is another way of obtaining the information, or costs would be increased rather than saved: see Frankson v Secretary of State for the Home Department [2003] 1 WLR 1952 (CA) at paragraph 12. Satisfying the tests of relevance and necessity in CPR, r 31.17(2) and (3) is not in itself sufficient: the court retains a discretion as to whether to make the order sought: Mitchell v News Group Newspapers Ltd [2014] EWHC 1885 (QB). In Kerner v WX [2015] EWHC 1247 (QB) an order under CPR r 31.17 was obtained for the purposes of identifying an unknown party to the substantive claim being advanced. The court held (Warby J) that it would be inappropriate to construe either provision of CPR r 31.17 in a ‘narrow and literal way’, as being confined to issues arising from statements of case between identified parties. This procedure is in addition to the existing procedures for obtaining documents from third parties, although with the pre-action disclosure procedure under CPR, r 31, the need to resort to the pre-existing methods (especially the Khanna application) ought not frequently to arise in practice. The pre-existing methods procedures are set out in the next two paragraphs. 14(b)(i)  Norwich Pharmacal orders 14.130 In Norwich Pharmacal Co v Commissioners of Customs and Excise [1974] AC 133 it was held that it is necessary to show that the party against whom disclosure is sought is (through no fault of his own) ‘mixed up’ in the tortious conduct of a party to the proceedings. For an arguably generous grant of such an order see The Coca Cola Co v British Telecommunications plc [1997] FSR 518, in which BT was ordered to provide the address of an intended respondent in respect of which it was the mobile telephone service provider. The mobile phone was likely to have been used by the intended respondent in committing the torts alleged against him of breach of trade marks/passing off. 14(b)(ii) The device used in Khanna 14.131 In Khanna v Lovell White Durrant [1995] 1 WLR 121, the court invented the idea of notional early trial dates for witnesses to attend to bring under subpoena (or witness order) documents required for trial, so that they could be examined and copied before the ‘real’ trial date.

14(c) Tactical considerations: pre-action disclosure/questions as against prospective respondent/third parties 14.132 There are certain kinds of cases in which pre-action disclosure is of considerable benefit, in particular to (ex-)employers. For instance, an (ex-) employer may believe that its data has been removed by an (ex-)employee and/ or he has transferred it to a competitor which employs or is about to employ him. Evidence may be insufficient to justify a search order, or the applicant may not wish to incur the costs of executing such an order. Further, the applicant 921

14.133  Interim remedies: general

may not wish to commence full scale proceedings until it has verified its suspicions. An application for pre-action disclosure against the (ex-)employee and/ or the competitor may be a viable proposition. That said, experience tells that it is difficult to predict the approach of judges and masters to applications for pre-action disclosure – some being generally reluctant to order it and others being more willing. Accordingly, it is prudent to warn clients that the outcome of such applications is notoriously unpredictable. An application is only likely to be worthwhile where the applicant seeks disclosure of a limited number of documents which are likely to be highly significant – either because they will persuade the other side to settle out of court or because they will have an important effect on the decision whether or not to bring substantive proceedings. In cases of the sort covered by this book, emails of (ex-)employees are often highly significant to the proof of the (ex-)employer’s case. Often these emails will be on the (ex-)employer’s own computer system, so that it will not be necessary to seek disclosure. Where email accounts are web-based (eg the (ex-)employee maintains a Hotmail, Yahoo or similar account), it may be necessary to obtain an order under CPR, r 31.17 for disclosure of such email accounts by the service provider. Likewise, it may be necessary to obtain such an order from mobile phone service providers if telephone records are sought and cannot be obtained from the (ex-)employee. Another rich source of documents and information may be the poaching employer. Well-targeted requests for documentation which is likely to have been handed over to it (such as lists of customers or levels of business generated from them while the (ex-)employee was in the employ of the (ex-)employer may be a good pressure point. The same is true of well-focused questions in solicitors’ pre-action correspondence (eg in relation to the use which such third party has made of such documents).

14(d)  Orders for early provision of witness statements and disclosure of evidence 14.133  Quite apart from pre-action disclosure, there lies the possibility of early unilateral disclosure in the action, an order often sought together with an order requiring the defendant (ex)employee to set out his wrongdoing. Such an order is to be contrasted with orders which merely accelerate the disclosure process for all parties, following an order for a speedy trial. The high water mark of such orders is the case of Intelsec Systems Ltd v Grech-Cini [2000] 1 WLR 1190 in which the deputy judge (Nicholas Warren QC) ordered disclosure by ex-employees of the names and addresses of business contacts, irrespective of whether the contacts had been made before or after termination of employment. So far as concerned contacts made during the course of employment, there was no problem. Those contacts, even if the employee was allowed to approach them after his employment ceased, were contacts which the employer was entitled to use and the employee must tell him their names and addresses. If the employee had approached the contact on his own account and not on behalf of the employer, then prima facie there would be a breach of the duty of fidelity and, again, the employer must be entitled to claim the contact as his own. In either case, there was a strong case for disclosure to the employer of names and addresses. However, in respect of persons approached 922

Pre-action disclosure 14.136

after the termination of employment, the position was more difficult. In some cases, there might be improper use of confidential client lists by the employee, but, even there, the appropriate remedies were damages and injunctions in relation to that improper use. However, such disclosure was justified (in that case) by the need to rectify misrepresentations arising out of the passing off, not the misuse of confidential information (see pages 1206E–1207E). Accordingly, the disclosure ordered in respect of persons approached after termination of employment was more limited. Also, in SBJ Stevenson Ltd v Mandy [2000] IRLR 233 the court had, at the interim stage, ordered the respondent to disclose on affidavit any soliciting of the clients of SBJ Stevenson (and disclosure of certain of its confidential information). Provisions requiring information and disclosure are regularly included in search orders (see 15.196–15.261) delivery up and preservation orders (see 15.171–15.175), especially of documents the property of the (ex-)employer or containing its confidential information or trade secrets. 14.134 However, the courts have been increasingly reluctant to order early unilateral disclosure, even in circumstances in which there is a serious issue to be tried of (ex)employee misconduct, and a suggestion that the (ex)employee cannot be trusted to comply with their disclosure obligations. In CBS Butler Ltd v Brown and others [2013] EWHC 3944 (QB), an application for an order to allow the claimants to search images of the defendants’ computers and mobile phones was refused on the basis that it would deprive the defendants of the opportunity of considering whether or not they would make any disclosure. The court held that to obtain an order which deprives a party of their opportunity to carry out disclosure, a claimant would have to show a substantial reason for believing that the defendant intended to conceal or destroy documents in breach of their obligations of disclosure under the CPR (paragraph 38). It was not sufficient to show no more than that the defendant had misused confidential information or otherwise broken their employment contract. 14.135  The leading case on unilateral disclosure and witness evidence of wrongdoing is Aon Ltd v JLT Reinsurance Brokers Ltd [2010] IRLR 600. In that case, an insurance broking company brought proceedings against former and current employees and directors who had gone to a competitor. Aon alleged breach of various contractual and fiduciary duties and misuse of confidential information. Interim relief had been granted. The question before the judge, Mackay J, was whether to grant a wide-ranging order requiring the defendants to file and serve affidavits setting out what they had done in terms of soliciting clients and staff and disclosing confidential information. Mackay J noted, at paragraph 18, that applications for orders of this kind are fact sensitive. Having reviewed the authorities (including the Intelsec case), he went on to observe that a disclosure order of the kind sought was ‘on any view an exceptional and not a routine order, one which should not be made as a matter of course where prohibitory injunctions of the type found elsewhere in this order are to be found’. 14.136  Mackay J set out a number of factors relevant to the exercise of his discretion at paragraph 26. The first was the ‘inability of the claimant to plead his case without this relief’. As to that, he noted that substantial evidence had already been 923

14.137  Interim remedies: general

filed. This and the other documents before him suggested that the case could be pleaded now. This meant that there was no reason to subvert the normal order of adversarial proceedings, ie that the cases should be pleaded first, and disclosure given later. This was so even though the claimant had shown a serious issue to be tried sufficient to obtain injunctive relief. The second factor was the width of the order sought. The judge concluded that it amounted to ‘standard disclosure in full in a non-pleaded case’. It was, he held, ‘the very antithesis of the focused and proportionate approach that might have made such an application more palatable’. The third factor was the saving of costs. There would be no saving, the judge found, because the provision of the information sought was likely to increase interlocutory activity rather than decrease it. Fourth, it was necessary to consider the adequacy of damages as a remedy. Fifth, it was relevant to consider the need to take pragmatic steps to protect the business from future loss. The judge held that the business could already take such steps without the disclosure sought. Sixth was the need to police the order. On this, the judge held that the current protection afforded by the order was sufficient. Having considered these matters, the judge refused to exercise his discretion to grant the order sought. 14.137  Aon has been followed in numerous subsequent cases. For example: Landmark Brickwork Ltd v Sutcliffe [2011]  IRLR  976 (paragraph 65); Maris Interiors LLP v Pleckinger [2011] EWHC 2260 (QB) (paragraph 27), Dellner Woodville Limited v Blackham [2012] EWHC 1739 (QB) (paragraphs 12–15); Al Hajeri v Bennett [2013] EWHC 2552 (QB); Visage Ltd v Mehan & ors [2017] EWHC 2017 (QB) (paragraphs 50–60); Capita plc v Darch [2017] IRLR 718 (paragraph 58). In Al Hajeri, HH Judge Seymour QC said at paragraph 9: ‘So far as an order for information is concerned, it has become depressingly common for Applicants for injunctions to seek in effect, on pain of being sent to prison in default, evidence against himself from a Defendant. This tendency seems to have developed particularly in the context of employment cases where a former employer is seeking to enforce against a former employee a restrictive covenant and to obtain by order of the Court, an affidavit from the Defendant admitting to breaches of the restrictive covenant in question.’

Having cited Aon with approval, Judge Seymour QC continued at paragraph 10: ‘In my respectful view, the important principle enunciated by Mackay J is sound and should be applied by the Court. The conduct of civil litigation in this country is not inquisitorial, it is adversarial. It is for a party seeking to pursue allegations against another party both to plead and to prove that which is alleged. It is no part of the ordinary process of civil litigation to interrogate a Defendant, on pain of imprisonment for failing to answer or for giving false answers, to obtain evidence which is not available to the party seeking to pursue causes of action against the Defendant.’

14.138  Notwithstanding the vehemence of the court’s apparent disapproval for early unilateral disclosure orders and for affidavit evidence setting out wrong­ doing, such orders remain regularly made. Even on the authority of Aon, an (ex-)employer is entitled to the court’s assistance in order to obtain ‘information which is required either to assist in giving effect to the injunctory relief, or 924

Pre-action disclosure 14.140

to assist them in undoing the harm which has been unlawfully done’. If, for example, a claimant needs the information in order to take steps to protect its confidential information, there is no reason why such orders should not be made. Le Puy Ltd v Potter [2015] IRLR 554 (paragraphs 64–65) is an example of such a case. 14.139  To summarise therefore, orders for early unilateral disclosure and affidavit evidence are powerful tools in the armoury of a claimant, but are contrary to normal adversarial civil litigation. However, if a claimant is able to show that, in respect of a proportionate and limited number of documents and allegations, such orders are necessary (classically, either to enable the enforcement of injunctive relief already ordered, or to protect its confidential information and prevent further harm), there is no reason why such orders will not be made. The court will be reluctant however to make such orders in respect of large numbers of documents, or unfocused allegations, and will prevent a claimant seeking such orders merely to cause the defendant to set out its own wrongdoing. Further, the court will take into account the stage of the litigation, and may refuse to make such orders if, for example, simultaneous disclosure would take place shortly in any event. In Dorma UK Ltd v Bateman [2016] IRLR 616 (paragraph 72) a speedy trial had been listed to commence approximately 2 months after the application was heard. This factor weighed heavily in the court’s analysis. The court found that ‘the parties will have enough to do in preparing their cases for this speedy trial without the additional burden on the defendants of preparing separate affidavits’, and rejected the application for disclosure by affidavit. Even if disclosure is ordered, a party still retains the right to redact irrelevant material: see Ennis Property Finance Ltd v Thompson and Another [2017] EHWC 3263 (Ch). See the Appendix to Chapter 18 for a sample letter before claim.

14(e) Correspondence seeking pre-action or early disclosure/information 14.140 Applications for pre-action or early disclosure will (except where part of a without notice application) almost always be preceded by correspondence in which a request for disclosure and/or information is formulated. Such correspondence can be a relatively cheap and effective way of bringing pressure to bear – and of possibly achieving a resolution of matters (in whole or in part) at an early stage. For example, where it is strongly suspected that a departing team has imparted confidential information to a (prospective) new employer, a solicitor’s letter requesting information from the departing employees (eg details of to whom and precisely what confidential information has been imparted or used) and a similar letter to the (prospective) new employer may produce excellent results. The recipients of such letters may not want to damage their credibility in any future proceedings by giving false or inadequate replies. Where the employee is still in his notice period, and therefore still owes duties of loyalty (or fiduciary duties) to the (original) employer, he may find it difficult to avoid providing such information or documents, without looking evasive or suspicious: 925

14.141  Interim remedies: general

see 3.85–3.142 (especially at 3.139–3.142) and 4.226–4.262 regarding duties of disclosure of ordinary employees and fiduciary employees respectively. The same is true in relation to early disclosure in the action, although it may be easier for the recipient of such requests to avoid providing information/ documentation on the basis that it is premature, since both sides will be exchanging disclosure lists as part of the ordinary pre-trial procedures. However, there will be cases where the documents and information are so pertinent (and specific) that it may be difficult credibly to resist compliance. 14.141 If early disclosure is sought by correspondence in the first instance (rather than immediately by application notice), careful thought should be given to the parameters of the requests. Often such requests in correspondence will be far-reaching, only to be narrowed if an application to court later becomes necessary. However, the applicant’s credibility may be undermined if its initial request by letter is substantially different from what is sought by court order. Such a discrepancy gives weight to an argument that the requests made in correspondence were oppressive and/or a fishing expedition. A targeted approach from the outset will often prove more successful.

15.  STAY IN FAVOUR OF MEDIATION 14.142  The CPR makes provision for the court to stay proceedings while the parties try to settle the case by alternative dispute resolution or other means: CPR, r 26.4. This is in addition to the existing procedure under section 9 Arbitration Act 1996 for compulsory stay in favour of arbitration where there is a binding agreement in writing to arbitrate (satisfying section 1 Arbitration Act 1996). In the case of mediation, however, there is no necessity for any pre-existing agreement. A stay under CPR, r 26.4 may either be brought into effect by all parties requesting a stay when filing the allocation questionnaire, or by the court, of its own initiative, where it is considered that such a stay would be appropriate. Where a stay is requested, or the court of its own initiative considers it appropriate, the court should direct that the proceedings, either in whole or in part, are stayed for one month or for such specified period as the court considers appropriate. However, stays will not be permitted if the purpose or effect is simply to evade case management. CPR, r 26.4 is designed to facilitate rather than delay the litigation process. Where a claim is stayed otherwise than by agreement between the parties, any interim injunction other than a freezing injunction will be set aside, unless the court orders that it should continue to have effect notwithstanding the stay: CPR, r 25.10.

16.  SERVING INTERIM ORDERS 14.143  A judgment or order which restrains a party from doing an act or requires an act to be done must, if disobedience is to be dealt with by proceedings for contempt of court, have a penal notice prominently displayed on the front page, and endorsed as follows (or in words to substantially the same effect): ‘If you the within-named [ ] do not comply with this order you may be held to be in 926

Committal proceedings 14.147

contempt of court and imprisoned or fined, or your assets may be seized’: CPR r 81.90; CPR r 81PD.2. The order must be served personally on the respondent: CPR r 81.6 (unless service is dispensed with or ordered ‘by an alternative method’ under CPR, r 6.20: CPR r 81.8). 14.144 The court retains a discretion to dispense with personal service of a mandatory or a prohibitory judgment or order, if it thinks it just to do so: CPR r 81.8(2). Where the judgment or order is prohibitory, the court may also dispense with personal service if satisfied that the respondent has had notice of it by being present when it was made or being notified of the terms of the order by telephone, email or otherwise: CPR r 81.8(1). If the respondent is a company, it must be served on the officer against whose property permission is sought to issue a writ of sequestration or against whom an order of committal is sought: CPR r 81.5(2); CPR r 81.3(c). The court enjoys a wide discretion in relation to this dispensing power: see Davy International Ltd v Tazzyman [1997] 1 WLR 1256. The Tazzyman case was referred to again by the Court of Appeal in Benson v Richards [2002] All ER (D) 160 (Oct) where Carnwath LJ reiterated that the discretion was unfettered provided that the requirements of service had been achieved, namely that the respondent knew the terms, was aware of the consequences of disobedience and was aware of the grounds constituting a breach to be able to answer any charges against him/rectify the situation. The power is to be exercised in the interests of justice, which includes not only prejudice to the person alleged to be in breach of the order, but also the court’s own interest in seeing that its orders are obeyed: see Giles v Tarry & Anr [2012] EWCA Civ 1886 (paragraphs 13–17). 14.145  Likewise, in the case of an undertaking given by the respondent to the court, it is sufficient that the respondent understood the effect of the undertaking, but the practice is still to serve the order containing the undertaking with a suitably worded penal notice: Hussain v Hussain [1986] 1 All ER 961 (CA). CPR 81.7 provides that the court will, in the first instance, seek to serve the order containing the undertaking. Nevertheless applicants are well-advised to take the initiative and attend to service themselves. Where the injunction is mandatory and specifies a limited period for doing the act required, the order must, unless the court has dispensed with service, be served within that time: CPR r 81.5. It is usually safer in practice to have service effected by a professional process server. 14.146  Under CPR r 23.9, any order for an injunction made on application without notice must be served by the applicant on the respondent with the application notice and any evidence in support, and must contain a statement of the right to apply to set aside or vary the order.

17.  COMMITTAL PROCEEDINGS 14.147  Breach of an injunction or an undertaking given to court is punishable as a contempt of court by committal: CPR r 81.4. An application may be made against a third party who aids and abets the commission of a contempt. For example, where an (ex-)employer has obtained an injunction against an (ex-) 927

14.148  Interim remedies: general

employee, restraining him from working in a particular area, he should inform the new employer employing the (ex-)employee of the injunction, so that the (ex-)employer can enforce the injunction against both (ex-)employee and new employer. Where the order is against a body corporate, a director or other officer may be committed: CPR r 81.4(3)). A committal application is made by an application notice under Part 23 in the proceedings in which the judgment or order was made or the undertaking was given: CPR r 81.10(1). Where the committal application is made against a person who is not an existing party to the proceedings, it is made against that person by an application notice under Part 23: CPR r 81.10(2). In either case, the application notice must set out in full the grounds on which the committal application is made and must identify, separately and numerically, each alleged act of contempt including, if known, the date of each of the alleged acts. It must also be supported by evidence on affidavits containing all the evidence relied upon: see CPR r 81.10(3). The need for precision and for full particularisation is critical. 14.148  The application notice and supporting evidence must be served personally on the respondent, unless the court has either (i) dispensed with the requirement for personal service if it considers it just to do so or (ii) made an order for service by an alternative method or at an alternative place: see CPR r 81.10(4) and (5). 14.149 In OCS Group UK Limited v Dadi and Os [2017] EWHC 1727 (Ch) the ex-employee was the respondent to an injunction order which (amongst other things): (i) required him to preserve documentation and (ii) prevented him from informing others about the existence of the court order. The order contained, on its front page, the usual penal notice explaining that breach of the order would be a contempt of court that could result in Mr Dadi’s imprisonment. The order was served on Mr Dadi personally by the applicant’s solicitor, who explained the importance of the order, read aloud the penal notice to him, and explained that he should take legal advice. In breach of the order, Mr Dadi then telephoned a third party to reveal the existence of the order, and then deleted around 8,000 emails. Mr Dadi later sought legal advice. Faced with an application for contempt, Mr Dadi apologised to the court for his conduct, and ‘threw himself on the mercy of the court’ (paragraph 18). Rose J gave Mr Dadi credit for his sincere apology, for his co-operation since taking legal advice, and his otherwise good character (paragraphs 34–38). However, the judge concluded (at paragraph 28) that a short sentence of imprisonment of six weeks must be imposed on Mr Dadi ‘to mark the court’s strong disapproval of his conduct and to act as a deterrence both in respect of his further compliance with the orders of the court and as a warning to others who might be tempted to flout the court’s orders in this manner’.

18. TRIAL OR SETTLEMENT 14.150  Disputes involving breaches of covenants in restraint of trade or confidence often do not proceed to trial. Because of the urgency which usually attends such cases, it is usual for there to be an application for an interim injunction. 928

Trial or settlement 14.151

Where such an application is made, the decision of the court at the interim stage is often treated by the parties for practical purposes as determinative of the issues between them, with the question of liability for legal costs being left to be negotiated between the parties. The reasons for the parties adopting this pragmatic approach are: •

Often the real issue, namely whether the (ex-)employee may or may not carry out certain activities for a limited period, is effectively decided by the grant or refusal of the interim injunction.

•

The financial cost of proceeding to trial (both legal and administrative). There will nearly always be an irrecoverable costs element, even for the winning party who wins all the points in issue, because he will normally be awarded his costs only on a ‘standard basis’ (see 14.158).

•

The difficulty for the applicant of proving that damage has resulted from the alleged breaches and the amount of such loss.

•

The unlikelihood of recovering substantial damages and legal costs from the (ex-)employee, having regard to what is known of his financial position. The position may be different where the new employer is included as a respondent – or can otherwise be held liable for the costs of the (ex-) employee (see 14.162–14.166).

For these reasons the parties may decide to treat the application for interim relief as the trial of the action. This may be agreed before the interim hearing and may be appropriate where the whole case depends on whether or not a restrictive covenant is enforceable. The parties may feel that the judge has as good an opportunity of deciding the matter on witness statements as on oral evidence at trial, and that therefore a trial will be a waste of expense. If such agreement is to be reached, the parties will need to consider with care the question of what test the court will be asked to apply at any interim hearing: a test of ‘serious issue to be tried’, or rather the test that would be applicable at full trial of the action. In Greer v Sketchley Ltd [1979] FSR 197, for example, the employee himself issued proceedings seeking a declaration that the restrictive covenant sought to be enforced by his employers was in fact unenforceable. His employers, by counterclaim, sought the contrary declaration, alongside an injunction to enforce the terms of the covenant. The case was able to be brought on for trial within two months of the claim having been issued, a timescale which the Court of Appeal (at page 199) described as ‘very wise’. Because the claim and the counterclaim were determined at a trial, the court made findings on the balance of probabilities rather than by application of the American Cyanamid test. Another option is for the parties, after the interim decision of the judge, to decide to treat the matter as final, again to save costs. As either claimant or defendant may now make an offer to settle, an increasing number of actions may settle following the interim decision, with the view of the judge at the interim stage shaping the parties’ approach to CPR, Part 36 offers or other less formal offers to settle: (see 14.158–14.161 as to Part 36 and other offers). 14.151  However, claimants (even with the express or implied consent of the defendant) should not simply rely upon an interim injunction as final relief, taking 929

14.152  Interim remedies: general

no further steps in the action, apart from the occasional application required to continue the injunction. They risk having the injunction discharged.

19.  COSTS ORDERS 19(a)  Costs of interim hearing 14.152  Legal costs are dealt with under CPR, Part 44. Some of the various bases of assessment of costs orders are defined in CPR, r 44.3(2) and (3). The award of legal costs is always a matter for the discretion of the court, but that discretion in relation to the costs of interim applications has normally been exercised as follows: •

On an application without notice, costs will be reserved for later decision.

•

After an interim hearing on notice: >

In the Queen’s Bench Division: costs in the case (formerly known as costs in the cause, ie costs are awarded to the party who ultimately wins at trial).

>

In the Chancery Division: if the applicant wins the interim application, applicant’s costs in the case (the applicant will recover his costs of the interim proceedings if he wins at trial, but even if he loses at trial he will not have to pay the respondent’s costs of the interim application); if the respondent wins, respondent’s costs in the case.

14.153  However, in the Chancery Division the order may be as in the Queen’s Bench Division, ie costs in the case irrespective of who wins the interim application: see the discussion in Steepleglade Limited v Stratford Investments Ltd [1976] FSR 3. The traditional Queen’s Bench Division approach appears preferable, because it would be quite wrong that, for instance, where an applicant has obtained an injunction by means of evidence which at trial is shown to be false, or even in cases such as Universal Thermosensors Ltd v Hibben [1992] 1 WLR 840, where at trial it is found that the interim injunction was too wide in its scope, the successful respondent (at trial) should be deprived of his costs of the interim hearing. At least in cases where there is a substantial (and material) conflict of evidence at the interim stage, the proper order ought to be costs in the case, all the more so where the court applying the American Cyanamid guidelines refuses to consider the merits in any detail. However, where an interim injunction is granted on the basis of the balance of convenience, in order to hold the ring until the matter can be decided at trial, costs (in both divisions) will often be reserved to trial of the substantive issue: Desquenne et Giral UK Ltd v Richardson [2001] FSR 1 (CA) – especially where (as in that case) the availability of an early trial date discovered by the judge had a substantial bearing on the balance of convenience. With the advent of the summary assessment of costs (see 14.154) the courts may in certain cases adopt a more robust approach, awarding costs of the interim hearing if it can discern that there is a clear ‘winner’ of the interim issue. For example, the court may award costs against the applicant, where it was inappropriate for it 930

Costs orders 14.155

to seek interim relief, even if there are real prospects of success at trial. See the recent case of Visage et al v Mehan et al [2017] EWHC 2734 (QB) for an example of the court’s willingness to award costs in respect of one successful aspect of an application or hearing, and otherwise reserving costs (see paragraphs 66–67). Where the applicant does not proceed with the interim hearing because at a late stage it accepts undertakings or assurances provided by the respondent, difficult issues may arise as to who should pay the costs incurred, especially where it is not clear whether there will be a trial. In such circumstances, in Spectron Group Ltd v GFI Net Inc (12 December 2000, unreported, Ch D) Neuberger J reluctantly reserved costs to trial. There has been a recent tendency of the courts to award costs in favour of the applicant on the basis that the applicant has been successful in the application and that, properly advised, the respondent should have consented to undertakings and a speedy trial rather than contest the point at an interim hearing. In Underwriting Exchange Ltd v Newall [2015] EWHC 948 at paragraphs 40-41, costs were awarded (and on the indemnity basis) following an interim hearing, on the basis that the respondent had ignored Balcombe LJ’s ‘notorious’ guidance in the Lawrence David v Ashton case (see 14.72). In Visage v Mehan, the judge described the approach of reserving costs as the ‘traditional approach’, contrasting to the ‘modern approach’ of cases such as Newall. 14.154  Rules relating to summary assessment of costs are to be found at CPR, r  44.6 and PD  44, paragraphs 8–9. In cases lasting a day or less (and many interim injunction cases fall into this category), the court will often assess costs immediately, and these will be ordered to be paid within 14 days. The prospect of a summary assessment of costs has an obvious impact on the advice given to clients whether to pursue or resist interim applications. Long gone are the days in which advice could be given that no costs would have to be paid until well into the future, by which time they might well be subsumed in the overall negotiations between the parties. For an example of when summary assessment of costs will be ordered at the interim stage see Picnic at Ascot Inc v Derigs [2001] FSR 2 per Neuberger J. Where a summary assessment of costs is sought, a written statement of costs in the form required by PD 44, paragraph 9 must be filed at court and copies served against the intended paying party not less than 24 hours before the date fixed for the hearing. Whilst failure to do so is not necessarily fatal (Macdonald v Taree Holdings Ltd [2001] EWCA Civ 312), it is most undesirable and will require explanation. Summary assessment was refused in Visage v Mehan because of the lack of clarity in a costs schedule.

19(b)  Payment on account of costs 14.155  Where costs are awarded (whether or not they are assessed), the successful party will usually apply for an order for payment on account of its costs. The presumption is now in favour of the court making an order for an interim payment on account of costs, unless there is good reason not to: CPR 44.2(8). This is to be contrasted with the position prior to the changes to the CPR introduced in April 2013 where there was no such presumption: see Grupo Hotelero Urvasco SA v Carey Value Added S.L. [2013] EWHC 1732 at paragraphs 60–61. 931

14.156  Interim remedies: general

14.156 In Mars UK  Ltd v Teknowledge Ltd (Costs) [1999] 2 Costs LR  44 (applying the previous rules) Jacob J considered that where it was necessary to wait for a detailed assessment, making an order for a lesser amount which the successful party would almost certainly recover was a closer approximation to justice. Having considered the circumstances and the conduct of the parties, Jacob J concluded that the successful applicant was likely to recover only 40% of its costs and reduced the figure further in arriving at an interim payment sum. This case was followed by Ouseley J in Beach v Smirnov [2007] EWHC 3499. However, where the court has not heard the trial, and has not had the opportunity to assess the issue of proportionality, and has no detailed knowledge of the nature and strength of the arguments, there is likely to be a greater reluctance to make an interim payment order. See under the pre-2013 rules Dyson Ltd v Hoover Ltd [2003]  EWHC  624 (Ch), in which Laddie J  refused to order an interim payment, taking the view that the sums involved were too large to justify an attempt at assessment without full knowledge of the issues. By contrast, in Kazakhstan Kagazy Plc and others v Zhunus and os [2015]  EWHC  404 (Comm), Leggatt J  found that the defendants’ costs for opposing the claimants’ application to amend the Particulars of Claim (a total of £945,000) were ‘neither reasonable nor proportionate’ (paragraph  14). Nevertheless, the judge determined that an order for a payment on account was appropriate, and followed an approach described (at paragraph  15) as ‘necessarily approximate’ which involved estimating the recoverable amount ‘in broad terms’ based on his knowledge of applications and costs of commercial litigation more generally. The judge then (also at paragraph 15) discounted that figure ‘to reflect the margin of error in [his] estimate and the principle that an interim payment should err on the side of awarding less than is ultimately likely to be recovered’. The judge awarded (at paragraphs 16–18) a total of £220,000 by way of payment on account of costs.

19(c)  Basis of assessment of costs 14.157  Costs are normally awarded on a ‘standard basis’. Costs assessed on the standard basis will only be allowed where they are proportionate to the matters in issue, with any doubt as to whether the costs were reasonably incurred or reasonable and proportionate being resolved in favour of the paying party (CPR, r 44.3(2)(b) – see also CPR, r 44.4 for the factors to be taken into account in deciding the amount of costs). The more unusual basis of assessment is indemnity costs. Here, any doubt as to whether the costs were reasonably incurred are resolved in favour of the receiving paying party (CPR, r 44.3(3)). For a party to obtain an order for payment of costs on an indemnity basis, it is not necessary to show some sort of moral lack of probity or conduct deserving moral condemnation on the part of the paying party: Reid Minty v Taylor [2002] 1WLR 2800 [27] cited with approval in Fourie v Le Roux [2007]  UKHL  1. It is necessary instead to show that the conduct of the paying party has in some respect been unreasonable (see Fourie); there must have been some conduct by the paying party or some circumstance which ‘takes the case out of the norm’: see for a helpful summary of the relevant principles Whaleys (Bradford) Ltd v Bennett 932

Costs orders 14.159

and Os [2017] EWCA Civ 2143 at paragraphs 19–25. The difference, however, between costs on a standard basis and on the indemnity basis is not great: Fourie at paragraph 39. In committal proceedings it is usual for costs to be awarded on an indemnity basis. See 16.107 regarding costs at trial.

19(d)  Part 36 offers/other offers 14.158  Under CPR Part 36 either party may make an offer, with attendant costs consequences (set out CPR r 36.13), to settle the claim. In order to give rise to the consequences set out in Part 36, the offer must strictly comply with the requirements of CPR r 36, in particular CPR r 36.5 and (if a defendant’s offer) CPR r 36.6. Careful attention should be given to Part 36 when drafting any offer. By way of example, any offer must: (i) be in writing; (ii) make clear that it is made pursuant to Part 36; (iii) specify a period of not less than 21 days within which the defendant will be liable for the claimant’s costs in accordance with rr 36.13 or 36.20 if the offer is accepted; (iv) state whether it relates to the whole of the claim or to part of it or to an issue that arises in it and if so to which part or issue; and (v) state whether it takes into account any counterclaim. 14.159  It is not always easy for a party to decide when to make such an offer. A costs offer made at an early stage will afford the offeror the best costs protection. However, at an early stage (eg before disclosure) it may be difficult to assess the strength of the case and therefore an appropriate level of offer. The costs consequences, in the context of an action for an injunction, are as follows: •

If the offer is accepted (either the defendant accepts the claimant’s offer or the claimant accepts the defendant’s offer), then the claimant will be entitled to costs up to the date on which notice of acceptance was served, which costs are assessed on the standard basis, if not agreed. The claimant’s entitlement to costs will include recoverable pre-action costs, namely the costs reasonably incurred in complying with the relevant pre-action protocol, but only to the extent they are proportionate: Callery v Gray, Russell v Pal Pak Corrugated Ltd [2001] 3 All ER 833 (CA).

•

Where a defendant’s offer is not accepted, but the claimant fails to ‘obtain a judgment more advantageous’ than that offer, the claimant will usually be ordered to pay the defendant’s costs (including their recoverable pre-action costs) from the latest date on which the claimant could have accepted the offer and interest on those costs.

•

Where a claimant’s offer is not accepted and the claimant obtains a judgment which is ‘at least as advantageous’ to the claimant as the proposals contained in its Part 36 offer, the court must, unless it considers it unjust to do so, order that the claimant is entitled to: >

interest on the whole or part of any sum of money (excluding interest) awarded at a rate not exceeding 10% above base rate for some or all of the period starting with the latest date on which the offer could have been accepted. This is unlikely to be relevant at an interim stage, 933

14.160  Interim remedies: general

where the court will not be determining liability for any damages claim; >

costs (including any recoverable pre-action costs) on the indemnity basis from the latest date on which the offer could have been accepted;

>

interest on those costs at a rate not exceeding 10% over base rate;

>

provided that the case has been decided and there has not been a previous order under CPR r 36.17(4)(d), an additional amount, which shall not exceed £75,000 calculated by applying a percentage to the sum awarded to the claimant by the court, or where there is no monetary award to the sum awarded to the claimant by the court in respect of costs. The percentage to be applied is 10% up to £500,000 and (subject to the limit of £75,000) 5% of any amount above that figure.

14.160  Given that Part 36 enables an applicant to make an offer, for example, restricting an (ex-)employee’s activities to a more limited extent than set out in the relevant post-termination covenants (eg by not seeking to enforce particular covenants or ‘blue pencilling’ others), there is considerable scope and incentive to settle actions for an injunction. Where the period of restraint may lead to a covenant being unenforceable, for example, an offer by the applicant to restrain the respondent for what is unarguably a reasonable period may avoid the need for an interim injunction hearing, with the attendant litigation risk. The possibility of paying costs on the indemnity basis, with interest at a penal rate (see 14.158), leads some defendants to settle in cases concerning covenants at the borderlines of enforceability. The effect on costs of an offer in terms which the court could not itself order is problematic, now that the courts are likely to take a much broader view on who should be awarded what proportion of its costs. Further, the courts may now be far more interventionist in suggesting that the parties give undertakings to resolve disputes – and, in view of the broad discretion of the judge regarding costs, parties may feel diffident about resisting strong ‘hints’ from the judge in this regard. In many more complex cases it may not always be so easy in these circumstances (or in any event) to see who has ‘won’ the hearing or case. In such circumstances, it may be helpful for a party on the question of costs to show the court that it had made an earlier offer in similar or even less favourable terms than those eventually achieved at court. On the other hand, it may be argued that the court should not take into account the question of cost orders, which were in terms which the court could not itself offer, but the safer course may well be to assume that such an offer could be taken into account. It is worth noting that where an offer is made by an applicant and is bettered at trial, then, even where the period for acceptance is limited, indemnity costs may be awarded against the respondent: Mantis Surgical Ltd v Tregenza [2007] EWHC 1545. 14.161  CPR r 36.1(2) provides that nothing in Part 36 prevents a party making an offer to settle in whatever way he chooses, but if that offer is not made in accordance with Part 36, it will only have the consequences specified in Part 36 if the court so orders. Accordingly, even where for one or other reason a party considers it inappropriate to make a Part 36 offer (eg there are fewer than 21 days until trial, 21 days being the prescribed period for acceptance), it may still be 934

Costs orders 14.163

worthwhile making an informal offer to settle, which will be taken into account by the court in deciding the issue of costs: CPR r 44.4(3).

19(e)  Costs liability of third parties 14.162  Circumstances occasionally arise whereby persons who are not party to proceedings may be held liable for the costs of a successful party in those proceedings: see section 51 Senior Courts Act 1981, as construed by the Court of Appeal in Aiden Shipping Co Ltd v Interbulk Ltd, The Vimeira (No 2) [1986] AC 965, and CPR 46.2. Helpful guidance is to be found in the decision of the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1  WLR  2807, as applied by the Court of Appeal in Arkin Borchard Lines Ltd and others [2004] EWCA Civ 655. In an employment context this discretion has resulted in cases where a new employer is held liable for the costs of defending an application for interim or final relief based upon post-termination restrictions: see, for example, Symphony Group plc v Hodgson [1994] QB 179 (CA); SBJ Stevenson Ltd v Mandy [2000] FSR 651. In Stevenson, although the court was satisfied that the new employer had not agreed to provide the defendant with an indemnity against all the costs which he might be ordered to pay to the claimant, the firm had paid for the legal advice taken by the defendant up to the commencement of proceedings and thereafter had enabled the defendant to fight for as long and as hard as he had by the promise of loans to meet his legal costs, upon which no cap was placed until a contested trial was imminent. The particular circumstances which appeared to justify an order for costs in favour of the claimant against the non-party (limited to one half of those costs) were the funding, which enabled the defence to continue, the interest which the new employer had in the defendant succeeding, and its knowledge that he would not be able to pay the claimant’s costs, if he failed in his defence. In Hodgson it was said that it was exceptional for a non-party to proceedings to be ordered to pay the costs of the successful party if the successful party had a cause of action against the non-party and could have joined him as a party to the original proceedings. Therefore, the non-party should at least be warned by the applicant for costs at the earliest opportunity of the possibility that costs might be sought against him, so that he has an opportunity to apply to be joined as a party to the action. This point was also made in Myatt v National Coal Board [2007] EWCA Civ 307, where a wasted costs order was made against a solicitor who acted outside the normal role of solicitor in that he was a real party to the proceedings, not merely funding them, but also substantially controlling or benefiting from them. The question of what amounted to the ‘normal role’ of a solicitor in circumstances where there was a Conditional Fee Agreement in place was considered by the Court of Appeal in Flatman v Germany [2013] 1 WLR 2676 (see paragraphs 24–47). 14.163  Drawing together the different points referred to above, and applying them to the typical scenario where a (prospective) new employer funds litigation by the (ex-)employer against the departing employee without joining the new employer as a party, the key elements which may (usually cumulatively, at least as to some of them) lead to a finding of liability on the part of the new employer to pay the costs of the old employer are: 935

14.164  Interim remedies: general

•

that the funding by the new employer is an effective cause of the litigation being brought or defended;

•

that the new employer has a personal interest in the outcome of the proceedings;

•

knowledge by the new employer that the employee will be unable to pay costs if they are awarded against him;

•

the exercise of control by the new employer over the litigation, eg such as choosing and instructing the legal team and dictating terms of settlement;

•

the existence of an indemnity by the new employer to pay the employee’s costs or damages – an indemnity will substantially increase the chance of the new employer being held liable for the old employer’s costs.

14.164  It is not necessary for all these factors to exist before the third party can incur liability for costs. Any application for costs against a third party should be considered by the trial judge. 14.165 The funding of litigation by third parties is becoming increasingly prevalent, and it is inevitable that successful litigants will look to an opponent’s funders in order to meet any costs liability if the counterparty is itself unable to pay. In such circumstances, disclosure is often sought in support of an application for third party costs. The proper approach to such applications was summarised by Blake J  in Thomson v Berkhamsted Collegiate School and Others [2009] EWHC 2374 (QB) (at paragraph 18). Although the courts exercise case management powers to ensure that any application does not turn into satellite litigation that results in ‘prolonged, complex and over-extended arguments about costs about costs’ (per Blake J  in Thomson at paragraph  18(vii)), in appropriate cases disclosure will be necessary and proportionate. Relevant considerations identified by Blake J  at paragraph  19 (all of which were approved by the Court of Appeal in Flatman at paragraph  28 per Leveson LJ) include the following: •

the strength of the application as it appears to the court unassisted by disclosure;

•

the potential value to the fair determination of the application of the documents of which the claimant seeks disclosure and whether they are likely to elucidate considerations highly probative of the  exercise of the court’s discretion, or threaten to drag the application into a side alley of satellite litigation with diminishing returns for the overall issue;

•

whether on a summary assessment it is obvious that the documents for which disclosure is sought will be the subject of proper legal professional privilege; and

•

whether the likely effect of any order the court might be minded to make will be proportionate and just in all the circumstances.

936

Appeals 14.168

14.166  Any applicant for disclosure in support of a third party costs order would be well advised to give particular attention to these factors in its supporting evidences.

20. APPEALS 14.167 The details of the procedure which now governs the appeal process can be found at CPR, Part 52 and PD 52 (A)–(E). However, in broad terms an appeal against the grant or refusal of an interim injunction by a judge can only be made with the permission of the court which made the order or, failing such permission, to the relevant appellate court in an appeal notice: CPR r 52.3(2). Permission to appeal is given only where there is a real prospect of success or some other compelling reason why the appeal should be heard. The decision to grant or refuse an interim injunction is a matter of the discretion of the judge, and the appeal court will not interfere with the exercise of that discretion unless the judge was wrong in law to exercise that discretion in that way, or no reasonable judge having regard to the duty to act judicially could have reached that decision: Hadmor Productions Ltd v Hamilton [1983] AC 191 (HL). Furthermore, there are practical timing difficulties in obtaining an effective hearing of an appeal against an interim injunction: the Court of Appeal may refuse to hear the merits of an appeal because the period of the covenant has expired or almost expired (Wincanton Ltd v Cranny [2000] IRLR 716), or because a speedy trial is imminent (SBJ Stevenson v Mandy [2000] IRLR 233). 14.168  These cases, where the period of the covenant is in danger of expiring or nearly expiring before the hearing of the appeal, cast a very high (even unreasonable) burden on counsel and solicitors, where appropriate, to move heaven and earth to obtain an expedited hearing from the Court of Appeal. However, the Court of Appeal is able to hear appeals at very short notice: in Siemens VAI Metal Technologies Ltd v Paul Wurth Ltd (1  May 2008, unreported) the appeal was heard within three days of the hearing below (on a short point arising during the interim springboard injunctions hearing). Similarly, an expedited appeal was heard in a matter of days in Willis Ltd & Anr v Jardine Lloyd Thompson Group plc & Os [2015] EWCA Civ 450. On the other hand (as made clear by the Court of Appeal in EE & Brian Smith (1928) Ltd v Hodson [2007] EWCA Civ 1210), the court should deal with applications for interim relief expeditiously, since delay may frustrate the very purpose for which the application is made. It is often possible, at least in a reasonably straightforward case, for the judge to announce his decision and to give his reasons for it at the conclusion of the hearing, or after a short adjournment. If that cannot be done, it is sometimes possible to announce a decision at the conclusion of the hearing, but to reserve the reasons for it. If that is done, the reasons should follow without undue delay, especially if the decision is one that may be subject to appeal. It is sometimes necessary to reserve the decision as well as the reasons, because more time is required for consideration of the evidence and submissions; and the more complex the case, the longer the time that may be required. Again, however, it is important for the decision 937

14.169  Interim remedies: general

to follow without undue delay. In that situation one would normally expect the reasons to be given at the same time as the decision; but if there is a good reason to defer the giving of reasons, once more the delay should be kept to a minimum, especially if the decision may be subject to appeal. 14.169 In Willis Ltd & Anr v Jardine Lloyd Thompson Group plc and Os (above) the appeal was heard at such speed there was no approved transcript of the judge’s decision below. Instead, the Court of Appeal relied upon notes made by the parties of the judge’s oral reasons. This decision therefore serves as a reminder to parties of the critical importance of taking a careful note of proceedings generally, and in particular of any oral judgment. 14.170  Where a judge refuses to award an interim injunction on an application without notice, an appeal may be made against that refusal. The Notice of Appeal must be filed within 21 days of the date of the decision of the lower court, or within such period as may be directed by the lower court: CPR r 52.12(2)(b). Time starts to run from the date of the judge’s decision, not from the date when the order reflecting that decision was drawn up: Sayers v Clarke Walker [2002] 2 BCLC 16. Unless the appeal court orders otherwise, the notice of appeal must be served on each respondent as soon as practicable and in any event not later than seven days after it has been filed: CPR r 52.12(3)(b).

21.  LITIGANTS IN PERSON 14.171  It is a feature of modern civil litigation that the unrepresented litigant is becoming increasingly common. This can present acute challenges both to the court and to other parties, particularly in cases of the kind considered in this chapter, where the law is rarely straightforward and proceedings can move with great speed. 14.172 The Bar Council, CILEx and the Law Society have jointly published guidelines intended to offer practical advice for lawyers dealing with litigants in person on the other side of litigation. These guidelines discuss the relationship between a lawyer’s duty to his client, his duty to the court and the administration of justice, and the extent to which the latter duty requires a lawyer to assist the litigant in person. These can be vexed questions. 14.173  In addition, both the Queen’s Bench Division and the Chancery Division have produced guides for litigants acting in person. Each of these is available at www.judiciary.gov.uk/you-and-the-judiciary/going-to-court/advice-for-lips. Lawyers may find it helpful to refer litigants in person to this website. These guides provide answers to many of the questions frequently asked by litigants in person, and can therefore save lawyers time. In addition, the act of referring the litigant in person to the guides can assist in demonstrating to the court that the represented party has been mindful of its potentially superior expertise and resources, and has sought to ensure that the parties are on an equal footing, consistent with the overriding objective at CPR r 1.1(2). 938

CHAPTER 15

Specific interim remedies Selwyn Bloch QC and Gavin Mansfield QC Introduction

15.1

1. Prohibitory injunctions to restrain breaches of restrictive covenants

15.2

2. Garden leave injunctions 15.3 2(a) Introduction 15.3 2(b) Continuation of the employment contract 15.7 2(c) Prohibition on specific performance of an employment contract15.10 2(d) Development of the garden leave injunction 15.14 2(d)(i) Older cases on indirect specific performance 15.14 2(d)(ii) Evening Standard v Henderson15.21 2(d)(iii) Provident Financial Group plc v Hayward15.22 2(d)(iv) Other early garden leave cases 15.24 2(e) The ‘right to work’ 15.26 2(f) Negativing the right to work – garden leave clauses 15.30 2(f)(i) Are express garden leave clauses always essential? 15.31 2(f)(ii) Qualifications to the ‘right to work’ 15.33 2(g) Payment of salary and compulsion to work: Sunrise Brokers15.37 2(h) Restraint of trade and the enforcement of garden leave 15.45 2(h)(i) Restraint of trade and the terms of the contract 15.46 2(h)(ii) How closely will the court apply restraint of trade principles at the enforcement stage? 15.55 2(i) When and for how long garden leave will be ordered 15.64 2(j) Interplay between garden leave and restrictive covenants 15.66 2(k) Summary of garden leave considerations 15.72 3. Confidentiality injunctions

15.74

4. Springboard injunctions 15.78 4(a)The Springboard principle 15.78 4(b) Classic statement of principles: Terrapin and Roger Bullivant15.79 4(c) The modern restatement of principles: QBE v Dymoke15.86 4(d) Confidential information cases 15.90 4(d)(i) Requirements for relief 15.90 4(d)(ii) Springboard should not be used to make up for absence of express covenants 15.91 4(d)(iii) Mere possession of confidential information is not sufficient for relief 15.92 4(d)(iv) Consideration of scope and duration of the headstart 15.96 939

Specific interim remedies

4(e) Extension to breaches other than breach of confidence 4(f) Types of springboard order 4(f)(i) Orders restraining dealing with clients 4(f)(ii) Orders restraining recruitment of employees 4(f)(iii) Orders restraining the employment of defendants 4(f)(iv) Delaying the commencement of a competing business 4(g) The duration of springboard relief 4(h) Controversy concerning the springboard doctrine 4(i) Interim or final order? 4(j) The patent infringement analogy 5. Orders relating to documents 5(a) Introduction 5(b) Property of the ex-employer 5(c) Detention, preservation and inspection orders 5(d) Interim mandatory injunctions 5(e) Orders for delivery up, search or inspection of electronic devices 5(f) Orders for provision of witness statements and early disclosure of evidence

15.98 15.104 15.106 15.112 15.118 15.122 15.123 15.128 15.142 15.148 15.153 15.153 15.165 15.171 15.176 15.177 15.191

6. Search orders 15.196 6(a) Nature of the order 15.197 6(b) Usual relief – standard form of search order 15.198 6(c) Requirements for search order 15.201 6(d) Limits on the use of search orders: proportionality 15.203 6(e) Safeguards where the search order is granted 15.205 6(e)(i) Full and frank disclosure 15.206 6(e)(ii) Full and frank disclosure where applicant does not wish to reveal its trade secrets 15.211 6(e)(iii) Supervising solicitor 15.215 6(e)(iv) Explanation of the order/provision of documents to respondent15.217 6(e)(v) Right of the respondent to take legal advice 15.218 6(e)(vi) Requirements regarding the search party 15.219 6(e)(vii) General safeguards regarding the manner of execution of the search order 15.220 6(e)(viii) List of items removed 15.221 6(e)(ix) Short duration of ‘gagging’ orders 15.222 6(e)(x) Compliance by director/responsible person in control of premises 15.223 6(e)(xi) Limitations – not to search for confidential documents/use recovered items/inform others of proceedings 15.224 6(e)(xii) Duty as to items found 15.225 6(e)(xiii) Cross-undertaking as to damages 15.228 6(e)(xiv) Undertaking to issue claim form 15.229 6(e)(xv) Right of the respondent/others to apply to vary/discharge order 15.230 6(e)(xvi) Privilege against self-incrimination 15.231 940

Prohibitory injunctions to restrain breaches of restrictive covenants 15.2

6(e)(xvii) Restrictions on use of information obtained under the search order 6(f) Can a respondent refuse to comply? 6(g) Applications to discharge 6(h) Cross-examination of respondent on his affidavit 6(i) Foreign defendants

15.242 15.245 15.249 15.255 15.259

Appendix to Chapter 15

INTRODUCTION 15.1  In Chapter 14 we considered interim remedies generally. In this chapter we consider the different types of interim remedies that arise most frequently in the context of the kind of employment disputes which are the subject of this book. In particular we consider: •

Prohibitory injunctions to restrain breaches of restrictive covenants (15.2).

•

Garden leave injunctions (15.3).

•

Confidentiality injunctions (15.74).

•

Springboard injunctions (15.78).

•

Orders to relating to documents (15.153).

•

Search orders (15.196).

1. PROHIBITORY INJUNCTIONS TO RESTRAIN BREACHES OF RESTRICTIVE COVENANTS 15.2 Points which require particular consideration when considering interim relief are: •

The interest of the (ex-)employer which the covenant is intended to protect, eg  confidential information, or business connection, or stability of the workforce: see 10.20–10.31.

•

Whether the covenants extend no further than is reasonably necessary to protect that interest: see 10.42 and Chapter 11. Consideration should be given to the extent to which the ability of the ex-employee to earn a living is affected by the enforcement of the covenant – a properly drafted covenant will seek to ensure that, while the ex-employer’s interests are protected, the ex-employee is left with adequate scope to earn a living: see 10.15–10.16 and 15.3.

•

If the covenants are too wide, whether they can be saved by severance (‘blue-pencilling’): see 12.46–12.59. Where the covenants are too wide 941

15.3  Specific interim remedies

because of an obvious error in drafting (which is not too uncommon!) and cannot be rescued by severance, whether they can be saved by a rule of construction or (as a final resort) rectification: see 12.17–12.40 and 12.65– 12.73. •

If the covenant is enforceable, whether the court should exercise its discretion to grant an injunction. The starting point when seeking to enforce a negative covenant is that the ordinary remedy is an injunction, but the court has a discretion to refuse an injunction in appropriate circumstances: D v P [2016] ICR 688. That is the position at trial (see 16.57). As to the exercise of the discretion at in interim stage see 14.7–14.27 and 14.67– 14.83.

2. GARDEN LEAVE INJUNCTIONS 2(a) Introduction 15.3  In this chapter, we look at the circumstances in which a court will grant an injunction to restrain an employee who wishes to compete while employed during an unexpired notice period. The basis of such an application is commonly the threat of breach of the implied duty of fidelity, though there may be express terms relating to work for a competitor during employment. The concept of garden leave, the right to exclude an employee from carrying out his duties and from contact with the employer’s customers and workforce and access to the employer’s confidential information during notice, is addressed at 5.121–5.127 and 9.102–9.108. Commonly an employer will seek an injunction in circumstances where the employee has been placed on garden leave, but that is not necessarily so. A number of the cases dealt with below arose in circumstances where the employer was content for the employee to work during their notice period: see eg Evening Standard Co Ltd v Henderson [1987] ICR 588 (15.21), Sunrise Brokers LLP v Rodgers [2015] IRLR 57 (15.35). In those cases the employer was not strictly speaking seeking an injunction to enforce garden leave, but the same issues arise in both instances. The courts have fashioned an injunction which reconciles competing public policies, namely that: •

contracts of employment (like any other contract) should be enforced, including express or implied terms not to work for a competitor of the employee’s current employer; but

•

it is inappropriate for the court to decree specific performance of an employment contract against an employee, ‘forcing’ him to work – on pain of imprisonment for contempt.

15.4  The effect of a garden leave injunction, in general terms, is that the employee is prevented by injunction from working in competition against his employer while his employment continues, usually for all or part of the employee’s notice period. In return, the employer undertakes to the court to pay the employee his salary and provide his contractual benefits during the period of the injunction; 942

Garden leave injunctions 15.8

and undertakes not to nullify this by seeking to ‘claw back’ the salary and value of the benefits by claiming damages for non-performance of the employment contract. The effect is therefore that the employer obtains an injunction which sterilises the competitive capacity of the employee during employment but, because he is being paid, does not force the employee to provide his services to the employer. In exceptional circumstances the court may grant an injunction without requiring an undertaking from the employer to continue to pay salary and provide contractual benefits: see 15.37–15.44. 15.5  It is very common for employment contracts to include an express garden leave clause, giving the employer the right to exclude the employee from work for all or part of his notice period. In the absence of such a clause, the question arises as to whether the employee has a right to work, so that exclusion from the workplace can, and in many cases will, amount to a repudiatory breach of contract, entitling the employee to accept the breach, and be discharged from all future obligations to the employer: General Billposting & Co Ltd v Atkinson [1909] AC 118 (see 9.50). 15.6  In dealing with this type of injunction we shall consider the following: •

Continuation of the employment contract.

•

Prohibition on ordering specific performance by the employee of an employment contract (directly or indirectly).

•

Development of the garden leave injunction.

•

The ‘right to work’.

•

Garden leave clauses negativing the ‘right’ to work.

•

Payment of salary and compulsion to work.

•

Restraint of trade and enforcement of garden leave.

•

Length of garden leave.

•

The interplay between garden leave and restrictive covenants.

2(b)  Continuation of the employment contract 15.7 Whereas injunctions to enforce restrictive covenants of the employment contract normally (but not always) arise in the context of the contract of employment having terminated, garden leave injunctions arise in the context of the employer seeking to keep the contract of employment alive, so that the employee can be restrained from competitive activity during their contractual notice period. 15.8  One of the first issues to resolve in a garden leave case is the question of whether the contract of employment is continuing, or whether it has terminated. Disputes commonly arise because the employee claims that they have resigned with immediate effect (by seeking to rely on acceptance of an alleged repudiation 943

15.9  Specific interim remedies

by the employer); whereas the employer seeks to keep the contract alive until the expiry of the employee’s notice period. If the employee is right, and the employer has repudiated the contract, then the employee’s immediate resignation will be effective. If the employee is wrong, then the summary resignation is itself a breach of contract and the contract remains alive. The contract of employment cannot be brought to an end by the unilateral wrongful act of one of the parties. A repudiatory breach of contract is of no effect (as far as the continued existence of the contract is concerned) unless and until it is accepted by the innocent party as bringing the contract to an end: Geys v Société Générale [2013] 1 AC 523 (see further 9.45–9.47). 15.9  While the contract of employment continues, the employee owes an implied duty of good faith and fidelity, which would be breached if the employee works in competition with the employer (see 3.21–3.25). The employee may also owe express contractual duties not to carry out other work (either in competition or at all) during the period of their employment. The basis of a garden leave injunction is the enforcement of these express and implied negative obligations. However, the next issue to consider is whether enforcement of those negative obligations in fact amounts to enforcement of a positive obligation to work for the employer.

2(c) Prohibition on specific performance of an employment contract 15.10  It has long been accepted that an employment contract cannot generally be specifically enforced by either party: Ridge v Baldwin [1964] AC  40 (HL) at page 65 per Lord Reid. An employer may not by way of decree of specific performance or injunction force an employee to work: De Francesco v Barnum (1890) 45 Ch D  430 at page 438. To do so would turn a contract of personal service into a contract of servitude. This is enshrined in section 236 Trade Union and Labour Relations (Consolidation) Act 1992, whereby the courts are precluded, whether by way of an order of specific performance of an employment contract or an injunction restraining a breach or threatened breach of such a contract, from compelling an employee to work. A  court cannot, therefore, order an employee to perform services for the employer. Nor can it achieve the same result by the back door, by making an order the effect of which is to compel the employee to work for the employer. The courts will be alive to the possibility that an injunction to enforce a negative covenant not to work for a competitor may force the employee to return to work for the employer, amounting indirectly to specific performance. 15.11 The prohibition on specific performance leaves open the prospect that employees may simply walk away from their employment contracts, safe in the knowledge that the court cannot enforce their contractual notice provisions. Here, as in many situations in employment law, the protection of the position of employees comes into conflict with the principles of freedom of contract. The courts have repeatedly deprecated the conduct of employees (especially of highly paid employees) who disregard their notice period and other obligations to join 944

Garden leave injunctions 15.15

new employers for even higher salaries. As it was put by Dillon LJ in Provident Group plc v Hayward [1989] ICR 160 at page 169D: ‘I  certainly would not wish to countenance the view that any employee can snap his fingers against his employer and disregard the notice provisions and obligations in his service agreement during his period of notice.’

15.12 The policy tension can be seen in Warren v Mendy [1989]  IRLR  210. Nourse LJ, while setting out the principle that the court would not enforce a negative covenant so as to compel the employee to perform his positive obligations under the contract, went on to say at page 215: ‘In stating the principles as we have, we are not to be taken as intending to pay anything less than a full and proper regard to the sanctity of contract. No judge would wish to detract from his duty to enforce the performance of contracts to the very limit which established principles allow him to go.’

15.13  The courts’ task has been to steer a line between the prohibition on specific performance, and the desire to enforce contracts freely entered into. The mechanism the courts have adopted has been to consider whether or not the effect of enforcing an employee’s negative obligations (either the implied duty of fidelity or express obligations not to compete) by preventing him from working for a competitor amounts to compulsion to continue to work for the employer. In addressing that question, many of the older cases are hard to reconcile.

2(d)  Development of the garden leave injunction (2)(d)(i)  Older cases on indirect specific performance 15.14  Many of the older cases looked at whether the choice for the employee was either to remain idle and starve or to perform services for the employer: see, for example, Rely-A-Bell Burglar and Fire Alarm Co Limited v Eisler [1926] Ch 609. If the effect of an injunction would be that the employee, if he did not return to work for his employer, would be idle then the injunction should not be granted. The court has traditionally not enforced a covenant which requires the employee to choose between performing his contract or remaining idle, eg, an injunction preventing the employee from working for anyone else in any trade or profession at all: Ehrman v Bartholomew [1898] 1 Ch 671. 15.15  However, injunctions were granted which indirectly put pressure on the employee to stay in employment: Lumley v Wagner (1852) 1 De GM & G 604 (injunction enforcing a covenant not to sing at another theatre). In Warner Brothers Pictures Inc v Nelson [1937] 1 KB 209, Branson J granted an injunction against the actress Bette Davis preventing her, during the currency of her contract with Warner, from acting for third parties. She could still work otherwise than as a film artiste, even though this would mean a substantial drop in earnings. The court held that the fact that she could work otherwise than as a film artiste meant that she was not compelled to perform the contract. 945

15.16  Specific interim remedies

15.16  In contrast, in Page One Records Ltd v Britton (trading as The Troggs) [1968] 1 WLR 157 (Stamp J), the manager of a pop group claimed that the group had terminated their relationship in breach of contract. The court refused to grant an injunction restraining the group from employing another manager. The group needed a manager, and the injunction would have the effect of forcing them to engage Page One: ie it would amount, indirectly, to specific performance of a contract for personal services. 15.17 In Warren v Mendy [1989] 1 WLR 853 (an action between two boxing promoters) the Court of Appeal refused indirectly to enforce an exclusive management contract between a boxer and his promoter, since it was a contract for the performance of personal services involving the continuing exercise of special skill and talent and a high degree of trust between the parties. Compulsion was a question of fact and might be inferred where the employer sought relief against the new employer and was likely to seek relief against any other employer. The Court of Appeal expressed a clear preference for the approach of Stamp J  in Page One to that of Branson J in Warner Brothers, and reaffirmed the principle applied in Whitwood Chemical Co v Hardman [1891] 2 Ch 416 (CA) that the court will not by the back door grant specific performance of an employment contract. It is doubtful that the injunction granted in Warner Brothers would be granted today. 15.18  Likewise, in Subaru Technica International Inc v Burns [2001] All ER (D) 195 (Dec) Nicholas Strauss QC (sitting as a deputy judge of the Chancery Division) refused to grant an injunction restraining Burns from driving for Peugeot when Burns would thereby (as a practical matter) have been compelled to drive for Subaru. The deputy judge relied on a rule of settled practice of general application to all contracts of personal service involving a close relationship, which applies whatever may have been the circumstances of the dispute and even in cases in which the employer has done nothing wrong. On the basis of this practice (despite misgivings) he rejected a submission that such an injunction might be granted where the relationship between the parties was sufficiently sound for the contract to be performed satisfactorily. In other words, the finding that the grant of the negative injunction would in reality have compelled Burns to drive for Subaru was sufficient by itself to prevent grant of the injunction. 15.19  Accordingly, where an employee purported to terminate his employment without giving the required period of notice, until the development of the concept of ‘garden leave’ in the late 1980s, it seemed that employers were confined to a claim for damages for breach of contract or to reliance on post-termination restrictive covenants. 15.20 In Thomas Marshall (Exports) Ltd v Guinle [1979] I Ch 227 Sir Robert Megarry V-C held that, although the court could not force the employee to work in accordance with his contract, it could restrain him from committing other breaches of his obligations during the period of his contract. He granted interim non-solicitation/dealing injunctions (with customers and suppliers) against a 946

Garden leave injunctions 15.22

managing director who had purported to resign from his employment well before the expiry of a fixed term, but whose resignation the employer refused to accept. These injunctions were founded on breaches of the duty of fidelity (and fiduciary duty). This case was decided before the ‘garden leave’ cases referred to at 15.21–15.25. 2(d)(ii)  Evening Standard v Henderson 15.21  In response to the dilemma employers faced, advisers looked for alternative ways to tackle the problem. The first case on the subject, Evening Standard Co Ltd v Henderson [1987] ICR 588, was not, strictly speaking, a garden leave case at all. Henderson, a production manager for Evening Standard, was subject to a notice period of 12 months. He purported to terminate his employment on two months’ notice in order to join a rival paper. Evening Standard sought to keep the contract of employment alive, rather than accepting Henderson’s conduct as bringing the contract to an end. In seeking the court’s assistance to keep Henderson to the period of his notice, Evening Standard offered undertakings to the court to pay Henderson his full salary and benefits during the notice period, whether or not he worked, and also not to seek damages against him for his failure to work (which would otherwise, of course, have cancelled out the benefit of the undertaking to pay salary and provide benefits). Evening Standard were granted an injunction because they were not seeking to force Henderson to work, which is not permitted (see 15.10), nor were they refusing him the right to work. Evening Standard was quite prepared to have Henderson work out his notice period and, indeed, up to the time of the hearing of the application Henderson had continued to perform his duties. It is this rather unusual feature which makes this case not, strictly speaking, a garden leave case. Usually, where an employee is making plans to join a rival the very last thing the employer will wish to do is to have him remain on the premises, with ongoing contact with customers, colleagues and confidential information and with the potential to harm the employer pending his departure. 2(d)(iii)  Provident Financial Group plc v Hayward 15.22  The first true garden leave case was that of Provident Financial Group plc v Hayward [1989]  ICR  160. Hayward, a financial director of an estate agency, gave six months’ notice in accordance with his contract. After working for two months Hayward was sent on garden leave in accordance with an express term in his contract, which included a provision for the continuation of his salary and benefits throughout the garden leave period. The contract also included standard provisions that Hayward would devote his whole time and attention to his duties and not engage in any other business or be employed by any third party whilst employed by Provident. Within a matter of weeks of commencing garden leave Hayward sought to take up a position with another estate agency. Provident applied to the court for an injunction to restrain Hayward from taking up his new employment until the expiry of his notice period. Provident’s primary concern related to the protection of 947

15.23  Specific interim remedies

its confidential information. The application was refused at first instance and Provident appealed. Although the Court of Appeal refused Provident’s application, it did so only on the ground that on the particular facts of the case there was ‘no real prospect of significant or serious damage’ being caused to Provident as a result of Hayward taking up his new position. It appears from the report that Hayward took up his new position some two-and-a-half months before his notice period would have expired. 15.23  In considering the arguments in Provident the Court of Appeal reached a number of useful conclusions which remain important in garden leave cases; these are as follows: •

The court had the power to ‘narrow the scope of the contractual embargo’ (Taylor LJ at page 170D) and to grant an injunction restraining Hayward from joining a competitor during his notice period. The Court of Appeal rejected an argument for Hayward that it could only grant an injunction in the full terms of a standard outside activities clause in his contract that prohibited him from undertaking or being employed by or having a financial interest in any other business or profession whilst employed by Provident. The Court of Appeal accepted that would be the correct approach when dealing with post-termination restrictive covenants, but ruled it did not apply where the application was to enforce a term of an ongoing contract. The Court of Appeal further ruled that, even if there was no express term prohibiting the employee working for a third party during the currency of a contract, an injunction to restrain an employee from working for a rival could be granted based on a breach of the employee’s duty of good faith – see Dillon LJ at page 167F.

•

An injunction in the terms requested would not fall foul of the prohibition on specific enforcement of contracts of employment. The Court of Appeal ruled: (a) the negative obligation not to work for another was not simply the corollary of a positive obligation to devote whole time and attention to the business of the employer; (b) starvation was not an issue – salary and benefits were to be continued throughout the notice period; and (c) even taking idleness as a separate issue (per Taylor LJ at page 170B), Hayward’s skills as a chartered accountant were ‘unlikely to atrophy’ in three months.

•

The practice of long periods of garden leave is capable of abuse. The mere fact that the employee would not starve is not enough. In the words of Dillon LJ (at page 168D): ‘The employee has a concern to work and a concern to exercise his skills. This has been recognised in some circumstances concerned with artists and singers who depend on publicity, but it applies equally I apprehend, to skilled workmen and even to chartered accountants.’

948

Garden leave injunctions 15.26

2(d)(iv)  Other early garden leave cases 15.24  Although Provident failed in their application on the basis of the absence of risk of any serious damage, in GFI Group Inc v Eaglestone [1994] IRLR 119 and Euro Brokers Ltd v Rabey [1995] IRLR 206 garden leave injunctions were granted to protect the employer’s customer connections. Those connections had been secured by lavish entertainment expenses, and in each case the court found they were likely to be significantly damaged were some injunctive relief not granted. 15.25  GFI Group Inc v Eaglestone [1994] IRLR 119 is also worthy of note as an illustration of the court ‘cutting down’ a contractual embargo when granting an injunction. Eaglestone was one of three employees who resigned to join a competitor employer. He was the most senior of the three and is described in the judgment as an ‘exceptionally highly paid employee of experience and standing’. All three employees resigned on the same day, the two more junior employees gave the four weeks’ notice required by their contracts, which they served and then left. Eaglestone’s notice was 20 weeks, a period which had been negotiated by him at the time he joined GFI, being a compromise between the three months Eaglestone had wanted and the six months GFI had asked for. Shortly after the two more junior employees left, Eaglestone purported to accept an alleged repudiation of his contract. In response, GFI obtained a without notice order restraining Eaglestone from joining his new employer until the expiry of the notice period based on a ‘cut down’ version of a prohibition against working for others whilst employed by GFI. Although there was no express garden leave clause, GFI had given the same undertakings in relation to continuation of salary and benefits and not to seek damages as were given in the Evening Standard case. Eaglestone applied to set aside the order, with the result that with some reluctance Holland J varied the injunction, reducing the period of the restraint from 20 to 13 weeks. Both Eaglestone’s status and the fact that the notice period had been negotiated at the time of his joining weighed heavily with the judge. However, on the basis that the damage which GFI were seeking to prevent had to a certain extent already been done by the more junior employees, 13 weeks was a more appropriate period than the full 20 weeks.

2(e) The ‘right to work’ 15.26 In many of the early garden leave cases employers were granted garden leave injunctions, relying on the notice provisions in the contract and the implied duty of fidelity. However, sending an employee on garden leave without an express right to do so has always carried the risk of a challenge from the employee that the employer’s acts amount to a repudiatory breach of the contract releasing the employer from all future obligations: General Billposting & Co Ltd v Atkinson [1909] AC  118. This contention is based on the employee’s ‘right to work’, a contention which gathers some support in Provident through the references to the right to exercise skills and the risk that skills might ‘atrophy’. 949

15.27  Specific interim remedies

15.27  The traditional view on the ‘right to work’ stems from cases such as Turner v Sawdon & Co [1901] 2 KB 653 and Collier v Sunday Referee Publishing Co Ltd [1940] 2 KB 647, which established that the employee has no right to be provided with work: their right is simply to receive their pay. As Asquith J put it in Collier, ‘provided I pay my cook, she cannot complain if I choose to take any or all of my meals out’. For many years certain exceptions were recognised to this principle, primarily the cases of pieceworkers where earnings are entirely dependent on the amount of work done (Devonald v Rossers & Sons [1906] 2 KB 708) and performance artists whose careers depend on working (Herbert Clayton & Jack Waller Ltd v Oliver [1930] AC 209 (HL)). Gradually, as social conditions changed, the courts began to show a willingness to extend the categories of those with a right to work. So, for example, in Langston v AUEW (No 2) [1974] IRLR 182 NIRC both Denning MR and Stephenson LJ thought it arguable that a welder had a right to work. Similarly, in Provident (see 15.22–15.23) Dillon LJ expressed the view that: ‘[t]he employee has a concern to work and to exercise his skills’ and that concern extended to ‘skilled workmen and even to chartered accountants’. 15.28  The right to work argument as a means of defeating garden leave was given a major boost by the Court of Appeal’s decision in William Hill Organisation Ltd v Tucker [1998] IRLR 313. In that case the Court of Appeal had to address directly the question of whether Mr Tucker had a right to work. Mr Tucker was responsible for investigating and then establishing a spread betting business for William Hill. In 1995 he was appointed to the position of senior dealer. Initially his contract was terminable on one month’s notice, but that was subsequently increased by agreement to six months’ notice. The contract was silent on whether Mr Tucker had a right to work and contained no garden leave clause. In February 1998 Mr Tucker resigned to join a competitor of William Hill and purported to give one month’s notice. William Hill reminded Mr Tucker that the required notice was six months and purported to send him on garden leave for that period. Mr Tucker declined to comply and William Hill sought a garden leave injunction. Unsuccessful at first instance, William Hill persisted, but again lost in the Court of Appeal, the court finding that Mr Tucker had a right to work. The Court of Appeal ruled that the question of whether there is a right to work is a matter of construction of the contract in the light of the surrounding circumstances. In Mr Tucker’s case he had a right to work arising from four factors (the first two of which arose from the surrounding circumstances): •

Mr Tucker’s position was both in substance and form a specific and unique post.

•

Mr Tucker’s skills required frequent exercise.

•

The following contract terms:

950

>

The identification of days and hours of work and an obligation to work the hours necessary to carry out his duties in a full and professional manner.

>

A declaration in the Staff Handbook that William Hill will ‘invest in its staff to ensure that they have every opportunity to develop their skills’.

Garden leave injunctions 15.32

> •

An express power of suspension to investigate serious allegations of breach of discipline.

There was no express garden leave provision.

The Court of Appeal also observed that there was little likelihood of an implied term permitting garden leave arising (Morritt LJ at page 318 (paragraph 24)). 15.29 The William Hill case reflected a trend in favour of a right to work. There were certain aspects on which the Court of Appeal relied which were surprising, eg that a standard hours of work clause or a standard suspension provision should be significant factors in determining a right to work. It was also unclear what posts could fairly be described as specific and unique posts.

2(f)  Negativing the right to work – garden leave clauses 15.30 Following the William Hill case it became received wisdom amongst employment lawyers that without an express garden leave clause negativing the ‘right to work’ it was very unlikely that the court would grant a garden leave injunction. This was based on: •

Difficulties with the application of the principles in that case itself (see 15.29) – and on one view almost any senior position could qualify as a specific and unique post.

•

The notoriety of the case itself, placing an additional onus on contract draftsmen to draft garden leave clauses, where it was intended to exclude a right to work. There was a perception that the case itself may have added strength to an argument that the omission of a garden leave clause meant that a right to work was intended.

2(f)(i)  Are express garden leave clauses always essential? 15.31  In our view, the perceptions at 15.30 were somewhat exaggerated – and it remains possible, based on William Hill, to construe a given contract of employment as conferring no right to work, even though there is no express provision for garden leave. Garden leave clauses are referred to in detail at 5.121–5.129. 15.32  Notwithstanding the prevalence in modern times of garden leave clauses, there remain cases where, even in the absence of such a clause, the employee has failed to establish a right to work. Careful analysis is needed of the remuneration structure (particularly where bonus or commission form a significant part of the remuneration) and the role of the employee. For example, in Christie v Carmichael [2010]  IRLR  1016 the EAT declined to find that a senior client relationship manager in an accountancy firm had a right to work. There was no evidence that he would become de-skilled over his notice period, and there was nothing to stop him from keeping up to date through personal study. Similarly, in 951

15.33  Specific interim remedies

SBJ Stephenson v Mandy [2000] IRLR 233 at paragraph 68, Bell J construed the employee’s contract as placing no obligation on the employer to provide work. 2(f)(ii)  Qualifications to the ‘right to work’ 15.33  Even where an employee in principle has a right to work, that right is not unlimited. It was acknowledged in the William Hill case that a right to work did not impose on an employer an obligation to find work for the employee if there was none to be done or none that could be done profitably. Nor would an employer be obliged to allocate work to one employee in preference to another if there was insufficient work for both. 15.34 A  further qualification arises where the employee himself is unwilling to perform his obligations under the contract. In SG&R Valuation Service Co v Boudrais [2008] IRLR 770, a case involving two senior employees of an international consulting and advisory company specialising in the hotel sector, Cranston J found that there was a right to work arising primarily from a combination of the seniority of the individual respondents, significant specialist skills which he found would ‘go stale’ if unused for a substantial period, and eligibility for discretionary bonuses which had represented a significant part of the remuneration package. This last element in relation to bonuses is a point worthy of note when dealing with employees on variable pay for whom the bonus or commission element represents a major part of their total package. However, of particular significance in the present context was that the court, relying on dicta in Miles v Wakefield Metropolitan Borough Council [1987] AC 539 (HL), ruled that the right to work is subject to the following qualification: ‘Employees who have a right to work have that right subject to the qualification that they have not as a result of some prior breach of contract or other duty, demonstrated in a serious way that they are not ready or willing to work, or to put it another way that they have not rendered it impossible or reasonably impracticable for the employer to provide work. The breach of contract or other duty must constitute wrongdoing by reason of which they will profit or potentially profit. In such circumstances there is no obligation on the employer to provide work, although the contract is ongoing. This is not an implied term in the employment contract but is a qualification to the legal construct, the right to work.’

15.35  In the SG&R Valuations case the two employees, both of whom were senior, albeit not Companies Act directors, had resigned together with a consultant to join a competitor. Whilst reaching no final conclusions the judgment records that there was evidence that the two employees had taken and misused confidential information, were planning to take business opportunities to their new employer and were also looking to encourage fellow employees to join them. There was no express garden leave clause in either contract. Whilst the court ruled that both employees in principle had a right to work, they failed to meet the necessary qualification outlined above. Another way of putting it (as contended on behalf of SG&R in that case) is that the expression ‘right to work’ is merely a label. There is no absolute right: the employer is merely under a duty not unreasonably 952

Garden leave injunctions 15.40

to refuse to provide work to an employee. Consequently, SG&R’s requirement that they remain at home for the remainder of their notice periods and continue to be bound by their contractual obligations during that period did not constitute a breach of their contract. 15.36 In Standard Life Health Ltd v Gorman [2010]  IRLR  233 the Court of Appeal adopted a similar approach in an agent’s case, holding that it was strongly arguable that where an employer discovered that his agent was in serious breach of the duty of good faith and then discovered that he was tied to a rival company, the employer had no duty to provide work, the obligation being interdependent with the agent’s duty to act loyally.

2(g)  Payment of salary and compulsion to work: Sunrise Brokers 15.37  The extent of the obligation to pay an employee, and the nature of compulsion to work arose in Sunrise Brokers LLP  v Rodgers [2015]  IRLR  57 (CA). The defendant inter-dealer broker was employed under a contract of employment containing a garden leave provision and a 12-month notice period. In April 2014 Mr Rodgers walked out and refused to continue working for Sunrise, with a view to moving to a competitor, with whom he had already signed a contract. He said he would agree to remain on garden leave until September 2014. Sunrise informed Mr Rodgers that it required him to work, and would not place him on garden leave. When Mr Rodgers continued to be absent from work, Sunrise stopped paying him, and sought an injunction to restrain him from working for a competitor. 15.38  The central question for the Court of Appeal was whether Sunrise was entitled to an injunction without having to pay Mr Rogers’ salary. Since Evening Standard it has been the common practice for an employer to undertake to pay salary and provide benefits as the quid pro quo of a garden leave injunction, but Underhill LJ analysed carefully the basis for that practice. 15.39  Mr Rogers had no contractual right to be paid. This was for two reasons. First, he was not ready and willing to work (following Standard Life Health referred to at 15.36). Secondly, Sunrise had not exercised its garden leave clause, so a situation had not arisen where Sunrise was contractually obliged to pay him even though he was not working. As Underhill LJ pointed out, that fact distinguished Sunrise from many cases: where an employer has chosen to operate a garden leave clause, the clause itself will assure the employee’s continuing entitlement to be paid. 15.40  Where there is no contractual right to be paid, the rationale for paying the employee lies in the rule that the court will not order specific performance of a contract for personal services; and will not enforce a prohibition on working or another employer if that produces the same result indirectly (paragraph 28). The essential question for the court was whether restraining Mr Rodgers from working for a competitor without undertaking to pay him was liable to compel him to return to work for them (paragraph 32). 953

15.41  Specific interim remedies

15.41  Underhill LJ then turned to the question of what amounts to compulsion. He found the language used in the older cases – ‘idleness and starvation’ was more colourful than helpful. In reliance on Warren v Mendy [1989] 1 WLR 853 (see 15.17) he formulated the test as follows: ‘What is required is a realistic evaluation of whether the pressures operating on the employee in the particular case are in truth liable to compel him to return to work for the employer’ (paragraph 32).

15.42  That test was not simply whether there would be ‘some degree of hardship’; nor the mere fact that the employee is prevented from earning his living. Further, and again by reference to Warren v Mendy, the court will look carefully and sceptically at claims that the employee has a necessity to maintain skill and talent throughout the notice period. In considering the compulsive effect of an injunction, the length of the restraint is a crucial consideration. The shorter the period, the more likely the court is to enforce. While there is no clear line between short and long periods, Underhill LJ noted that the ‘indirect compulsion’ principles were developed in the older cases in respect of long periods, often of several years (paragraph 34). 15.43  Mr Rodgers’ appeal failed on the facts, Underhill LJ stating that there was almost no evidence of financial hardship, and even less evidence of the risk of atrophication of skills. In the latter regard, Mr Rodgers had himself offered to stay on garden leave between April and September 2014. Accordingly the Court of Appeal upheld an injunction restraining Mr Rodgers from working for a competitor during his notice period, even though he was not being paid. 15.44  A number of points are worthy of note: •

It is clear (and consistent with Warren v Mendy) that the question of compulsion depends on an analysis of the facts. Underhill LJ said (paragraph 44) that he did not want to encourage the notion that in every case ‘an elaborate examination of the employee’s means and resources will be appropriate’; ‘All that is required is sufficient information to give the court the basis for a broad assessment of the compulsive effect of the restriction’. It will be difficult to know what amounts to ‘sufficient information’, but a prudent employee representative will want to put in as much evidence as possible.

•

The factual nature of the issue makes it difficult for parties, and particularly employers, to predict the strength of their position. An employer’s prospect of enforcement may turn on facts about the employee’s financial position which may be outside his knowledge.

•

One point relied on by Underhill LJ in assessing compulsion was the fact that it was only because of Mr Rodgers’ unwillingness to perform his obligations that he was not being paid (paragraph 33). That point does not sit well with the underlying rationale of the compulsion principle. Sunrise had told Mr Rogers to work, and stopped paying when he did not. The only way he could

954

Garden leave injunctions 15.48

be paid was to work. That point seems to illustrate the compulsion to work, rather than to negative it. However, it does show, as we refer to at 15.12, the tension with the court’s desire to enforce parties’ bargains. For further consideration of Sunrise see 9.111–9.115.

2(h)  Restraint of trade and the enforcement of garden leave 15.45  The extent to which enforcement of garden leave is subject to restraint of trade principles is unclear, and the authorities are inconsistent. There is a consistent view in the cases that restraint of trade is relevant to some extent, but there are two key areas of uncertainty: •

Is the duty of fidelity, and/or any express clause restricting work for a competitor subject to the doctrine of restraint of trade, or does restraint of trade only arise when the court exercises its discretion whether to grant an injunction?

•

Where the doctrine of restraint of trade does apply, do the principles differ from those applied to post-termination restrictions?

(2)(h)(i)  Restraint of trade and the terms of the contract 15.46  When considering enforcement of a post-termination restriction, the court engages in a two-stage process. First, is the restriction, assessed at the date the contract was entered into, an unenforceable restraint of trade? Secondly, even if the restriction is valid, should it be enforced by injunction, assessed at the date of enforcement? 15.47 A  post-termination covenant is of course prima facie unenforceable. Where the court is asked to enforce garden leave, the employer is not relying on a post-termination covenant, but on a combination of an express term prohibiting working for a competitor during employment and/or the implied duty of fidelity and/or a garden leave clause. Whether such clauses are themselves subject to the doctrine of restraint of trade is unclear. There is a consensus in the authorities that the doctrine of restraint of trade is relevant to the question of discretion to grant an injunction (ie  at the second stage). The position is less clear as to whether a term applying during employment may be unenforceable at the first stage. That distinction, though subtle, could be significant: affecting for example the ability to claim for damages for breach of such a term. 15.48 In William Hill Organisation Ltd v Tucker [1998]  IRLR  313 there is a passage in the judgment of Morritt LJ (at paragraph 25) where he appeared to suggest that the courts should not enforce a garden leave clause ‘to any greater extent than would be covered by justifiable covenant in restraint of trade’. A few years later in Symbian Ltd v Christensen [2001] IRLR 77 Morritt LJ said that the principle of restraint of trade may be applicable to restraints imposed during 955

15.49  Specific interim remedies

the subsistence of the contract, relying on Esso Petroleum v Harper’s Garage [1968] AC 269, 328–329 and Instone v Schroeder [1974] 1 WLR 1308, 1315. In Instone the Court of Appeal held that restrictions during the continuance of a contract were capable of being unenforceable, though it was far less likely that restrictions during employment would be contrary to public policy as opposed to post-termination restrictions. The clauses in the particular case (a restriction on working for a competitor while employed by Symbian, and a garden leave clause) standing alone were obviously justifiable. In the exercise of its discretion to grant an injunction the court has the power to modify the extent to which it will enforce the contractual embargo, so as to ensure that at the time of enforcement it does not operate as an unreasonable restraint of trade (paragraphs 45–46). 15.49  The approach of Morritt LJ suggests that restraint of trade is relevant both in assessing the terms as at the date the contract was entered into, and at the time of enforcement. A number of subsequent first instance decisions have taken the approach that restraint of trade is only relevant at the second stage: ie in the exercise of discretion as to enforcement. 15.50 In Tullett Prebon Plc v BGC Brokers LP [2010] IRLR 648 (paragraphs 219–223) Jack J stated that the court will approach the enforcement of a period of garden leave by injunction ‘in a similar way in part’ to that in which it approaches the enforcement of a post-termination restraint. Where enforcement of a garden leave provision differs from enforcement of a covenant is that enforceability of the covenant is to be judged at the date of the contract. Where the issue is garden leave, the court looks at the situation at the time enforcement is sought. 15.51  The court in JM Finn & Co v Holliday [2014] IRLR 102 (Simler J) took the same approach (paragraph 57): ‘During the currency of the employment relationship, when an express negative covenant or the implied duty of good faith apply to prevent an employee working for another employer, the doctrine of restraint of trade will not apply to such a restraint; nor is there a need to justify an express contractual garden leave provision by reference to this doctrine. However, in circumstances where an employer has put an employee on garden leave and then seeks an injunction to restrain the unwilling employee from joining a competitor before the expiry of his notice period, an injunction to enforce or aid that period of garden leave must be considered in light of the restraint of trade doctrine.’

15.52  Simler J’s approach was followed by Warby J  in Elsevier Ltd v Munro [2014] IRLR 779; at paragraph 55 he said: ‘covenants restraining an employee from working for a competitor during his employment are not subject to the doctrine of restraint of trade and do not need to pass any test of reasonableness in order to be enforceable.’

In Sunrise, Underhill LJ said (paragraph 46): ‘The obligation of an employee not to work for a competitor during the currency of his employment cannot be equated with an obligation under a 956

Garden leave injunctions 15.56

clause providing for post-termination restraints; and the principles governing their enforcement by injunction are different. In the former case the obligation arises inherently from the employee’s duty of fidelity to the employer; and the court will, rightly, be very ready to enforce it, subject only to the constraints discussed above deriving from the rule against enforcement of a contract for personal services. In the latter case the restraint on the employee’s activities is prima facie unlawful and requires to be fully justified in accordance with the well-known principles. The enforceability of these separate obligations should be addressed separately and in their own terms.’

15.53  The later cases do not deal with the Esso case, nor with Morritt LJ’s reliance on it in Symbian. However, the apparent difference of approach may be a narrow one. Morritt LJ said that restraint of trade principles apply during the subsistence of the contract, but that the clauses in issue were obviously justifiable. The later cases suggest that the doctrine does not apply at all to the duty of fidelity or garden leave clauses. Either way, in practice a court is highly unlikely to find that a clause preventing an employee from competing with his employer during employment is a restraint of trade. 15.54  Given that in all of the cases cited the court agreed that the doctrine of restraint of trade is relevant at the point of enforcement, it may be thought that the question of whether it is also relevant at the first stage is academic. However, the point is potentially significant. If a clause which applies during employment is an unreasonable restraint, judged at the date the contract is entered into, it is unenforceable for all purposes, and cannot be relied on at all. If the court refuses as a matter of discretion to enforce a clause by injunction the clause remains valid, and can form the basis of a claim for damages – a point acknowledged by Jack J in Tullett (paragraph 223). 2(h)(ii) How closely will the court apply restraint of trade principles at the enforcement stage? 15.55  The cases considered above are consistent in regarding the doctrine of restraint of trade as relevant at the enforcement stage. In Sunrise, Underhill LJ acknowledged the principle advanced by Morritt LJ in William Hill (albeit only in a footnote) that courts should not grant relief to enforce a garden leave clause to a greater extent than would be covered by a justifiable restraint of trade clause. That was not in issue in Sunrise, as there was no suggestion that a six-month restriction was unjustifiable. 15.56  What is less clear is how closely restraint of trade principles should be applied to garden leave enforcement, and how closely the approach should mirror the approach taken to post-termination covenants. If what Morritt LJ had in mind in William Hill was that the court should have regard to potential abuses which may arise from garden leave and not enforce garden leave in a manner which is unreasonable, having regard to restraint of trade principles, there can be no difficulty with this. If, however, it was intended to mean that garden leave clauses are to be scrutinised as if they were post-termination restrictive 957

15.57  Specific interim remedies

covenants, that is dubious. In particular, since during garden leave the employee remains an employee subject to the duty of fidelity, one would expect that the employer would be entitled to bargain for a greater measure of protection than the ex-employer (see 3.75–3.84 as to the effect of garden leave on the duty of fidelity). During employment the employer is entitled to protect himself against competition more broadly than can be achieved by a post-termination covenant. 15.57  In the subsequent cases, the exact test applied at the stage of enforcement has not always been clear, but the approach has not been to apply the same rigorous test as would be applied to a post-termination restriction. In Tullett Jack J said at paragraphs 221–222: ‘221. Where the enforcement of a garden leave provision differs from the enforcement of a covenant is that the enforceability of a covenant is to be judged at the time that it was entered into. If, on that basis, it is unenforceable, that is the end of the matter. If it is enforceable, then prima facie an injunction will follow. …‘ 222. Where the issue is garden leave, the court looks at the situation at the time enforcement is sought. The court will look primarily at what is required for the reasonable protection of the protectable interest, here trade connection. It will also take account of the situation of the employee. …’

15.58 In Finn Simler J said that an injunction to enforce a garden leave clause ‘must be justified on similar grounds as a restrictive covenant’ (paragraph 61). She went on to give the following summary. The claimant must demonstrate a legitimate interest to protect and must show that the injunction sought extends no further than is reasonably necessary to protect its interests. An injunction may be refused if the claimant will suffer no damage, or has delayed in bringing an application. There is greater flexibility in cutting down the terms of the restriction when dealing with garden leave than when dealing with the terms of a restrictive covenant. The court has the flexibility to grant an injunction for less than the full notice period. 15.59 One important distinction is therefore clear: unlike a post-termination covenant which is either enforceable or not the court has the power to ‘whittle’ down enforcement during a garden leave period either as to duration, or as to restricted activities. 15.60  Further, the cases demonstrate a less rigorous approach to determining what is a reasonably necessary protection of a legitimate interest. During garden leave, the courts appear willing to take a broader approach than they would to a post-termination covenant. Finn is a good example. Simler J referred to the need for a protectable interest, and for the injunction to go no further than reasonably necessary to protect that interest. The interest she identified in the case was customer connection (paragraph 62). She reviewed the evidence and was satisfied that there was a need for an injunction to protect that interest. However, the injunction granted, as is typical in garden leave cases, restrained the employee from joining or assisting the competitor until expiry of notice. If the court had 958

Garden leave injunctions 15.64

been assessing the position post-termination, it would not have been likely to uphold a non-compete restriction. Client connection can usually be adequately protected by a non-solicitation and non-dealing covenant. Yet no attempt was made in the case to explore why an injunction wider than non-solicitation/nondealing was necessary. 15.61 In ICAP  Management Services Ltd v BGC  Services (Holdings) LLP [2017] EWHC 1321 Garnham J followed the approach of Simler J in Finn (as agreed by the parties), see paragraphs 108–112. However, Garnham J’s analysis showed a rather closer scrutiny of the evidence as to legitimate interests, and as to the appropriateness of garden leave in the light of those interests. He found there was insufficient evidence of an interest in either client connection or stability of the workforce to justify a garden leave injunction (paragraphs 114–121). He accepted that ICAP had a legitimate interest in protecting its highly confidential information, and held that a 12-month garden leave injunction was justified on that ground (paragraphs 134–141). 15.62 In Elsevier Warby J suggested that the interests that may be sufficient for an injunction to enforce garden leave may be wider than those required to justify a post-termination restriction. Following Provident v Hayward he said that although merely helping a competitor after termination could not be restrained, an employee may in an appropriate case be restrained from fostering the profitability of a rival during the continuation of his employment. At paragraph  79 Warby J said: ‘As I read the authorities the true position is not that the restraint of trade doctrine applies with its full force in relation to contractual obligations that apply during the period of employment. Rather the doctrine will guide the exercise of the court’s discretion. It may therefore be permissible to restrain an employee from competing during the period of his employment, even though that would not be legitimate post-employment. The reasoning of Dillon LJ in Provident at (87– 88) above acknowledges this.’

15.63  In conclusion, although the language used by the courts in a number of cases has suggested that the same restraint of trade principles apply both before and after termination, in fact the courts in enforcing garden leave take a broader approach to legitimate interest, and a broader approach to what is necessary to protect that interest.

2(i) When and for how long garden leave will be ordered 15.64  Garden leave will only be enforced for a limited period – ie  the minimum length of time adequately to protect the employer’s legitimate interest: see Cantor Fitzgerald International v George (17 January 1996, unreported) (CA). However, in contrast with restrictive covenants, the court may where appropriate reduce the duration of garden leave to a period less than the notice period: Tullett Prebon Plc v BGC Brokers LP [2011] IRLR 420; GFI Group Inc v Eaglestone [1994]  IRLR  119; and see Credit Suisse Asset Management Ltd v Armstrong 959

15.65  Specific interim remedies

[1996]  IRLR  450 (CA). 12-month restrictions were enforced in JM  Finn & Co Ltd v Holliday [2014]  IRLR  102 and Tullett Prebon Plc v BGC  Brokers LP [2011] IRLR 420. However, those cases were at the longer end of the scale and most reported cases have concerned garden leave of six months or less. Garden leave will only be enforced where the employer can show that some detriment will result from the employee working for a rival (Provident Financial Group plc v Hayward [1989] ICR 160), such as where the employee has been exposed to confidential information of the employer. 15.65 In Faieta v ICAP Management Services Ltd [2017] EWHC 2995 Moulder J held that an express garden leave clause was subject to an implied term that the employer’s rights under the clause would not be exercised irrationally or perversely. That provides another route of attack against the employer’s decision to place the employee on garden leave (see further 9.103). Faieta was not an employee competition case, and there was no issue as to restraining the employee from other employment. It is unclear whether the implied term adds anything of substance in an employee competition case: where the employer makes a genuine good faith decision to use garden leave to protect its business interests it is difficult to see a perversity challenge succeeding in circumstances where a restraint of trade challenge would not succeed.

2(j)  Interplay between garden leave and restrictive covenants 15.66  Usually a contract of employment will contain both a garden leave clause and post-termination covenants. In TFS Derivatives v Morgan [2005] IRLR 246, the employee argued that the court should refuse to enforce various restrictive covenants on the basis that it would have been more appropriate for the employer to have invoked its right to place him on garden leave in order to have obtained legitimate protection. Cox J rejected this argument on the basis (among others) that notwithstanding the employer’s contractual right, placing the employee on garden leave may have constituted a breach of the implied term of mutual trust and confidence. In our view, it would be a very rare case where the invocation of a contractual right to put an employee on garden leave would amount to a repudiatory breach of contract. In many cases where there are both garden leave provisions as well as post-employment restrictive covenants in the contract of employment, the employer may (in particular where there are any doubts regarding the effectiveness of the post-termination restrictions) be best advised to keep the contract alive and rely on the garden leave provisions. The advantages of doing so arise from the fact that the courts are more amenable to granting relief to the employer during the subsistence of the employment contract than thereafter (see 3.7–3.8, 10.2–10.4 and 15.45–15.63). More specifically, the courts will during employment: •

protect confidential information which does not amount to trade secrets; and

•

more readily restrain competitive activity.

960

Garden leave injunctions 15.69

15.67  Conversely, where employment is at an end, the courts will: •

carefully scrutinise covenants restraining competitive activity, including confidentiality covenants;

•

(absent enforceable restrictive covenants) protect only trade secrets or confidential information in the nature of a trade secret.

15.68  Many contracts of employment contain a garden leave offset provision, whereby the duration of post-termination covenants is reduced by the amount of time the departing employee spent on garden leave prior to termination. That type of clause became common following Credit Suisse Asset Management Ltd v Armstrong [1996] IRLR 450 (CA), which was subsequently applied in Brake Bros v Ungless [2004] EWHC 2799 and in Tradition Financial Services Ltd v Gamberoni [2017] IRLR 698, paragraphs 110–113. The existence of a garden leave clause (with or without offset) may be relevant both in assessing the validity of a post-termination covenant, and when the court considers the discretion to grant an injunction. In Armstrong, it was held that the judge had not erred in concluding that the applicants were entitled to the protection of restrictive covenants prohibiting the respondents from competing with or soliciting the applicant’s business for a period of six months after their employment terminated, notwithstanding that the applicants had already had six months of complete protection by placing the respondents on ‘garden leave’ throughout their notice periods. If a restrictive covenant is valid, the employer can expect to have it enforced, subject to the usual grounds on which an injunction can be withheld. The Court of Appeal went on to say that although the court can exercise its discretion in deciding the permissible length of garden leave, the courts would not re-write a restrictive covenant so as to enforce it for a lesser period than that which the parties have purported to agree. The existence of a garden leave clause, however, may be a factor to be taken into account in determining the validity of a restrictive covenant. Moreover, in an exceptional case where a long period of garden leave had already elapsed, perhaps substantially in excess of a year, without any curtailment by the court, it is possible that the court would decline on public policy grounds to grant any further protection based on a restrictive covenant. (The latter comment, in so far as it points to garden leave substantially in excess of a year, is out of kilter with the periods of garden leave normally granted by the court (see 15.64).) 15.69  Further, the court will have regard to the overall reasonableness of the combination of garden leave and post-termination restrictions when exercising its discretion at the enforcement stage. If the combined period is more than reasonably necessary to protect the employer’s legitimate interests, the court may, as a matter of discretion, grant an injunction for a shorter period. In Tullett Prebon Plc v BGC Brokers LP [2011] IRLR 420 Jack J explained the position as follows (paragraphs 224–225): ‘224 Where the court considers that the period for which the employer is entitled to protection ends during the time for which the employee may be on garden leave, it will enforce the garden leave provision for that period, and will decline 961

15.70  Specific interim remedies

to enforce any enforceable post termination restriction. It will decline the latter because the employer will have already got all the protection he is entitled to, and the court has a discretion not to enforce an enforceable post termination restriction or covenant where the circumstances are such that it should not. 225 The court may consider that the period for which the employer is entitled to protection extends beyond the period which is available for garden leave and into the period covered by an enforceable post termination restriction or covenant. The court will then exercise its discretion as to the enforcement of the restriction and will enforce the restriction for the whole or such part of the period provided by the terms of the restriction as is appropriate.’

15.70  Jack J  accordingly reduced the period of enforcement of the restrictive covenants. When judging the enforceability of restrictive covenants (as at the date they were entered into) a restrictive covenant’s period may not be cut down, but a flexible approach is possible when the court is exercising its discretion whether or not to enforce an enforceable covenant. Since the court has a discretion not to enforce it at all (as a result of circumstances as they appear at the hearing) the court has a discretion to enforce only part of the period in the light of those circumstances. Jack J went on to hold (at paragraph 237) that where a post-termination covenant did not have regard to garden leave the clause was not thereby made unreasonable. His reasoning was that in deciding whether to give effect to the covenant, and the extent to which it should be given effect, the court will take account of garden leave. ‘Any necessary adjustment is, as it were, built in by the law.’ That passage would appear to be out of line with the view in Armstrong (see 15.68) that the existence of a garden leave provision may be relevant to assessing the reasonableness of post-termination covenants. 15.71 In Sunrise Brokers LLP v Rodgers [2015] IRLR 57 the court granted an injunction for a total of ten months: the six-month post-termination covenants were enforced in full, despite the fact that the defendant had been injuncted for four months prior to termination of employment, during which time the garden leave clause had not been operated by the employer, but the employee refused to work (the facts of the case are dealt with more fully at 15.37–15.44). Underhill LJ regarded ten months’ relief as just, despite the fact that the garden leave clause (if it had been exercised) would have led to an offset of up to six months’ time spent on garden leave against the six months post-termination restrictions. On the face of it, the employer ended up with more than they bargained for, though this was rationalised on the basis that the defendant’s breach had deprived the employer of the benefit of an orderly handover (paragraphs 45–50).

2(k)  Summary of garden leave considerations 15.72  A garden leave injunction is a valuable tool for an employer seeking to protect its business interests. It may be deployed either on its own, or in combination with post-termination covenants. However, in practice the prevalence of garden leave offset clauses in modern contracts means that an employer may need to choose whether to enforce garden leave or the post-termination covenants. 962

Garden leave injunctions 15.73

A garden leave injunction has a number of advantages over enforcement of posttermination restrictions. First, the effect of enforced garden leave will often be wider than enforceable covenants, stopping the employee from carrying out any work in competition. Secondly, the court has considerable flexibility as to the scope and duration of an injunction to protect the employer during garden leave. If the court thinks that enforcement of garden leave for the whole notice period would be unreasonable it may still grant an injunction of shorter duration or narrower scope. In contrast, an unreasonable post-termination covenant will not be enforceable at all. On the other hand, there are downsides for the employer, arising from the fact that the contract of employment must be kept alive in order to enforce garden leave. First, cost: the employer will have to pay the employee contractual remuneration during the garden leave period. Secondly, there is always some risk that garden leave may be brought to an end by a repudiatory breach on the part of the employer during the notice period. 15.73  In deciding whether an application for a garden leave injunction is an option, the following issues should be considered: •

Is the contract continuing, or has it been terminated?

•

In addition to the implied duty of fidelity are there express terms restricting the employee’s right to carry out other work?

•

How long is the notice period?

•

Is there an express garden leave clause?

•

Are there grounds to argue that the contract has been repudiated? Have the notice and garden leave clauses been operated in accordance with their terms? Is the employee being paid in line with his contractual rights during notice/garden leave?

•

If there is no express garden leave clause, consider whether there is a right to place the employee on garden leave, or whether the employee has a right to work.

•

Is there an argument that garden leave enforcement amounts to indirect specific performance? Is the employee in effect being compelled to return to work for the employer? What is the impact of garden leave on the employee’s earnings, maintenance of skills, ability to work for others?

•

Would enforcement of garden leave be an unreasonable restraint of trade? May garden leave be enforced for a shorter duration, or to limit a narrower range of activities?

•

Was the decision to place the employee on garden leave, or continue garden leave, an irrational or perverse exercise of discretion?

•

Consider the relationship between garden leave and post-termination restrictions. Is there a garden leave offset in the covenants? Is the aggregate period of restriction unreasonable? If so the court may refuse to enforce the post-termination restrictions in whole or in part after the garden leave period. 963

15.74  Specific interim remedies

3. CONFIDENTIALITY INJUNCTIONS 15.74  The subject of confidential information is dealt with in Chapter 6. There are a number of different remedies the court may grant where a defendant is alleged to have taken and misused confidential information: •

An order to restrain a defendant from misusing or divulging confidential information.

•

A springboard injunction to deprive the defendant of a headstart obtained by using confidential information.

•

Orders relating to documents, for example: >

orders for delivery up of confidential information, and electronic media upon which it is stored;

>

orders for forensic examination of computers;

>

orders for preservation of evidence;

>

search orders.

15.75  In this section we address some general issues relating to orders to restrain confidential information from being divulged or misused. Section 4 (15.78–15.152) deals with springboard injunctions. Section 5 (15.153–15.195) deals with a range of orders in relation to documents, and finally section 6 (15.196–15.260) deals with search orders. 15.76  When considering injunctions to restrain the unauthorised use or disclosure of trade secrets or confidential information, points which require particular consideration are: •

The identification of the confidential information or trade secrets so as to establish that a duty of confidence exists, and the risk of its breach. See P A Thomas & Co v Mould [1964] 2 QB 913; FSS Travel & Leisure Systems Ltd v Johnson [1998] IRLR 352 and CMI-Centers v Phytopharm plc [1999] FSR 235. The degree to which it is necessary to identify items of confidential information in confidential information and in restrictive covenant cases where the underlying interest is confidential information is dealt with at 6.111–6.118.

•

The basis on which it is alleged that the information is confidential or a trade secret, emphasising, for example, that it is specified as such in the contract of employment and/or the steps which were taken during employment to maintain confidentiality. See Chapter 6 (Confidentiality) at 6.68–6.71, 5.44 for a precedent confidentiality clause and the Appendix to Chapter 8 – Guidelines for maintaining confidentiality.

•

The particularisation of the confidential information and trade secrets for the purposes of framing an injunction. It is a cardinal rule that any injunction must be capable of being framed with sufficient precision so as to enable

964

Springboard injunctions 15.78

a person enjoined to know what it is he is to be prevented from doing: see per Balcombe LJ, Lawrence David Limited v Ashton [1989] ICR 123 at page 132. The inability of an employer to define its confidential information with any degree of precision may militate against an injunction. See also Caterpillar Logistics v Huesca de Crean [2012]  IRLR  419 per Stanley Burnton LJ at paragraphs 68–73: in a confidential information case it is in the interests of justice and the efficient and fair conduct of proceedings that the claimant’s case be pleaded as soon as possible, so a defendant and the court knows precisely what the case is. •

The effect of section 12 Human Rights Act 1998 as interpreted by the House of Lords in Cream Holdings Ltd v Banerjee [2005] 1 AC 253 has to be taken into account, namely, that the court will not grant an interim injunction ‘unless satisfied the applicant’s prospects of success at the trial are sufficiently favourable to justify such an order being made in the particular circumstances of the case’ – see 14.80–14.82.

•

Whether the applicant (and not someone else) is beneficially entitled to the information: Fraser v Evans [1969] 1 QB 349 at pages 361–2.

•

The extent to which it may be open to the respondent to raise the public interest (or iniquity) defence: see 6.141–6.164.

•

The extent to which the evidence shows that there has been unauthorised use or disclosure, or that there is a risk that there will be unauthorised use or disclosure unless an injunction is granted: Bridlington Relay Ltd v Yorkshire Electricity Board [1965] 1 Ch 436 at page 445, Kitzing v Fuller [2016] EWHC 804 (Ch) at paragraph 30, Rafael Advanced Defence Systems Ltd v Mectron Engenharia, Industria e Commercio SA [2017] EWHC 597 (Comm) at paragraphs 24–28.

15.77  Even if a confidentiality injunction is refused, in an appropriate case the applicant may be able to obtain an undertaking by the respondent or order to keep an account of royalties received and to pay some or all of those royalties into a joint account: see Coco v A N Clark (Engineers) Ltd [1969] RPC 41. This ‘halfway house’ may be appropriate where the applicant has established an arguable case of breach of confidence by the respondent, but the balance of convenience militates against the grant of an interim injunction. In these circumstances the applicant is at least given security for his claim in the event of his succeeding at trial.

4. SPRINGBOARD INJUNCTIONS 4(a) The Springboard principle 15.78  A springboard injunction is a type of injunction whereby the applicant seeks to deprive a respondent of the benefit of an ongoing unfair competitive advantage (a ‘headstart’) obtained as a result of earlier unlawful conduct. The principle was originally developed in misuse of confidentiality cases, but in recent years it has been accepted that springboard relief is available more widely to prevent unfair 965

15.79  Specific interim remedies

headstarts arising from other causes of action, including breach of contract and fiduciary duty. It has become an important tool in team move litigation. There is no single form of springboard injunction: it is a flexible remedy that in each case must be tailored to meet the circumstances of the headstart and the steps needed to neutralise it. The doctrine, both in principle and scope, is not without controversy.

4(b) Classic statement of principles: Terrapin and Roger Bullivant 15.79  The classic statement of the ‘springboard’ doctrine is found in the judgment of Roxburgh J in Terrapin Ltd v Builders’ Supply Co (Hayes) Ltd, Taylor Woodrow Ltd and Swiftplan Ltd [1960] RPC 128 at page 130: ‘… the essence of this branch of the law, whatever the origin of it may be, is that a person who has obtained information in confidence is not allowed to use it as a springboard for activities detrimental to the person who made the confidential communication, and springboard it remains even when all the features have been published or can be ascertained by actual inspection by any member of the public … The possessor of the confidential information still has a long start over any member of the public … It is, in my view, inherent in the principle on which Saltman Engineering Co Ltd v Campbell Engineering Co Ltd (1963) 65  RPC  203 (noted at [1963] 3 All ER  413) rests that the possessor of such information must be placed under a special disability in the field of competition to ensure that he does not get an unfair start.’

15.80 In Terrapin, a set of drawings and tools had been made from original drawings containing confidential information of Terrapin. Taylor Woodrow had avoided the need to go through the process which Terrapin had gone through in compiling these drawings and thereby saved a great deal of labour and careful draughtsmanship. 15.81  For many years, the high-water mark of the springboard doctrine in the employment context was the decision of the Court of Appeal in Roger Bullivant Ltd v Ellis [1987] IRLR 491. This decision is often of great practical significance in cases involving competition between ex-employer and ex-employee. Ellis was the ex-managing director of the applicant, Bullivant. While still employed by Bullivant, Ellis acquired a company which subsequently became the vehicle of a rival business. When he left Bullivant he took with him a vast number of documents including a card index listing Bullivant’s contacts. 15.82  A number of points are significant about this decision. The card index was retrieved during a search order so the confidential information could no longer be used by Ellis. However, the court granted an order restraining Ellis from dealing with customers whose names appeared on the card index and whom he contacted while the index was in his possession whether: • 966

the card index was used for this purpose (even though he could have contacted them without using it); or

Springboard injunctions 15.86

•

the card index was not used for this purpose (paragraph 15 of the decision) – although in fact Ellis probably used the index to contact all the names on it (see paragraph 13 of the decision).

15.83  Nourse LJ stated (at paragraph 24): ‘While I recognise that it would have been possible for [Ellis] to contact some, perhaps many, of the people concerned without using the card index, I am far from convinced that he would have been able to contact anywhere near all of those whom he did contact between February and April 1985. Having made deliberate and unlawful use of the [claimant’s] property, he cannot complain if he finds that the eye of the law is unable to distinguish between those whom he could, had he chose, have contacted lawfully and those whom he could not. In my judgment it is of the highest importance that the principle of Robb v Green [1895] 2  QB  1 (upheld by the Court of Appeal at [1895] 2  QB  315) which, let it be said, is one of no more than fair and honourable dealing, should be steadfastly maintained.’

15.84  Nourse LJ said (at paragraph  28) that in Robb v Green [1895] 2  QB  1 the defendant was not precluded from contracting with any of the claimant’s customers, if he was able to do so without using the information which he had unlawfully acquired. He was, however, of the view that in Bullivant it would be difficult for either party to know whether that sort of injunction would be or had been breached and it was accordingly difficult to enforce. He therefore preferred the wider form of order. The Court of Appeal in fact discharged the injunction, but only on the basis that it had been in place for longer than the duration of the headstart by the time the appeal was heard (see 15.125). 15.85 In Johnson & Bloy (Holdings) v Wolstenholme Rink plc [1987] IRLR 499 (CA) the Court of Appeal supported the approach in Bullivant: both Fox and Parker LJJ were prepared to hold that an initial wrongdoing by the employee could in effect disentitle an employee from using his ‘know-how’ (provided it fell within the second category of Faccenda Chicken Ltd v Fowler [1987] Ch 117, ie information which was confidential during employment) where the documents removed by the employee in breach of his duty of fidelity contained both knowhow and confidential information of the employer. Again, in PSM International plc v Whitehouse [1992] IRLR 279 the Court of Appeal followed Bullivant.

4(c) The modern restatement of principles: QBE v Dymoke 15.86 In QBE Management Services (UK) Ltd v Dymoke [2012] IRLR 458 (at paragraphs 239–247) Haddon-Cave J summarised the principles behind springboard relief, which he described as ‘well established’. Those principles have become the starting point in springboard cases in the employee competition arena: (1) Where a person has obtained a ‘head start’ as a result of unlawful acts, the court has the power to grant an injunction which restrains the wrongdoer, so as to deprive him of the fruits of his unlawful acts. 967

15.87  Specific interim remedies

(2) The purpose of a springboard order is to prevent defendants from taking unfair advantage of the springboard which they have built up by misuse of confidential information – relying on Nourse and May LJJ in Roger Bullivant v Ellis [1987] IRLR 491. (3) Springboard relief is not confined to cases of breach of confidence. It can be granted in relation to breaches of contractual and fiduciary duties. It flows from a wider principle that the court may grant an injunction to deprive a wrongdoer of the advantage derived from his wrongdoing. See Midas IT Services v Opus Portfolio Ltd (unreported Ch D Blackburne J 21/12/99 pages 18–19) and UBS  Wealth Management (UK) Ltd v Vestra Wealth LLP [2008] IRLR 965. Haddon-Cave J cited with approval the judgment of Openshaw J in UBS (paragraph 3) when he said: ‘In my judgment, springboard relief is not confined to cases where former employees threaten to abuse confidential information acquired during the currency of their employment. It is available to prevent any future or further economic loss to a previous employer caused by former staff members taking an unfair advantage, and “unfair start”, or any serious breaches of their contracts of employment (or if they are acting in concert with others, of any breach by any of those others).’

(4) Springboard relief must be sought and obtained at a time when any unlawful advantage is still being enjoyed by the wrongdoer: Universal Thermosensors v Hibben [1992] 1 WLR 840, Sun Valley Foods v Vincent [2000] FSR 825, 834. (5) Springboard relief should have the aim of restoring the parties to the competitive position they each set out to occupy and would have occupied but for the defendant’s misconduct: Universal Thermosensors at 855A. (6) Springboard relief will not be granted where a monetary award would have provided an adequate remedy to the claimant for the wrong done to it: Universal Thermosensors at 855B. (7) Springboard relief is not intended to punish the defendant for wrongdoing. ‘It is merely to provide a fair and just protection for unlawful harm on an interim basis.’ What is fair and just in any particular circumstances will be measured by: (i) the effect of the unlawful acts upon the claimant; and (ii) the extent to which the defendant has gained an illegitimate competitive advantage. The seriousness or egregiousness of the particular breach has no bearing on the period for which the injunction should be granted: Sectrack NV  v Satamatics Ltd. [2007]  EWHC  3003 (Comm) at paragraph 68. (8) The burden is on the claimant to spell out the precise nature and period of the competitive advantage. An ‘ephemeral’ or ‘short-term’ advantage will not be sufficient. 15.87  The form of the springboard order is a matter of discretion for the court. Haddon-Cave J  set out five further principles to be applied when formulating springboard relief (Supplemental Judgment paragraphs 8–13): 968

Springboard injunctions 15.91

(1) The form of the springboard relief should fit the facts. (2) The relief should reflect and restrain the spectrum of the unlawful activities which made up the springboard. (3) In granting springboard relief, the court may restrain otherwise unlawful activities taking place on unlawful foundations. The purpose of springboard relief is to level the playing field. (4) The form and content of the springboard relief should match the ‘tensile strength’ of the springboard unlawfully used by a defendant. ‘As with the length of springboard relief, so with the contents thereof: the equation regarding relative advantage is kinetic and not merely linear’. (5) The court should take account of all the circumstances and grant relief which it thinks is fair, just and equitable. 15.88 The QBE principles have been adopted and applied as an accurate statement of principles: see eg CEF Holdings Ltd. v Mundey [2012] IRLR 912 per Silber J at paragraphs 72 and 128. 15.89 The principles in QBE were recognised by the Court of Appeal in Personnel Hygiene Services Ltd v Rentokil Initial UK  Ltd [2014]  EWCA  Civ 29, at paragraphs 29 and 48–49, where Rimer LJ referred to Haddon-Cave J’s ‘restatement’ of the principles upon which such relief may be granted.

4(d)  Confidential information cases 4(d)(i)  Requirements for relief 15.90  In order to obtain a springboard injunction in a case concerning confidential information the applicant must show (per Jonathan Parker J in Sun Valley Foods Ltd v Vincent [2000] FSR 825 at page 834): •

unlawful use of its confidential material;

•

that the respondent thereby gained an unfair competitive edge over the applicant; and

•

that the advantage still exists at the date that the springboard injunction is sought and that it will continue to have effect unless the relief sought is granted.

4(d)(ii) Springboard should not be used to make up for absence of express covenants 15.91  An ex-employer will sometimes seek a springboard injunction to attempt to protect (mere) confidential information (as opposed to trade secrets) when there are no enforceable express covenants in the contract of employment. A springboard injunction will not, however, be granted merely as substitute relief 969

15.92  Specific interim remedies

to assist an ex-employer who has not troubled to take an express covenant to protect his confidential information. 4(d)(iii)  Mere possession of confidential information is not sufficient for relief 15.92  The mere possession of confidential information, without unlawful use, will not suffice to justify springboard relief: •

The mere possession of confidential materials does not create a headstart which needs to be cancelled out.

•

All that is needed – and is proportionate – in such a case is a normal delivery up and a confidentiality injunction.

•

The only reason equity fashioned the unusual remedy of a springboard injunction is to cover cases where a normal confidentiality injunction would have no effect because the confidential materials have already been used, so that a confidentiality injunction would serve no purpose.

15.93  Further, English law has never countenanced barring out relief (eg  preventing an (ex-)employee from joining a rival of the (ex-)employer as a means of providing protection against future misuse of confidential information, absent a reasonable restrictive covenant. The proper means of obtaining protection against misuse of confidential information is for the employer to bargain for an appropriate restrictive covenant. One of the justifications for such a barring out covenant is the difficulty of policing misuse of confidential information – but it is not the basis of obtaining such protection without a covenant. 15.94  The above paragraph in the previous edition of this work was cited with approval by the Court of Appeal in Caterpillar Logistics Services Ltd v de Crean [2012] IRLR 410 at paragraph 56, a case in which an attempt to develop the law in relation to barring-out relief was made and rejected. 15.95 Also relevant in this regard is the decision in Peter Pan Manufacturing Corp v Corset Silhouette Ltd [1963] RPC 45 at page 55, where Pennycuick J, commenting on the springboard principle, stated: ‘Whatever the scope of the principle considered above, it has never been, so far as the authorities cited to me show, carried to the extent of imposing upon a trader who receives confidential information as to the composition of some kind of material an indefinite bar on the employment of that material notwithstanding that he made no use of the information while it remained confidential and that the composition of the material is no longer secret. I do not think that the law can impose such a far reaching disability.’

4(d)(iv)  Consideration of scope and duration of the headstart 15.96 Where interim injunctions are sought against former employees who have taken customer lists (and other confidential documents) for the purpose of 970

Springboard injunctions 15.97

contacting customers of the applicant, it is essential before seeking any springboard injunctions to consider carefully whether any springboard advantage still exists: ie whether, even without using confidential information, the respondents would not be in the position in which they are at the date of the interim application; see, eg, Sun Valley Foods Ltd v Vincent [2000] FSR 825. •

Where there is no continuing springboard advantage, the injunction ought to be limited to restraining the respondent from using the applicant’s confidential documents and information.

•

Where there is a continuing springboard advantage, (ie  the respondent is continuing to exploit a position at which he would not have arrived but for his use of the applicant’s confidential information) the applicant should consider limiting the springboard injunction to those customers whom the respondent contacted using the applicant’s documents but whom he would not otherwise have been able to contact. The difficulty of policing such an injunction has to be weighed against the possibility that at trial it may be found that an injunction was too wide, with potential liability to the respondents on the cross-undertaking in damages. Where the injunction is limited to restraining contact with customers whom the respondent has contacted using the list, the danger may not be great. As the Vice-Chancellor pointed out in Universal Thermosensors Ltd v Hibben [1992] 1 WLR 840 at page 851, the court may view with scepticism the contention of a respondent who has chosen to use a list, that he already carried some of the information in his own head and that looking at the list for any particular name or names was unnecessary. Moreover, any uncertainties arising from the evidence would be likely to be resolved against the respondent.

15.97 In Universal Thermosensors an injunction was granted on similar facts to those in Roger Bullivant Ltd v Ellis [1987]  IRLR  491. A  former employee had taken confidential client information and used it to contact clients. The list was recovered by a search order, and an injunction granted to restrain the defendant from dealing with clients who appeared on the list who he had contacted while he had the list. At trial the injunction was discharged and the claimant made liable to compensate the defendant under the cross-undertaking in damages. However, the court’s approach was consistent with Bullivant, which Sir Donald Nicholls V-C  purported to follow. The problem in the case was that insufficient care had been taken at the interim stage to identify the benefit obtained through misuse of confidential information. The court found that if the defendant had not taken confidential information, he would, over time, have been able to compile the information himself through public domain sources. Crucially, the court found that he would have been able to do that by the time the interim injunction was granted. In those circumstances, at the time the injunction was granted there was no remaining headstart. The purpose of an injunction should not be to put the claimant in a better position than he would have been absent breach, yet that is effectively what the injunction had done. 971

15.98  Specific interim remedies

4(e)  Extension to breaches other than breach of confidence 15.98 The springboard doctrine’s roots lie in cases concerned with breach of confidence, as illustrated by Terrapin, Roger Bullivant and Universal Thermosensors. In recent years the doctrine has come to be seen as not limited to confidence cases, but part of a wider principle: see the third principle in QBE  Management Services (UK) Ltd v Dymoke [2012]  IRLR  458, following UBS Wealth Management (UK) Ltd v Vestra Wealth LLP [2008] IRLR 965 (see 15.86). For a long time, however, the application outside of confidence cases was controversial. 15.99 In Balston Ltd v Headline Filters Ltd [1987]  FSR  330 in refusing to grant an interim springboard injunction Scott J held (at page 340) that springboard injunctions ought only to be granted in cases of (continuing) misuse of confidential information. In CBT  Systems UK  Ltd v Campopiano (24  July 1995, unreported) Carnwath J  expressed caution about extending springboard injunctions to breaches of the duty of fidelity. On the other hand, in Renton Inspection and Technical Engineering (Training Division) Ltd v Renton (25 October 1991, unreported) the Court of Appeal appeared to treat the remedy of a springboard injunction as being arguably available if there had been breaches by a director/employee of his fiduciary duty and/or duty of fidelity, although on the facts it was held that no such injunction should have been granted. 15.100 In Midas IT  Services v Opus Portfolio Ltd (21  December 1999, unreported) (Ch D) the issue took centre stage. In that case, Blackburne J  (at first instance) was required to give judgment on the issue of whether a ‘springboard injunction is limited to cases of misuse of confidential information’ or whether such an injunction was merely ‘an illustration of a wider principle’ enabling the court to neutralise ‘any unfair advantage obtained by a person … as a result of a prior breach of duty by that person’. With ‘diffidence’ Blackburne J disagreed with Scott J’s decision in Balston Ltd v Headline Filters Ltd (see 15.99). He held that in an appropriate case the court was able to grant a ‘springboard’ injunction to neutralise an unfair advantage obtained by a person in breach of a legal obligation, and that such injunctions were not limited to cases of misuse of confidential information. 15.101 In UBS Wealth Management (UK) Limited v Vestra Wealth LLP [2008] IRLR 965 Openshaw J reviewed Midas and Balston. Preferring Midas, he held that springboard injunctive relief is available to prevent any future or further serious economic loss to a previous employer caused by former staff members taking unfair advantage of any serious breaches of their contract of employment (or, if they are acting in concert with others, of any breach of those others). Openshaw J’s approach was followed in Clear Edge UK Ltd. v Elliot [2011] EWHC 3376 (QB), per Popplewell J and, most significantly, in QBE. 15.102 The QBE principles have been followed in a number of later first instance decisions, and were recognised by the Court of Appeal in Personnel Hygiene 972

Springboard injunctions 15.107

Services Ltd. v Rentokil Initial UK  Ltd [2014]  EWCA  Civ 29 (see 15.89). The broader approach was also taken by the Court of Appeal in Willis Ltd. v JLT Group plc [2015] IRLR 844. The application in that case arose from a coordinated attempt by a competitor to poach Willis’ staff, involving alleged breaches of fidelity by a senior employee of Willis. Elias LJ (paragraph 8) addressed the springboard in line with the broader modern formulation: ‘the relief was sought on the basis of the well-known Springboard Principle i.e. it was alleged that the respondents had benefitted from their unlawful activities and that it was necessary, in order to prevent them from taking advantage of those activities, to prevent any employees … from being able to join them.’

15.103  It is fair to note that in neither case was the Court of Appeal asked to review the scope of the springboard doctrine, as opposed to the application of the principles. There remain some controversies as to the springboard doctrine (see 15.128–15.141). However, for the time being, the position is settled as set out in QBE and UBS, unless and until there is a sustained challenge to those cases in the Court of Appeal or Supreme Court.

4(f) Types of springboard order 15.104  Springboard relief is a flexible remedy: the form of the order must be tailored to fit the facts of the wrongdoing and the headstart obtained by it. There is therefore no one form of ‘springboard injunction’ that a court may either grant or refuse. The court’s order will be tailored to meet the needs to undoing the headstart. 15.105  There are however a number of broad categories of springboard relief that can be discerned from the cases. The following is not by any means an exclusive list. The flexible nature of the remedy means that the court has discretion to fashion new and different types of order to meet the demands of the particular case. 4(f)(i)  Orders restraining dealing with clients 15.106  The classic form of springboard can be seen in Roger Bullivant v Ellis. The ex-employee had taken a card index containing customer details and had used it until it was recovered by the employer on execution of a search order. An injunction was granted restraining him from entering into any contract with a customer who had been approached by him (or his new business) at a time when they were in possession of the card index. Contracts entered into but unfulfilled at the date of the hearing were excluded from the injunction. 15.107  A more recent example of the classic Roger Bullivant style of springboard is to be found in Whitmar Publications Ltd v Gamage [2013] EWHC 1881 (Ch), where a springboard injunction was granted to restrain the defendants from dealing with customers whose names appeared on business cards taken and copied 973

15.108  Specific interim remedies

by the ex-employee. However, neither the principles for springboard relief nor the details of the order are explored in any detail in a judgment delivered at the end of an urgent application. 15.108 In UBS  Wealth Management (UK) Ltd v Vestra Wealth LLP [2008] IRLR 965 part of the court’s order restrained the defendants from servicing clients of the claimant. The basis for the order was that the defendants had engaged in solicitation of clients during their notice periods, in breach of their duties of fidelity. The order also restrained further poaching of employees – see 15.114. 15.109  A similar order was granted in Independent Sales Solutions v Tomkins [2010]  EWHC  3971 (QB) where the defendant was an insurance agent who resigned his agency, but prior to departure had engaged in solicitation of clients to follow him to his new business. The court followed the approach in UBS v Vestra. The case illustrates a common reason why employers seek springboard injunctions when defendants have breached their duties prior to termination of their employment. The defendant had a post-termination non-solicitation covenant but not a non-dealing covenant. The non-solicitation covenant was of little practical use when the solicitation had already been carried out pre-termination. The order extended to any client of the claimant’s with whom the defendant had dealt during his agency or since its termination, save for those who had lodged a letter of appointment transferring their business by the date the application was issued. In Visage Ltd v Mehan [2017]  EWHC  2734  QB Yip J  granted an interim springboard injunction, in addition to an injunction to enforce the departing employee’s post-termination restrictions. The basis for the springboard was that the defendants had obtained a headstart by soliciting clients and using confidential information while still employed by the claimants. Yip J noted that the evidence supported the claimants’ concerns that without a springboard injunction the defendants would work around their post-termination covenants by swapping areas of responsibility (paragraph 46). The exact form of the springboard injunction is unclear from the judgment. 15.110  The exclusion of clients who had already transferred their business to the defendant/his new employer by the date of application is not uncommon. In Roger Bullivant at first instance Falconer J  excluded from the scope of the injunction contracts which had been entered into at the time of the hearing but were unfulfilled. By the time the appeal was heard, that issue had been abandoned, so that part of Falconer J’s order was not considered further by the Court of Appeal. There is little authority as to whether such a limitation is necessary or not. The court may be reluctant to make an order that impacts on the rights of third parties (ie the customers who have already moved their business). Often claimants, particularly in the financial services and insurance sectors, decide for practical and commercial reasons not seek to restrain a defendant from dealing with those clients whose business has already transferred. They may take the view that seeking to interfere with the choice of a client who has already moved its business would result in bad public relations and instead pursue a claim in damages in respect of the lost clients. 974

Springboard injunctions 15.114

15.111  However, the court does have the power in an appropriate case to make an order which prevents a defendant from dealing with clients with whom he has already contracted. In PSM International plc v Whitehouse [1992] IRLR 279 (CA) it was submitted that there had never been a case in which an applicant had been granted an injunction against an ex-employee restraining him from fulfilling a contract already made with a third party. Lloyd LJ (with whom Neill LJ agreed) accepted that the court should be chary of granting an equitable remedy which would have the effect of interfering with the contractual rights of third parties, but he did not doubt that equity has the power to do so in appropriate cases. Although a court would no doubt be more ready to restrain the ex-employee from entering into future contracts in breach of the ex-employer’s right to its trade secrets, Lloyd LJ held that the equitable jurisdiction to grant an injunction was not confined to future contracts. The Court of Appeal accordingly upheld the injunction preventing fulfilment of existing contracts made in breach of confidence. In doing so it had regard to two factors. First, the relevant contracts were entered into while the departing employee was still employed by the claimant, a fact which was known to his new employer. Secondly, the order applied only to one client, and, on the facts, it was open to the claimant to argue that the client was on notice that the defendant was acting in breach of his duties to the claimant. 4(f)(ii)  Orders restraining recruitment of employees 15.112  Springboard relief has been common in team moves disputes in recent years. In a situation where a team of employees has been enticed to move by senior employees acting in breach of duty (and often conspiring with a competitor), the court may grant a springboard injunction to restrain further ‘poaching’ of employees. 15.113 In Siemens VAI Metal Technologies Ltd v Paul Wurth Ltd (1 May 2008, unreported) a team move was alleged to have been organised by misuse of the claimant’s confidential information to entice staff to leave and join a competitor. The court granted interim injunctive relief effectively restraining the impending team move. The order restrained the defendants from offering employment to or entering into a contract of employment with any employees who had been approached after confidential information had come into the hands of the defendants – or inducing any employee to terminate his employment (whether lawfully or otherwise). A  key feature of the case was that the key employees who had instigated a team move had been ‘turned’ by their employer so that there was a real prospect that the team move could be reversed. 15.114 In UBS  Wealth Management (UK) Ltd v Vestra Wealth LLP [2008] IRLR 965, 75 employees of the claimant resigned to join Vestra, a start-up competitor. There was a serious issue to be tried that the mass defection (as Openshaw J  described it) had been brought about by poaching by senior departing employees, in breach of their duties of fidelity. The judge restrained the defendants, on an interim basis, from soliciting any employee of the claimant 975

15.115  Specific interim remedies

who had not yet resigned. That relief was necessary to cancel out the unlawful head-start Vestra had achieved by a substantial coordinated team move. 15.115 In Tullett Prebon Plc v BGC Brokers LP [2011] IRLR 420, Jack J granted relief to prevent BGC approaching or recruiting further Tullett brokers, both on an interim and final basis. The interim order was made on a springboard basis, though at trial Jack J  justified the order on a quia timet basis. The order was necessary given the defendants’ disregard for the law and for employees’ duties and, as a result, the extent to which Tullett’s business had been de-stabilised. As the judge explained in his interim judgment at paragraphs 16–17: ‘The Respondents conduct, as it is set out in the affidavits filed on behalf of the Applicants, shows a cynical disregard for the law and for employees’ duties. By their tactics they are likely to have de-stabilised a substantial part of Tullett Prebon’s work force. I do not think that the Respondents can complain if pending trial they are prevented from approaching or entering negotiations with employees in respect of whom it may be argued that they have obtained no unfair advantage. … I consider that that is necessary to prevent the Respondents taking further advantage of the situation which they have improperly created. …’

15.116 In Willis Ltd v JLT  Group Plc [2015]  IRLR  844 the Court of Appeal recognised the application of the springboard principle where an employer was under attack from a competitor in an unlawful team move. Springboard relief was granted (albeit for a short period to a return date) restraining recruitment of employees in the relevant business unit, whether the recruitment was by lawful or unlawful means. Per Elias LJ (at paragraph 9): ‘They sought relief in two main parts. The first was to prevent the respondents from approaching employees in order to persuade them to leave or to encourage others to leave. That would have been unlawful (as [their counsel] accepts). The second, in relation to the first two respondents in particular, was designed to prevent them from seeking to recruit employees from Willis or to negotiate with them or accept them into employment in any way. This would not of itself involve any illegal activity by the respondents in the normal way, but the relief was sought on the basis of the well-known Springboard Principle ie it was alleged that the respondents had benefitted from their unlawful activities and that it was necessary, in order to prevent them from taking advantage of those activities, to prevent any employees, either from the US or the UK operations, from being able to join them.’

15.117  Willis, in common with many of the cases referred to above, involved a large scale team move. The facts illustrate the problem employers face and the need for springboard relief. There had been over 30 resignations, but there remained employees who Willis were concerned the defendants would continue to poach, or who would be tempted to move simply to follow those who had gone. An order simply preventing enticement of the employees would have been inadequate. One benefit of the headstart was that having recruited a critical mass of employees, the defendants could sit back and reap the benefits of that unlawful conduct – ie those who were drawn to follow their colleagues by the destabilising effect of the breaches (see paragraph 19 per Elias LJ). Further, it was difficult to monitor where approaches came from. 976

Springboard injunctions 15.119

4(f)(iii)  Orders restraining the employment of defendants 15.118 In Clear Edge UK  Ltd v Elliot [2011]  EWHC  3376 (QB) the defendants were a team of three who planned to move to another company to develop product in competition with the claimant. The allegation was that there was a coordinated and clandestine campaign to leave the claimant, taking the entirety of the team and misusing confidential information. By their breaches of fidelity and breaches of confidence an unfair advantage had been obtained: (a) the claimant was weakened, as rather than promoting the claimant’s business, the defendants had engaged in diverting its goodwill away to themselves; (b) the rival business achieved a ready-made team equipped with the claimant’s confidential information, so that they would be able to develop a competing product more quickly than would have been the case if they acted legitimately. An injunction was granted which prevented the individual defendants from being engaged in or assisting the rival business on the grounds of the risk that if they joined the new business they would use confidential information and harm the claimant’s business. One defendant had a substantial unexpired notice period, so the order could be justified on a garden leave basis. However, for the other two defendants, who had much shorter notice periods, the order was granted on a springboard basis. In effect the order operated to give the claimant the benefit of a non-competition restriction, despite the absence of any such-post termination covenant in the defendants’ contracts. It should be noted though that the duration of the relief was only two months until speedy trial. In Dyson Technology Ltd v Pellerey [2015] EWHC 3000 (Ch) an injunction was granted to restrain a former employee from joining a competitor. The court enforced a restrictive covenant, though said it would have granted the same injunction on a springboard basis, to prevent the defendant from making use of confidential information he had acquired as a result of his breach of contract. The breach in question was his failure to comply with a clause requiring disclosure of approaches by a competitor: had Dyson been informed of an approach by Tesla, it would not have given the defendant confidential information about a new project. The appeal in this case is reported as D v P [2016] ICR 688; the first instance judgment and the names of the parties were only made public in November 2017. 15.119 An unusual form of springboard was granted by Spencer J  in Dorma UK  Ltd. v Bateman [2015]  IRLR  616. Once again, the case concerned an alleged unlawful team move. The four defendants were employees of the claimant who all resigned on the same day to set up a new office of a competing business. The first defendant was a senior employee, the others his subordinates, though all were alleged to have engaged in planning the unlawful move and in attempting to take confidential information. Spencer J  decided that a springboard injunction was appropriate. As a result of the defendants’ unlawful actions the competitor had obtained the advantage of a ready-made team for its new branch. Had it recruited lawfully, it would have been likely to take much longer to build a team. There are two notable features of the case. First, as in Clear Edge (though that case was not cited), the judge thought that it was necessary, in order to negate the headstart, to prevent the defendants starting work for the competitor. The second feature was that the judge achieved that result by imposing an order on the second to fourth defendants 977

15.120  Specific interim remedies

in the form of the restrictive covenants which applied to the first defendant. Of the four defendants, only the first (the most senior) had restrictive covenants in his contract. Those included non-solicitation and non-dealing with customers, and poaching of employees, and a non-competition restriction. The judge made an order in the terms of those covenants against the second to fourth defendants, even though they had never agreed those terms. The effect was that by operation of the non-competition restriction the defendants would not be able to work in the new local office before trial, though they would be able to take up employment with the competitor elsewhere. 15.120  Spencer J’s approach should be treated with some caution. It may be that his approach achieved justice on the facts of the case. However, in many cases it will be a misleading distraction to shape a springboard injunction along the lines of one defendant’s restrictive covenants. In a springboard case the focus should be on the headstart obtained by the defendant’s unlawful actions, and on the particular relief required to undo that headstart. There is no reason why the consequences of a defendant’s unlawful actions during employment should bear any relation to his own covenants entered into at the beginning of his employment. There is even less reason why those consequences should bear any relation to the covenants entered into by another employee. Focussing on the defendants’ post-termination restrictions may distract from the real issues. 15.121  The broader point raised by Clear Edge and Dorma is the extent to which it is appropriate to use springboard relief to prevent defendants starting work for a competitor. The cases are unusual. In each case the defendants were free to resign, and the majority of the defendants had short notice periods and no posttermination covenants. The logic of the cases must be that but for the unlawful actions they would not have resigned, or would not have resigned at the time they did, and therefore the defendant would not have obtained the benefit of their services. However, there is little analysis of those hypothetical facts in either case. The two cases go substantially further than the Siemens/UBS/Tullett/Willis line of cases: in those cases the emphasis was on preventing the recruitment of employees who had not yet left to join the defendants in the team move. However, many of the defendants in those cases were restrained from joining the competitor in any event until after trial, either due to garden leave or their own post-termination covenants. In those circumstances the issue did not arise. In Caterpillar Logistics (see 15.94) the Court of Appeal had refused to grant ‘barring out’ relief following termination of employment in the absence of an enforceable post-termination restriction. However, in that case the claim had not been put on a springboard basis, as there was no evidence that the defendant had obtained a headstart through breaches of confidence or other breaches of duty. Clear Edge and Dorma indicate that in an appropriate case the court may effectively give non-competition relief in the absence of a covenant by way of springboard relief. 4(f)(iv)  Delaying the commencement of a competing business 15.122  The most radical springboard injunction is possibly the order granted in QBE  Management Services (UK) Ltd v Dymoke [2012]  IRLR  458. In that case the springboard injunction prevented the defendants from launching their 978

Springboard injunctions 15.124

proposed new venture. An interim injunction had been granted with that effect in October 2011 and at trial the injunction was continued until the end of April 2012 – a total period of just over six months. However, the facts of the case were extreme: the court had found that the defendants were engaged in executing a concerted plan to acquire the claimant’s business by stealth without paying for it.

4(g) The duration of springboard relief 15.123  There are few cases where the duration of springboard relief has been considered at trial. Many of the cases arise as interim applications, where the court’s primary focus is whether there will be a headstart that continues until trial, rather than the ultimate length of the headstart. The court will need to assess the continuation of the headstart in the context of the date when a trial may be listed: that is relevant to the question of whether at the interim stage the court will need to modify the American Cyanamid approach to have closer regard to the merits in accordance with the approach in NWL v Woods [1979] 1 WLR 1294 and Lansing Linde v Kerr Ltd [1991] IRLR 80 (see 14.75): see MPT Group Ltd v Peel [2017] IRLR 1092 at paragraphs 16–22, where the judge held that it was necessary to form some view as to the likely length of any final springboard, and as to the likely date of trial, in order to decide whether the Lansing Linde test should be applied. See also Dorma UK Ltd v Bateman [2016] IRLR 616 at paragraphs 29–32, where Spencer J held that in relation to the application for a springboard injunction (but not the application to enforce post-termination restrictions) it was necessary to consider whether the application had a real prospect of success. The rationale for that appears to have been that the springboard was of uncertain length, whereas the covenants would not substantially have expired by the time of the speedy trial. 15.124  As to the duration of springboard relief more generally, in QBE HaddonCave J gave the following guidance (paragraph 285): ‘(1) First, the appropriate measure for the length of a springboard injunction is the length of time that it would have taken the wrongdoer to achieve lawfully what he in fact achieved unlawfully, relative to the victim. (2) Second, it must be emphasised that the exercise is a relative one and any advantage must be measured as such. Wrongful activities may have both a positive and negative effect, i.e. benefiting the wrongdoer whilst simultaneously harming the victim. Thus, for instance, the unlawful poaching of key staff is likely to advantage the wrongdoing party whilst disadvantaging the victim who has lost key staff and may have to recover lost market ground. (3)

Third, it is relevant to look at the period of time over which the unlawful activities have in fact taken place. The relationship of this period with the length of any springboard relief is, however, kinetic not linear.

(4)

Fourth, there may be many different factors at play during the period of unlawful activity materially affecting the advantage gained which may, or may not, obtain in similar assumed circumstances of purely lawful 979

15.125  Specific interim remedies

activity. These factors might include, for instance, (i) the advantage of soliciting junior employees whilst still being employed and in positions of power, compared with the trying to recruit as an ex-employee, (ii) the advantage of stealth and secrecy, so that management are unaware and do not take defensive measures, and (iii) conversely, the advantage sometimes of being able to work speedily and not having to be covert. (5)

Fifth, the nature and length of the ‘springboard’ relief should be fair and just in all the circumstances.’

15.125 In Roger Bullivant the injunction was discharged on grounds that although properly granted the headstart had ceased before the appeal was heard, which was 15 months after termination of the defendant’s employment. The Court of Appeal limited the injunction to one year after termination of employment, being the duration of the post-termination restriction in the defendant’s contract of employment. However, the duration of post-termination restrictions should not be taken as a reliable guide to the length of the springboard: the extent of a headstart achieved by unlawful actions may bear little, if any relation to what the parties bargained for by way of post-termination restraint (see further 15.120). 15.126 In Tullett the injunction against recruitment was granted for 12 months, though it should be noted that this period expired only 14 days after judgment at the end of trial. In effect, the court endorsed the grant of interim relief but held no further relief was necessary following trial. Further, by the conclusion of trial the injunction granted was justified on a quia timet basis, rather than on the springboard basis. 15.127  A one-year period was also applied in Fisher-Karpark Industries Ltd v Nichols [1982] FSR 351. It should not, however, be thought that 12 months is some sort of benchmark – springboard injunctions are often granted for much shorter periods, and nowadays a springboard period of 12 months is probably more the exception than the rule.

4(h)  Controversy concerning the springboard doctrine 15.128  The springboard doctrine appears to be embedded in English law (absent detailed review by the Court of Appeal or Supreme Court). It is worth noting that the doctrine has been subject to criticism. The springboard doctrine has been doubted due to two apparently anomalous features: (1) In cases based on misuse of confidential information, is it appropriate to use springboard relief to extend a defendant’s duty of confidence beyond the time when information has come into the public domain, and thereby lost its quality of confidence? The normal position is that a duty of confidence exists only in relation to material that is confidential. This is a question about the scope of the duty of confidence. (2) Is it appropriate to grant an injunction to deprive the defendant of the benefit of his past unlawful acts? Normally the remedy for a past unlawful act is 980

Springboard injunctions 15.131

purely a financial one (damages or an account of profits as appropriate); injunctions are used to restrain future unlawful acts. This is a question about the availability of remedies. 15.129 The essence of the springboard doctrine as set out in Terrapin Ltd v Builders’ Supply Co (Hayes) Ltd, Taylor Woodrow Ltd and Swiftplan Ltd [1960]  RPC  128 is that the defendant, by reason of his breach of confidence, is placed at a special disability to other competitors, ie those competitors who are in a position to obtain or piece together the confidential information from public sources. On the one hand, that may appear to suggest that the defendant is placed under a continuing duty of confidence even though the information is in the public domain. On the other hand, it reflects the reality that even if the elements of the information are in the public domain, it may take a person acting lawfully time to discover and piece together the information. A related question has been whether it makes a difference if information finds its way into the public domain from the confider, the confidant, or a third party: see Cranleigh Precision Engineering Ltd v Bryant [1964] 3 All ER 289 at page 302E; Mustad & Son v Allcock & Co Ltd and Dosen [1963] 3 All ER 416; Speed Seal Products Ltd v Paddington [1986] 1 All ER 91. 15.130 In Attorney-General v Guardian Newspapers Ltd (No  2) [1988] 3 All ER 545 (HL) (the Spycatcher case) the House of Lords considered the springboard doctrine, though the principles to be derived from the case are not clear. The reasoning of their Lordships differed, and none of their Lordships set out a detailed analysis of the springboard doctrine. The case concerned an injunction to restrain reporting of extracts from a book, the publication of which had been banned in England, but which had been published and extensively reported abroad. Lord Goff (at pages 661J–662C) pointed to the illogicality of artificially prolonging the duty of confidence where information is in the public domain, regardless of how it came to be public. Lord Goff disapproved of the idea that an injunction could be granted to prevent use of information which had lost its confidentiality. He did not doubt the existence of the springboard doctrine: indeed he said that Cranleigh was best explained as an application of the springboard doctrine as set out in Terrapin. However, it is not clear exactly what Lord Goff understood the basis of the doctrine to be. Lords Brightman and Keith both considered it possible, in an appropriate case, to grant an injunction against a confidant not to protect a subsisting duty of confidence, but in order to preclude the confidant from benefiting from his own wrongdoing. 15.131  Lord Goff’s approach was followed by Laddie J in Ocular Sciences Ltd v Aspect Vision Care Ltd [1997] RPC 289. Laddie J considered the availability of an injunction to deprive a defendant of the benefit of past breaches. He said that that injunctions are not granted against the continued flow of a wrongful benefit arising out of or caused by breach of the plaintiff’s rights, but to prevent continuation of the breach. If a continuing activity of the defendant does not constitute a breach of confidence, then it ought not to be injuncted even if it produces an unfair benefit to the defendant. The way the court reduces or eliminates unfair benefit is by financial penalties or a constructive trust (page 401). 981

15.132  Specific interim remedies

15.132 Both the duty question and the remedy question were the subject of detailed analysis by Arnold J  in Vestergaard Frandsen A/S  v Bestnet Europe Ltd [2009] EWHC 1456 (Ch). Although the case was appealed to the Court of Appeal and ultimately to the Supreme Court, neither of these issues were the subject of appeal. 15.133  As to the first issue Arnold J held that there was no sound authority for the proposition that an injunction can be granted to restrain continued use of confidential information once it has ceased to be confidential. Terrapin was not authority for that proposition, because properly understood the information in that case still possessed limited confidentiality. The confidential information could be worked out by reverse engineering from product information in the public domain, but until that was done, the confidential information retained its confidentiality. Spycatcher, AG v Blake [1998] Ch 439 CA and AG v Times Newspapers [2001] 1 WLR 885 (CA) consistently state that publication brings confidentiality to an end. At paragraph 73 Arnold J said: ‘If the springboard doctrine is understood to be that an injunction can be granted to restrain continued misuse of confidential information once the information has ceased to be confidential, then it should now be regarded as having been laid to rest.’

15.134  Arnold J identified two other possible interpretations of the springboard doctrine. The first is that information may have a limited degree of confidentiality even though it can be ascertained from public domain sources. The second is that an injunction may be granted to prevent the defendant from benefitting from a past misuse of confidential information even if it is no longer confidential. He regarded the first of these as soundly based, and an injunction could be granted to restrain misuse of the still confidential information until such time as it could be reverse engineered or compiled from public sources. 15.135  It is the second interpretation of the doctrine that arises most commonly in employee competition cases: an injunction to prevent the defendant from benefitting from past misuse of confidential information. Arnold identified both Terrapin and Roger Bullivant as examples of this kind of case. In Roger Bullivant an order restraining misuse of confidential information would have been no practical benefit to the claimant: the card index had been delivered up, and the defendant had obtained his headstart by contacting clients prior to delivery up. What the claimant needed was an order restraining dealings with clients. 15.136  Arnold J stated his conclusions on this ‘version’ of the springboard doctrine as follows (paragraph 93):

982

‘i)

in general, the remedy for past misuse of confidential information is a financial one. Where appropriate, the claimant can claim a restitutionary remedy, namely an account of profits, which deprives the defendant of the benefit of his wrongdoing;

ii)

as the law presently stands, it is not clear whether an injunction can be granted to prevent a defendant from benefiting from a past misuse

Springboard injunctions 15.138

of confidential information. Laddie J. in Ocular Sciences interpreted Lord Goff in Attorney General v Observer as having concluded that the answer was no, but I am less confident of this. Bullivant and Universal Thermosensors suggest that the answer is yes, and Laddie J. did not consider those cases; iii) in my view, it is significant that Terrapin, Bullivant and Universal Thermosensors are all cases about interim injunctions. When an interim injunction is sought, the court’s task is to hold the ring pending trial. It is not in a position to determine the parties’ legal rights or to award either compensatory or restitutionary remedies. In these circumstances a limited injunction to prevent the defendant from benefiting from his (alleged) past misuse of confidential information may be the best way to preserve the status quo pending trial. If it turns out to have been wrongly granted, the court can require the claimant to compensate the defendant under the cross-undertaking in damages (as occurred in Universal Thermosensors); iv)

in any event, it seems to me that the reasoning in both Bullivant and Universal Thermosensors indicates that considerable caution is required both as to whether to grant such an injunction at all and, if so, as to its form and duration. As Nicholls V.C. pointed out in the latter case, the court must be careful to ensure that such an injunction does not put the claimant in a better position than if there had been no misuse. As the Court of Appeal pointed out in the former case, the duration of any such injunction should not extend beyond the period for which the defendant’s illegitimate advantage may be expected to continue.’

15.137 We note: •

Arnold J did not seek to depart from or challenge Roger Bullivant Ltd v Ellis [1987] IRLR 49 or Universal Thermosensors v Hibben [1992] 1 WLR 840.

•

While referring to the interim nature of those cases he did not go so far as to state that springboard relief could only be appropriate in such a case.

•

The caution that he urged as to the principle, scope and duration of a springboard order is consistent with the principles set out in QBE Management Services (UK) Ltd. v Dymoke [2012] IRLR 458.

15.138 A  further attempt to limit the springboard doctrine can be seen in the decision of Morgan J in BBC v Harper Collins [2010] EWHC 2424 (Ch). The case concerned the driver known to ‘Top Gear’ fans as ‘The Stig’. The Stig’s identity was intended to be secret, and the driver had entered into a confidentiality agreement to that effect. The driver and Harper Collins planned to publish a book which would have revealed his identity. On the BBC’s application to restrain publication Harper Collins successfully argued that there was so much information about the Stig’s identity online that there was no longer any confidence to be breached. The BBC’s alternative argument relied on the springboard principle: the driver had started dealing with Harper Collins, and breached confidence at a time when his identity was not widely known. Breach of confidence at that early stage allowed the book to be prepared for the lucrative Christmas market. Had he waited until his identity was in the public domain the book would not have been ready until 983

15.139  Specific interim remedies

the following year, and may then not have been published at all. In that way, an unlawful headstart had been obtained. Morgan J stated at paragraph 65: ‘In my judgment, the discussion in the cases which are collected in Vestergaard, such as Terrapin v Builders Supply Co (Hayes) [1967] RPC 375, Roger Bullivant Ltd v Ellis [1987] FSR 172 and Universal Thermosensors Ltd v Hibben [1992] 1 WLR 840, all involve circumstances where an injunction granted by the court would prevent damage which would ensue to the claimant if no injunction were granted. If the apprehended damage has already been inflicted in any event, or could be inflicted pursuant to lawful action by a defendant, then in my judgment it is not appropriate to grant an injunction. Such an injunction would not protect the claimant from harm caused by the unlawful action of a defendant. Although such an injunction would deprive the defendant of a benefit, it is not a proper use of the court’s power to grant an injunction merely to punish a defendant for his previous unlawful action, where the injunction does not protect the claimant against further harm, unlawfully caused. The court may award a financial remedy to a claimant in such a case, but that is not the remedy sought by the BBC on this application.’

15.139  This is clearly right to the extent that the court will be concerned to prevent damage from occurring in future: if the damage has ‘already been inflicted in any event’ then there is no point in an injunction. Morgan J was right to say that the purpose of an injunction is not to punish a defendant – a point made in QBE and the cases referred to therein. The focus of the court should be on whether an injunction is needed to prevent future harm, as Lewison said in Willis v JLT (paragraph 22): ‘The wrongdoing may have been in the past, but the question of springboard relief is whether the effect of past wrongdoing continues to confer a present and future benefit on the wrongdoer which the court should prevent.’ 15.140  Morgan J’s view that an injunction should not be granted where the damage ‘could be inflicted pursuant to lawful action by a defendant’ is doubtful. The essence of a springboard injunction is to prevent the defendant from doing something lawful, because of the headstart obtained by earlier unlawful actions. If the future conduct to be restrained by injunction were unlawful that would be a straightforward quia timet injunction to restrain an apprehended breach of duty. As Haddon-Cave J put it in QBE (Supplemental judgment paragraph 11): ‘In granting springboard relief, the Court may restrain otherwise lawful activities taking place on unlawful foundations. The purpose of springboard relief is to level up the playing field. It is no answer for the defendants to say that they should not be restrained from continuing now with “permissible preparations” for their new venture when they would not have reached this point of preparedness but for their months of previous unlawful activity.’

15.141 The Vestergaard and BBC cases both provide arguments for a cautious approach to springboard relief. As and when the springboard doctrine comes to be reviewed further by the Court of Appeal or the Supreme Court they may yet provide the basis for challenge to the doctrine. However, neither case provides a significant challenge to QBE, which we suggest represents the best current statement of the applicable principles, as set out at 15.86. We address in the following 984

Springboard injunctions 15.146

section the further question whether springboard relief should only be available as an interim remedy.

4(i)  Interim or final order? 15.142  In the light of Vestergaard, there has been some debate as to whether springboard relief is available as a final remedy at trial, or should only be granted as an interim remedy, to hold the ring until trial. 15.143  Haddon-Cave J’s seventh principle in QBE (paragraph 246) included the statement ‘It is merely to provide a fair and just protection for unlawful harm on an interim basis.’ That sentence might be read as indicating that springboard injunctions are only available as an interim remedy. 15.144  However, care must be taken not to read too much into Haddon-Cave J’s reference to ‘an interim basis’. Haddon-Cave J was himself giving judgment at the end of trial, and he went on to grant a springboard injunction as final relief for three months following trial (see Supplemental Judgment in QBE at paragraphs 14–17 [2012] IRLR 458 at 489). The thrust of Haddon-Cave J’s seventh principle was about what is a fair and just protection for unlawful harm, as opposed to punishment. There is no reason those issues may not be live at trial. Indeed, to allow a springboard injunction only as an interim remedy, rather than at trial, would set up an inappropriate incentive for parties to delay or accelerate the trial process to suit their own advantage. 15.145 There are other instances in the employment sphere of springboard relief being available at trial: see for example Crowson Fabrics Ltd. v Rider [2008] IRLR 288, First Conferences Services Ltd. v Bracchi [2009] EWHC 2176 (Ch) both per Peter Smith J. In Bracchi Peter Smith J rejected a submission that Vestergaard casts considerable doubt on the proposition that a permanent injunction can be granted to prevent a defendant from benefiting from a past misuse of confidential information. In Kerry Ingredients UK Ltd. v Bakkavor Group Ltd [2016] EWHC 2448 (Ch), a case concerning misuse of confidential information, Newey J granted a springboard injunction at trial restraining use of information for the time it would have taken to reverse engineer or compile the information from public sources. 15.146 In Tullett Prebon plc v BGC Brokers LP [2010] IRLR 648 (Jack J) an interim injunction was granted to restrain BGC from recruiting employees of Tullett until trial. The interim injunction was originally obtained on the springboard basis. At trial Jack J upheld the injunction, and ordered that it remain in place until 14 days after judgment. However, in his judgment at trial, Jack J stated that the basis for continuing the injunction and the justification for having made it on an interim basis was ‘better put more simply’ as a form of quia timet relief: BGC had shown an intention to recruit unlawfully, and would have continued to do so unless restrained by injunction (paragraphs 248–253). In so deciding Jack J avoided the complexities arising from Arnold J’s decision in Vestergaard. 985

15.147  Specific interim remedies

15.147  Where springboard principles are applied in patent cases, the courts are willing to grant springboard relief as a final remedy, as we set out in the following section (15.148–15.152).

4(j) The patent infringement analogy 15.148  In patent infringement cases, the courts have been willing to use springboard injunctions to deprive a defendant of a headstart obtained by breaching a patent, and to grant such relief as a final remedy, not just as interim relief. The problem arises as the term of the patent comes to an end. After expiry of the patent a competitor would be entitled to make use of the formerly patented technology, in competition with the patent owner. There are cases where a competitor ‘jumps the gun’ by infringing the patent before it expires, the better to compete after expiry. That situation is analogous to the situation where an employee, intent on working in competition after he leaves his employer, breaches his duties before termination, eg by soliciting clients for his new business, or poaching colleagues. 15.149  In the patent cases the courts in an appropriate case will grant a springboard injunction to restrain the competitor for a limited period after the expiry of the patent. The ECJ recognised the permissibility of a post-expiry springboard injunction in those circumstances in Generics BV v Smith Kline & French Laboratories Ltd [1997] RPC 801, [1998] 1 CMLR 1, ECJ. 15.150 In Smith & Nephew plc v Convatec Technologies Inc (No. 2) [2013] EWHC 3955 (Pat) Birss J reviewed the principles for grant of springboard relief in patent cases. Normally a final injunction is granted at trial to prevent a defendant in future from committing an unlawful act. In patent cases a final injunction is normally time limited in that it will last until the expiry of the patent. The question for the court was the circumstances in which the court should grant a final injunction which restrains what would otherwise be a lawful act. Having reviewed the authorities, Birss J held that a court can intervene to deprive an infringer of an unwarranted advantage gained from their act of infringement. He distinguished VestergaardFrandsen A/S v Bestnet Europe Ltd [2009] EWHC 1456 (Ch) (see 15.132–15.133) on the grounds that Arnold J was there dealing with misuse of confidential information, though he did not elaborate on the grounds for distinction, merely saying that misuse of confidential information ‘raises its own special factors as can be seen from that judgment [ie Vestergaard] itself’ (paragraph 126). If damages were recoverable in respect of damage suffered after the expiry of the patent caused by pre-expiry infringements, it was difficult to see why an injunction could not be granted to prevent the harm from occurring in the first place. Birss J considered that the following factors were relevant in considering final springboard relief in a patent case (paragraph 133): • 986

caution was required before a final injunction was granted restraining an otherwise lawful activity. Nevertheless in a proper case it would be;

Orders relating to documents 15.154

•

the nature of any unwarranted advantage relied on had to be identified. The precise relationship between the unlawful activity in the past and the later acts which were said to exploit that unwarranted advantage needed to be considered;

•

if an injunction was to be granted it had to be in an appropriate form and for a duration commensurate with the unwarranted advantage relied on;

•

the court had to be particularly careful not to put the claimant in a better position than it would have been if there had been no infringement at all, especially if otherwise lawful competitive activity was to be restrained; and

•

in considering what relief to grant, the availability of other remedies apart from an injunction had to be taken into account. Not only damages but the availability of an account of profits should be considered too.

15.151  Birss J’s judgment was later overturned on the question of infringement ([2015] EWCA Civ 607, [2015] RPC 31), but the approach to springboard relief was not challenged. 15.152 The factors identified by Birss J  as applicable in patent cases can be seen to be closely analogous to the modern approach in employment cases set out by Haddon-Cave J in QBE Management Services (UK) Ltd. v Dymoke [2012] IRLR 458. The approach is contrary to the notion that an injunction cannot be granted to deprive a defendant of the benefit of an unlawful headstart at all, or that it should only be available as an interim remedy.

5. ORDERS RELATING TO DOCUMENTS 5(a) Introduction 15.153  Where an ex-employer’s information may have been taken or misused, there are a number of things that employers may seek from the court to protect his position. First, they may seek an order to restrain use or disclosure of the information (see 15.74–15.77). They may seek a springboard injunction (15.78– 15.147). Often they will also be concerned about documents in the hands of the defendants. 15.154  There are four different classes of document which the ex-employer may be seeking to recover, or at least to see: •

Documents belonging to the ex-employer which have been removed by the ex-employee.

•

Documents which, although not physically belonging to the ex-employer, contain confidential information belonging to it; these are normally treated on the same basis as the first class.

•

Documents which infringe the ex-employer’s copyright or database right. 987

15.155  Specific interim remedies

•

Documents belonging to the respondent which contain evidence of breaches of the contract of employment (or other unlawful acts), eg emails, letters and invoices showing solicitation of, or dealing with, customers in breach of a non-solicitation/dealing covenant.

15.155  The ex-employer is likely to have some or all of a number of objectives in relation to such documents: •

To obtain delivery up of the documents, so as to deprive the defendant of possession of them.

•

To inspect the documents, in order to gather evidence of the defendant’s breaches.

•

To preserve the documents, to prevent their destruction and so that they are available to be delivered up or disclosed at a later stage of proceedings.

•

To obtain information from the defendant, to assist in achieving any of the above aims.

15.156  The court’s powers to achieve these aims depends on the nature of the documents, and the stage at which the application is made. A variety of powers may be relevant. CPR 25.1 provides that the court may grant a range of interim remedies. The first of those (CPR 25.1(1)(a)) is an interim injunction, and a number of cases concerned with documents, and inspection of computers have been brought simply as interim injunction applications. 15.157  CPR 25 also contains more specific powers to grant orders relating to property: •

CPR  25.1(1)(c): an order for the detention, custody or preservation of relevant property; or for the inspection of relevant property;

•

CPR 25.1(1)(d): an order authorising a person to enter any land or building in the possession of a party to the proceedings for the purposes of carrying out an order under subparagraph (c);

•

CPR  25.1(1)(e): an order under  section 4 of the Torts (Interference with Goods) Act 1977 to deliver up goods;

•

CPR 25.1(1)(h): a search order.

15.158  Further, by CPR 25.1(1)(3) the fact that a particular kind of interim remedy is not listed in paragraph (1) does not affect any power that the court may have to grant that remedy. Some applications have been brought on the basis of an inherent jurisdiction to grant the order sought, even though it does not fit within a particular sub-paragraph of CPR 25.1(1). 15.159  The court’s powers in relation to disclosure may also be engaged, both its general powers to order standard and specific disclosure, and its powers to order disclosure pre-action under CPR 31.16. 988

Orders relating to documents 15.162

15.160  The framework of the court’s powers, and the principles for their exercise were largely devised in a paper-based world. The vast growth of electronic communication and use of IT has made the position considerably more complicated. Any application in relation to documents will need to have regard to a number of issues: •

Electronic documents are easy to copy, remove and conceal. Vast amounts of data can be stored on tiny USB devices, or quickly uploaded to an online storage facility. At the same time, it is harder for a defendant to fully erase the electronic record of his activities.

•

The scale of the exercise of identifying, recovering, and disclosing documents has become much greater. Disputes now tend to involve a far larger volume of documents, and those documents can be stored on a wide variety of media: eg computers, USB sticks, smartphones, or online ‘cloud’ storage accounts.

•

It is also much easier to mix the ex-employer’s confidential documents with the defendant’s own documents, either cutting and pasting information from documents, or simply by storing those documents together.

•

Any attempt to obtain delivery up of documents will need to require the defendant not just to hand over documents, but will also have to consider how to get copies of the delivered up documents expunged from the defendant’s systems.

•

Many of the steps entailed in identifying and securing electronic documents can only properly be carried out by a forensic IT expert.

15.161  There are a range of orders that an ex-employer may seek: •

Preventing disclosure or misuse of defined confidential information.

•

Preserving (ie preventing the destruction of) confidential information and evidence.

•

Delivery up of the ex-employer’s property.

•

Disclosure of evidence of wrongdoing.

•

Witness evidence explaining what confidential information the defendant has had in his possession, where it has been stored, and to whom it has been disclosed.

•

At some point, though not necessarily at an interim stage, permanent deletion of the ex-employer’s confidential information from the defendant’s systems.

•

Forensic examination of computers and other electronic devices, to ‘police’ delivery up and disclosure, and/or to discover evidence of wrongdoing.

15.162  The right combination of these orders will depend on the facts of a given case, and on the ex-employer’s strategic objectives. Careful thought needs to 989

15.163  Specific interim remedies

be given as to how an application in relation to documents fits into the overall case, which may also involve eg an application for an injunction to enforce posttermination covenants, or a claim for damages for past breaches. 15.163  If the ex-employer’s principal concern is to protect his information, then an early application for delivery up and destruction may achieve his objectives and bring proceedings to a swift conclusion. If, on the other hand, the employer has longer term objectives, eg a permanent injunction and damages, then preservation of the documents may be more important than early destruction. Indeed, destruction may itself destroy the evidential record if not handled carefully. 15.164  Where it is likely that an order for delivery up or preservation of property will be executed at the premises of the defendant or a third party, the court shall consider whether to include in the order, for the benefit of the parties, similar provisions to those specified in injunctions and search orders (CPR PD  25A, paragraph 8.2).

5(b)  Property of the ex-employer 15.165  Section 4 Torts (Interference with Goods) Act 1977 empowers the High Court on an application in accordance with the rules of court: ‘… to make an order providing for the delivery up of any goods which are or may become the subject-matter of subsequent proceedings in the court or as to which any question may arise in the proceedings.’

CPR 25.1(1)(e) provides that the court may grant: ‘an order under section 4 of the Torts (Interference with Goods) Act 1977 to deliver up goods.’

15.166  In relation to hard copy documents at least, the ex-employer will frequently invoke this jurisdiction relying on his property in the documents. 15.167 Electronic documents may not constitute goods, and therefore may not be covered by this power. In Fairstar Heavy Transport NV  v Adkins [2013] EWCA Civ 886 Edwards-Stuart J at first instance had refused an order for delivery up of (non-confidential) emails in the possession of an agent. He held that the information in them was not property, and the claimant therefore had no proprietary claim. The Court of Appeal ordered delivery up on different grounds: the emails were documents, and the principal was entitled to inspection of the documents of records of the agent in relation to the agency. The court declined to deal with the question of whether there was a proprietary right in information. Subsequently, the Court of Appeal has held that the tort of conversion cannot be committed by wrongful interference with intangible (as opposed to tangible) property, and cannot form the basis of an application for delivery up of electronic documents: Your Response Ltd v Data Team Business Media Ltd [2014]  EWCA  Civ 281, Churngold Recycling Ltd v The Environment Agency 990

Orders relating to documents 15.171

[2014] EWCA Civ 909. In each case the Court of Appeal purported to be bound by the House of Lords decision in OBG v Allan [2008] 1 AC 1, to the effect that conversion only applies to chattels and not choses in action. In both cases the Court of Appeal acknowledged that there was a case to allow rights of possession over digitised material, but held that they were precluded from doing so by OBG. See also Capita plc v Darch [2017] IRLR 718. 15.168 Many employment contracts include a term requiring an employee to deliver up property and documents to the employer on termination of their employment. In such a case, an application for delivery up will be based upon enforcement of that term. In Eurasian Natural Resources Corporation v Judge [2014] EWHC 3556 (QB) Swift J refused to imply such a term into the contract of a non-executive director. When drafting a contract for an employee or director it is prudent to include an express term requiring delivery up on termination or earlier at the request of the employer: see 5.138 for a precedent clause. 15.169  Copyright material is subject to a separate discretionary power of the court to order delivery up to the ex-employer (section 99 Copyright, Designs and Patents Act 1988) or destruction (section 114); see also right of seizure (section 100). As to database infringement, see 7.52. 15.170  In employment-related disputes where the ex-employer seeks to recover documents or other property belonging to him, there is often no real dispute as to ownership of the documents or other goods. The difficulty as regards the implementation of these orders lies more often in the proof of whether the documents or other goods are in fact in the control of the ex-employee. Often the exemployee will file an affidavit or witness statement to the effect that he does not have in his control the documents in question – and there is little (at the interim stage) which the ex-employer can do about that, unless there are grounds for an order of cross-examination: see 15.256–15.259. Therefore, where one is dealing with an unscrupulous ex-employee, there is sometimes the need for the more drastic remedy of a search order: see 15.196–15.260, or for forensic examination of computers to check whether the ex-employee’s account is correct.

5(c)  Detention, preservation and inspection orders 15.171  CPR 25.1(1)(c) provides that the court may make an order: ‘(i) for the detention, custody or preservation of relevant property; (ii)

for the inspection of relevant property.’

CPR 25.1(1)(d) provides for: ‘an order authorising a person to enter any land or building in the possession of a party to the proceedings for the purposes of carrying out an order under subparagraph (c).’

An application under CPR 25.1(1)(c) may be of assistance to the (ex-)employer. For instance, in the light of the increasing reluctance of the courts to grant search 991

15.172  Specific interim remedies

orders and the expensive safeguards now built into them (see 15.201–15.244), cases may arise where the less drastic relief within this rule will be appropriate, eg an order for preservation of certain documents without a search order. 15.172 These powers have been held to be wide enough to cover orders for the search and examination of computers and databases: see the cases at 15.177–15.190. 15.173  Before the court will make an interim preservation order, it must normally be shown that the respondent has the property in his possession or control: Wilder v Wilder and Charters (No 2) (1912) 56 Sol Jo 571; but see Penfold v Pearlberg [1955] 1 WLR 1068, where an order was made against a party not in possession, but subject to the consent of a requisitioning local authority, on the basis that the authority would in all probability not object. 15.174  A document the authenticity of which was a vital question in the action is included within the meaning of ‘property’: Re Saxton (deed) [1962] 1 WLR 859 (in which Lord Wilberforce ordered the document to be delivered up for inspection by an expert). 15.175  The court has power to allow a party to copy documents (or other property) in the possession of the opposing party: Lewis v Earl of Londesborough [1893] 2 QB 191 (where, prior to the era of photocopying, an order was made sanctioning the ‘photography’ of an opponent’s documents in his possession). Usually inspection is by an expert (as in Re Saxton), but sometimes inspection may be permitted by an employee of a party instead: Centri-Spray Corp v Cera International Ltd [1979] FSR 175.

5(d)  Interim mandatory injunctions 15.176 Claimants should also note the possibility of obtaining an interim injunction for delivery up where, for example, they have a contractual right to possession: Nottingham Building Society v Eurodynamics Systems plc [1993]  FSR  468. In that case the claimant had a contractual right to delivery up of software and documents on termination of the contract. It applied for a mandatory injunction to enforce performance of a contractual obligation to deliver up. Chadwick J set out the following principles for the grant of a mandatory injunction: ‘In my view the principles to be applied are these. First, this being an interlocutory matter, the overriding consideration is which course is likely to involve the least risk of injustice if it turns out to be “wrong” in the sense described by Hoffmann J [in Films Rover International and others v. Cannon Film Cells Ltd. [1986] 3 All E.R. 772]. Secondly, in considering whether to grant a mandatory injunction, the court must keep in mind that an order which requires a party to take some positive step at an interlocutory stage, may well carry a greater risk of injustice if it turns out to have been wrongly made than 992

Orders relating to documents 15.179

an order which merely prohibits action, thereby preserving the status quo. Thirdly, it is legitimate, where a mandatory injunction is sought, to consider whether the court does feel a high degree of assurance that the plaintiff will be able to establish his right at a trial. That is because the greater the degree of assurance the plaintiff will ultimately establish his right, the less will be the risk of injustice if the injunction is granted. But, finally, even where the court is unable to feel any high degree of assurance that the plaintiff will establish his right, there may still be circumstances in which it is appropriate to grant a mandatory injunction at an interlocutory stage. Those circumstances will exist where the risk of injustice if this injunction is refused sufficiently outweigh the risk of injustice if it is granted.’

5(e) Orders for delivery up, search or inspection of electronic devices 15.177  There is an increasing body of case law where the court has addressed applications for examination of computers or storage devices in the possession of defendants. The grounds upon which such applications have been brought have been varied, and as a result, there is little coherence as to the principles to be applied. Some cases have treated the applications as akin to search orders; others have treated them simply as a form of mandatory interim injunction application and applied the tests from American Cyanamid v Ethicon [1975] AC  396 and Zockoll Group v Mercury Communications [1998] 1 FSR 354. Others still have dealt with the issue as one of disclosure. 15.178 In Nucleus Information Systems v Palmer [2003] EWHC 2013 (Ch) the defendants were former employees of the claimant, and it was alleged they were trying to force Nucleus into liquidation so as to be able to acquire it. Following the termination of their employment, the defendants returned computers to the claimant but they had been wiped clean. The claimant made an application for an injunction to restrain the defendants from misusing confidential information, an order for delivery up of the claimant’s information, an order for preservation of evidence and an order for the defendants’ computers to be delivered up to the claimant, so they could be copied and searched. The application in respect of the computers was put on the basis that it was the only way that the claimants could be sure that the defendants had complied with the other orders. The court was willing to make all of the orders apart from the order for inspection of the computers. The court was concerned that such an order would potentially interfere with the defendants’ article 8 rights to privacy and with legal professional privilege. There was no necessity for the order: given that an order for preservation of evidence was in place, the defendants would have to provide disclosure in the course of proceedings in the usual way and the claimants could make an application for specific disclosure if they had grounds to believe the disclosure was inadequate. 15.179  Two features of the court’s approach are notable: the concern to avoid infringing the article 8 and privilege rights of the defendants and a concern to risk interfering with those rights no more than was necessary at the particular stage of the proceedings. It should be noted, however, that the refusal of the order was 993

15.180  Specific interim remedies

in the context of an application for the claimant to have access to the computers. Subsequent cases have shown increasingly elaborate mechanisms to obtain forensic examination of computers while protecting the defendants’ rights. 15.180 Two decisions of Akenhead J  have stressed the high threshold a claimant must get over for the court to grant inspection of computers by way of inspection or preservation of property under CPR  25.1: M3 Property Ltd. v Zedhomes Ltd [2012]  EWHC  780 (TCC) and McLennan Architects Ltd v Jones [2014] EWHC 2604 (TCC). In M3 Properties, relying on Patel v Unite [2012]  EWHC  92 he said that the court must be satisfied that an order for inspection of electronic devices is necessary and proportionate. In McLennan he repeated that point and went on to give a list of factors (which he described as non-exhaustive) which might properly be taken into account in determining whether an order is necessary and proportionate. ‘(a) The scope of the investigation must be proportionate. (b) The scope of the investigation must be limited to what is reasonably necessary in the context of the case. (c)

Regard should be had to the likely contents (in general) of the device to be sought so that any search authorised should exclude any possible disclosure of privileged documents and also of confidential documents which have nothing to do with a case in question.

(d) Regard should also be had to the human rights of people whose information is on the device and, in particular, where such information has nothing or little to do with the case in question. (e)

It would be a rare case in which it would be appropriate for there to be access allowed by way of taking a complete copy of the hard drive of a computer which is not dedicated to the contract or project to which the particular case relates.

(f)

Usually, if an application such as this is allowed, it will be desirable for the Court to require confidentiality undertakings from any expert or other person who is given access.’

M3 Property Ltd. and McLennan are consistent with Nucleus Information Systems in the concern shown to protect the rights of the defendant and third parties. 15.181  The jurisdiction for an order for imaging and searching electronic storage devices was given detailed consideration by King J  in Phaestos Ltd v Ho [2012] EWHC 2756 (QB). The claimant was concerned that its former employees had taken and used its software. It sought a suite of relief including the listing of documents containing confidential information, preservation and delivery up of such documents, imaging of electronic storage devices and searches of the images for the claimant’s software or evidence of its use. The imaging and search were to be carried out by an independent expert. The search or inspection of the images was said to be for two purposes. First, to police compliance by the defendants of their delivery up and disclosure obligations. Secondly, to obtain evidence of the extent of the defendants’ wrongdoing. The defendants argued that the legal basis 994

Orders relating to documents 15.183

for the imaging and inspection was that of a search order and should only be made if the test for a search order was satisfied. The claimant relied on a variety of principles for the legal basis of the application: preservation and inspection of property under CPR 25.1, specific disclosure under CPR 31.12 and inspection of documents mentioned in witness statements under CPR 31.14. Alternatively, it was argued there was an inherent jurisdiction to grant an interim remedy, which was flexible enough to permit an order for preservation and inspection of evidence. King J’s conclusion in relation to those competing submissions is not entirely clear. He appears not to have accepted the argument that inspection of the images could only be permitted if grounds for a search order were made out. He applied a test of whether the order was necessary and proportionate under each of CPR 31 and the inspection of property ground under CPR 25.1. Applying that test, King J held that the claimant was entitled to the orders for delivery up and for the imaging of storage devices, but was not entitled to an order for search of the images. Such an order was not necessary to police disclosure and delivery up. That was premature: e-disclosure had not taken place and the process of delivery up was not complete. On the basis of the pleaded case, King J decided that an order was not necessary and proportionate as a means of identifying evidence of wrongdoing; rather it was an unjustified fishing expedition. 15.182 In CBS Butler v Brown [2013] EWHC 3944 (QB) the claimant obtained an order that was described as a hybrid of a preservation order and a search order. The claimant, the supervising solicitor and IT expert attended the defendant’s premises for the purpose of making images of relevant storage devices. Unlike a standard search order, the claimant did not at that stage get to inspect the imaged material. Indeed, the claimant gave an undertaking not to inspect or use the images without permission of the court or the defendants’ consent. The evidence having been preserved by the imaging, a further application was then necessary to deal with the question of how the images were to be inspected. The claimant’s application was for the claimant’s IT expert to interrogate the image, using keyword searches for disclosable material and ‘blacklist’ search terms for material that should not be disclosed (eg on grounds of privilege). By the time the application was heard a defence had been filed and standard disclosure under CPR 31.7 would become due in the normal course. Tugendhat J viewed the application as a departure from the standard form of disclosure, in effect depriving the defendant of its opportunity to comply with its disclosure obligations itself. Tugendhat J said that such an order was an intrusive order and could only be made where there was a paramount need to prevent a denial of justice to the claimant. There may be the need for such an order if the defendant fails to comply with his disclosure obligations having had the opportunity to do so. The claimant must show that there are substantial reasons for believing that a defendant is intending to conceal or destroy documents in breach of his obligations of disclosure under the CPR (following Lock v Beswick [1989] 1 WLR 1268). 15.183  Some consistent themes can be identified from the cases above perhaps surprisingly, given that the cases were decided on a variety of juridical grounds, and without referring to the other cases: 995

15.184  Specific interim remedies

•

The juridical grounds for an application for imaging of electronic devices and inspection of them depends upon the purpose for which the order is being sought.

•

Whatever the basis, the underlying test is whether an order is necessary and proportionate, balancing on the one hand avoiding denying justice to the claimant and, on the other hand, the defendants’ (and third parties’) rights under article 8 (right to private life), and to protect their privileged information.

•

A distinction may be drawn between imaging and inspection; it is easier to persuade a court that imaging is a necessary and proportionate step than subsequent inspection.

•

Whether it is necessary and proportionate to carry out inspection depends upon the purpose for which inspection is sought and the stage of proceedings at which it is sought. Once an image has been taken, the urgency may go out of many applications and the court may be content to allow disclosure to take its normal course.

15.184  There is a strand of authority in which a more permissive approach has been taken. We have seen above (15.176) that in Nottingham Building Society v Eurodynamics Systems plc [1993] FSR 468 the court approached the question on the basis of the test for an interim injunction, so that the key test applied for the grant or refusal of a particular order was the balance of convenience. 15.185  The same approach was taken in Warm Zones v Thurley [2014] IRLR 791 (QB), though Nottingham Building Society was not cited. The evidence indicated that the former employees, while employed by the claimant, had offered the claimant’s database and tender documents to a competitor. The claimant sought delivery up of documents, and an injunction for imaging and inspection of the defendants’ computer and storage devices. That would be carried out by an IT expert, who would then provide the material found in the inspection to an independent solicitor nominated by the defendants. Simler J approached the question as an interim mandatory injunction (merits, balance of convenience, undertaking in damages), applying American Cyanamid and Zockoll Group v Mercury Communications [1998] 1 FSR 354 not as a matter of inspection or disclosure. She found that the balance of convenience favoured the grant of the order: it was proportionate, being designed to secure ‘return, protection and security’ of confidential information. Simler J was concerned as to the infringement of the rights of third parties whose information might be on the devices, but was satisfied by the claimant’s assurances that it would put in place safeguards to protect that information (though the judgment does not record what those safeguards were). 15.186  There are a number of features which suggest the case should be treated with some caution. None of the cases referred to above were cited. In approaching the balance of convenience, the court was concerned by the risk of harm if the defendants continued to misuse confidential information. However, that concern could have been met by less invasive orders: an injunction on use of 996

Orders relating to documents 15.189

the information, an order for preservation of evidence, even the imaging of the devices. There was no separate consideration of whether it was necessary and proportionate to permit inspection of the images at that stage. 15.187  Warm Zones was followed in Arthur J Gallagher Services (UK) Ltd v Skriptchenko [2016]  EWHC  603 (QB). The order sought was for the imaging and inspection by an IT expert of the defendants’ computers and electronic devices and the deletion of confidential material belonging to the claimants. The application was put on the basis that order was necessary to prevent the defendants from having access to the claimant’s confidential material. As had been the case in Warm Zones, Slade J approached the case as an application for an interim mandatory injunction, without reference to the authorities referred to above. In granting the order Slade J went further than the order in Warm Zones, granting an order for destruction of any the claimant’s confidential material found on the inspected devices. The court clearly formed the view that the defendants’ behaviour was such that they could not be trusted: they had engaged in a ‘high degree of subterfuge’. Therefore, the court was able to feel the high degree of assurance that the claimant would succeed at trial (as per Nottingham Building Society). Slade J rejected the idea that the defendants should be left to delete the material themselves for that reason. It is not clear why Slade J rejected the argument that destruction should be left until the end of trial. That would be the more conventional approach for a mandatory order requiring destruction of material. 15.188  It should be noted that the order was only granted on the basis of a careful regime to identify the appropriate documents. Copies of the full device images were to be retained, so that deleted material was preserved in case it was later held to have been wrongly deleted. Inspection was to be carried out by search terms, with the results to be scrutinised by the expert in the first instance, and then by the defendant, so that only the claimant’s confidential information would be disclosed to the claimant. A dispute resolution mechanism provided that any disputes about particular documents were to be referred back to the court, or to an arbitrator. Such mechanisms are now common in applications for inspection of electronic devices, as claimants seek to show they are acting in a proportionate manner and that the defendants’ rights in relation to their own confidential or privileged material are being respected. 15.189 In practice, parties should consider carefully whether there is a real need for an application for examination of electronic devices. In some cases, the application may secure and uncover vital evidence and/or may prevent use of the claimant’s confidential information. However, in other cases, particularly if proper thought is not given to the mechanisms for inspection, the exercise may prove an expensive and time-consuming distraction. The following broad (nonexhaustive) guidance may be of assistance: •

It will be apparent from the cases referred to above that an IT expert will be necessary both to image the data sources, and to carry out any search and inspection. 997

15.190  Specific interim remedies

•

While imaging should be relatively straightforward for the expert, any search and inspection requires more than IT skills: the searchers need to know what they are looking for. It is vital that the person carrying out the search has clear and comprehensive instructions as to what they are to search for.

•

The IT expert will not be in a position to judge the relevance of documents themselves. In some cases, the search may be for specific documents, but in most cases keyword searches will be necessary. Great care is needed in drawing up the search terms in order to avoid missing relevant documents, or returning a large volume of false positives.

•

In order to avoid disclosure of the defendant’s own confidential private or privileged material a mechanism will be needed to identify those documents: in Skriptchenko keyword searches were used in the first instance.

•

Once the IT expert has produced the results, there will normally need to be a process conducted between the parties’ lawyers to identify areas of agreement as to: (a) what can be disclosed/delivered up to the claimant, and (b) what must not be disclosed or delivered up. There are various ways of doing this. Much depends on the circumstances, including the size of the exercise, the nature of the documents in issue and the time limits imposed by the proceedings as a whole and costs.

•

As a backstop, many regimes provide for a dispute resolution mechanism, either by reference back to the court, or reference to an arbitrator.

15.190  If the exercise is intended to provide delivery up and destruction, rather than simply disclosure, care is needed as to how that exercise fits into the proceedings as a whole as they progress: •

Many litigants make a mistake in demanding destruction of electronic documents in the hands of a defendant at too early a stage. If this is done without having taken a full image of the defendant’s relevant devices first, it may result in evidence of wrongdoing being destroyed.

•

The defendant may wish to refer to the material at trial for a variety of reasons: to argue that the material was not confidential, or of insufficient value to give rise to substantial damages, or that it was not used. It will be difficult for a defendant to do that without disclosure of the material. However, once the material has been delivered up the claimant is in a position to protect its confidentiality by seeking limits to disclosure, either by way of redaction, or by confidentiality club arrangements: see 14.97.

5(f) Orders for provision of witness statements and early disclosure of evidence 15.191  An application for orders in relation to documents will often include an application for an order that the defendants provide affidavits or witness statements, and/or provide early disclosure of evidence. The court’s approach depends 998

Orders relating to documents 15.194

on what type of information is being sought. The court is generally prepared to order affidavits dealing with matters which are necessary as ancillary to enforcement of the claimant’s rights: •

Applicants will generally be entitled to information which is required either to assist in giving effect to the interim relief, or to assist them in undoing the harm which has been unlawfully done.

•

Applicants are not entitled to information merely to assist them in their claims, unless the narrow conditions for pre-action disclosure under CPR 31.16 are made out (see 14.125–14.128). The court will be likely to refuse anything which is regarded as early interrogation of, or disclosure from, a respondent, subverting the normal trial process.

15.192 See Intelsec Systems Ltd v Grech Cini [2000] 1 WLR 1190, Tullett Prebon plc v BGC Brokers [2009] EWHC 819 (QB), Aon Ltd v JLT Reinsurance Brokers Ltd [2010] IRLR 600, Landmark Brickwork v Sutcliffe [2011] IRLR 976, Le Puy v Potter [2015] IRLR 554, Corbiere Ltd v Xu [2018] EWHC 112 (Ch). 15.193  So, the court often grants orders requiring a respondent to provide the following types of information in an affidavit: •

Where delivery up or disclosure has been ordered, verification of compliance with the terms of the order.

•

Identifying data storage devices, email accounts and online storage accounts where confidential information and evidence may be located, for the purpose of facilitating an application for forensic examination.

•

Identifying were the claimant’s confidential information is, or has been, located, and any copies made.

•

Identifying to whom the applicant’s confidential information or property has been given. The purpose is to assist the claimant in protecting its information and property, so that, for example the claimant can determine whether further respondents need to be added to an application for delivery up.

15.194 In M & E Global (Staffing) Solutions Ltd & Anr v Mr Russell Tudge & Ors [2016] EWHC 597 (QB), the ex-employer succeeded in its application for an order seeking ‘an affidavit confirming delivery up/deletion and providing information about the use that has been made of M & E’s confidential information, including disclosure to and use by third parties’. The judge commented that the affidavit order followed naturally from the orders for delivery up of confidential information held by the defendant: such orders ‘for the provision of information on affidavit as to the use to which the information has been put are properly ancillary to the grant of an order for delivery up of confidential information’. In Corbiere Ltd v Xu [2018] EWHC 112 (Ch) Zacaroli J made an order requiring the defendant to disclose, among other things, the location of confidential information he had accessed and copied, what became of it and the names of those 999

15.195  Specific interim remedies

who may have it in their possession. At paragraph 22 the Judge said that the court has a wide power under CPR 25.1 to order disclosure prior to trial, in particular in support of an injunction restraining the use of confidential information, or to enable appropriate steps to preserve property which may be ordered to be delivered up at trial, or to identify third parties to whom confidential information has been passed and against whom proceedings might be brought. In the unusual circumstances of the case he also made an order under section 37 Senior Courts Act 1981 that the defendant, a Chinese national, surrender his passport until he had complied with the disclosure application. 15.195  For further commentary on applications for early provision of witness statements or disclosure of evidence, see 14.133–14.139.

6. SEARCH ORDERS 15.196  The search order is a powerful weapon in the hands of the ex-employer where he has good reason to believe that the ex-employee has documents which show wrongdoing on his part, such as the conversion of documents or misuse of confidential information, and that the conduct of the ex-employee shows that there is a real possibility that he might destroy them before a hearing at which both parties will be present and that the damage, potential or actual, will be very serious for the ex-employer. For a fuller exposition reference should be made to the White Book, commentary to CPR 25.1 and Vol 2 Section C 15-89 and Gee on Commercial Injunctions (6th edn, 2016).

6(a)  Nature of the order 15.197  This type of order, first sanctioned by the Court of Appeal in the case of Anton Piller KG v Manufacturing Processes Ltd [1976] Ch 55, is now on a statutory footing, set out in section 7 Civil Procedure Act 1997. The power of the court to make such an order is expressly referred to at CPR 25.1(1)(h). The order: •

Empowers the applicant to enter the respondent’s premises and search for and seize documents and other articles; while it is not a search warrant (per Lord Denning MR in Anton Piller at page 60) in the sense that it does not permit the use of force, nonetheless, since the respondent risks punishment for contempt if he does not submit to the order, its effect is often similar: Thermax Ltd v Schott Industrial Glass Ltd [1981] FSR 289 at page 291 per Browne-Wilkinson J.

•

Is essentially mandatory, requiring the respondent immediately to disclose the whereabouts of and to deliver up documents and other goods, and typically includes a number of different orders, including other mandatory orders.

•

Will almost always be made in the absence of the respondent.

1000

Search orders 15.199

6(b)  Usual relief – standard form of search order 15.198  The particular requirements pertaining to search orders are dealt with in 25PD.7.1. A standard form of search order is annexed to CPR PD 25A and is reproduced in the Appendix to this Chapter, including footnotes taken from the adapted form of order found in the Commercial Court Guide. The standard form is changed from time to time, so the Ministry of Justice website should be checked before using the draft: https://www.justice.gov.uk/courts/procedurerules/civil/rules/part25/pd_part25a. The advocate should disclose to the court any material deviations from the standard form in the draft order presented to the court: Memory Corporation plc v Sidhu [2000] 1 WLR 1443 (CA). Any material deviation should be shown in the draft by redline or highlighting, and the skeleton argument should draw attention to the deviations and explain the reasons for them. A typical order may include the following: •

Prohibitory injunctions restraining unlawful acts such as breaches of contract (eg breaches of restrictive covenants in employment contracts) and of confidence (including springboard injunctions); breaches of copyright and torts (eg passing off and procurement of breaches of contract).

•

A  prohibitory injunction restraining the respondent from warning third parties of the grant of the search order; this is important where it is intended to search different premises, to prevent persons at other premises still to be searched from being tipped off – although it is often wise to search as many as possible of the premises simultaneously.

•

An order directing the respondent to permit the search of their premises (including vehicles) and to reveal the whereabouts of items listed in the order (whether at the premises named in the order or other premises) and authorising the applicant to remove or copy these items.

•

An order (known as a ‘Norwich Pharmacal’ order: Norwich Pharmacal Co v Customs and Excise Commissioners [1974] AC 133) requiring immediate disclosure of the names and addresses of third parties ‘mixed up’ in the alleged wrongful activities of the respondent (eg as customers or suppliers) in order to establish causes of action against third parties: EMI  Ltd v Sarwar and Haidar [1977]  FSR  146 (order for immediate disclosure of names and addresses of suppliers of infringing articles and information and forthwith to deliver up all relevant documents relating thereto) and Gates v Swift [1981] FSR 57 (disclosure of names and addresses of those to whom the respondent had supplied infringing articles or information). Provision may be made for the disclosure of names and addresses of customers and suppliers, but in view of the potential danger to a respondent’s business, this should not be automatically granted: see Gee, 17.023–17.027.

15.199  Paragraphs 16 and 17 of the standard form of search order accordingly provide that the respondent must immediately hand over to the applicant’s solicitors any of the listed items, which are in his possession or under his control, save for any computer or hard disk integral to any computer. Any items the subject of 1001

15.200  Specific interim remedies

a dispute as to whether they are listed items must immediately be handed over to the supervising solicitor (see 15.215) for safe keeping pending resolution of the dispute or further order of the court. Further, the respondent must immediately give the search party effective access to the computers on the premises, with all necessary passwords, to enable the computers to be searched. If they contain any listed items the respondent must cause the listed items to be displayed so that they can be read and copied. The respondent must provide the applicant’s solicitors with copies of all listed items contained in the computers. Paragraph 18 of the standard order provides that the respondent must immediately inform the applicant’s solicitors (in the presence of the supervising solicitor) so far as he is aware: (a) where all the listed items are; (b) the name and address of everyone who has supplied him, or offered to supply him, with listed items; (c) the name and address of everyone to whom he has supplied, or offered to supply, listed items; and (d) full details of the dates and quantities of every such supply and offer. Paragraph 19 of the standard order provides that within a stated number of working days after being served with the order the respondent must swear and serve an affidavit setting out the information referred to in paragraph 18. Paragraph 21 of the standard order provides that until 4.30pm on the return date the respondent must not destroy, tamper with, cancel or part with possession, power, custody or control of the listed items otherwise than in accordance with the terms of the order. 15.200  The court is able to order delivery up by the respondent of his passport in order to ensure compliance with a search order: Bayer AG  v Winter [1986] 1 WLR 497 (CA) (applied in Robinson v Robinson (15 October 2003, unreported (ChD)). The Court of Appeal has observed that ‘orders for the surrender of passports (even if once novel, see Bayer v Winter), and even in the absence of any contempt, are not unfamiliar’ (JSC BTA Bank v Mukhtar Ablyazov [2013] 1 WLR 1331, paragraph 171). The power to make a passport order can also be exercised post-judgment (see Lexi Holdings Plc v Luqman [2008] EWHC 2908).

6(c)  Requirements for search order 15.201  The search order is an exceptional remedy (described by Donaldson LJ in Bank Mellat v Nikpour [1985] FSR 87 as a ‘nuclear weapon of the law’), such that the applicant is required (see judgment of Ormrod LJ in Anton Piller KG v Manufacturing Processes Ltd [1976] Ch 55 at page 62 as applied in Indicii Salus Limited v Chandrasekaran [2007] EWHC 406 (Ch) to show: •

An extremely strong prima facie case.

•

That the damage, potential or actual, will be very serious for the applicant.

•

By clear evidence, that the respondent has in his possession incriminating documents or things.

•

That there is a real possibility that the respondent might destroy such material before a hearing at which both parties will be present. The fact that the respondent is operating openly or is a respectable company may be a reason for refusing an order: Booker McConnell plc v Plascow [1985] RPC 425;

1002

Search orders 15.204

Systematica Ltd v London Computer Centre Ltd [1983]  FSR  313; but in Yousif v Salama [1980] 3 All ER 405 evidence of a forgery of a cheque was held to be enough: see EMI Ltd v Pandit [1975] 1 WLR 302. •

That the harm likely to be caused to the respondent in his business affairs must not be out of proportion to the legitimate object of the order (see Indicii at paragraph 11).

15.202 In Dunlop Holdings Ltd v Staravia Ltd [1982] Comm LR 3, when discussing the evidence an applicant must produce, Oliver LJ held as follows: ‘It has certainly become customary to infer the probability of disappearance or destruction of evidence where it is clearly established on the evidence before the Court that the respondent is engaged in a nefarious activity which renders it likely that he is an untrustworthy person. It is seldom that one can get cogent or actual evidence of a threat to destroy material or documents, so it is necessary for it to be inferred from the evidence which is before the Court.’

This passage was followed by Hoffmann J in Lock International plc v Beswick [1989] 3 All ER  373 at page 1280G and Warren J  in Indicii Salus Limited v Chandrasekaran [2007] EWHC 406 at paragraph 15. In view of the exceptional nature of this relief, evidence must be provided by the applicant on affidavit, not merely by witness statement (CPR PD 25A, paragraph 3.1).

6(d)  Limits on the use of search orders: proportionality 15.203  As set out above, one of the principal aspects of the overriding objective in litigation is that cases be dealt with proportionately (CPR 1.1). Search orders constitute a severe inroad into the privacy of the individual and the courts have become increasingly unwilling to grant them. Thus, while these orders could once be obtained with relative ease (particularly in the Queen’s Bench Division), because of abuses which have occurred in the obtaining and service of these orders, there is now a judicial reluctance to grant them at all. The court will normally require to be persuaded that some lesser order, such as a mandatory order for delivery up, is not likely to provide the applicant with sufficient protection – without the concomitant invasion of the privacy of the respondent. While this may be easy to demonstrate in a large-scale commercial fraud or video piracy case, the position may be different where the applicant is an ex-employer seeking to recover documents from an exemployee: the fact that there is evidence to suggest that the ex-employee has acted dishonestly may be insufficient to persuade a judge that the respondent is the type of person who, if served with a mandatory order for immediate delivery up, will destroy the documents or other articles, the subject-matter of the order. 15.204  This judicial reticence is illustrated by the decision in Lock International plc v Beswick [1989] 3 All ER 373. Lock obtained a search order against eight former employees who commenced a rival business manufacturing and marketing metal detectors. It is worthwhile quoting at some length from the judgment of Hoffmann J (at page 383h): 1003

15.205  Specific interim remedies

‘[Search] orders are frequently sought in actions against former employees who have joined competitors or started competing businesses of their own. I have learnt to approach such applications with a certain initial scepticism. There is a strong incentive for employers to launch a pre-emptive strike to crush the un-hatched competition in the egg by causing severe strains on the financial and management resources of the defendants or even a withdrawal of their financial support. Whether the [claimant] has a good case or not, the execution of the [search] order may leave the defendants without the will or the money to pursue the action to trial in order to enforce the cross-undertaking as to damages. Some employers regard competition from former employees as presumptive evidence of dishonesty. Many have great difficulty in understanding the distinction between genuine trade secrets and skill and knowledge which the employee may take away with him. Even in cases in which the [claimant] has strong evidence that an employee has taken what is undoubtedly specific confidential information, such as a list of customers, the court must employ a graduated response. To borrow a useful concept from the jurisprudence of the European Community, there must be proportionality between the perceived threat to the claimant’s rights and the remedy granted. The fact that there is overwhelming evidence that the respondent has behaved wrongfully in his commercial relationships does not necessarily justify [a search] order. People whose commercial morality allows them to take a list of customers with whom they were in contact while employed will not necessarily disobey an order of the court requiring them to deliver it up. Not everyone who is misusing confidential information will destroy documents in the face of a court order requiring him to preserve them. In many cases it will therefore be sufficient to make an order for delivery up of the [applicant’s] documents to his solicitor or, in cases in which the documents belong to the defendant but may provide evidence against him, an order that he preserve the documents pending further order, or allow the [claimant’s] solicitor to make copies. The more intrusive orders allowing searches of premises or vehicles require a careful balancing of, on the one hand the [claimant’s] right to recover his property or to preserve important evidence against, on the other hand, violation of the privacy of a defendant who has had no opportunity to put his side of the case. It is not merely that the defendant may be innocent. The making of an intrusive order ex parte even against a guilty defendant is contrary to normal principles of justice and can only be done when there is a paramount need to prevent a denial of justice to the [claimant]. The absolute extremity of the court’s powers is to permit a search of a defendant’s dwelling house, with the humiliation and family distress which that frequently involves.’

In Lock because the evidence disclosed did not satisfy the requirements stated by Ormrod LJ (see 15.202), and because of material non-disclosure in the supporting affidavits of the claimant, the search order was discharged.

6(e)  Safeguards where the search order is granted 15.205  Due to the invasive nature of a search order, a number of features provide safeguards for defendants: We consider those safeguards in detail below but in summary they are as follows: 1004

Search orders 15.206

•

As the application for the order will be without notice, the applicant must comply with the duty of full and frank disclosure that applies to all without notice applications (15.206–15.211).

•

When the order is executed an independent supervising solicitor must attend. The supervising solicitor has a duty to the court to explain to the respondent the effect of the order (15.215–15.217).

•

The respondent has a right to delay the search in order to seek legal advice (15.218).

•

Unless the court orders otherwise, execution of a search order should only be commenced between 9.30am and 5.30pm on a weekday (15.219).

•

All items removed in the search must be listed (15.221).

•

The order places limitations on the extent of the search, and on the removal and use of documents obtained in the search (15.224–15.227, 15.242– 15.244).

•

As with any injunction, the applicant must give a cross-undertaking in damages. The cross-undertaking extends not only to losses caused by the order being wrongly granted, but to breaches of the order as to the execution of the search. A breach of the terms as to the search may also be a contempt of court, and/or may lead to the order being set aside (15.219 and 15.230).

•

A respondent has the right to seek to set the order aside (15.230).

•

In certain circumstances a respondent can rely on the privilege against selfincrimination to withhold documents (15.231–15.244).

6(e)(i)  Full and frank disclosure 15.206 In Indicii Salus Limited v Chandrasekaran [2007] EWHC 406 Warren J  summarised the relevant principles relating to full and frank disclosure. Referring to the judgment of Ralph Gibson in Brink’s MAT Ltd v Elcombe [1988] 1 WLR 1350 (CA) at pages 1356ff, he summarised the principles as follows: •

The applicant must make full and fair disclosure of all facts that are material for the judge to know in dealing with the application.

•

Materiality is to be decided by the court, not by the applicant or his legal advisers.

•

Proper inquiries must be made by the applicant before making the application to ensure that he is able to present all material facts. The duty therefore applies not only to material facts known to the applicant, but also to any additional facts which he would have known if he had made such enquiries.

•

The extent of the inquiries which will be held to be necessary depends on all the circumstances of the case, including: 1005

15.207  Specific interim remedies

(i) the nature of the case when the applicant makes the application; (ii) the order being sought and its probable effect on the respondent; and (iii) the degree of legitimate urgency and the time available to make the inquiries. •

If material non-disclosure is established, the court will be ‘astute to ensure’ that an applicant who obtains an order without notice without making full disclosure is deprived of the advantage he may have derived as a result of his breach of duty.

•

Whether the non-disclosure is sufficiently material to justify or require the immediate discharge of the order without examination of the merits depends on the importance of the fact or facts not disclosed to the issues decided by the judge on the application.

•

The answer to the question whether the non-disclosure was innocent is, therefore, an important consideration, but it is not decisive.

•

An injunction will not be discharged for every omission.

•

The court has a discretion, despite proof of material non-disclosure which justifies or requires the immediate discharge of the without notice order, nevertheless to continue the order or make a new order on terms.

15.207  Therefore, the duty on the part of the applicant applying for a search order without notice to the respondent to make full and frank disclosure is an important safeguard for the respondent. This duty includes an obligation to make sufficient enquiry: Jeffrey Rogers Knitwear Productions Ltd v Vinola (Knitwear) Manufacturing Co [1985]  FSR  184; Brink’s MAT  Ltd v Elcombe [1988] 1 WLR 1350; Sal Oppenheim J R & Cie Kgaa v Rotherwood (UK) Ltd (19 April 1996, unreported) (CA); and see Bank Mellat v Nikpour [1985]  FSR  87 (CA). The duty further requires the applicant to present the evidence upon which he relies fairly: Marc Rich v Krasner (CA) (15  January 1999, unreported); Gadget Shop v Bug.com [2001]  FSR  383 and Jain v Trent Strategic Health Authority [2008]  QB  246. Failure to comply with this duty will, if material, normally result in discharge of the order and an enquiry as to damages on the cross-undertaking. The court may discharge the order even in circumstances where the failure was inadvertent: Wardle Fabrics v Myristis Ltd [1984] FSR 263 and Thermax Ltd v Schott Industrial Glass Ltd [1981] FSR 289 (in both cases the mandatory part of the order was discharged). These cases should be compared with Yardley & Co v Higson [1984] FSR 304 and Brink’s MAT  Ltd v Elcombe, in which the court, having discharged the original order on the grounds of material (but innocent) non-disclosure, granted a further application for an injunction. The matter is essentially one for the court’s discretion, but the fact that the non-disclosure was innocent and that an injunction could properly have been granted even had the facts been disclosed are important factors: Lloyds Bowmaker Ltd v Britannia Arrow Holdings plc [1988] 1 WLR  1337 (CA); Behbehani v Salem [1989] 1 WLR  723 (CA). However, in some case the court will continue the order despite there having been material non-disclosure (see Elvee Ltd v Taylor [2002]  FSR  738), even 1006

Search orders 15.208

where the breach is not innocent: Wells v Chave [2014] EWHC 2444, see also the freezing order cases of PJSC Vseukrainskyi Aktsionernyi Bank v Maksimov [2013] EWHC 3203. As to legal and procedural aspects of the case in Memory Corporation plc v Sidhu [2000] 1 WLR 1443 (CA), Mummery LJ stated: ‘It cannot be emphasised too strongly that at an urgent without notice hearing for a freezing order, as well as for a search order or any other form of interim injunction, there is a high duty to make full, fair and accurate disclosure of material information to the court and to draw the court’s attention to significant factual, legal and procedural aspects of the case. It is the particular duty of the advocate to see that the correct legal procedures and forms are used; that a w ­ ritten skeleton argument and a properly drafted order are prepared by him p­ ersonally and lodged with the court before the oral hearing; and that at the hearing the court’s attention is drawn by him to unusual features of the evidence adduced, to the applicable law and to the formalities and procedure to be observed.’

15.208 In Arena Corporation Limited v Schroeder [2003]  EWHC  1089 (Ch), after extensively reviewing the above authorities, Alan Boyle QC (sitting as a deputy judge of the Chancery Division), set out the following principles regarding a party’s failure to provide full and frank disclosure (paragraph 213): ‘(1) If the court finds that there have been breaches of the duty of full and fair disclosure on the ex parte application, the general rule is that it should discharge the order obtained in breach and refuse to renew the order until trial. (2)

Notwithstanding that general rule, the court has jurisdiction to continue or re-grant the order.

(3)

That jurisdiction should be exercised sparingly, and should take account of the need to protect the administration of justice and uphold the public interest in requiring full and fair disclosure.

(4) The court should assess the degree and extent of the culpability with regard to non-disclosure. It is relevant that the breach was innocent, but there is no general rule that an innocent breach will not attract the sanction of discharge of the order. Equally, there is no general rule that a deliberate breach will attract that sanction. (5)

The court should assess the importance and significance to the outcome of the application for an injunction of the matters which were not disclosed to the court. In making this assessment, the fact that the judge might have made the order anyway is of little if any importance.

(6)

The court can weigh the merits of the plaintiff’s claim, but should not conduct a simple balancing exercise in which the strength of the plaintiff’s case is allowed to undermine the policy objective of the principle.

(7)

The application of the principle should not be carried to extreme lengths or be allowed to become the instrument of injustice.

(8) The jurisdiction is penal in nature and the court should therefore have regard to the proportionality between the punishment and the offence. (9)

There are no hard and fast rules as to whether the discretion to continue or re-grant the order should be exercised, and the court should take into account all relevant circumstances.’ 1007

15.209  Specific interim remedies

15.209  The applicant should not use the search order application as part of a ‘fishing expedition’ to ascertain what causes of action he may have against the respondent: Hytrac Conveyors Ltd v Conveyors International Ltd [1983] 1 WLR 44 – and the duty of full and frank disclosure helps to ensure that this does not happen. 15.210  Examples of cases where the search order was set aside for non-disclosure (together with the matters not disclosed) are: Lock International plc v Beswick [1989] 3 All ER 373 (true financial position of applicant and therefore value to the respondent of the cross-undertaking); Thermax Ltd v Schott Industrial Glass Ltd [1981]  FSR  289 (inter alia, that the respondent was not simply a creature of other respondents, former directors of the applicant, and the existence of secrets of the respondents at their premises); Manor Electronics Ltd v Dickson [1988] RPC 618 (the true financial position of the applicant meant that the crossundertaking was worthless); Columbia Picture Industries Inc v Robinson [1987] Ch 38 (inter alia, misleading impression that the respondent’s business was being carried out clandestinely). 6(e)(ii) Full and frank disclosure where applicant does not wish to reveal its trade secrets 15.211  In a case involving trade secrets there may be a conflict between the duty of disclosure and the need not to divulge (on affidavit) trade secrets to the respondent. In WEA Records Ltd v Vision’s Channel 4 Ltd [1983] 1 WLR 721 the judge had on the application without notice been given information which the applicants alleged was confidential and which was not incorporated into the affidavits in support of the motion. Sir John Donaldson MR said at pages 724D–E: ‘… I cannot at the moment visualise any circumstances in which it would be right to give a judge information in an … application [made without notice] which cannot at a later stage be revealed to the party affected by the result of the application’,

and at page 726G: ‘… there was no possible justification for this information being revealed to the defendants’ counsel but not to their solicitors. Solicitors are officers of the court and are to be trusted to the same extent as counsel.’

15.212 This view was reiterated in Helitune Ltd v Stewart Hughes Ltd [1994]  FSR  422, where it was held that disclosure of confidential exhibits to parties could be limited to the respondent’s legal advisors and an independent expert. Note also that the court has power to grant an injunction restraining the use of confidential affidavits: Lubrizol Corpn v Esso Petroleum Co Ltd (No 2) [1993] FSR 53. 15.213 A  practical solution is provided by CPR PD  25A, paragraph  7.4 (2), which provides that confidential exhibits to an affidavit need not be served but must be made available for inspection by the respondent in the presence of the 1008

Search orders 15.216

applicant’s solicitors during the search. Confidential exhibits may be retained by the respondent’s solicitors on their undertaking: (a) not to permit the respondent to see the exhibits, save in their presence; and (b) not to make or take away any note or record of them. It is suggested that each such document should be marked as confidential and numbered. 15.214 It should be noted that restrictions of this nature are generally only interim measures. In Al Rawi v Security Service [2012] 1 AC 531 (paragraph 64) Lord Dyson made the following observation: ‘It is commonplace to deal with the issue of disclosure by establishing ‘confidentiality rings’ of persons who may see certain confidential material which is withheld from one or more of the parties to the litigation at least in its initial stages. Such claims by their very nature raise special problems which require exceptional solutions. I  am not aware of a case in which a court has approved a trial of such a case proceeding in circumstances where one party was denied access to evidence which was being relied on at the trial by the other party.’

6(e)(iii)  Supervising solicitor 15.215  CPR PD 25A, paragraph 7 requires that: (a) the order and evidence in support should be personally served, and its execution should be supervised by a solicitor other than a member of the firm of solicitors acting for the applicant in the action; the supervising solicitor should be accompanied only by the persons mentioned in the order; (b) the supervising solicitor should be a solicitor experienced in the operation of search orders; (c) he should prepare a written report on what happened when the order was executed; (d) as soon as the report is received the applicant’s solicitor should serve a copy of the report on the respondent – and file a copy of the report with the court – it will be considered at the ‘return date’ hearing when both parties are present; and (e) the supervising solicitor must make a list of all material removed from the respondent’s premises and supply a copy of such list to the respondent: see 15.221. As to (b), the applicant must include in his evidence, in support of the application for the search order, the name and other details relating to the supervising solicitor including details of his experience. 15.216 The applicant is responsible for paying the costs of the supervising solicitor without prejudice to a decision by the court on whether ultimately those costs should be borne in whole or in part by the respondent. 1009

15.217  Specific interim remedies

6(e)(iv)  Explanation of the order/provision of documents to respondent 15.217  CPR PD 25A, paragraph 7(4) (see paragraph 9 of the standard form of search order) requires the supervising solicitor to explain the terms and effect of the order fairly and in everyday language to the respondent or other persons served with the order, and to inform the respondent of his right to seek legal advice and apply to vary or discharge the order – and that he may be entitled to avail himself of legal professional privilege and the privilege against self-incrimination: see Booker McConnell plc v Plascow [1985] RPC 425. In VDU Installations Ltd v Integrated Computer Systems and Cybernetics Ltd [1989] FSR 378 Knox J held that a negligent failure by an applicant’s solicitor to explain the order accurately constituted a contempt of court. Presumably the same would apply to a supervising solicitor. Under Schedule D of the standard order the applicant’s solicitors undertake to provide to the supervising solicitor for service on the respondent: (a) a service copy of the order; (b) the claim form (with respondent‘s response pack) or, if not issued, the draft produced to the court; (c) an application for hearing on the return date; (d) copies of the affidavits or draft affidavits and exhibits capable of being copied containing the evidence relied upon by the applicant; (e) a note of any allegation of fact made orally to the court where such allegation is not contained in the affidavits or draft affidavits read by the judge; and (f) a copy of the skeleton argument produced to the court by the applicant’s counsel/ solicitors. The applicant’s solicitors also undertake to answer at once to the best of their ability any question whether a particular item is a listed item. 6(e)(v)  Right of the respondent to take legal advice 15.218  The standard form of search order set out in the White Book 2017, Civil Procedure Forms Volume contains a provision (paragraph 10) that before complying with the order, the respondent is entitled to seek legal advice and ask the court to vary or discharge the order. Whilst doing so, he may ask the supervising solicitor to delay starting the search for up to two hours or such other longer period as the supervising solicitor may permit. However, the respondent must: (a) comply with the terms of paragraph 27 of the standard order (ie as to variation or discharge); (b) not disturb or remove any listed items; and (c) permit the supervising solicitor to enter, but not start to search. These are important safeguards in view of the fact that the respondent will not have been present at the hearing of the application and the jeopardy for the respondent who does not comply properly with the order. Search orders are long and complicated, such that many respondents may not fully understand the details of the order, even as explained by the supervising solicitor. 6(e)(vi)  Requirements regarding the search party 15.219  Paragraph 6 of the standard form of search order requires the respondent to permit the supervising solicitor, the named solicitor/s in the firm of the applicant’s solicitors and up to a given number of other persons (stating their identity or capacity) accompanying them, to enter the premises mentioned in the 1010

Search orders 15.220

order and any other premises of the respondent disclosed by it under the order and any vehicles under the respondent’s control on or around the premises so that they can search for, inspect, photograph or photocopy, and deliver into the safekeeping of the applicant’s solicitors all the documents and articles which are listed in the order. Given that it is likely that relevant documents will be stored on computers or other electronic devices, it is advisable that a forensic IT expert forms part of the search party, so that he may inspect and image relevant computers and devices. The credentials of the IT expert will need to be addressed in the evidence in support of the application, and he or she will need to give undertakings to the court in respect of the preservation of material imaged during the search. The order permits entry between 9.30am and 5.30pm Monday to Friday unless the court orders otherwise (CPR PD  25A, paragraph  7.4(6)). However, once the search is started, it continues until the search is complete. The significance of this requirement was demonstrated by Universal Thermosensors Ltd v Hibben [1992] 1 WLR 840, in which the order was served by a man at 7.15am on the respondent’s wife when she was at home with only her children. At that time she could not obtain legal advice. A woman should not be subjected to the alarm of being confronted, without warning, by a solitary man, with no recognisable means of identification and claiming an entitlement to enter her home and telling her that she was not allowed to get in touch with anyone (except a lawyer) about what was happening. Where the supervising solicitor is male and the order is likely to be served on an unaccompanied woman, at least one person named in the order must be a woman and must accompany the supervising solicitor (CPR PD 25A, paragraph 7.4(5)). 6(e)(vii)  General safeguards regarding the manner of execution of the search order 15.220 It is vital that the search order is served and executed precisely in accordance with its terms. Failure to comply with the provisions may result in the order being set aside and the cross-undertaking as to damages being enforced against the applicant. Non-compliance with the terms may amount to contempt of court on the part of the applicant’s solicitors and/or the applicant. Columbia Picture Industries Inc v Robinson [1987] Ch 38 was a case of serious abuse in the service of a search order. Scott J held that the applicants and their solicitors had acted oppressively and in abuse of their powers in executing the order by seizing items not covered by the order, retaining items not covered by the order, and in losing some of the items taken, and also that their conduct was improper in that they had obtained the order with a view to putting the respondent out of business. Scott J also made it clear (at page 77) that if in the course of execution further documents came to light which were not covered by the order, they could not be taken unless the respondent’s solicitors were present to confirm and ensure that the consent given was a free and informed one: see also VDU Installations Ltd v Integrated Computer Systems and Cybernetics Ltd [1989] FSR 378. A police search should not be carried out simultaneously with the execution of a search order: ITC  Film Distributors Ltd v Video Exchange Ltd (No 2) (1982) 126 Sol Jo 672 (CA) – now embodied in the standard form of search order (paragraph 8). 1011

15.221  Specific interim remedies

6(e)(viii)  List of items removed 15.221  A list of all material removed must be made by the supervising solicitor and a copy supplied to the respondent. Nothing may be removed until the respondent has had a reasonable opportunity to check the list: CPR PD  25A, paragraph 7.5. 6(e)(ix)  Short duration of ‘gagging’ orders 15.222 Any order restraining the persons served from informing others of the existence of the order should be for a very limited period – Universal Thermosensors Ltd v Hibben [1992] 1 WLR 840. Paragraph 20 of the standard form of search order limits this provision until 4.30pm on the return date or further order of the court.) 6(e)(x)  Compliance by director/responsible person in control of premises 15.223  Paragraph  5 of the standard order states that the order must be complied with by: (a) the respondent; (b) any director, officer, partner or responsible employee of the respondent; and (c) if the respondent is an individual, any other person having responsible control of the premises to be searched. 6(e)(xi) Limitations – not to search for confidential documents/use recovered items/ inform others of proceedings 15.224  Arrangements should be made so that personnel of the person who has obtained the order do not search through the documents of a competitor company: Universal Thermosensors. In Lock International plc v Beswick [1989] 3 All ER 373, because the judge who originally granted the search order was conscious that he was allowing the applicant to see confidential information of a competitor, he extracted a written undertaking from each officer of the employee not to use the information for purposes other than the prosecution of the applicant’s action. Hoffmann J was of the view (at page 386d) that in such circumstances it would have been sufficient to allow the applicant’s solicitors to remove and make copies for their own retention, pending an application by the applicant inter partes for leave to inspect them: cf Centri-Spray Corporation v CERA  International Ltd [1979]  FSR  175. The standard form contains an undertaking not without permission of the court to use any information or documents obtained as a result of carrying out the order nor until after the return date inform anyone else of the proceedings except for the purposes of those proceedings (including adding further respondents) or commencing civil proceedings in relation to the same or related subject matter to those proceedings (Schedule C, paragraph (4)). 6(e)(xii)  Duty as to items found 15.225  CPR PD 25A, paragraph 7 requires that: 1012

Search orders 15.227

(a) No material shall be removed unless clearly covered by the terms of the order. (b) The premises must not be searched and no items shall be removed from them except in the presence of the respondent or a person who appears to be a responsible employee of the respondent. (c) Where copies of documents are sought, the documents should be retained for no more than two days before return to the owner. (d) Where material in dispute is removed pending trial, the applicant’s solicitors should place it in the custody of the respondent’s solicitors on their undertaking to retain it in safekeeping and to produce it to the court when required. (e) In appropriate cases the applicant should insure the material retained in the respondent’s solicitors’ custody. (f) The supervising solicitor must make a list of all material removed from the premises and supply a copy of the list to the respondent. (g) No material shall be removed from the premises until the respondent has had reasonable time to check the list. (h) If any of the listed items is stored on a computer or other electronic device, the respondent must immediately give the applicant’s solicitors effective access to the computers/other electronic device, with all necessary passwords, to enable them to be searched, and cause the listed items to be copied or printed out. A  forensic IT expert will need to form part of the search party, in order to inspect devices and carry out any necessary imaging. (i) The applicant must take all reasonable steps to ensure that no damage is done to any computer or data. (j) The applicant and his representatives may not themselves search the respondent’s computers unless they have sufficient expertise to do so without damaging the respondent’s system. 15.226 Where the supervising solicitor is satisfied that full compliance with paragraphs (g) and (h) above is impracticable, he may permit the search to proceed and items to be removed without compliance with the impracticable requirements. 15.227  Under Schedule D of the standard order and (except where documents are to be kept by the supervising solicitor) the applicant’s solicitors undertake to retain in their own safe keeping all items obtained as a result of the order until the court directs otherwise. Further, the applicant’s solicitors undertake to return the originals of all documents obtained as a result of the order (except original documents which belong to the applicant) as soon as possible and ‘in any event within [two] working days of their removal’. 1013

15.228  Specific interim remedies

6(e)(xiii)  Cross-undertaking as to damages 15.228  Schedule C  of the standard order contains a cross-undertaking by the applicant to the effect that if the court later finds that the order or carrying it out has caused loss to the respondent, and decides that the respondent should be compensated for that loss, the applicant will comply with any order the court may make. Further, if the carrying out of the order has been in breach of the terms of the order or otherwise in a manner inconsistent with the applicant’s solicitors’ duties as officers of the court, the applicant will comply with any order for damages the court may make. Damages awarded on the cross-undertaking can in search order cases be very high indeed. It is for the applicant’s solicitor to explain carefully to the applicant the risks involved. The applicant should produce evidence of his ability to pay under the cross-undertaking: Vapormatic Co Ltd v Sparex Ltd [1976] 1 WLR 93. 6(e)(xiv)  Undertaking to issue claim form 15.229  If the claim form is not already issued at the time of the application, the order will include directions requiring a claim to be commenced pursuant to CPR 25.2(3) and PD 25A, paragraph 5.1(5). These directions are included in the standard form order. 6(e)(xv)  Right of the respondent/others to apply to vary/discharge order 15.230  The standard order (paragraph 27) provides that anyone served with or notified of the order may apply to the court at any time to vary or discharge the order (or so much of it as affects that person), but they must first inform the applicant’s solicitors. If any evidence is to be relied upon in support of the application, the substance of it must be communicated in writing to the applicant’s solicitors in advance. 6(e)(xvi)  Privilege against self-incrimination 15.231  This is the common law privilege which enables a respondent in civil proceedings to refuse to answer any question or produce any document or thing if to do so would tend to expose him to criminal proceedings: see section 14 Civil Evidence Act 1968. (‘Criminal proceedings’ include for this purpose proceedings for contempt of court: Bhimji v Chatwani (No 2) [1992] 1 WLR 1158.) This privilege was considered by the House of Lords in Istel Ltd v Tully [1993] AC 45. Where assurances are obtained from prosecuting authorities that no prosecution will take place, the privilege may be lost (Istel). However, there must be actual notice to and assurances from the authorities, not merely an order that information disclosed not be revealed to the authorities: United Norwest Co-operatives v Johnstone [1994] TLR 104 (CA). It is not adequate protection for a respondent to hand documents in respect of which privilege is claimed to the supervising solicitor: Den Norske Bank ASA v Antonatos [1998] 3 WLR 711 (CA). However, 1014

Search orders 15.232

the privilege against self-incrimination does not extend to independent matters coming to light in the course of executing a search order: see 15.236. 15.232  Parliament has in piecemeal fashion whittled away the privilege against self-incrimination, most significantly (in the intellectual property field) by section 72 Senior Courts Act 1981, which provides: ‘(1) In any proceedings to which this subsection applies a person shall not be excused, by reason that to do so would tend to expose that person, or his or her spouse, to proceedings for a related offence or for the recovery of a related penalty: (a) from answering any question put to that person in the first-mentioned proceedings; or (b) from complying with any order made in those proceedings. (2) Subsection (1) applies to the following civil proceedings in the High Court, namely: (a) proceedings for infringement of rights pertaining to any intellectual property or for passing off; (b) proceedings brought to obtain disclosure of information relating to any infringement of such rights or to any passing off; and (c) proceedings brought to prevent any apprehended infringement of such rights or any apprehended passing off. (3)

Subject to subsection (4) no statement or admission made by a person: (a) in answering a question put to him in any proceedings to which subsection (1) applies; or (b) in complying with any order made in any such proceedings, shall, in proceedings for any related offence or for the recovery of any related penalty, be admissible in evidence against that person or (unless they married or became civil partners after the making of the statement or admission) against the spouse or civil partner of that person.

(4)

Nothing in subsection (3) shall render any statement or admission made by a person as there mentioned inadmissible in evidence against that person in proceedings for perjury or contempt of court.

(5)

In this section— “intellectual property” means any patent, trade mark, copyright, registered design, technical or commercial information or other intellectual property “related offence”, in relation to any proceedings to which subsection (1) applies, means — (a) in the case of proceedings within subsection (2)(a) or (b)— (i) any offence committed by or in the course of the infringement or passing off to which those proceedings relate; or

1015

15.233  Specific interim remedies

(ii) any offence not within sub-paragraph (i) committed in connection with that infringement or passing off, being an offence involving fraud or dishonesty; (b) in the case of proceedings within subsection (2)(c), any offence revealed by the facts on which the plaintiff relies in those proceedings; “related penalty”, in relation to any proceedings to which subsection (1) applies means — (a) in the case of proceedings within subsection (2)(a) or (b), any penalty incurred in respect of anything done or omitted in connection with the infringement or passing off to which those proceedings relate; (b) in the case of proceedings within subsection (2)(c), any penalty incurred in respect of any act or omission revealed by the facts on which the plaintiff relies in those proceedings. (6)

Any reference in this section to civil proceedings in the High Court of any description includes a reference to proceedings on appeal arising out of civil proceedings in the High Court of that description.’

15.233  Further exceptions are to be found in section 31 Theft Act 1968 and section 13 Fraud Act 2006. 15.234  The scheme under these statutory provisions is that in cases covered by these Acts the respondent is deprived of the privilege against incrimination, but is compensated by the fact that any statement made by him which he is thus obliged to make may not be used against him in criminal proceedings. 15.235 The statutory exceptions are usefully summarised in CPR PD  25A, paragraph  7.9 which provides that there is no privilege against ­ self-incrimination in: (1) intellectual property cases in respect of a ‘related offence’ or for the recovery of a ‘related penalty’ as defined in section 72 Senior Courts Act 1981; (2) proceedings for the recovery or administration of any property, for the execution of a trust or for an account of any property or dealings with property, in relation to: (a) an offence under the Theft Act 1968 (see section 31 Theft Act 1968); or (b) an offence under the Fraud Act 2006 (see section 13 Fraud Act 2006) or a related offence within the meaning given by section 13(4) of that Act – that is, conspiracy to defraud or any other offence involving any form of fraudulent conduct or purpose; or (3) proceedings in which a court is hearing an application for an order under Part IV or Part V Children Act 1989 (see section 98 Children Act 1989).

1016

Search orders 15.239

15.236  However, there are many cases which fall outside these statutory exceptions: (see last sentence of CPR PD  25A, paragraph  7.9). Indeed, in cases of fraudulent conspiracies (where the need to obtain the information is greatest) the respondent may be able to invoke the privilege because: •

the case may not concern ‘intellectual property’ or passing off; and/or

•

there is a danger of conspiracy charges falling outside the Theft Act 1968 and the Fraud Act 2006.

15.237 In a trade secrets or confidential information case the question will arise whether the information amounts to ‘commercial information or other intellectual property’ within the meaning of section 72 Senior Courts Act 1981. In Istel Ltd v Tully [1993]  AC  45 Lord Lowry (at page 360H) said that ‘commercial information’ must be information of the same type as the other examples of intellectual property listed in section 72(5), which refers to ‘any patent, trade mark, copyright, registered design, technical or commercial information or other intellectual property’, and therefore the House of Lords rejected the claimant’s submission that the information sought as to the defendant’s dealings with certain assets (to enable the claimant to trace funds) amounted to commercial information within the meaning of section 72(5). However, in Phillips v News Group Newspapers Ltd. [2012] 2  WLR  848, a telephone hacking case, Neuberger MR distinguished Istel: in Istel information about assets had been ‘commercial information’ in the sense that it was about financial matters, but it had not been confidential information. Neuberger MR interpreted ‘commercial information’ in section 72(5) as meaning confidential information of a commercial nature, and ‘other intellectual property’ as being broad enough to cover personal confidential information. The result was that all information of confidential nature fell within the scope of section 72(5), and the ‘hacker’ defendant was precluded by section 72 from relying on privilege against self-incrimination. 15.238  For the privilege to be successfully invoked, there must be a real risk, or increased risk, of prosecution; or the privilege may be invoked on the ground, in respect of any piece of information or evidence, that the prosecuting authority might wish to rely on it as establishing guilt or in determining whether to prosecute: Den Norske Bank ASA v Antonatos [1998] 3 WLR 711. In many cases involving claims of breach of confidence against ex-employees, the risk of criminal proceedings may be remote. It might be thought to be a delicate line to tread for the applicant to persuade the court that the behaviour of the respondent is serious enough to warrant the grant of a search order, but the respondent is not seriously at risk of prosecution outside the Theft Act 1968 or the Fraud Act 2006. However, in practice (outside the realm of large-scale frauds), the court may well regard the behaviour of the respondent as warranting the grant of a search order, but not being significant enough to attract conspiracy charges. 15.239  In civil litigation the invocation by a defendant of the privilege against self-incrimination may bear with it a price – the court may draw negative 1017

15.240  Specific interim remedies

inferences against the defendant: Rank Film Distributors Ltd v Video Information Centre [1980] 2 All ER 273 (CA) at page 292a–b. However, if the court refuses to grant a search order on the basis that the defendant may invoke the privilege, the defendant may get the best of both worlds, ie the protection of the privilege without having to bear the negative consequences of having taken it. Paragraph 11 of the standard form of order provides: ‘Before permitting entry to the premises by any person other than the Supervising Solicitor, the Respondent may, for a short time (not to exceed two hours, unless the Supervising Solicitor agrees to a longer period) gather together any documents he believes may be incriminating or privileged and hand them to the Supervising Solicitor for him to assess whether they are incriminating or privileged as claimed. (a)

If the Supervising Solicitor decides that the Respondent is entitled to withhold production of any of the documents on the ground that they are privileged or incriminating, he will exclude them from the search, record them in a list for inclusion in his report and return them to the Respondent.

(b)

If the Supervising Solicitor believes that the Respondent may be entitled to withhold production of the whole or any part of a document on the ground that it or part of it may be privileged or incriminating, or if the Respondent claims to be entitled to withhold production on those grounds, the Supervising Solicitor will exclude it from the search and retain it in his possession pending further order of the court.’

Paragraph  12 of the standard order provides that if the respondent wishes to take legal advice and gather documents as permitted, he must first inform the supervising solicitor and keep him informed of the steps being taken. 15.240  The privilege against self-incrimination has caused significant debate in circumstances where a respondent to a search order seeks to claim such privilege regarding illegal material which is unrelated to the purposes of the search order in question. In C  plc v P  (Secretary of State for the Home Department intervening) [2006] Ch 549, unlawful images of children were discovered, by those acting for the supervising solicitor, on the hard drive of a computer owned by the respondent. At first instance, Evans-Lombe J held that, but for the Human Rights Act 1998, the privilege against self-incrimination would have acted so as to permit a respondent (in civil proceedings) not only to refuse to answer questions or produce documents, but also to refuse to produce any incriminating article found in the course of a search of premises pursuant to court order. However, the judge found that, since the Human Rights Act, it had become clear that such privilege did not apply in criminal proceedings in relation to ‘independent evidence’ (evidence that came into existence independently of, and usually prior to, any compulsory questioning of the defendant or any application of the court’s compulsory discovery process). As it was illogical for the privilege to be wider in civil proceedings than in criminal proceedings, the learned judge held that the court could, ‘modify’ the common law doctrine so that it complied with the criminal law. He therefore directed that the offending material should be passed to the police authorities. 1018

Search orders 15.243

15.241  However, in C plc v P (Attorney-General intervening) [2008] Ch 1 the Court of Appeal upheld the first instance judgment on different grounds. It held that the privilege against self-incrimination did not extend to independent matters coming to light in the course of executing a proper order of the court. Therefore, although the offensive pictures were required to be disclosed to the supervising solicitor pursuant to the terms of the original order, there was no privilege in the offending material itself. Accordingly, regardless of the effect of the Human Rights Act 1998, there was no privilege in the material and nothing to prohibit such material being disclosed to the police. 6(e)(xvii)  Restrictions on use of information obtained under the search order 15.242  There is authority to the effect that documents obtained as a result of the execution of a search order should only be used for the purposes of the proceedings in which the order had been obtained: Hallmark Cards Inc v Image Arts Ltd [1977]  FSR  150 (CA) at page 154; General Nutrition Ltd v Pattni [1984]  FSR  403; Commissioners of Customs and Excise v AE  Hamlin & Co [1984] 1 WLR 509; EMI Records Ltd v Spillane [1986] 1 WLR 967. On the other hand, in Piver (LT) SARL v S & J Perfume Co Ltd [1987] FSR 159 Walton J held that information disclosed by a private investigator while executing a search order could be passed by him to another of his clients whom he concluded was also being defrauded by the defendant. In Twentieth Century Fox Film Corporation v Tryrare Ltd [1991] FSR 58 Harman J held that the general rule that information disclosed on disclosure may only be used for the purposes of the action in which it was disclosed, save with leave of the court, had nothing to do with information obtained under a search order. These orders have always been intended to enable proceedings to be taken against third parties. 15.243 The true position would appear to be as stated by Knox J  in VDU  Installations Ltd v Integrated Computer Systems and Cybernetics Ltd [1989] FSR 378 at page 395, ie the use to which the information is put should be within the ambit of the purpose for which the court is making the order. One of the purposes of the grant of a search order is to obtain information against other respondents against whom the applicant could pursue his claims: Sony Corporation v Anand [1981]  FSR  398 (Browne-Wilkinson J); another is to recover property: VDU Installations; but not to let a mutual customer know that the respondent had been guilty of an irregularity (VDU Installations). If these broader purposes are included within the meaning of ‘purposes of the action’, there can be no quarrel with the concession of counsel in Bhimji v Chatwani (No 2) [1992] 1 WLR 1158, (referred to by Knox J at page 1163E) that documents revealed pursuant to search orders should only be used for the purpose of the action. These broader purposes appear to have gained acceptance and, in accordance with the standard form of order, search orders will now ordinarily contain an undertaking by the applicant not, without leave, to use information or documents obtained other than for: •

the current proceedings; or 1019

15.244  Specific interim remedies

•

commencing civil proceedings ‘in relation to the same or related subject matter’ to the current proceedings;

until after the return date – at the return date the judge will be able to consider any application by the respondent requiring that the information be used only in the current proceedings: note, however, that the fact that discoveries are made may be relayed to, for example, prosecuting authorities: Process Development Ltd v Hogg [1996] FSR 45. 15.244  Where a search order is subsequently discharged, the judge has a discretion whether or not to exclude evidence obtained as a result of the order: Guess? Inc v LeeSeckMon [1987] FSR 125. In this case the Court of Appeal of Hong Kong held that, irrespective of whether the order had been discharged for innocent or other reasons, if there had been serious and substantial non-disclosure the court should not allow the applicant to use the information obtained, unless there were good and compelling reasons. In Dubai Bank Ltd v Galadari [1990] 1 Lloyds Rep 120 (CA) Dillon LJ expressed reservations as to the degree of emphasis expressed in Guess?, stating that it was a matter of discretion for the judge to decide whether to allow use of the information; see also AN Computer Technology Ltd v 4-Sight Ltd (14  January 1992, unreported) (ChD) in which certain aspects of the reasoning in Guess? were questioned. In both Dubai Bank and AN Computer Technology the court refused to make an order preventing use of the fruits of the without notice order.

6(f)  Can a respondent refuse to comply? 15.245 A  court is unlikely to commit a respondent for a technical or trivial breach of an order (see Adam Phones Ltd v Goldschmidt [2000]  FSR  163). However, a respondent is treading on thin ice when refusing to comply with a search order. If he does refuse to comply and subsequently fails to persuade the court to discharge the order, then he will be in contempt of court. If the respondent uses the time during which the application to discharge is being considered to frustrate the order, for example, by destroying records, the consequences will be grave: WEA  Records Ltd v Vision’s Channel 4 Ltd [1983] 1  WLR  721. If the respondent does obtain a discharge of the order, he is probably still in contempt, although the contempt would probably be seen as technical and not meriting any penalty. In Hallmark Cards Inc v Image Arts Ltd [1977] FSR 150 (CA) Buckley LJ said (at page 153) that while the search order stands, the party who refuses access to his premises is in default of the order: ‘But if the party against whom the order is made were to succeed in getting the order discharged, I cannot conceive that that party would be liable to any penalties for any breach … .’

See also WEA Records Ltd v Visions Channel 4 Ltd [1983] 1 WLR 721 (CA) at pages 725–726. 1020

Search orders 15.250

15.246  A somewhat tougher line was suggested in Wardle Fabrics Ltd v G Myristis Ltd [1984]  FSR  263, in which Goulding J  held that the only defence to non­ compliance is that the order was void ab initio. Goulding J stated (at page 275): ‘The fact that [the order] is subsequently discharged is no automatic answer to proceedings for contempt, although the circumstances are appropriate to be considered when the Court has to decide on penalties.’

15.247 In Columbia Picture Industries Inc v Robinson [1987] Ch  38 Scott J, referring to the Wardle case, stated (at page 72): ‘The judge’s reasoning is, if I may respectfully say so, difficult to fault. Moreover, if respondents to [search] orders were to be allowed to delay their execution while applications to discharge were being made, the purpose of [search] orders and procedure would be largely lost. Ample time would then be available to those disposed to destroy evidence or to secrete away master tapes to do so.’

15.248  However, Scott J seemed to soften his approach in Bhimji v Chatwani [1991] 1 All ER 705, in which (while repeating that a respondent who refuses to comply with a search order while making an application to discharge it does so at his own risk), he held that the breach in question was not contumacious and imposed no penalty since: •

It was as a result of alleged legal advice that it was permissible for entry to be postponed pending the application (this advice, if given, was wrong).

•

At an early stage the respondent offered to provide reasonable protection of the documents.

•

There was no evidence to suggest that the making of the application was merely a device to postpone the search.

•

There was no evidence of impropriety by the respondent in respect of the documents in the period of delay.

•

The order was oppressive by nature and there was prima facie injustice done to the respondent in being subjected to it.

6(g)  Applications to discharge 15.249  As to the right of the respondent to apply for variation or discharge, see 15.230. 15.250  An application to discharge a search order should be made in accordance with CPR, Pt 23 (and in particular see CPR 23.10). In theory, in a case of sufficient urgency an order made without notice can be set aside on an application similarly without notice: London City Agency (JCD) Ltd v Lee [1970] 1 Ch 597; and see CPR23. However, the court will rarely suspend a search order on a without notice application without affidavit evidence in support: Hallmark Cards Inc v Image Arts Ltd [1977] FSR 150. 1021

15.251  Specific interim remedies

15.251 A  fully executed search order could be discharged with retrospective effect if it should never have been made: Booker McConnell plc and another v Plascow [1985] RPC 425. In this case the Court of Appeal said that an application to set aside an executed search order was not normally a matter of urgency. If the sole reason for applying to discharge was to enforce the cross-undertaking as to damages, that should normally wait until trial. In any event the respondents should wait until the return date to make their application, unless the matter was one of extreme urgency. 15.252 In Dormeuil Frères SA  v Nicolian International (Textiles) Ltd [1988] 3 All ER 197, where an application was made to set aside a search order on the basis of material non-disclosure, Sir Nicholas Browne-Wilkinson V-C said that the appropriate time for such application to be heard was at trial. 15.253  However, in Tate Access Floors Inc v Boswell [1990] 3 All ER 303 at page 316 the Vice-Chancellor modified his view, having regard to the decision in Behbehani v Salem [1989] 1 WLR 723 (CA) (reported after Dormeuil). Behbehani showed that although the court has power to grant interim relief, notwithstanding a failure to make proper disclosure at the without notice stage, in deciding whether to grant such further relief the court has to consider all the circumstances of the failure to make proper disclosure. It should consider whether such failure was innocent or deliberate and weigh the public interest in maintaining the golden rule that the party seeking relief without notice to the respondent should make full and frank disclosure as against the requirements of justice in granting the applicant relief to which he would otherwise be entitled in an application on notice. The Vice-Chancellor therefore considered that he had been in error in Dormeuil in thinking that normally the question of whether there had been a failure to disclose was not appropriate to be dealt with at the interim stage. While welcoming guidance from the Court of Appeal, the Vice-Chancellor thought that the reconciliation between the public interest in upholding the golden rule and the public interest in ensuring that the courts are not clogged with long interim hearings is that the investigation of the circumstances in which the without notice order was obtained should take place at the interim stage only where it is clear that there has been a failure to make a material disclosure, or where the nature of the alleged failure is so serious as to demand immediate investigation. 15.254 In Imam Said Abdul Aziz Al-Rawas v Pegasus Energy [2008] EWHC 617 (QB) the court dealt with the award of damages after a search order (and freezing order) had been set aside and an enquiry ordered as to damages payable under the cross-undertaking. The court held that the relevant respondents were entitled to recover special damages in respect of the costs that they incurred through dealing with the search and freezing orders. Whilst no evidence had been adduced that any business was disrupted by the search order, the application of common sense was sufficient for the court to be satisfied that the sheer scale and time of a search would have resulted in serious disruption to ordinary business, and the time spent in dealing with the search could be taken as a measure of the loss caused thereby. The court also held (applying Columbia Pictures v Robinson [1987] Ch 38) that in principle, general damages might be awarded where a search and seizure order 1022

Search orders 15.256

had been wrongly obtained and likewise with a freezing order: applied. Such damages were to compensate a party against whom such orders were obtained, for the consequences of the order which could not be claimed as special damages. However, damages were not awarded for nothing, and the circumstances of a case had to justify an award. In most cases it would be necessary to have some evidence to support the award. Unless the particular facts made it appropriate as an exception, damages for emotional distress were not recoverable under a crossundertaking in damages (see also Hone v Abbey Forwarding Ltd (In Liquidation) [2014] 3  WLR  1676). In addition to general damages, the respondents were awarded aggravated damages, as the search and seizure order was obtained by the intentional concealment of material matter from the court. The court, however, declined to grant exemplary damages. The contrast between the references to compensation and to damages in the first and second sentences of the standard undertaking given to support a search and seizure order was marked (see 15.228). The second sentence applied where the order had been carried out in breach of its terms or where the applicant’s solicitors had acted in breach of their duty to the court. Those were matters which could be considered to give rise to a possible claim for exemplary damages. The undertaking thus appeared to have been framed with the distinction between compensatory and punitive damages in mind. Therefore, the applicant for an order accepted liability for compensatory damages only, save for where the second sentence applied. Moreover, exemplary damages were not available by reason of misrepresentation in the obtaining of the order, as the undertaking was not framed to cover that occurrence. Since the search and seizure and the freezing orders had not been carried out in breach of the orders or in a manner inconsistent with the applicant’s solicitors’ duties as officers of the court, the question of an award of exemplary damages did not arise.

6(h)  Cross-examination of respondent on his affidavit 15.255 Where an applicant believes that disclosure resulting from the search order is inadequate, he can apply to the court to cross-examine the respondent as to his compliance with the order. CPR 34.8 states: ‘(1) A party may apply for an order for a person to be examined before the hearing takes place. … (3)

An order under this rule shall be for a deponent to be examined on oath before: (a) a judge; (b) an examiner of the court; or (c) such other person as the court appoints.’

15.256  Peter Gibson J  in the decision of RAC  Ltd v Allsop (3  October 1984, unreported) (RCJ) (referred to and applied in CBS United Kingdom Ltd v Perry [1985] FSR 421) said: 1023

15.257  Specific interim remedies

‘The object of the application must, I  apprehend, truly be to obtain further information which it is believed is in the possession of the person the subject of the order but which that person has failed to disclose notwithstanding the earlier order. The object of the application must not be to enable contempt proceedings to be brought so as to punish the person served with the order. Further, it must not be to obtain information which is to be used for the purpose of the action when that action comes to trial.’

Where the court gives permission to cross-examine a witness on his or her written evidence, and the witness fails to attend in breach of a court order, that witness’s evidence cannot be used without the court’s permission (CPR  32.7(2)). However, in Phillips v Symes [2003] EWCA Civ 1769, Wall LJ doubted whether it was right ‘… to place the deponent in the position that, unless he is prepared to be cross-examined on his affidavits, they count for nothing at all’. Instead, his Lordship acknowledged that without such cross-examination the court was entitled to attach little weight to such evidence. 15.257  However, cross-examination is not to be used as a fishing expedition: the applicant should produce evidence that the respondents have further information which they have not revealed. See Den Norske Bank ASA  v Antonatos [1998] 3 WLR 711 (CA), where the ‘policing’ function of such examination was referred to (at page 731F) and the difficult interrelationship between such examination and the privilege against self-incrimination was discussed. 15.258 In Bayer AG v Winter (No 2) [1986] 1 WLR 540 Scott J adopted a very negative stance towards cross-examination at the interim stage. He said: ‘For my part I find it very difficult to envisage any circumstances in which, as a matter of discretion, it would be right to make such an order as is sought in the present case and as was made by consent in House of Spring Gardens Ltd v Waite [1985] FSR 173 (CA). The proper function of a judge in civil litigation is to decide issues between parties. It is not, in my opinion, to preside over an interrogation.’

In Bayer, there had been strong evidence on behalf of the applicant showing that the first respondent had been selling counterfeit copies of the applicant’s product. Scott J suggested that the applicant should seek either an order for specific disclosure or apply for the respondent’s committal.

6(i)  Foreign defendants 15.259 The courts are reluctant to grant a search order against a foreign defendant in respect of foreign premises, but may do so if the defendant is served within this jurisdiction. In Cook Industries Inc v Galliher [1979] Ch  439 (where the foreign defendant had been properly served within the jurisdiction and filed a notice of intention to defend) the court ordered that the Paris flat of a foreign defendant could be searched and an inventory of its contents be made. 1024

Search orders 15.260

15.260  However, in Altertext Inc v Advanced Data Communications Ltd [1985] 1 All ER 395 (where the defendant could not be served within the jurisdiction) Scott J held that a search order should not be made against a party over whom the court does not have jurisdiction. Even if the case is one where leave under CPR  6.36 ought to be given to serve the defendant outside the jurisdiction, a search order ought not to be executed until the defendant has had a chance of applying to set aside the service of the claim form. In this case the claimant (understandably) declined the offer by the judge to grant an order, to be suspended for a short period to enable the defendant to apply to set aside the order granting leave to serve outside the jurisdiction. The whole purpose of a search order was to surprise the defendant. Scott J refused the defendant’s application as a matter of his discretion, stating that search orders in respect of foreign premises ought not to be granted except against defendants over whom the courts of England and Wales have unquestionable jurisdiction. It should be noted that section 7 Civil Procedure Act 1997 is limited to premises in England and Wales.

1025

APPENDIX TO CHAPTER 15

This form (including its footnotes) follows the form annexed to CPR PD 25A, as also appears annexed to the Admiralty and Commercial Courts Guide. The form is updated from time to time, before using check https://www.justice.gov. uk/courts/procedure-rules/civil/rules/part25/pd_part25a.

Search Order SEARCH ORDER

IN THE HIGH COURT OF JUSTICE

[    ] DIVISION Before The Honourable Mr Justice [    ]

Claim No.



Dated

Applicant Seal Respondent Name, address and reference of Respondent

PENAL NOTICE IF YOU [    ]1 DISOBEY THIS ORDER YOU MAY BE HELD IN CONTEMPT OF COURT AND MAY BE IMPRISONED, FINED OR HAVE YOUR ASSETS SEIZED. ANY OTHER PERSON WHO KNOWS OF THIS ORDER AND DOES ANYTHING WHICH HELPS OR PERMITS THE RESPONDENT TO BREACH THE TERMS OF THIS ORDER MAY ALSO BE HELD TO BE IN CONTEMPT OF COURT AND MAY BE IMPRISONED, FINED OR HAVE THEIR ASSETS SEIZED.

1 Insert name of Respondent(s).

1026

Search Order

This Order 1. This is a Search Order made against [     ] (“the Respondent”) on [    ] by Mr Justice [    ] on the application of [    ] (“the Applicant”). The Judge read the Affidavits listed in Schedule F and accepted the undertakings set out in Schedules C, D and E at the end of this order. 2. This order was made at a hearing without notice to the Respondent. The Respondent has a right to apply to the court to vary or discharge the order – see paragraph 27 below. 3.  There will be a further hearing in respect of this order on [     ] (“the return date”). 4.  If there is more than one Respondent— (a) unless otherwise stated, references in this order to “the Respondent” mean both or all of them; and (b) this order is effective against any Respondent on whom it is served or who is given notice of it. 5.  This order must be complied with by— (a) the Respondent; (b) any director, officer, partner or responsible employee of the Respondent; and (c) if the Respondent is an individual, any other person having responsible control of the premises to be searched. The Search 6.  The Respondent must permit the following persons2— (a) [    ] (“the Supervising Solicitor”); (b) [     ], a solicitor in the firm of [     ], the Applicant’s solicitors; and (c) up to [     ] other persons3 being [their identity or capacity] accompanying them, (together “the search party”), to enter the premises mentioned in Schedule A to this order and any other premises of the Respondent disclosed under paragraph 18 below and any vehicles under the Respondent’s control on or around the premises (“the premises”) so that they can search for, inspect, photograph or photocopy, and deliver into the safekeeping of the Applicant’s solicitors all the 2 Where the premises are likely to be occupied by an unaccompanied woman and the Supervising Solicitor is a man, at least one of the persons accompanying him should be a woman. 3 None of these persons should be people who could gain personally or commercially from anything they might read or see on the premises, unless their presence is essential.

1027

Appendix to Chapter 15

documents and articles which are listed in Schedule B to this order (“the listed items”). 7.  Having permitted the search party to enter the premises, the Respondent must allow the search party to remain on the premises until the search is complete. In the event that it becomes necessary for any of those persons to leave the premises before the search is complete, the Respondent must allow them to re-enter the premises immediately upon their seeking re-entry on the same or the following day in order to complete the search. Restrictions on Search 8.  This order may not be carried out at the same time as a police search warrant. 9.  Before the Respondent allows anybody onto the premises to carry out this order, he is entitled to have the Supervising Solicitor explain to him what it means in everyday language. 10.  The Respondent is entitled to seek legal advice and to ask the court to vary or discharge this order. Whilst doing so, he may ask the Supervising Solicitor to delay starting the search for up to 2 hours or such other longer period as the Supervising Solicitor may permit. However, the Respondent must— (a) comply with the terms of paragraph 27 below; (b) not disturb or remove any listed items; and (c) permit the Supervising Solicitor to enter, but not start to search. 11. Before permitting entry to the premises by any person other than the Supervising Solicitor, the Respondent may, for a short time (not to exceed two hours, unless the Supervising Solicitor agrees to a longer period) gather together any documents he believes may be [incriminating or]4 privileged and hand them to the Supervising Solicitor for him to assess whether they are incriminating or privileged as claimed. (a) If the Supervising Solicitor decides that the Respondent is entitled to withhold production of any of the documents on the ground that they are privileged or incriminating, he will exclude them from the search, record them in a list for inclusion in his report and return them to the Respondent. (b) If the Supervising Solicitor believes that the Respondent may be entitled to withhold production of the whole or any part of a document on the ground that it or part of it may be privileged or incriminating, or if the Respondent claims to be entitled to withhold production on those grounds, the Supervising Solicitor will exclude it from the search and retain it in his possession pending further order of the court.

4 References to incriminating documents may be omitted from orders made in those intellectual property proceedings, where the privilege against self-incrimination does not apply—see paragraph 7.9 of the Practice Direction (Interim Injunctions).

1028

Search Order

12.  If the Respondent wishes to take legal advice and gather documents as permitted, he must first inform the Supervising Solicitor and keep him informed of the steps being taken. 13.  No item may be removed from the premises until a list of the items to be removed has been prepared, and a copy of the list has been supplied to the Respondent, and he has been given a reasonable opportunity to check the list. 14.  The premises must not be searched, and items must not be removed from them, except in the presence of the Respondent. 15.  If the Supervising Solicitor is satisfied that full compliance with paragraphs 13 or 14 is not practicable, he may permit the search to proceed and items to be removed without fully complying with them. Delivery up of Articles/Documents 16.  The Respondent must immediately hand over to the Applicant’s solicitors any of the listed items, which are in his possession or under his control, save for any computer or hard disk integral to any computer. Any items the subject of a dispute as to whether they are listed items must immediately be handed over to the Supervising Solicitor for safe keeping pending resolution of the dispute or further order of the court. 17.  The Respondent must immediately give the search party effective access to the computers on the premises, with all necessary passwords, to enable the computers to be searched. If they contain any listed items the Respondent must cause the listed items to be displayed so that they can be read and copied5. The Respondent must provide the Applicant’s Solicitors with copies of all listed items contained in the computers. All reasonable steps shall be taken by the Applicant and the Applicant’s solicitors to ensure that no damage is done to any computer or data. The Applicant and his representatives may not themselves search the Respondent’s computers unless they have sufficient expertise to do so without damaging the Respondent’s system. Provision of Information 18.  The Respondent must immediately inform the Applicant’s Solicitors (in the presence of the Supervising Solicitor) so far as he is aware— (a) where all the listed items are; (b) the name and address of everyone who has supplied him, or offered to ­supply him, with listed items; (c) the name and address of everyone to whom he has supplied, or offered to supply, listed items; and (d) full details of the dates and quantities of every such supply and offer. 5 If it is envisaged that the Respondent’s computers are to be imaged (ie the hard drives are to be copied wholesale, thereby reproducing listed items and other items indiscriminately), special provision needs to be made and independent computer specialists need to be appointed, who should be required to give undertakings to the court.

1029

Appendix to Chapter 15

19. Within [     ] working days after being served with this order the Respondent must swear and serve an affidavit setting out the above information.6 Prohibited Acts 20.  Except for the purpose of obtaining legal advice, the Respondent must not directly or indirectly inform anyone of these proceedings or of the contents of this order, or warn anyone that proceedings have been or may be brought against him by the Applicant until 4.30 p.m. on the return date or further order of the court. 21.  Until 4.30 p.m. on the return date the Respondent must not destroy, tamper with, cancel or part with possession, power, custody or control of the listed items otherwise than in accordance with the terms of this order. 22.  [Insert any negative injunctions.] 23.  [Insert any further order] Costs 24.  The costs of this application are reserved to the judge hearing the application on the return date. Restrictions on Service 25.  This order may only be served between [     ] a.m./p.m. and [     ] a.m./p.m. [and on a weekday].7 26. This order must be served by the Supervising Solicitor, and paragraph 6 of the order must be carried out in his presence and under his supervision. Variation and Discharge of this Order 27.  Anyone served with or notified of this order may apply to the court at any time to vary or discharge this order (or so much of it as affects that person), but they must first inform the Applicant’s solicitors. If any evidence is to be relied upon in support of the application, the substance of it must be communicated in writing to the Applicant’s solicitors in advance. Interpretation of this Order 28.  Any requirement that something shall be done to or in the presence of the Respondent means—

6 The period should ordinarily be longer than the period in paragraph (2) of Schedule D, if any of the information is likely to be included in listed items taken away of which the Respondent does not have copies. 7 Normally, the order should be served in the morning (not before 9.30am) and on a weekday to enable the Respondent more readily to obtain legal advice.

1030

Search Order

(a) if there is more than one Respondent, to or in the presence of any one of them; and (b) if a Respondent is not an individual, to or in the presence of a director, officer, partner or responsible employee. 29.  A Respondent who is an individual who is ordered not to do something must not do it himself or in any other way. He must not do it through others acting on his behalf or on his instructions or with his encouragement. 30.  A Respondent which is not an individual which is ordered not to do something must not do it itself or by its directors, officers, partners, employees or agents or in any other way. Communications with the Court All communications to the court about this order should be sent to— [Insert the address and telephone number of the appropriate Court Office] Where the order is made in the Chancery Division The Senior Associate, Fifth Floor, the Rolls Building, 7 Rolls Building, Fetter Lane, London EC4A 1NL quoting the case number. The telephone number is 020 7947 6733. Where the order is made in the Queen’s Bench Division Room WG08, Royal Courts of Justice, Strand, London WC2A 2LL quoting the case number. The telephone number is 020 7947 6010. Where the order is made in the Commercial Court The Admiralty and Commercial Court Listing Office, 7 Rolls Building, Fetter Lane, London EC4A 1NL, quoting the case number. The telephone number is 0207 947 6826. The offices are open between 10am and 4.30pm Monday to Friday. Schedule A THE PREMISES Schedule B THE LISTED ITEMS Schedule C Undertakings given to the court by the applicant (1) If the court later finds that this order or carrying it out has caused loss to the Respondent, and decides that the Respondent should be compensated for that loss, the Applicant will comply with any order the court may make. 1031

Appendix to Chapter 15

Further if the carrying out of this order has been in breach of the terms of this order or otherwise in a manner inconsistent with the Applicant’s solicitors’ duties as officers of the court, the Applicant will comply with any order for damages the court may make. [(2) As soon as practicable the Applicant will issue a claim form [in the form of the draft produced to the court] [claiming the appropriate relief].] (3) The Applicant will [swear and file an affidavit] [cause an affidavit to be sworn and filed] [substantially in the terms of the draft affidavit produced to the court] [confirming the substance of what was said to the court by the Applicant’s counsel/solicitors]. (4) The Applicant will not, without the permission of the court, use any information or documents obtained as a result of carrying out this order nor inform anyone else of these proceedings except for the purposes of these proceedings (including adding further Respondents) or commencing civil proceedings in relation to the same or related subject matter to these proceedings until after the return date. [(5) The Applicant will maintain pending further order the sum of £ [     ] in an account controlled by the Applicant’s solicitors.] [(6) The Applicant will insure the items removed from the premises.] Schedule D Undertakings given by the applicant’s solicitors (1) The Applicant’s solicitors will provide to the Supervising Solicitor for service on the Respondent— (i) a service copy of this order; (ii) the claim form (with defendant’s response pack) or, if not issued, the draft produced to the court; (iii) an application for hearing on the return date; (iv) copies of the affidavits [or draft affidavits] and exhibits capable of being copied containing the evidence relied upon by the applicant; (v) a note of any allegation of fact made orally to the court where such allegation is not contained in the affidavits or draft affidavits read by the judge; and (vi) a copy of the skeleton argument produced to the court by the Applicant’s [counsel/solicitors]. (2) The Applicants’ solicitors will answer at once to the best of their ability any question whether a particular item is a listed item. (3) Subject as provided below the Applicant’s solicitors will retain in their own safe keeping all items obtained as a result of this order until the court directs otherwise. 1032

Search Order

(4) The Applicant’s solicitors will return the originals of all documents obtained as a result of this order (except original documents which belong to the Applicant) as soon as possible and in any event within [two] working days of their removal. Schedule E Undertakings given by the supervising solicitor (1) The Supervising Solicitor will use his best endeavours to serve this order upon the Respondent and at the same time to serve upon the Respondent the other documents required to be served and referred to in paragraph (1) of Schedule D. (2) The Supervising Solicitor will offer to explain to the person served with the order its meaning and effect fairly and in everyday language, and to inform him of his right to take legal advice (including an explanation that the Respondent may be entitled to avail himself of the privilege against self-incrimination and legal professional privilege) and to apply to vary or discharge this order as mentioned in paragraph 27 above. (3) The Supervising Solicitor will retain in the safe keeping of his firm all items retained by him as a result of this order until the court directs otherwise. (4) Unless and until the court otherwise orders, or unless otherwise necessary to comply with any duty to the court pursuant to this order, the Supervising Solicitor shall not disclose to any person any information relating to those items, and shall keep the existence of such items confidential. (5) Within [48] hours of completion of the search the Supervising Solicitor will make and provide to the Applicant’s solicitors, the Respondent or his solicitors and to the judge who made this order (for the purposes of the court file) a written report on the carrying out of the order. Schedule F Affidavits The Applicant relied on the following affidavits— [name] [number of affidavit] [date sworn] [filed on behalf of] (1) (2) Name and address of applicant’s solicitors The Applicant’s solicitors are— [Name, address, reference, fax and telephone numbers both in and out of office hours.]

1033

CHAPTER 16

Final remedies Selwyn Bloch QC, Adam Solomon QC and Jeremy Lewis Introduction 

16.1

1. Damages for breach of the employment contract  1(a) Normal measure  1(b) Damages where there is no demonstrable financial loss: Wrotham Park damages (now known as ‘negotiating damages’)

16.5 16.5

2. Damages for inducing breach of contract and other economic torts  2(a) The economic torts: inducement of breach tort compared with conspiracy  2(b) Measure of loss for economic torts  2(c) Exemplary damages for economic torts

16.11 16.22 16.22 16.24 16.26

3. Damages for breach of confidence  3(a) Damages for breach of confidence in a contractual context  3(b) Damages for breach of confidence outside contractual context  3(c) Claim for loss of profits for breach of confidence  3(d) Stage of proceedings at which damages are assessed  3(e) Further breaches of confidence not proved at trial  3(f) Date at which damages are assessed  3(g) Exemplary damages for breach of confidence  3(h) Damages in addition to or in lieu of an injunction 

16.28 16.28 16.30 16.34 16.37 16.38 16.39 16.40 16.41

4. Account of profits  4(a) When is an account of profits available?  4(b) Account of profits for breach of contract  4(c) To what profits is the claimant entitled? 

16.42 16.44 16.45 16.48

5. Choice between an account of profits and damages 

16.52

6. Permanent injunctions  6(a) Discretion to grant or refuse  6(b) Need to frame injunction precisely 

16.57 16.57 16.65

7. Delivery up/ destruction 

16.67

8. Declarations 

16.71

9. Receiver 

16.74

10. Rectification 

16.75

11. Remedies for breach of fiduciary duty  11(a) Remedies against the fiduciary 

16.76 16.78 1035

16.1  Final remedies

11(a)(i) Proprietary remedies  11(a)(ii) Rescission  11(a)(iii) Personal remedies: compensation or account of profits and/or forfeiture of salary and bonuses  11(a)(iv) Sums diverted to the fiduciary's company or partnership/ joint venture  11(b) Remedies against third parties in connection with breach of fiduciary duty  11(b)(i) Dishonest assistance  11(b)(ii) Knowing receipt  11(b)(iii) Proprietary claim  11(c) Limitation 

16.78 16.83 16.86 16.100 16.103 16.103 16.104 16.105 16.106

12. Costs 

16.107

Annex: limitation and breach of fiduciary duty  A. Overview  B. Section 21 Limitation Act 1980  (a) Williams v Central Bank of Nigeria  (b) Section 21(3) and company directors  (c) Section 21(1)(b): recovery of trust property  (d) Section 21(1)(a): fraud/fraudulent breach of trust  C. Section 36 Limitation Act 1980  D. Action for an account  E. Accrual of cause of action  F. Section 32 Limitation Act 1980  (a) Reasonable diligence  (b) Action based on defendant’s fraud  (c) Concealment  G. Laches 

16.108 16.108 16.109 16.110 16.111 16.112 16.114 16.115 16.119 16.121 16.123 16.124 16.126 16.127 16.132

INTRODUCTION 16.1  Often disputes involving breaches of restrictive covenants or confidence do not proceed to trial. The decision of the court at the interim stage is frequently treated by the parties for practical purposes as determinative of the issues between them, and certainly sets the tone and agenda for the litigation, and for settlement discussions. Under the CPR summary assessments of costs provisions, legal costs will also often be dealt with by the court at the interim stage (see 14.152–14.154). That said, with the courts being ready to grant speedy trials within a very short time of the commencement of proceedings, it has become more common for cases to proceed to trial (or at least, proceed beyond the interim application stage, through the early stages of litigation such as disclosure and preparation of witness statements). Usually, speedy trials are limited to issues of liability, with most financial remedies (if the claimant succeeds on liability) being listed for separate hearing at a later date. Speedy trials are however normally the time in which it is appropriate to deal with injunctive relief. 1036

Introduction 16.4

16.2  Equally, the parties may proceed to trial without seeking interim relief. This may happen, for example, where the (ex-)employer has reacted too slowly to the perceived breaches by the (ex-)employee so as to disentitle himself from obtaining interim relief. Another example is where the (ex-)employer forms the view that he may not succeed in obtaining interim relief, eg  where he is not good for damages on the cross-undertaking (see 14.58–14.64), or for some other reason the balance of convenience does not favour him. On occasion an (ex-) employer may even decide that the final remedy of an account of profits is a sufficiently effective deterrent to an (ex-)employee, because the remedy of an account of profits may require him to disgorge his profits to the ex-employer. 16.3  The means of proof at trial are far more cumbersome than at the interim stage. Evidence is taken merely by witness statements at the interim stage (without the need for attendance or examination of witnesses), and hearsay evidence is readily accepted. At trial, while the evidence of factual and expert witnesses will be required to be served in advance by way of witness statement and expert report respectively, the usual mode of evidence at the trial itself is by way of live evidence, usually present in court (or with the permission of the court by video link), which evidence is subject to cross-examination. At trial, witness statement evidence without the witnesses being present (in court or, where permitted, by video link) is the exception. Indeed, any attempt to rely on witness evidence without calling the maker of the statement may be liable to backfire. In Towry EJ Ltd v Bennett and others [2012] EWHC 224 (QB), the claimant sought to do precisely that. The defendant successfully made an application under CPR r 33.4, which applies when a party who proposes to rely on hearsay evidence does not propose to call the person who made the original statement to give oral evidence: the court may, on the application of any other party, permit that party to call the maker of the statement to be cross-examined on the contents of the statement. 16.4  We refer in outline below to the forms of final relief which are commonly sought in the kinds of disputes which are the subject of this book. Our focus here is principally on cases of breaches of restrictive covenant (and knowing inducement of such breaches by third parties) and breaches of confidence. We also deal with the remedies which arise against fiduciaries and third parties in the context of breaches of fiduciary duties. The forms of final relief are principally: •

Damages (16.5–16.41): > for breach of the employment contract, especially restrictive covenants, including damages on a Wrotham Park basis (now known as ‘negotiating damages’) – ie where no financial loss can be proved to flow from the breach of restrictive covenant: see 16.11–16.21 – damages claims against third parties and exemplary damages; >

for breach of confidence.

•

An account of profits (16.42–16.56).

•

Permanent injunctions (16.57–16.66).

•

Delivery up or destruction of documents (16.67–16.70). 1037

16.5  Final remedies

•

Declarations (16.71–16.73).

•

The appointment of a receiver (16.74).

•

Remedies for breach of fiduciary duty (16.76–16.106). There is inevitably a degree of overlap between this section and the preceding more general sections (notably as to the account of profits) but given the substantial developing case law in relation to this topic we believe that it would be helpful to focus on remedies for fiduciary duty separately. Under this heading we deal with: >

proprietary remedies against the fiduciary (16.78–16.82);

>

rescission (16.83–16.85);

>

personal remedies against the fiduciary (16.86–16.102): — an account of profits (16.87–16.89); — equitable compensation (16.90–16.92); — forfeiture of remuneration (16.93–16.98); — public policy defence to claims based on profit from breach of fiduciary duty (16.99); — remedies where sums are diverted to the fiduciary’s company or partnership/ joint venture (16.100–16.102),

> remedies against third parties in connection with a breach of fiduciary duty: — dishonest assistance (16.103); — knowing receipt (16.104); — proprietary claims (16.105). At the end of this chapter, given the substantial recent case law on the subject we also include by way of schedule an overview of the effect of limitation in relation to fiduciary claims (16.106–16.131).

1. DAMAGES FOR BREACH OF THE EMPLOYMENT CONTRACT 1(a)  Normal measure 16.5  Damages are the usual remedy for breach of contract, whether by the (ex-) employee or (ex-)employer, and whether for: (a) breach during employment; (b) breach after the termination of employment of post-termination covenants; (c) breaches of confidence; or (d) knowing inducement by third parties of breaches (a)–(c). 1038

Damages for breach of the employment contract 16.8

16.6  Claims by the (ex-)employer will often be for loss of profits on contracts or opportunities diverted by the (ex-)employee where there are profitable contracts which have been lost. Damages are assessed on the usual Hadley v Baxendale (1894) 9 Exch 341 basis. In other words, damages are such as may fairly and reasonably be considered as either arising naturally, ie  according to the usual course of things, from the breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach. If special circumstances under which the contract was made were communicated by the claimant to the defendant, and thus known to both parties, the damages resulting from the breach which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under the special circumstances so known and communicated. 16.7  The (ex-)employer is entitled to be placed in the position he would have been in if the defendant had abided by the terms of his contract. In the classic case in which the (ex-)employer has lost business through the actions of the (ex-)employee, this involves proof that the contract in question would have been placed with the (ex-)employer. Usually, it is not possible to show that the contract in question would definitely have been placed with the (ex) employer, and the loss is more likely to be seen as the loss of a chance. Accordingly, following the principles set out in Allied Maples Group Ltd v Simmons and Simmons [1995] 1 WLR 1602 (CA), the court will evaluate the chance of which the (ex-)employer has been deprived. This is normally expressed in the form of a fixed percentage chance of making a profit of £x. There may be a considerable problem if evidence is given (perhaps by the solicited customers themselves) that they would not in any event have placed the business in question with the (ex-)employer. In Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443, where the managing director of IDC unlawfully diverted a potential contract to himself, there was clear evidence that the customer did not wish to place a contract with IDC but only with Cooley in his private capacity. Roskill J said that, nonetheless, the opportunity was there and could not be taken since IDC was not aware of it because of Cooley’s conduct. He would accordingly have awarded damages representing a 10% chance of IDC obtaining the contract in question (but, more favourably to IDC, granted to them an account of profits: see 16.43). In Sanders v Parry [1967] 2 All ER 803, where Parry in breach of his duty of fidelity entered into a contract with a client of Sanders (a solicitor), Havers J awarded damages representing the lost chance of retaining the client’s work. In the nature of things damages of this kind are extremely difficult to assess: ‘But the fact that damages cannot be assessed with certainty does not relieve the wrongdoer of the necessity of paying damages for his breach of contract’ (per Vaughan Williams LJ in Chaplin v Hicks [1911] 2 KB 786 at page 792).

16.8 Accordingly, in Sanders v Parry, Sanders was awarded 12 months’ net profit on the basis that, despite evidence of some animosity on the part of the client towards Sanders, it was still possible that he might have remained as a client. Havers J ‘picked’ a period of 12 months and arrived at a net figure after 1039

16.9  Final remedies

the deduction of office expenses. In Robb v Green [1895] 2 QB 315 Hawkins J referred to the difficulty in assessing damages in cases of this sort, emphasising that he could not grant an indemnity against the whole diminution of the claimant’s trade, there being other possible causes. 16.9  As in other breach of contract cases, the claimant must have made reasonable efforts to mitigate its loss. 16.10 In Johnson v Agnew [1979] 1 All ER 883 (HL) Lord Wilberforce said that damages for breach of contract were normally assessed at the date of the breach, but that if to follow that rule would give rise to injustice, the court has power to fix such other date as may be appropriate in the circumstances.

1(b) Damages where there is no demonstrable financial loss: Wrotham Park damages (now known as ‘negotiating damages’) 16.11  Until relatively recently, an (ex)employer who suffered no, or no provable, loss faced the prospect of receiving no, or only nominal, damages. AttorneyGeneral v Blake [2001] 1 AC 268 was an exceptional case in which the Attorney General sought damages against a spy who had published his memoirs, contrary to the Official Secrets Act, notwithstanding that the information was no longer confidential and the publication was not contrary to the public interest. The House of Lords held that the remedies available to the court in a case of a breach of contract can include: (i) damages calculated on the Wrotham Park basis; or (ii) an account of profits. The second of these remedies is considered below at 16.42–16.56 and in relation to breach of fiduciary duty at 16.87–16.89. In relation to the first of these remedies, in April 2018, shortly before this edition was due to be published (and too late for a complete re-write of this section), the Supreme Court gave its decision in Morris-Garner v One Step (Support) Ltd [2018] UKSC 20. It overruled the Court of Appeal and made it clear that Wrotham Park damages (the term now to be used is ‘negotiating damages’) are only to be granted in specifically defined circumstances. This decision sweeps away much of the case law on the subject and is addressed (albeit briefly) at the end of this section at 16.21. The judgments are lengthy and their effect will no doubt be the subject of much debate in the future. What follows (16.12–16.20) is now largely historical, especially in relation to cases involving only breaches of restrictive covenant. These paragraphs may still, however, have some relevance in cases involving breaches of confidence or infringement of intellectual property rights. 16.12  Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798 concerned a development of houses that had been built in breach of a restrictive covenant, but where there was no resulting diminution in the value of the dominant land. For socio-economic policy reasons Brightman J declined to grant a mandatory injunction for the demolition of the houses and instead ordered damages in lieu. Brightman J calculated the damages by considering a hypothetical negotiation, prior to the breach, for the relaxation of the restrictive covenant. In such a negotiation the covenantee would look to the profits that the covenantor 1040

Damages for breach of the employment contract 16.15

expected to make in order to arrive at the price to be paid. In Wrotham Park, the actual profits were equated with what the expected profits would have been and damages in a sum equivalent to 5% of the profits were awarded. 16.13  There has been significant academic and judicial debate as to the basis of the damages awarded in Wrotham Park: were they compensatory, or restitutionary? World Wide Fund for Nature v World Wrestling Federation Entertainment Inc [2008] 1 All ER 74 (‘WWF’) was a case in which both parties wished to use the initials ‘WWF’ to describe their organisation. The parties reached agreement as to their use by a contract made in 1994, which restricted the defendant’s use of the initials. The defendant breached the contract and the claimant brought a number of sets of proceedings. In the present claim, it sought damages on the Wrotham Park basis. The Court of Appeal found that Wrotham Park damages are compensatory rather than being ‘gains-based’, although Chadwick LJ observed that labelling Wrotham Park damages as ‘compensatory’ and an account of profits as ‘gains-based’ is not informative. 16.14 In WWF Chadwick LJ went on to say (at paragraphs 53–54) that in the light of A-G v Blake and Experience Hendrix LLC v PPX Enterprises Inc [2003] 1 All ER (Comm) 830: ‘… it must now be regarded as settled in this Court that, on a claim by a covenantee for an injunction and damages against a covenantor who has acted in breach of a restrictive covenant, the Court may, in addition to granting an injunction to restrain further breaches, award damages in respect of past breaches notwithstanding that the covenantee cannot establish actual financial loss. In such a case the damages in respect of past breaches may be in an amount assessed as the sum which the Court considers it would have been reasonable for the covenantor to pay and the covenantee to accept for the hypothetical release of the covenant. In such a case it seems to me that principle requires that the sum be assessed on the basis (i) that the hypothetical release would have taken effect from a date immediately before the covenantor was first in breach and (ii) that the hypothetical release should be for a period ending with the date on which the injunction to restrain future breaches takes effect. I  can see no reason why the hypothetical release should be assumed to extend into a period when (by reason of the injunction) the covenantor can no longer be said to be taking any benefit under it. I should add, for completeness, that (if it were necessary to decide the point) I  would hold that, in a case where a covenantor has acted in breach of a restrictive covenant, the Court may award damages on the Wrotham Park basis, notwithstanding that there is no claim for an injunction; and notwithstanding that there could be no claim for an injunction.’

16.15  Support for the contention that Wrotham Park damages are compensatory rather than gains-based can be gained from the decision of the Court of Appeal in One Step (Support) Ltd v Morris-Garner [2016] IRLR 435, a case concerning breaches of non-competition and non-solicitation covenants in the sale of a business providing rented accommodation and support services for children leaving care and vulnerable adults. Losses flowing from the breaches were difficult to 1041

16.16  Final remedies

quantify and the claimant contended that ordinary compensatory damages would not be an appropriate remedy. Having dismissed the remedy of an account of profits, the trial judge allowed the claimant to elect damages on the Wrotham Park basis. The defendants appealed on the ground, inter alia, that the judge had erred in holding that awarding such damages was the correct remedy because they could only be awarded where the injured party was unable to prove identifiable financial loss and it was necessary to avoid manifest injustice. On appeal, Christopher Clarke LJ), held that Wrotham Park damages are a form of compensatory damage ‘although not of the ordinary type’ (at paragraph 81). However, dealing head-on with this issue, Leggatt J. in Marathon Asset Management LLP and another v Seddon and others [2017] IRLR 503 (a case involving allegations of misuse of confidential information, conspiracy to injure and breach of fiduciary obligations) held (at paragraph  202), following a review of the WWF and A-G v Blake cases, and considering submissions on One Step, held that: ‘… the remedies are “compensatory” only in the broad sense that they provide redress for wrongdoing. I  think it plain that they do this, however, not by providing compensation in the narrow sense of compensation for loss, but by ordering the defendant to pay to the claimant a sum of money which represents a gain made by the defendant from its wrongful act.’

This approach appears correct. In that case, the judge held that the defendants were liable for unlawfully copying and retaining documents containing confidential information about the claimant’s business. However, he also found that the claimant had not shown that the defendants’ actions had caused it any loss or the defendants any gain, with the result that the claimant was entitled only to nominal damages. Marathon is also authority for the proposition that Wrotham Park damages are not an available remedy for a claim in conspiracy (see paragraphs 220–221). Marathon is referred to in passing by the Supreme Court in One Step (at paragraph 75), albeit without any significant comment. 16.16  Damages on the Wrotham Park basis are not available as of right; rather, they are normally limited to situations where the innocent party would otherwise be left without any, or any adequate, remedy. However, the threshold for availability of Wrotham Park damages is lower than the ‘exceptional circumstances’ bar that the House of Lords in A-G v Blake found was necessary for the grant of an account of profits. The test for the award of Wrotham Park damages is not whether the case is exceptional but whether such damages are required by justice. 16.17 In Experience Hendrix, Peter Gibson LJ (at paragraph 58) identified three factors that contributed to his preparedness to grant Wrotham Park damages: •

there had been a deliberate breach by the defendant of its contractual obligations for its own reward;

•

the claimant would have had difficulty in establishing financial loss therefrom; and

1042

Damages for breach of the employment contract 16.20

•

the claimant had a legitimate interest in preventing the defendant’s profitmaking activity carried out in breach of the defendant’s contractual obligations.

16.18  At first instance in WWF [2006] All ER (D) 212 (Feb) in a passage quoted without comment in the Court of Appeal judgments both in that case (in which his decision was reversed but on other grounds) and in Lunn Poly Ltd v Liverpool & Lancashire Properties Ltd [2006] 25 EG 210 (at paragraph 23), Peter Smith J  strongly disagreed with the relevance of the first of the factors identified by Peter Gibson LJ: ie deliberate breach. Damages under the Wrotham Park principle are compensatory, not punitive, and as such the intention of the defendant should be irrelevant. 16.19 In Force India Formula One Team Ltd v 1 Malaysia Racing Team Sdn Bhd [2012] RPC 757, Arnold J identified what he saw as the principles established by the cases dealing with Wrotham Park damages (at paragraph 386): •

The overriding principle is that the damages are compensatory: see AttorneyGeneral v Blake at paragraph 298, Experience Hendrix at paragraph 26 and WWF at paragraph 56 (but see the comments as to the special meaning of ‘compensatory’ made in Marathon referred to in 16.15).

•

The primary basis for the assessment is to consider what sum would have been arrived at in negotiations between the parties, had each been making reasonable use of their respective bargaining positions, bearing in mind the information available to the parties and the commercial context at the time that notional negotiation should have taken place: see Experience Hendrix at paragraph  45; WWF at paragraph  55; Lunn at paragraph  25 and Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd [2011] 1 WLR 2370 at paragraphs 48–49 and 51.

•

The fact that one or both parties would not in practice have agreed to make a deal is irrelevant: Pell at paragraph 49.

•

As a general rule, the assessment is to be made as at the date of the breach: Lunn at paragraph 29 and Pell at paragraph 50.

•

Where there has been nothing like an actual negotiation between the parties, it is reasonable for the court to look at events occurring after the time at which the hypothetical negotiation takes place (and in particular, to take account of how profitable the outcome has been for the contract-breaker), and to consider whether or not that is a useful guide to what the parties would have thought at the time of their hypothetical bargain: Pell at paragraph 51.

•

The court can take into account other relevant factors, and in particular delay on the part of the claimant in asserting its rights: Pell at paragraph 54.

16.20  In the Force India appeal the Court of Appeal did not express a view on this approach to the law (albeit stating that it was unnecessary for the judge to have embarked on this lengthy discussion of cases, many of which had not been cited to him). Nevertheless, it remains a useful summary, and was referred to again by Arnold J himself in Primary Group (UK) Ltd and others v Royal Bank of Scotland plc and another [2014] EWHC 1082 (Ch). Two additional points are 1043

16.21  Final remedies

to be added to Arnold J’s list. First, the fact the parties are taken to have been willing to make a deal even if one or both of them would not in reality have been prepared to do so means that it is also to be assumed that the parties would have acted reasonably regardless of whether that would in fact have been the case. Thus, particular character traits of the parties should be disregarded. The hypothetical negotiation is designed to establish the value of the wrongful use to the wronged party and not some objective figure as between hypothetical persons negotiating for a hypothetical licence. The negotiation would be one between the actual parties, albeit that they are to be treated as parties willing to deal with each other with a view to reaching a reasonable result (see 32Red plc v WHG (International) Ltd and others [2013] EWHC 815 (Ch) at paragraph 32). Secondly, although a defendant cannot defeat a claim for infringement by arguing that he could have achieved the same result without infringing the claimant’s rights, the availability of alternatives is a legitimate consideration in assessing compensation. The only illegitimate consideration in the hypothetical negotiation is not doing the deal (see the Court of Appeal judgment in Force India Formula One Team Ltd v Aerolab SRL [2013] RPC 947 and Vestergaard Frandsen A/S and others v Bestnet Europe Ltd and others [2014] EWHC 3159 (Ch) at paragraphs 79–85). 16.21  The decision of the Supreme Court in Morris-Garner v One Step (Support) Ltd [2018] UKSC 20, has now significantly changed the previously understood law (referred to in 16.11–16.20). The practical effect of this decision is that negotiating damages (the term Wrotham Park damages is to be avoided) are now not available as such for breach of restrictive covenants of the kind covered by this book (as opposed to restrictive covenants over land). Lord Reed’s judgment provides a detailed overview of the development of the law in relation to damages assessed by reference to a hypothetical release fee. Lady Hale, Lord Wilson and Lord Carnwath agreed with Lord Reed and Lord Sumption delivered a separate judgment advancing different reasoning. The core of Lord Reed’s reasoning and conclusions are at paragraphs 91–95. In brief: •

negotiating damages can be awarded for breach of contract where the loss suffered by the claimant is appropriately measured by reference to the economic value of the right which has been breached, considered as an ‘asset’ (paragraph 95(10)). Examples provided are the breach of a restrictive covenant over land, an intellectual property agreement or a confidentiality agreement (paragraph 92);

•

however, where the claimant’s interest in the performance of a contract is purely economic, and he cannot establish that any economic loss has resulted from its breach, the normal inference is that he has not suffered any loss (paragraph 95(9)); breach of a non-competition obligation may cause the claimant to suffer pecuniary loss resulting from the wrongful competition, such as a loss of profits and goodwill, which is measurable by conventional means, but in the absence of such loss, it is difficult to see how there could be any other loss (paragraph 93);

•

that said, evidence of a hypothetical release fee might still be relevant to assessment of loss in other circumstances eg where the parties had been

1044

Damages for inducing breach of contract and other economic torts 16.23

negotiating a release fee prior to breach – but (other than in the loss of an ‘asset’ case) this would not constitute the loss itself (paragraphs 94 and 100). The relevance of such evidence would lie in it affording some guide to the value of the actual loss suffered. Accordingly, following this decision, in employment competition cases, negotiating damages would appear to be limited to claims of breach of confidence or infringement of intellectual property rights. In One Step itself, the Supreme Court ordered that the hearing on quantum should not proceed on the basis of assessing a notional release fee but it was for the judge to assess the financial loss the claimant actually sustained. If evidence was led in relation to a hypothetical release, it was for the judge to assess its relevance and weight, if any, but such a fee was not the measure of the claimant’s loss (paragraph 100).

2. DAMAGES FOR INDUCING BREACH OF CONTRACT AND OTHER ECONOMIC TORTS 2(a) The economic torts: inducement of breach tort compared with conspiracy 16.22  The different kinds of claims that may be made against third parties are considered in detail at 19.29–19.61. The most frequently encountered claims within the context of this book are: •

Claims usually made by the (ex-)employer against the new employer (or some other third party, including other (ex-)employees) for inducing breach of contract by the (ex-)employee (see 19.31–19.38). The elements of the tort, in particular the necessary knowledge of the third party, were considered by the House of Lords in OBG Ltd v Allan [2008] 1 AC 1.

•

Claims for conspiracy to cause harm by unlawful means (see 19.39–19.51). While there is a prospect of a higher award of damages in the case of the tort of conspiracy than with other torts which are not based on dishonesty (see 16.24 below), it may be a matter of fine judgment whether it is appropriate to plead conspiracy when there are other economic torts which can be pleaded against the relevant third parties. For example, in a team move case the claim can often be pleaded against the new employer on the basis of knowing inducement of the departing employee to breach his contract of employment (including, where appropriate, his restrictive covenants), or breach of confidence. To add a claim of conspiracy (or, for that matter, dishonest assistance in breach of fiduciary duty) may simply be for the claimant to take on a disproportionately greater burden, together with the attendant risk of an adverse issues based costs order.

16.23  Dishonesty-based claims are in the nature of fraud claims which have to be distinctly pleaded and proved (see PD 16, paragraph 8.2(1)). In Hornal v Neuberger [1957] 1 QB 247 (CA) it was held that where fraud, or another matter which is or may be a crime, is alleged against a party or against persons not parties to the action, 1045

16.24  Final remedies

the standard of proof to be applied is that applicable in civil actions generally, namely proof on the balance of probability, and not the higher standard of proof beyond all reasonable doubt required in criminal matters. It has been said, relying on Hornal and In re H [1996] AC 563 (in particular per Lord Nicholls at pages 586–587) that it was a rule of evidence that the more serious the allegation the more convincing must be the proof of the matters alleged because serious wrongdoing was less probable than no wrongdoing. That can no longer be said to be an accurate statement of the law. The passage in Lord Nicholls’ speech in Re H has been the subject of considerable comment in later decisions of the House of Lords and the Supreme Court: see Re B [2009] AC 11; Re S-B [2010] 1 AC 678 and Re J [2013] 1 AC 680. The authorities were collected and considered in Otkritie International Investment Management Ltd v Urumov [2014] EWHC 191 (Comm) at 84–91 and Group Seven Ltd and another v Nasir and others; Equity Trading Systems Ltd v Notable Services LLP and others [2017] EWHC 2466 (Ch) at 49, which latter case held (at 50–51) that the correct position in relation to the standard of proof for allegations of dishonesty or which are serious, is that it is the civil standard, namely that the allegations must be proved on the balance of probabilities. It must be proved that the fact which is in issue more probably occurred than it did not occur. While it is obviously right to consider the inherent probability, or the inherent improbability, of an event in considering whether it has been proved on the balance of probabilities, there is no necessary connection between seriousness and inherent improbability (an approach recently applied in the employee competition context, in the case of Bourne Rail Ltd and another v Ashton and others [2018] EWHC 73 (QB) at paragraphs 50 and 305). Further, it is not correct to say that the more serious the consequences of a finding, the more cogent must be the evidence in support of it.

2(b)  Measure of loss for economic torts 16.24  The approach to an award of damages for economic torts (eg inducing a breach of contract or conspiracy) is in line with other torts. The economic torts are referred to at 19.29–19.61. The claimant is entitled to be put in the position in which it would have been but for the commission of the torts, which may include compensation for loss of profits and compensation for expenses incurred. In cases of unlawful team moves and other acts of joint wrongdoing the damages can be substantial. In British Midland Tool Ltd v Midland International Tooling Ltd [2003] 2 BCLC 523 (discussed at 4.187) the claimant succeeded in each of its heads of loss: (1) loss of the claimant’s business; (2) trading losses subsequently incurred; and (3) closure costs, all claimed and found as having been caused by the unlawful conspiracy. In relation to the inducement tort although there must be a causal connection between the inducement to breach contract and the loss suffered, the wrongdoing of the (ex)employee does not act so as to break the causal chain; such a strict requirement of direct causation would render the accessory economic torts impotent: Grupo Torras SA v Al-Sabah (No 5) [2001] Lloyd’s Rep PN 117. 16.25  Compensation for expenses incurred as a result of the third party’s wrongdoing can cover a wide variety of costs. A full understanding of the steps taken 1046

Damages for breach of confidence 16.28

by the (ex)employer is required before all of the potential heads of damage can be assessed. It can include not only the costs of investigating the breach and the inducement of the breach, but also the costs incurred in attempting to mitigate the consequences of such breach: British Motor Trade Association v Saladori [1949] Ch 556. For a fuller treatment of the subject of damages for economic torts, see McGregor on Damages (20th edn) Chapter 48.

2(c)  Exemplary damages for economic torts 16.26  As with all torts, exemplary damages are available for inducing a breach of contract: Kuddus v Chief Constable of Leicestershire [2002] 2 AC 122 (HL). The speeches in Kuddus develop, and simplify, the availability of exemplary damages significantly from Lord Devlin’s formulation of required categories in Rookes v Barnard [1964] AC 1129. What is now required is ‘outrageous conduct’ (per Lord Nicholls at paragraph 144). This broadens Lord Devlin’s second category, which was that the breach must have been calculated to create a profit likely to exceed any compensation to the claimant. The Kuddus approach to exemplary damages was applied by the High Court of Hong Kong in a ‘team move’ case: Deacons v White & Case LLP, HCA 2433/2002. Of White & Case’s inducement to breach contract, deputy High Court judge Gill said (at paragraph 252): ‘I  have to say all of this amounts to a cynical disregard for the rights of Deacons, putting profit before honour; it is below the belt. But I cannot go so far as to find that it was vindictive, or malicious, or contumelious, and I  am not, objectively, filled with a sense of outrage. In the circumstances, on the authorities and specifically those that are current I  find against the claim for exemplary damages; but not by much.’

16.27 Despite the broadening of the availability of exemplary damages to all torts, as the Deacons case aptly demonstrates, they are still not awarded lightly. In similar vein they were refused in British Midland Tool Ltd v Midland International Tooling Ltd [2003] 2 BCLC 523 at paragraphs 251–252 (notwithstanding the finding of conspiracy), the judge stating: ‘The Tamworth 4 did not execute their plan in the belief that it would result in a greater profit for themselves than the compensation payable to the claimant. Their principal motive was to be able to work for themselves rather than the Allen Group. Had MIT in fact made profits which exceeded the compensation payable to the claimant, there would have been nothing, given the nature of causes of action relied on, to stop the claimant from claiming an account of those profits. The claim for exemplary damages has plainly been conceived in a punitive spirit’.

3. DAMAGES FOR BREACH OF CONFIDENCE 3(a)  Damages for breach of confidence in a contractual context 16.28  The authorities on the measure of damages for breach of confidence are not always easy to follow. However, where the issue of damages for breach of 1047

16.29  Final remedies

confidence arises in the context of a contract, such as the contract of employment, the position is simpler. There is no reason why they should not be assessed in the usual manner for breach of contract, ie Hadley v Baxendale (1894) 9 Exch 341 principles. There ought to be no need to refer to other bases of liability (whether in equity or otherwise) where there is a contract: Vokes Ltd v Heather (1945) 62 RPC 135 (CA) at page 141 cited in Faccenda Chicken v Fowler [1987] Ch 117 (CA) at page 135: ‘Where the parties are, or have been, linked by a contract of employment, the obligations of the employee are to be determined by the contract between him and his employer.’

16.29 As with damages for breach of restrictive covenants, where the breach of contractual confidence causes the (ex-)employer to lose business, the measure of damages will be the loss of the chance of retaining that business: see SBJ Stephenson v Mandy [2000] FSR 286, in which the claimant was (in addition to the loss of commission for one year) awarded damages for the loss of the chance of retaining the clients in future years as a result of the defendant’s use of confidential information in breach of contract. (The loss of the chance was valued at one third of lost net commission and fees for a multiplier of three years.) See also Jackson v Royal Bank of Scotland plc [2005] 2 All ER 71, in which the principles of loss of chance in the context of breach of contractual confidence and breach of contract more generally were examined by the House of Lords in detail. The claimant was a client of the defendant bank, which passed to the claimant’s client (‘EB’) details showing substantial profits being made by the claimant in its contract with EB. The result was that EB cancelled its contracts with the claimant. The House of Lords concluded that the effect of the contract that the defendant had entered into was that it was obliged not to pass on information about the prices which were being charged by the supplier, and the claimant had an obvious and legitimate interest in maintaining its confidentiality. There was no evidence that the parties had contemplated at the time of the contract that knowledge of the supplier’s identity and its contact details would lead inevitably to knowledge of the prices; the fact that EB had had the means of obtaining that information if it chose to do so was beside the point. There was no reason to suppose that, had it been asked at the time of the contract, the claimant would have agreed to the release of the confidential information. As soon as the confidential information was released, there was no repeat business. Accordingly, the loss of the repeat business was not too remote, and the claimant was entitled to damages for loss of the opportunity to earn profits from its trading relationship with EB. The defendant’s liability was not limited to a period of one year. No cut-off point had been provided by the contract and the only limit on the period of its liability was when, on the facts, the question whether any loss had been sustained had become too speculative to permit the making of any award. The award which the judge had made, on a reducing basis extending over a four-year period, was as good an estimate as could now be made of the effect on the claimant’s profits of the defendant’s breach of contract. 1048

Damages for breach of confidence 16.31

3(b) Damages for breach of confidence outside contractual context 16.30  There has been debate in a number of cases as to whether an action for breach of a non-contractual duty of confidence is an action in tort. In the Court of Appeal in Douglas and Others v Hello! Ltd [2001] 2 WLR 992, Sedley LJ referred to ‘the tort of breach of confidence’ (at 999 and 1000). However, support for the tortious basis has tended to come from cases concerned with infringement of privacy. Protection of confidential (as opposed to private information) has more commonly been regarded as an equitable principle, not a tort: see OBG v Allan [2008] 1 AC  1 per Lord Nicholls, and Google Inc v Vidal-Hall [2015] 3 WLR 409 where the Court of Appeal held that it was bound by Kitechnology BV  v Unicor GmbH  Plastmachinen [1995]  FSR  766 at 777–778, to the effect that an action for breach of confidence is not an action in tort (albeit the point in Google is arguably obiter, since the court was considering breach of private information, which is on any view a tort). Notwithstanding this approach, in general, outside the contractual context the measure is the tortious measure of damages. The claimant is entitled to that sum which will put him in the position in which he would have been if he had not sustained the wrong: Dowson & Mason Ltd v Potter [1986] 1 WLR 1419 (CA) and Indata Equipment Supplies Ltd v ACL Ltd [1998] FSR 248. In Indata, the Court of Appeal assessed damages for breach of confidence on the tortious basis, but the Kitechnology case was not referred to. One way of rationalising Indata (as proposed by Arnold J in Force India Formula One Team Ltd v 1 Malaysia Racing Team SDN BHD and others [2012] EWHC 616 (Ch)), is that the claimant there was entitled to damages for the tort of unlawful interference, and that the claim for breach of confidence did not entitle it to a greater measure of damages (at paragraph 407). In Dowson & Mason it was held that the particular position of the claimant must be considered: •

If the claimant would have sold or licensed the information, the claimant is entitled to the value of the information either on the basis of the market value of the information or on the basis of a capitalised royalty.

•

If the claimant would not have sold the information but used it, for example, in the manufacture of his own goods, he will be entitled to damages on the basis of his loss of profits.

16.31 Dowson was referred to with approval by the Court of Appeal in Vestergaard Frandsen A/S (now called MVF 3 Aps) v Bestnet Europe Ltd and others [2013]  EWCA  Civ 428 (at paragraphs 24–27). This is consistent with the position adopted in the Force India case, notwithstanding the debate around the proper categorisation of the breach of confidence. In that case Arnold J held (paragraph 424): ‘The same approach is to be adopted to the assessment of damages or equitable compensation whether the obligation of confidentiality which has been breached is contractual or equitable. Where the Claimant exploits the confidential information by manufacturing and selling products for profit, and his profits have been diminished as a result of the breach, then he can recover his loss of 1049

16.32  Final remedies

profit. Where the Claimant exploits the confidential information by granting licences to others, and his licence revenue has been diminished as a result of the breach, he can recover the lost revenue. Where the Claimant would have “sold” the confidential information but for the breach, he can recover the market value of the information as between a willing seller and a willing buyer. Where the Claimant cannot prove he has suffered financial loss in any of these ways, he can recover such sum as would be negotiated between a willing licensor and a willing licensee acting reasonably as at the date of the breach for permission to use the confidential information which has been misused in the manner in which the Defendant has used it.’

16.32  Since the claimant in Dowson had no intention of selling or licensing the information in question, he was entitled to damages on the basis of his loss of profits. On this basis the Court of Appeal distinguished its decision in Seager v Copydex Ltd (No 2) [1969] 1 WLR 809, where the claimant had intended to sell or license the information. In Seager the Court of Appeal held that damages were to be assessed at the market value of the information misused by the defendants. Lord Denning MR said (at page 813): ‘Now a question has arisen as to the principles on which damages are to be assessed. They are to be assessed, as we have said, at the value of the information which the defendant took. If I may use an analogy, it is like damages for conversion. Damages for conversion are the value of the goods. Once the damages are paid, the goods become the property of the defendant. A satisfied judgment in trover transfers the property of the goods. So here, once the damages are assessed and paid, the confidential information belongs to the defendants … The value of the information depends on the nature of it. If there was nothing very special about (the information), that is, if it involved no particular inventive step, but was the sort of information which could be obtained by employing any competent consultant, then the value of it was the fee which a consultant would charge for it: because in that case the defendants, by taking the information, would only have saved themselves the time and trouble of employing a consultant. But, on the other hand, if the information was something special, for instance, it involved an inventive step or something so unusual that it could not be obtained by just going to a consultant, then the value must be much higher. It is not merely a consultant’s fee, but the price which a willing buyer – desirous of obtaining it – would pay for it … If … the confidential information was very special indeed, then it may well be right for the value to be assessed on the footing that in the usual way it would be remunerated by a royalty. The Court, of course, cannot give a royalty by way of damages. But it could give an equivalent by a calculation based on a capitalisation of a royalty. Thus it could arrive at a lump sum.’

16.33 Accordingly, Seager v Copydex Ltd (No  2) is only useful authority for the position where the claimant would have sold or licensed the information. It follows of course that if damages are assessed on a loss of profits basis there is no reason to consider the information as having been ‘transferred’ to the defendant upon payment of damages. However, where damages are assessed on the basis of its value, it is logical to treat the property as having been transferred. See also Gorne v Scales [2006] EWCA Civ 311, in which the measure of damages where customer information had been used in breach of confidence was held by the Court of Appeal to be the value of that information on the open market. 1050

Damages for breach of confidence 16.37

3(c)  Claim for loss of profits for breach of confidence 16.34  In a claim for loss of profits in respect of specific business the claimant must, of course, establish: •

that the business in question was obtained as a result of the misuse of the claimant’s confidential information; and

•

that, but for the defendant obtaining the business in question, the claimant would have done so, in whole or in part: see Universal Thermosensors Ltd v Hibben [1992] WLR 840 at page 851.

16.35 Normal principles of causation and foreseeability apply: in Douglas v Hello! [2008] 1 AC 1, the House of Lords (by majority decision) restored the decision of Lindsay J at first instance to the effect that OK! was entitled to damages in respect of its commercial interest in the photographs of Mr and Mrs Douglas’s wedding. Hello! had contended that the award of damages should not be allowed in full because, on the evidence, a substantial part of the loss was caused by the publication of the unauthorised photographs in national daily newspapers, rather than in Hello!. Lord Hoffmann (at paragraph 127) pointed out that the judge had concluded that the full losses were ‘sufficiently consequential upon the breach and sufficiently foreseeable as to make “Hello!” liable for them in the ordinary way’ (at paragraph  48). Lord Hoffmann further supported the judgment of Lindsay J (at paragraph 53) in which he said: ‘I  do not regard the newspaper publications of the pictures as so remote a consequence of Hello!’s publication as not to be laid at Hello!’s door and plainly the newspaper publications would not have occurred as they did but for Hello!’s publication of the unauthorised photographs.’

16.36  The claimant may alternatively seek to establish a general loss of profit by diminution of his trade. The difficulty of so doing or of proving damage to the claimant’s goodwill (where loss of specific business cannot be shown) is illustrated by Universal Thermosensors (at page 852). There, the claimant relied on a general reduction in turnover as the basis of its claim, but was unable to produce evidence showing that it had lost specific clients due to the defendants’ breaches. The judge was not willing to infer damage to goodwill flowing from the defendants’ canvassing of the claimant’s customers, and held that the recession and general internal disorganisation were more likely to be the causative factors. The judge also held that the fact that the defendants had obtained the names of the claimant’s contacts would not in fact have provided any significant advantage: the reality was that the claimant was vulnerable to competition notwithstanding the theft of its confidential information.

3(d)  Stage of proceedings at which damages are assessed 16.37 In the Queen’s Bench Division damages will normally be assessed at trial; although if a speedy trial is ordered, as often happens in employee 1051

16.38  Final remedies

competition cases, the Court may well order that the expedited hearing deals solely with liability. In the Chancery Division it is usual for damages to be dealt with separately from the hearing as to liability by an enquiry as to damages, as in Saltman Engineering Co Ltd v Campbell Engineering Co Ltd [1963] 3  All ER 413.

3(e)  Further breaches of confidence not proved at trial 16.38  On the enquiry as to damages the claimant may raise further breaches (not proved at trial) in respect of other items of confidential information: National Broach & Machine Co v Churchill Gear Machines Ltd [1965] 2 All ER 961.

3(f)  Date at which damages are assessed 16.39  Damages will normally be assessed at the time of the breach, unless this will cause injustice (eg in a case where damages are calculated by reference to the value of the information, if the value of the information has increased considerably by the date of trial): cf Johnson v Agnew [1979] 1 All ER 883 (HL). In respect of some specific forms of damages claims however, and where there are good reasons to do so, the court will take into account events after the breach. For an account of profits the court enquires into what profits the defendant has actually made as a result of its wrongful act; when licence fee damages are awarded, the benefit to the defendant is, where possible, measured by estimating the sum of money which the defendant would reasonably have had to pay to do lawfully what was done unlawfully or to obtain an equivalent benefit (see Marathon at paragraphs 225 and 245–253).

3(g)  Exemplary damages for breach of confidence 16.40  In trade secrets cases it is not uncommon for the claimant to claim exemplary damages. These are punitive in nature and are appropriate when the defendant has cynically calculated that his breaches are likely to bring him more profit than is likely to be awarded to the claimant: Broome v Cassell & Co Ltd (No 1) [1972] AC 1027. There is some uncertainty as to whether exemplary damages are available for (non-contractual) breach of confidence. However, there is support in Douglas v Hello! Ltd (No 3) [2003] 3 All ER 996 for the proposition that such an award may be made: Lindsay J, at first instance, was happy to assume that exemplary damages (or equity’s equivalent) were available for breach of confidence (although, on the facts, no award was made). However, in Crawfordsburn Inn Limited v Graham [2013] NIQB 79 (albeit without reference to the Douglas v Hello! Decision) it was held that exemplary damages could not be awarded for breach of confidence. 1052

Account of profits 16.42

3(h)  Damages in addition to or in lieu of an injunction 16.41  Finally, it should be noted that damages for breach of confidence may be claimed in addition to, or in substitution for, an injunction under section 50 Senior Courts Act 1981 (the successor to Lord Cairns’s Act). There is some academic debate as to whether there is a claim in equity for non-contractual damages which are not in lieu of an injunction. The better view is that such a remedy is available: see Lord Goff in Attorney-General v Guardian Newspapers Ltd (No 2) [1990] 1 AC 109 (HL) at page 286–7 and Arnold J in Force India Formula One Team Limited v 1 Malaysia Racing Team SDN BH [2012] RPC 29 at paragraph  393. See however the comments in Malone v Metropolitan Police Commissioner [1979] 1 Ch  344 at page 360 to the contrary. It should also be noted that such a claim based on confidentiality is an equitable claim. Accordingly, the normal equitable rules apply. Thus, a court would have a discretion whether to refuse some or all such relief on equitable principles. The court would generally decline to award damages for breach of confidence against a third party who was an innocent purchaser of the information. It may even decline to do so where he was the innocent user of the information without giving value for it, since his conscience was not fixed by equity: see Valeo Vision SA  v Flexible Lamps [1995]  RPC  205. The precise nature of the relief which would be granted will always depend on all aspects of the particular case. Where the confidential information has been passed by the defendant to a third party, the claimant’s rights will prevail as against the third party, unless he was a bona fide purchaser of the information without notice of its confidential nature (Imerman v Tchenguiz [2011] 1 All ER  555 at paragraph  74). Only a third party who knew or ought to have known of the impropriety could be liable to the wronged party.

4. ACCOUNT OF PROFITS 16.42 An account of profits is an equitable remedy. This remedy is based on the principle that the defendant who has improperly received or retained profits acquired from the use of the claimant’s property (including confidential information) should be made to disgorge such profits. Typically, an account of profits would be ordered against a defendant who has committed a breach of fiduciary duty or confidence: Attorney-General v Guardian Newspapers Ltd (No 2) [1990] 1 AC 109 (HL). This remedy looks to the profit of the defendant, while damages typically look to the loss of the claimant. It is an important part of the armoury of the employer who has suffered (or against whom there is threatened) diversion of contracts or other losses through breaches of fiduciary duty or confidence by an (ex-)director or employee. While the (ex-)employer will normally wish to obtain an interim injunction to restrain further breaches, there may be occasions when it is thought advisable not to do so and, instead, to claim an account of profits made by the (ex-)director/employee arising from such breaches. The idea of carrying on business for the ultimate benefit of the (ex-)employer can constitute as much of a deterrent to the new employer and (ex-)employee as an interim injunction. Where a new employer is receiving the benefit of the breaches of contract of the 1053

16.43  Final remedies

(ex-)employee, it is necessary to add the new employer as a defendant to obtain an account of profits against it. 16.43 In Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443, referred to at 16.7, Roskill J held that Cooley had acted in breach of fiduciary duty in failing to pass to IDC all relevant information received in the course of his negotiations with the Gas Board (from whom the claimant company obtained business) and in guarding it for his own personal purposes and profit. He had embarked on a deliberate course of conduct which had put his personal interests as a potential contracting party with the Gas Board in direct conflict with his pre-existing duty as managing director. He was therefore held liable to account to IDC for all the benefit he had received and would receive under the contract with the Gas Board. The question of whether the benefit of the contract with the Gas Board would have been obtained for IDC but for Cooley’s breach of duty was irrelevant. It was therefore irrelevant that as a result of the order for an account IDC would receive a benefit which it would not otherwise have received.

4(a) When is an account of profits available? 16.44  Prior to A-G v Blake [2001] 1 AC 268, an account of profits was available only in the case of breach of (the equitable duty of) confidence or breach of fiduciary duty. It is now possible, in exceptional circumstances, for an account of profits to be ordered as the remedy to a breach of contract: see 16.45–16.47. Further, since the account of profits is a discretionary remedy, the court will take into account such matters as delay in bringing the proceedings, or whether the claimant has acquiesced in the defendant’s conduct, as well as the conduct of the claimant (ie whether he comes to court with ‘clean hands’). In Seager v Copydex Ltd [1967] 1 WLR 923, where the court held that the defendant had not acted dishonestly, damages only were awarded. The defendant’s innocence may have been a factor in this regard. The position should be compared with that of an innocent fiduciary having to account for profits arising from the use of information where his interest conflicts with his duty: Boardman v Phipps [1967] 2 AC 46. Logically, it would seem that an account can only be claimed for breach of an equitable duty of confidence – making it necessary even where there is a contractual obligation of confidence to plead also breach of the equitable obligation – although it is doubtful that a court would disallow the remedy if only contractual breach were pleaded.

4(b)  Account of profits for breach of contract 16.45 The facts of A-G  v Blake [2001] 1 AC  268 were truly unusual: an ex British intelligence officer turned Soviet spy was set to profit from the publication of a book containing information that, although no longer confidential, it was a breach of contract for him to reveal. On those facts the House of Lords extended the remedy of an account of profits to ‘exceptional’ cases of breach of contract. The public policy considerations that were present in A-G v Blake – of 1054

Account of profits 16.48

preventing a double-agent from profiting from his treachery – should be borne in mind when considering the application of the principle to more prosaic cases. 16.46  Although the speech of Lord Nicholls makes clear that a breach of contract case would have to be exceptional to warrant the ordering of an account of profits, he was intentionally unspecific as to what will constitute an exceptional case. He did not accept that the following categories were of assistance in defining what qualified as exceptional: •

a case of ‘skimped’ performance: the defendant has failed to provide the service to the full extent that he contracted to provide; and

•

a case where the defendant does precisely that which he contracted not to do.

16.47  In the Court of Appeal, Lord Woolf MR had identified three factors that also are not sufficient to make a case ‘exceptional’. Whilst Lord Nicholls agreed that none of them, alone, was sufficient to warrant an account of profits, in combination they may well be relevant: •

the fact that the breach was cynical and deliberate;

•

the fact that the breach enabled the defendant to enter into a more profitable contract elsewhere; and

•

the fact that by entering into a new and more profitable contract the defendant put it out of his power to perform his contract with the claimant.

4(c) To what profits is the claimant entitled? 16.48  Where the profits could not have been made without using the confidential information, the claimant is entitled to the whole of the profits. For example, this would encompass the price of the goods made by using the confidential information received less the manufacturing cost, and not merely the additional profit made by use of the confidential information: Peter Pan Manufacturing Corporation v Corsets Silhouette Ltd [1963]  RPC  45. On the other hand, the court may in certain circumstances invoke the principle of proportionality so as to deny the claimant the discretionary remedy of an account of profits altogether. In Satnam Investments Ltd v Dunlop Heywood & Co Ltd [1999] 3 All ER 652, the Court of Appeal declined to hold the third party who had received and used confidential information liable to an account of profits. Satnam had an option to acquire a development site. In breach of fiduciary duty their agents told a rival developer (Morbaine) about the site. Morbaine acquired the site. Satnam claimed to be entitled to the site itself because Morbaine held it on constructive trust. The information was however held to be ‘not very confidential’ and would have been available on reasonable enquiry. Trust property was the gist of the action, and there was no trust property. Accordingly, the Court of Appeal held it would be inequitable (and contrary to commercial good sense) to hold the third party liable on the basis that there was a degree of confidentiality in the information when it was disclosed to the third party. However, what was claimed in that case 1055

16.49  Final remedies

was the development sites itself and not merely a personal liability to account for profits. Satnam therefore is not strong authority for the proposition that there can be no personal liability to account for profits in the case of dishonest assistance in the absence of a misapplication of trust property. In Novoship (UK) Ltd and others v Mikhaylyuk and others [2015] QB 499, it was held that an account of profits is available against one who dishonestly assists a fiduciary to breach his fiduciary obligations, even if that breach does not involve a misapplication of trust property (see further 16.103). 16.49  The position is much more difficult where the claimant’s information contributed only in part to the profit, eg where manufacture was possible by other means, but use of the claimant’s confidential information enabled the defendant to make the product more cheaply. This may have been the principal reason why an account was not granted in Seager v Copydex Ltd [1967] 1 WLR 923: see in particular Lord Denning MR at pages 931F–932B. On the other hand, the court may approach a case in a fairly rough and ready manner, when in doubt leaning in favour of the injured party, as in Normalec Ltd v Britton [1983] FSR 318. See also My Kinda Town Ltd v Soll [1983]  RPC  15 (a passing off case), in which Slade J said: ‘What will be required on the enquiry … will not be mathematical exactness but only a reasonable approximation.’

16.50 See also Attorney-General v Guardian Newspapers Ltd (No  2) [1988] 2 WLR 805 at pages 859–60, where the order for an account of profits against The Sunday Times out of the publication of the book Spycatcher (based on the inferential evidence of increased circulation) was not limited to profits made from those parts of the book which the newspaper was not permitted to publish. Scott J held that the behaviour of the newspaper in publishing was such that it was in no position to argue against the equity of an order that it account for the profit made out of the entire publication. 16.51 The decision of Scott J  was upheld on appeal ultimately to the House of Lords ([1988] 3 WLR  776). There, Lord Keith pointed out (at page 788F) that the newspaper was not entitled in the taking of the account to deduct the sums paid to the publishers of the confidant (Mr Wright) as consideration for the licence granted by them, since neither Mr Wright nor his publisher were, or would in the future be, in a position to maintain an action in England to recover such payments. See further 16.88 in regard to the causal nexus between breach of fiduciary duty and the profits claimed and allowable deductions.

5. CHOICE BETWEEN AN ACCOUNT OF PROFITS AND DAMAGES 16.52  An account of profits and damages are alternative remedies. It is usual for the claimant to seek damages and, in the alternative (at his election), an account of profits (in addition to an injunction and/or an order for delivery up or destruction of material made or acquired in breach of confidence). The particular advantages 1056

Choice between an account of profits and damages 16.55

of seeking an account are well illustrated by Cooley. The claimant is not required to prove loss (which is usually extremely difficult – see 16.7); nor is the claimant required to mitigate his loss. An election can be delayed, usually until final judgment, at which time the claimant can make an informed choice as to which alternative suits him best: Tang Man Sit (Deceased) (Personal Representatives) v Capacious Investments Ltd [1996] AC 514, 521 (PC). At a split trial (ie between liability and remedy) the court may delay entering judgment and require, first, that sufficient information be provided to enable a choice to be made between the alternative remedies (Island Records Limited v Tring International plc [1995] 3 All ER 444 (Lightman J)). 16.53  The potential advantages for the claimant in obtaining an account and attendant dangers for a defendant are illustrated by the case of Normalec Ltd v Britton [1983] FSR 318, where a sales agent used confidential information of the identity of customers and their requirements to entice them away from the claimant, as a result of which Walton J held that the entirety of the defendant’s business belonged in equity to the claimant – even though the business dealt with a large number of matters with which the claimant did not deal: this was an extreme decision (see 4.48 and 16.80). In Ocular Sciences Ltd v Aspect Vision Care Ltd [1997] RPC 289 at pages 413–16 Laddie J refused to impose a constructive trust where there had been no diversion of business, and contamination of the defendant’s business by breaches of confidence was small and technically inconsequential. 16.54  It has been held that in a claim for misuse of confidential information, the claimant does not have a discretion to choose between the remedies of an account of profits and licence fee damages (Vercoe v Rutland Fund Management Ltd [2010] EWHC 424 (Ch) at paragraphs 333–339, approved in Walsh v Shanahan and others [2013] EWCA Civ 411 at paragraphs 63–68 and followed in Hosking v Marathon Asset Management LLP [2017] ICR 791 (Ch) at paragraphs 223–239). It is for the court to decide which remedy is appropriate. That is because the two remedies represent different techniques for measuring a gain made by a wrongdoer. It is a matter for the court, and not for the claimant, to decide what is the most appropriate measure of a claimant’s loss or of a defendant’s gain. Furthermore, the choice of measure should be made by applying legal principles, namely: •

the strength of the interest which the law recognises as deserving protection;

•

whether the defendant could reasonably have expected to obtain the benefit enjoyed by its infringement of the claimant’s right (or an equivalent benefit) by paying for it.

16.55  The objective in any case is to identify the appropriate remedy for the circumstances of the wrongdoing – to make the remedy fit the tort. As Sales J put it in Vercoe, (at paragraph 339) it is to find the ‘just response to the wrong in question’. A claimant is not entitled to such a discretionary remedy in all circumstances in which it can show it has ‘clean hands’. Such a submission was rejected by the Court of Appeal in Walsh v Shanahan and others [2013] EWCA Civ 411 (at paragraph 65), when approving the approach in Vercoe. It was held (at paragraph 66): ‘an account of profits, like all equitable remedies, is discretionary and 1057

16.56  Final remedies

that, on the facts of any particular case, it may be inappropriate to grant it. There are many cases in which an equitable remedy will be refused on a discretionary basis even if the claimant has not disentitled himself to it by misconduct: for example, a claimant for an interim injunction may be refused one because damages are regarded as an adequate remedy.’ 16.56  The aim, therefore, is to do justice that is fair to both claimant and wrongdoer and identify the appropriate remedy, whether damages or an account, for the circumstances of the particular wrongdoing. Different considerations however apply in relation to claims arising from breach of fiduciary duty (see 16.87–16.89 below).

6. PERMANENT INJUNCTIONS 6(a)  Discretion to grant or refuse 16.57  The remedy of a permanent injunction, being an equitable form of relief, is discretionary. However, it will not readily be refused: As was stated by Smith LJ in Shelfer v City of London Electric Lighting Co [1895] 1 Ch 287 at page 322: ‘A person by committing a wrongful act … is not thereby entitled to ask the Court to sanction his doing so by purchasing his neighbour’s rights, by assessing damages in that behalf.’

16.58  In restrictive covenant cases the question of the grant of a permanent injunction may be academic (or be of primary relevance to the issue of costs), since the period of the restriction will often have expired by the time of trial. However, given the modern tendency of the courts to order speedy trial in such instances, that will often not be the case. Once the court has at trial established that the covenant is enforceable, the court then considers the question of whether in the exercise of its discretion it should be enforced against the (ex-)employee. In TFS Derivatives v Morgan [2005] IRLR 246 Cox J stated the principle (at paragraph 39): ‘Even if the covenant is held to be reasonable, the Court will then finally decide whether, as a matter of discretion, the injunctive relief sought should in all the circumstances be granted, having regard, amongst other things, to its reasonableness as at the time of trial.’

16.59 The discretion must be exercised in accordance with established principles. These principles are set out in the judgment of Colman J  in Insurance Company v Lloyd’s Syndicate [1995] 1 Lloyd’s Reports 272 at pages 276–7. In that case the judge found that the defendant would be in breach of an implied duty of confidence arising out of an arbitration agreement if he were to make certain disclosures relating to an arbitration award. The judge dealt with the question whether it was appropriate for the court to grant a final injunction against breach of the duty of confidence. He said (in relation to a contention that where one finds a confidentiality covenant of this kind in favour of a corporate body which has no personal feelings, it is necessary to show that the body will suffer commercial detriment to its trading interests in order to obtain an injunction): 1058

Permanent injunctions 16.62

‘What one has in this kind of case is an implied negative covenant as to confidentiality of the award, the commercial purpose of which is the maintenance of the essentially unquantifiable benefit of secrecy for both parties. If it were the position that no breach of the covenant could be restrained by injunction unless specific loss and damage were proved, the covenant would in most cases be unenforceable like every other negative covenant which had the purpose of conferring an unquantifiable benefit on a contracting party. The Courts have recognised this problem by consistently enforcing such unquantifiable negative covenants without proof of damage unless enforcement would impose severe hardship on the defendant. In Doherty v Allman [1878] 3  AC  709, a case concerned with an injunction to restrain conversion of leased buildings, said to be in breach of an implied negative covenant, Lord Cairns LC stated at page 720 in relation to the enforcement of negative covenants: “It is not then a question of balance of convenience or inconvenience or of the amount of damage or of injury; it is a specific performance by the Court of that negative bargain which the parties have made with their eyes open between themselves.”’

16.60 In Insurance Company v Lloyd’s Syndicate Colman J went on to state: ‘However, Lord Cairns was not in this passage withdrawing injunctions in support of express negative covenants from the category of discretionary remedies, he was merely emphasising the point that the Court would not be deterred from making such an order by absence of proof of loss or damage to the applicant. In other words, proof of damage is not a threshold prerequisite for the remedy’,

and further explained: ‘It is, however, clear that the Courts do exercise a discretion to refuse such injunctions in cases where some particular hardship would be caused to the defendant by enforcement of the covenant, although no damage would be caused to the applicant if there were no enforcement.’

16.61 In Dyson Technology v Strutt [2005] All ER (D) 355 Sir Donald Rattee approved the following summary of the effect of the authorities: ‘1.

Express or implied negative covenants will in general be enforced by injunction without proof of damage by the [claimant];

2.

The principle does not depend on whether the [claimant] is a person or a corporation. The ready availability of the remedy is not the consequence of equity’s regard for the [claimant’s] personal feelings but of equity’s perception that it is unconscionable for the defendant to ignore his bargain.

3.

Although absence of damage to the [claimant] is not in general a bar to relief, there may be exceptional cases where the granting of an injunction would be so prejudicial to a defendant and cause him such hardship that it would be unconscionable for the [claimant] to be given injunctive relief if he could not prove damage. In such cases an injunction will be refused and the [claimant] will be awarded nominal damages.’

16.62 In Dyson the judge concluded that once it has been established that a restrictive covenant is valid and enforceable, then, whether or not the covenantee 1059

16.63  Final remedies

has shown that it would suffer damage by its breach, the court should normally exercise its discretion in favour of enforcing the covenant by injunction. There might be an exceptional case, in which the degree of hardship to be caused to the covenantor by such an injunction in the absence of proof of damage to the covenantee might be so extreme, as to make the enforcement of the covenant by injunction unconscionable. 16.63  The Court of Appeal in D  v P  [2016]  IRLR  355 (also now reported as Dyson Technology Ltd v Pellerey [2016] EWCA Civ 87) endorsed and adopted the approach taken in the Insurance Company and Strutt cases, absent use of the word ‘exceptional’ to describe cases in which covenants were not enforced by injunction, as this left an unhelpfully wide margin for parties to dispute whether or not their case was truly exceptional (at paragraph 20). The court emphasised that the starting point (albeit not necessarily the finishing point) in the consideration of a claim by an employer to enforce an employee’s negative covenant is that the ordinary remedy is an injunction. 16.64  Apart from the case where the covenant is no longer reasonable as at the date of trial (see 16.58), the sort of factors which might be relevant to establishing the existence of the type of case where the court might not grant a permanent injunction include: •

The extent of use of the confidential information. If the contribution was minor, damages may be appropriate: Bostitch v McGarry & Cole Ltd [1964] RPC 173; and see discussion of Seager v Copydex Ltd (No 2) at 16.32– 16.33 and Ocular Sciences Ltd v Aspect Vision Care Ltd [1997] RPC 289 at pages 401, 404 and 406–7.

•

In confidential information cases, where the information was all in the public domain by the time of the trial, and so available to a competitor whom the covenantor wished to join (D v P [2016] IRLR 355) paragraph 21).

•

The extent of publication: however, even fairly wide dissemination may not preclude the grant of an injunction, as long as the injunction will not thereby be rendered useless; see 6.138–6.142, where the issue of the degree of dissemination is discussed.

•

Good faith and change of position on the part of the defendant: see Seager v Copydex (No 2).

•

The public interest (relevant to both restrictive covenant and confidential information cases): Biogen v Medeva plc [1993] RPC 475.

•

The special position of employers and employees (no specific performance of contracts of service and see in particular in relation to garden leave injunctions 15.3–15.73).

•

Other factors which may preclude the grant of equitable relief, eg delay, acquiescence, lack of ‘clean hands’: Ocular Sciences.

It is repeatedly emphasised, however, that the categories of circumstances are never closed and every case will turn on its own facts: D v P (paragraph 21). 1060

Delivery up/destruction 16.67

6(b)  Need to frame injunction precisely 16.65  The injunction sought must be framed with sufficient certainty to enable the defendant to know precisely what he may or may not do: P A Thomas & Co v Mould [1968] 2 QB 913 and Lawrence David Ltd v Ashton [1989] ICR 123 at 132 (see 6.113–6.119). As has been regularly emphasised by the courts, such an approach is especially important in respect of claims for injunctive relief based on alleged breaches of confidence (see Ocular Sciences v Aspect Vision Care [1997]  R.P.C. 289 (at 359) and United Pan-Europe v Deutsche Bank [2000] 2 BCLC 461 at 479h). 16.66  Different kinds of confidentiality injunctions may be obtained, eg springboard injunctions (15.78–15.147) and injunctions preventing professionals from acting against their former clients. In Prince Jefri Bolkiah v KPMG (a firm) [1999] 1 All ER  516 the House of Lords enunciated the following principle: where a former client established that the defendant firm was in possession of information which had been imparted in confidence, that he had not consented to its disclosure, and that the firm was proposing to act for another client with an interest adverse to his in a matter to which the information was or might be relevant, the court would intervene to restrain the firm from acting for that other client. The court would only not intervene if the defendant firm satisfied it, on the basis of clear and convincing evidence, that effective measures had been taken to ensure that no disclosure would occur and that there was no risk of the information coming into the possession of those acting for the other client. However, in Caterpillar Logistics Services (UK) Ltd v Huesca de Crean [2012]  IRLR  410 it was held that there was nothing to justify the extension of the relief granted in the Bolkiah case, which prohibited KPMG from acting against their former client in connection with a matter in which they had previously acted for him, to the ordinary relationship of employer and employee. The principle for which it is authority is confined to solicitors (or firms acting in a similar manner to solicitors – in Bolkiah, the accountants were undertaking the provision of litigation support services. In Generics (UK) Ltd v Yeda Research & Development Co Ltd [2011] EWHC 3200, the Bolkiah principle was applied to patent attorneys, who share many of the characteristics of litigation solicitors) and the approach should not be extended to the employment relationship, except perhaps in the most exceptional of circumstances.

7. DELIVERY UP/DESTRUCTION 16.67  In relation to materials which belong to the claimant he is, of course, entitled in law to delivery up of that which belongs to him (see CPR r 25.1 in respect of interim remedies). In addition, the court may in its discretion (as part of its inherent jurisdiction in equity) order a defendant to deliver up or destroy on oath any materials in his possession or control which contain confidential information of the claimant, even though the physical documents belong to the defendant ‘… with a view to assisting the claimant and ensuring to the claimant the fruits of success in the action’ (Industrial Furnaces Ltd v Reaves [1970] RPC 605 at page 626). 1061

16.68  Final remedies

16.68 These orders are thus intended to ensure that the defendant does not continue the misuse of confidential information. In Industrial Furnaces Graham J  would ordinarily have ordered destruction on oath of the infringing materials but, because he viewed the defendant as unreliable, he ordered delivery up (even though that material might contain confidential information of the defendant). Nowadays, it is quite common for the court to grant orders that deletion of electronically stored information be carried out by or under the supervision of an expert or experts appointed by the claimant and/or the defendant. This is particularly appropriate where the information is stored on a number of different devices and servers and the claimant wants to ensure that its information is irretrievably deleted from them. Often lay personnel do not have the expertise to delete information irretrievably, ie without leaving some version or copy or fragments retrievable by a competent computer user. Deletion by an expert may also be appropriate where the claimant’s information is intermingled with that of the defendant (or privileged or incriminating material of the defendant) and there is a risk that the claimant’s employees may, in the course of inspection and deletion of the claimant’s information, see confidential information of the defendant or some third party. 16.69 In Warm Zones v Thurley & Anor [2014] IRLR 791, Simler J made an order for imaging and inspection of defendants’ computers, albeit not for destruction of material. That approach was relied upon, and extended to destruction of material, in Arthur J Gallagher Services UK Ltd v Skriptchenko [2016] EWHC 603, albeit at an interim application (see 15.153–15.195). The approach adopted by the court was first to assess the evidence, and the court was persuaded that there was a strong case that the claimant would succeed and obtain relief at trial, including destruction. Balancing the scope and effect of the mandatory orders sought against the real risk of use by the defendants of the claimants’ confidential information, the court was persuaded to make orders requiring delivery up, imaging, and search of the defendants’ electronic devices to protect the claimants’ confidential information. The evidence should be destroyed, with the devices thereafter returned to the defendants. So as to eliminate the risk of the defendants’ confidential information being accessed by the claimants, the order made provision for the devices containing the relevant information to be delivered to an external computer expert appointed by the defendants, with the further orders as to how the parties should deal with information agreed to be confidential to the claimants, and provision as to how the parties should deal with evidence which is not so agreed. 16.70  Not only documents (including information stored on computer), but also goods embodying the confidential information, may be ordered to be destroyed: Peter Pan Manufacturing Corporation v Corsets Silhouette Ltd [1963] RPC 45 (destruction of brassieres made using the claimant’s confidential method and design) and see Ackroyds (London) Ltd v Islington Plastics Ltd [1962] RPC 97 at page 105. The destruction of property in this manner is not lightly ordered: in Saltman Engineering Co Ltd v Campbell Engineering Co Ltd [1963] 3 All ER 413 at page 415, while delivery up of infringing drawings was ordered, the court was reluctant to order the destruction of tools which might serve a useful purpose. Instead, an enquiry as to damages both in respect of past and future 1062

Declarations 16.73

loss (under Lord Cairns’ Act) was ordered. In Reid & Sigrist Ltd v Moss and Mechanism Ltd (1932) 49 RPC 461 at page 482 the defendant was ordered to deliver up all items containing the claimant’s confidential information. In the judgment dealing with the terms of the final order in Brandeaux Advisors (UK) Ltd et al v Chadwick [2011] EWHC 58, the court ordered return of confidential documents unlawfully taken by the defendant, but did not go so far as to order that the defendant’s solicitors should also delete the electronic copies of those documents from their servers. The rationale for this limitation was because of the inconvenience to the solicitors themselves, whereas the claimants could be adequately protected by undertakings from the solicitors (at paragraph 5).

8. DECLARATIONS 16.71  The court may make a binding declaration whether or not any other remedy is claimed: CPR r 40.20, a jurisdiction derived from section 19 Senior Courts Act 1981. The remedy is discretionary. The court considers justice to the claimant and defendant respectively, whether the grant of the declaration serves any useful purpose, and whether there are any special reasons why the court should not grant it: Financial Services Authority v Rourke [2002] CP Rep 14. See also 14.123 in relation to interim injunctions. 16.72 A  court will not normally decide academic or hypothetical questions: Re Barnato [1949] Ch  258 (CA). However, a declaration was awarded to an employer in Marion White Ltd v Francis [1972] 1 WLR 1423 (CA) in relation to Marion White’s standard covenant entered into by all its employees, although the particular covenant sued on had ceased to be operative. Marion White still had an interest with regard to their other employees as to whether such a covenant was enforceable. The Court of Appeal (somewhat reluctantly) exercised its jurisdiction in favour of Marion White (allowing them to amend their pleadings to seek a declaration) to put right the view which the judge below took of the standard clause by granting a declaration ‘which satisfied the employer but binds nobody’ (per Stephenson LJ at page 1430H). 16.73 In Greer v Sketchley Ltd [1979]  FSR  197 an employee who, on being threatened that he would be acting in breach of a restrictive covenant in his contract of employment if he joined a rival (as he intended to do), before joining the rival issued proceedings claiming a declaration that the clause was invalid. Sketchley counterclaimed for an injunction. Lord Denning MR commended the employee’s courteous and sensible approach in seeking declaratory relief in order to know the legal position. (The clause was held to be invalid.) Another example where an employer sought a declaration was in Commercial Plastics Ltd v Vincent [1964] 3 All ER 546, where an injunction was sought to restrain Vincent from entering the employment of a particular rival for the period of the covenant, together with a declaration that he was not entitled for the same period to enter the employ of any of Commercial Plastics’ competitors in their field of work. It has become increasingly common for employees to seek a declaration in this 1063

16.74  Final remedies

manner: see eg Thomas v Farr plc [2007] ICR 932 (where the declaration was refused). Usually the court will be prepared to order a speedy trial of the issues – an approach described as ‘wise’ in Greer, and see also Petter v EMC Europe Ltd & Anr [2015] IRLR 847, in which the Court of Appeal surveyed the authorities on expedition, and upheld an order for a speedy trial in respect of an employee’s claim for a declaration notwithstanding that no injunctive relief was sought by the ex-employer. See also 14.120–14.122. For a full discussion on when the court will entertain claims for a declaration where the points in issue are ‘academic’ or ‘hypothetical’ but are points of general public interest, see Rolls-Royce plc v Unite The Union [2010] 1 WLR 318 at paragraphs 13–60. Generally in cases covered by this book there will be a real dispute, so the point will not arise.

9. RECEIVER 16.74  A further remedy (rarely used) for the breach of confidence is the equitable remedy of the appointment of a receiver to collect and receive all profits made by means of the use of the confidential information.

10. RECTIFICATION 16.75  The remedy of rectification of contracts is considered at 12.65–12.73.

11.  REMEDIES FOR BREACH OF FIDUCIARY DUTY 16.76 In many cases, the significance of establishing that an employee has not only acted in breach of contract but also in breach of fiduciary duty will lie principally in the remedies available. The Companies Act 2006 (‘CA 2006’) preserves the pre-existing law in relation to remedies for breach of fiduciary duty. Section 178 provides: ‘178  Civil consequences of breach of general duties (1)

The consequences of breach (or threatened breach) of sections 171 to 177 are the same as would apply if the corresponding common law rule or equitable principle applied.

(2)

The duties in those sections (with the exception of section 174 duty to exercise reasonable care, skill and diligence) are, accordingly, enforceable in the same way as any other fiduciary duty owed to a company by its directors.’

16.77 Different remedies may apply to breach of different provisions. Thus, since the duty to exercise reasonable care and skill under section 174 is expressly not to be treated as a fiduciary duty (section 178(2)), there is no reason for equitable remedies against fiduciaries to apply. Unless otherwise stated, we focus below on remedies likely to arise for breach of the statutory duties under sections 172, 175 and 186 CA 2006 (or their common law/ equitable equivalents), being 1064

Remedies for breach of fiduciary duty 16.79

the duties most likely to be engaged in the context of an employee/ director entering into competition or preparations for competition with the principal. In addition, in order to facilitate other remedies, an order may be made for an account. As explained at first instance by David Richards J in Barnett v Creggy [2015] PNLR 13 at paragraphs 62 and 63: ‘62  An order for an account may be made against a person who holds or has held money or other property for another in a fiduciary capacity, most obviously as a trustee. It is the means by which the beneficial owners of the fund can ascertain the manner in which the fund has been administered and applied, and it may provide the basis for proceedings to recover trust property or for personal remedies against the trustee or others. 63  It is a discretionary remedy which will be ordered if the circumstances of the case warrant it.’

11(a)  Remedies against the fiduciary 11(a)(i)  Proprietary remedies 16.78  A director is treated as a trustee in respect of the company and its assets, and as such a breach of his duty towards the company is a breach of trust (First Subsea Ltd v Balltec [2017] 3 WLR 896 (CA) at paragraphs 59–62). A director who is the recipient of company property which he misapplied in breach of fiduciary duty therefore holds it on trust for the company (JJ Harrison v Harrison [2002] BCLC 162 (CA) per Chadwick LJ at paragraphs 25–30). Equally where a director receives a bribe or secret commission in breach of fiduciary duty, it is held on trust for the company (FHR European Ventures LLP v Cedar Capital Partners LLP [2015] AC 250 (SC)). Property which the fiduciary acquired for his own benefit but which, pursuant to his fiduciary duties, should have been acquired on behalf of the company is treated as being company property on the basis that the fiduciary is treated as being in the same position as if he had acted in accordance with his duty and acquired the benefit for the principal: First Subsea v Balltec [2017] 3 WLR  896 (CA) at paragraphs 36–37). This includes intellectual property (Ultraframe (UK) Limited v Fielding [2005] EWHC 1638 (Ch D) at paragraph 1526), but probably not confidential information (see Douglas v Hello! (No 6) [2006] QB 125 (CA) at paragraph 119). A chose in action such as the benefit of a contract diverted by the fiduciary may also constitute property. As explained by Lewison J in Ultraframe (at paragraph 1491): ‘In this sense property can consist of choses in action (eg  the benefit of a contract with a third party, or a debt). … Thus in the “corporate opportunity” cases, a director who diverts a corporate opportunity away from the company and towards himself holds any resulting chose in action (eg a contract enabling him to exploit that opportunity) on trust for the company, provided that there is a sufficient nexus between the property acquired and the breach of duty. It is possible that the corporate opportunity itself may be regarded as trust property, in the sense of being an intangible asset of the company. …’

16.79  This is consistent with the analysis of Lawrence Collins J in CMS Dolphin Limited v Simonet [2001] 2 BCLC 704 that the underlying basis of liability of a 1065

16.80  Final remedies

director who exploits a maturing business opportunity is that the opportunity is treated in equity as if it were the property of the company. That does not however require that the company has some pre-existing beneficial interest in the corporate opportunity. As explained by Patten LJ in First Subsea (at paragraph 37): ‘a constructive trust will be imposed on fiduciaries in such cases [ie receipt by a director of a benefit resulting from breach of fiduciary duty to the company] regardless of whether it is possible to treat the benefit or payment received by the agent as derived from property in which the principal had a pre-existing interest. This is consistent with cases like Phipps v Boardman [1967] 2 AC 46 and the decision in Bhullar v Bhullar [2003] 2 BCLC 241 referred to by Lord Neuberger where Jonathan Parker LJ said (at paragraph 28): “[W]here a fiduciary has exploited a commercial opportunity for his own benefit, the relevant question, in my judgment, is not whether the party to whom the duty is owed (the company, in the instant case) had some kind of beneficial interest in the opportunity: in my judgment that would be too formalistic and restrictive an approach. Rather, the question is simply whether the fiduciary’s exploitation of the opportunity is such as to attract the application of the rule.”’

16.80  Goodwill may also be regarded as company property for these purposes (see eg  Condliffe v Sheingold [2007]  EWCA  Civ 1043 at paragraphs 11–20). Further, in Normalec Limited v Britton [1983] FSR 318 (Ch D) (see also 4.48 and 16.53), this reasoning was applied to the misappropriation of a business as a whole. Normalec concerned a sales agent who, whilst under a duty to maximise sales for his employer, set up a rival business and diverted sales to that business. Walton J held that, having taken advantage of his fiduciary position to establish the rival business, the whole of that business was treated as belonging in equity to the claimant employer, even though the business may also have dealt with a large number of matters which did not involve competition with the employer. 16.81 A  different conclusion was reached in Ultraframe. Lewison J  decided, albeit without considering Normalec, that a proprietary claim could not be brought in relation to an alleged misappropriation of a business or of profits generally, although it could be available in relation to a specific business asset, whether tangible or intangible, such as the benefit of a specific contract arising from a maturing business opportunity (Ultraframe at paragraphs 1518–1547). The rationale for this view was in part that it was consistent with authority that there could be ‘just allowances’ so that where it is found that a business has been misappropriated by virtue of a breach of fiduciary duty, the fiduciary may be permitted to retain part of the profits, or the profits after a period of time. This may be appropriate where the profits have been generated by the fiduciary’s skill, efforts or resources, whereas there could be no such allowance if the claim was proprietary in nature (Ultraframe at paragraphs 1544–1546). However once it is accepted that the imposition of a constructive trust in such cases does not depend on a pre-existing property right (16.79), but rather is an equitable remedy in response to exploitation of the opportunity in breach of fiduciary duty, there would seem no reason why that proprietary remedy should not be sufficiently flexible to permit just allowances. 1066

Remedies for breach of fiduciary duty 16.85

16.82  Where a director is treated as holding company property on constructive trust (having received the property as a result of the director’s breach of fiduciary duty), the company can enforce the proprietary rights in the property against the recipient of the property or its traceable proceeds, provided that the recipient has retained the property or traceable proceeds and is not a bona fide purchaser for value (Foskett v McKeown [2001] 1 AC  102; Ultraframe at paragraphs 1518– 1522). The proprietary remedy may be an order to transfer the property to the company/principal. Other forms of proprietary remedy may be available, such as, where trust money has been applied to improve property, a charge over that property (Ultraframe at paragraph 1512). Similarly, where the employer’s money has been wrongfully used in breach of fiduciary duty to provide part of the cost of acquiring an asset, the employer may choose between claiming a proportionate share of the asset or enforcing a lien upon it to secure the personal claim against the fiduciary for the amount of the misapplied money (Foskett v McKeown [2001] 1 AC 102). 11(a)(ii) Rescission 16.83  The remedy of rescission may be available either where a fiduciary enters into a contract with the principal/employer in breach of fiduciary duty (HelyHutchinson v Brayhead Ltd [1968] 1 QB 549 at pages 585, 589–590), or where the principal enters into the contract with a third party in which the fiduciary is personally interested and the third party has knowledge or notice of that interest (Transvaal Lands Co v New Belgium (Transvaal) Land and Development Co [1914] 2 Ch  488, CA; Hurstanger Ltd v Wilson [2007] 1 WLR  2351 (CA) at paragraphs 46–47). Ordinarily, where there is a breach of one of the general fiduciary duties, the transaction is voidable rather than void (Pitt v Holt [2013] 2 AC 108 (SC) at paragraph 93). But in GHLM Trading Limited v Maroo [2012] 2  BCLC  369, Newey J  (at paragraphs 170 and 171) considered that where a director has caused the company to enter into a transaction in pursuit of his own interests, rather than the interests of the company (contrary to section 171  CA  2006), as against any party having notice of the fact of the director exceeding his authority, the better view was that the contract was void. 16.84  The nature of the breach and the knowledge of the principal/employer or third party is also relevant to whether rescission will be granted. For these purposes, in claims as between the defaulting fiduciary and the principal, the knowledge of the defaulting fiduciary is not to be applied to the principal (and the same applies as between the principal and any person who dishonestly assists the defaulting fiduciary): see UBS AG (London Branch) and another v Kommunale Wasserwerke Leipzig GmbH [2017] EWCA Civ 1567; [2017] 2 Lloyd's Rep 621 at paragraphs 147–153. Where there has been partial disclosure of a conflicting interest, but not full information, the Court may exercise a discretion against allowing rescission (Hurstanger Ltd v Wilson [2007] 1 WLR 2351 (CA) at paragraphs 43–51). 16.85 Rescission of a voidable contract is only possible if the contract has not been affirmed. In addition it must be possible for there to be restitution of 1067

16.86  Final remedies

benefits received (Gamatronic (UK) Ltd and another v Hamilton and Mansfield [2017]  BCC  670), though it will suffice if practical justice can be achieved between the parties, such as by compensating the wrongdoing director for any work performed): GHLM Trading phLimited v Maroo [2012] 2  BCLC  369 (at paragraph 172). Rescission may be of particular value in the context of a departing director or employee with fiduciary duties, as a means of recovering benefits paid or agreed to be paid prior to discovering the disloyalty. However particularly where the termination arrangements involve the employee giving up a shareholding in the employer, the requirement for restitution may be a significant practical bar to rescission. That was the case in Gamatronic. In the light of the departing director’s non-disclosure of wrongdoing (contrary to sections 172 and 177 CA 2006), the employer was held to be entitled to rescind a share purchase agreement, pursuant to which the employee directors had sold their shares in the employer upon termination of their employment and directorships. However relief was refused, as there could only be rescission on the basis of making restitution, in this case by returning the shares, and the claimants were not prepared to do so. 11(a)(iii)  Personal remedies: compensation or account of profits and/or forfeiture of salary and bonuses 16.86  By way of a non-proprietary remedy, where there is a breach of fiduciary duty, the claimant may elect either to claim compensation or an account of profits for the breach of fiduciary duty. Account of profits 16.87  Whilst the courts have a discretion whether to grant an account of profits in relation to misuse of confidential information, and exceptionally, breach of contract (see 16.45–16.47, 16.52–16.56), an account of profits will invariably be an available remedy where the claim arises from a breach of fiduciary duty (unless an election has been made in favour instead of equitable compensation). See eg Walsh v Shanahan and others [2013] EWCA Civ 411 at paragraphs 37, 68; Novoship (UK) Ltd v Mikhaylyuk [2015] QB 499 (CA) per Longmore LJ at paragraph 118 (distinguishing between claims against fiduciaries and non-fiduciaries – in that case a dishonest assistance claim – and stating that no doubt was being cast on the ‘well-established principle’ of the fiduciary’s duty to account for an unauthorised profit). The fiduciary who makes an unauthorised profit is treated as having made the profit for the benefit of the person to whom the duty is owed, and is liable to account for that profit (Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch) at paragraph 1550; Murad and Murad v Al-Saraj and another [2005] EWCA Civ 959 (CA) at paragraphs 56 and 71 per Arden LJ and at paragraph 108 per Jonathan Parker LJ). For policy reasons the courts decline to investigate hypothetical situations as to what would have happened if the fiduciary had performed his duty. Even if findings of fact are made as to what would have happened (as may be the case if there is also a common law claim in tort or for breach of contract), this remains irrelevant to the account of profits (Murad at paragraphs 59, 76 and 85 per Arden LJ). 1068

Remedies for breach of fiduciary duty 16.88

16.88  The profits to be accounted for are those made within the scope of the duty. Therefore in the case of unauthorised profits made in the context of a conflict or potential conflict of interest, the defaulting fiduciary is liable to account only for profits made ‘within the scope and ambit of the duty which conflicts or may conflict with the personal interest’ (Murad at paragraph 112 per Jonathan Parker LJ). There must be ‘some reasonable connection between the breach of duty and the profits for which the fiduciary is accountable’, such that the profits are properly attributable to the breach of duty (CMS Dolphin Limited v Simonet [2001] 2 BCLC 704 at page 732; Ultraframe at paragraphs 1583 and 1588). The account should not be transformed into a vehicle for unjust enrichment for the claimant (Ultraframe at paragraph 1582). There are various ways in which the account can be fashioned: (1) It is open to the defaulting fiduciary to show that some of the profit was not attributable to his wrongful act, but due to (for example) his own skill and effort. The burden is on the defaulting fiduciary in relation to this (Murad per Arden LJ at paragraphs 77–79; Ultraframe at paragraph 1582). In Clegg v Pache [2017] EWCA Civ 256, the court reached a similar conclusion on the facts by a different route. Here one of two directors and owners of a joint venture company had over many years been diverting business to another company, FPL. At first instance it was held that it was for the claimant to identify each item or element of FPL’s profits which was sufficiently referable to the breach. On appeal the court held that since the defendant had actively concealed his interest and involvement in FPL, justice required that the starting point should be an obligation to account for all of FPL’s profits for the relevant period except where it could be shown they were independently undertaken or earned. (2) On the taking of the account, the court may exercise a discretion to make an allowance for the skill and effort of the defaulting fiduciary (Murad per Arden LJ at paragraph  88). This issue was considered by Elias J  in Nottingham University v Fishel [2000] ICR 1462 at pages 1499D–1450D. He noted (following Guinness plc v Saunders [1990] 2  AC  663 (HL) at page 701 per Lord Goff) that in principle an allowance should only be made where it would not have the effect of encouraging a fiduciary to put himself in a position where his personal interest might conflict with his duty. However, he considered that in an appropriate case this would not preclude some allowance being made by way of reward for services rendered (if not already covered by remuneration paid by the employer), albeit not compensation representing the full value of those services. In Fishel Elias J therefore allowed a payment equivalent to that which would have been received if he had arranged the work pursuant to his contract – equating to 5% of the total payments. However, whilst an allowance may be made to reflect the skill and effort of the defaulting fiduciary, the account may extend to further benefits consequential upon the diversion of an opportunity. Where the fiduciary diverts a contract, therefore, the account may include profits from subsequent renewals even though there was no right of renewal when the contract was diverted: Woodfull v Lindsley [2004] 2 BCLC 131. 1069

16.88  Final remedies

(3) The nature and circumstances of the breach are relevant considerations in exercising the discretion but there can be an allowance for work and skill notwithstanding that the conduct of the fiduciary is open to criticism (eg  Roadchef (EBT) Ltd v Ingram Hill [2014]  EWHC  109 per Proudman J at paragraph 201), though not where the fiduciary had been guilty of any ‘dishonesty or bad faith, or surreptitious dealing’ (Cobbetts LLP  v Hodge [2010] 1  BCLC  30 per Floyd J  at paragraph  52; Imageview Management Limited v Jack [2009] 2  All ER  666 (CA) at paragraphs 56–57). This limitation applies specifically to an allowance for work and skill, rather than to expenditure incurred in order to make the profit: Cobbetts at paragraph 116. In Cobbetts the defendant, Mr Hodge, was an employee in a solicitor’s firm who was held to owe relevant fiduciary duties in relation to work carried out for a client in finding investors in the client company. He negotiated and was allotted a 5% share in the client company, which amounted to a secret profit in breach of fiduciary duty. Floyd J acknowledged that Hodge had worked hard for the client but also noted that he had not simply omitted to disclose the arrangement with the client but had given his employer a misleading account of the basis of his acquisition of the shares. As such to permit him an allowance for his skill and work would be to offend against the principle that there could be no such allowance in cases of dishonesty, bad faith or surreptitious dealing and would also be ‘to encourage fiduciaries to place their own interests ahead of those for whom they serve’. The only allowance made, therefore, was for the cost of acquiring the shares. See also eg  Accidia Foundation v Simon Dickinson Limited [2010] EWHC 3058, where an agent who was required to account for profits was permitted some allowance in relation to service provided where its conduct, though open to criticism, was not surreptitious. (4) In the case of diversion of business, it might be open on the evidence for a court to limit the period of the account of profits on the basis that there will come a time when it can safely be said: (a) that any future profits of the new business will be attributable not to the goodwill misappropriated but to the defendant’s own efforts in carrying on the new business; and (b) that the profits are no longer tainted by the position of conflict and therefore not within the scope and the ambit of the fiduciary duty (Murad at paragraphs 115–116 per Jonathan Parker LJ). (5) A  further possibility may be to order a payment representing the capital value of the advantage obtained (Ultraframe at paragraph 1588). (6) In Northampton Regional Livestock Centre Co Limited v Cowling [2014]  EWHC  30, Green J  (at paragraphs 190–191, 265–267) accepted that a distinction was properly to be drawn between partial and total nondisclosure in relation to the remedies available in the event of a benefit received in circumstances of an unauthorised conflict of interest (an appeal by the defaulting directors was rejected, but did not address this issue [2016] 1 BCLC 431 (CA)). Where there has been no disclosure at all, the payment or receipt of a secret commission is treated as a bribe and as a form of fraud, where it is ‘unnecessary to prove motive, inducement or loss up to the amount of the bribe’; the principal can recover the amount of the bribe, 1070

Remedies for breach of fiduciary duty 16.90

or damages for fraud if there is loss from entering into the transaction in respect of which the bribe was given, and the transaction is voidable at the election of the principal (Cowling at paragraph 190, following Hurstanger Ltd v Wilson [1997] 1 WLR 2351 at paragraph 38). Where there is consent obtained but only on the basis of partial or inadequate disclosure, the payment is not treated as being fraudulent or as a bribe. In this case the fiduciary had acted as agent for the vendor of a property and also for the purchaser. Although he disclosed that he was acting for the purchaser he failed to disclose the valuable terms which entailed entitlement to a third of any uplift on a further sale by the purchaser, or that he had disclosed the vendor’s confidential commercial information to it. Since there was consent on the basis of partial disclosure this was not a bribe. However, despite the greater flexibility potentially available than if the case was treated as fraudulent, he was still required to account for the fee he earned from the purchaser (a third of the profit on onward sale) since this was earned through the breach, and to account for the fee paid to the claimant. 16.89  As indicated at 16.88(3), (6) therefore, although bad faith is not a necessary element in establishing a breach of fiduciary duty, it may be relevant to the question of the allowances to be made on the taking of the account (Murad at paragraph 68 per Arden LJ). Compensation 16.90  Equitable compensation may be ordered where the employer/ principal suffers loss as a result of the breach of fiduciary duty (see eg  Gwembe Valley Development v Koshy (No 3) [2004] 1 BCLC 131 (CA) per Mummery LJ at paragraph 142; AIB Group (UK) Plc v Mark Redler & Co Solicitors [2015] AC 1503 (SC) per Lord Toulson at paragraph  55; per Lord Reed at paragraph  134). Broadly, equitable compensation for breach of duty seeks to place the claimant in the position as if the duty had been performed (AIB Group per Lord Reed at paragraph 94). Compensation is assessed at the date of trial with the benefit of hindsight; common law principles of remoteness and foreseeability do not apply (AIB Group (UK) Plc v Mark Redler & Co per Lord Reed at paragraph 135). But the defaulting fiduciary is only liable for loss caused by the relevant breach of duty, applying a ‘but for’ test of whether loss would not have occurred but for the breach of fiduciary duty (and not loss that would have occurred even if the breach of duty had not taken place) (Novoship (UK) Ltd v Mikhaylyuk [2015] QB 499 (CA) at paragraph 105). Therefore there can be no claim for loss which has been avoided unless the benefit is collateral (see Madoff Securities International Limited (in Liquidation) v Raven [2013] EWHC 3147 (Comm) at paragraphs 296–303; AIB Group). It is therefore open to the defaulting director to show that the loss, or part of it, would still have been incurred if the relevant duty had been performed (see Gwembe Valley Development v Koshy (No 3) [2004] 1 BCLC 131 at paragraphs 142–147; Target Holdings Limited v Redferns [1996] 1 AC 421 (HL) at pages 434F and 438D–439B per Lord Brown Wilkinson; Bank of Ireland v Jaffery [2012] EWHC 1377 at paragraph 290). This is in contrast with the position in relation to an account of profits (see Murad and Murad v Al-Saraj and Westwood 1071

16.91  Final remedies

Business Inc [2005] EWCA Civ 959 (CA) at paragraphs 66–67 per Arden LJ, at paragraph 111 per Jonathan Parker LJ). But see Goldtrail Travel Limited v Aydin [2016] 1 BCLC 635 (CA) at paragraph 44), in which Vos LJ doubted whether, in calculating equitable compensation for diversion of an opportunity in breach of section 175 CA 2006, it is permissible to reduce compensation to allow for the chance that the company would not have secured the opportunity but for (in that case) the dishonest assistance in the breach of fiduciary duty. 16.91 A  claim for equitable compensation may also proceed on the basis of compensating loss of a chance. In Hosking v Marathon Asset Management LLP [2017] Ch 157 (Ch), Mr Hosking was a member of the claimant LLP and part of its senior management. He was found to have acted in breach of fiduciary duty owed to the LLP by discussing with four of its employees the possibility of starting a new business and producing a business plan. An arbitrator (David Owen QC) concluded that in relation to three of the employees the breach of duty had led to the loss of the chance that they could have been retained despite Mr Hosking’s impending departure. The chance was assessed at 5%, and equitable compensation of over US$1m was awarded for the loss of this chance, given the impact on the claimant investment management business. 16.92 In Swindle v Harrison [1997] 4 All ER 705 (CA) Evans LJ suggested, by way of exception to this approach to equitable compensation, that in cases of fraudulent breach of fiduciary duty it may not be open to the fiduciary to show that the loss would still have been sustained if the duty had been performed. A similar view was expressed in Bairstow v Queen’s Moat Houses Plc [2002]  BCC  91 (at paragraphs 52–54 per Robert Walker LJ). However, in Gwembe Valley Development, in the context of dishonest non-disclosure in breach of fiduciary duty, the Court of Appeal concluded ([2004] 1 BCLC 131 at paragraph 147) that a director is not responsible for loss which the company would have suffered even if he had complied with his duty. Forfeiture of remuneration 16.93  A fiduciary agent who acts dishonestly, or is to be treated as having acted dishonestly (as in the case of receiving a secret profit) and in breach of a fiduciary obligation, forfeits the right to commission or remuneration for services without proof of loss or any mental element of fraud or dishonesty beyond that required to establish the breach, but subject to the limitation that this does not entail loss of remuneration for other severable dealings or for services generally: Stupples v Stupples & Co (High Wycombe) Limited [2013] 1  BCLC  729; Imageview Management Limited v Jack [2009] Bus LR 1034 (CA). The principle has tended more readily to be applied to one off transactions rather than to remuneration in an ongoing relationship such as an employee’s salary and bonuses: Avrahami v Biran [2013] EWHC 1776 at paragraph 343. Thus in Imageview a footballer’s agent who made a secret side deal forfeited his entitlement to commission on the secret deal and had to re-pay all that he had received. In Stupples a consultant forfeited fees in relation to a particular transaction in relation to which he had acted in breach of fiduciary duty by encouraging the client to withdraw its instruction 1072

Remedies for breach of fiduciary duty 16.97

and engage the consultant’s own firm, but HHJ Cooke concluded that it would be unjust to require the monthly consultancy fee paid in relation to the provision of services generally to be forfeited. 16.94 The difficulty of a claim for forfeiture of salary in the context of an ongoing relationship is illustrated by the decision in Bank of Ireland v Jaffery [2012] EWHC 1377. Mr Jaffery, a senior executive of the claimant bank, acted in breach of fiduciary duties in relation to loans made to customers or projects in which he had an undisclosed interest. However (at paragraphs 370–373) Vos J held that it would be disproportionate and inappropriate to require Mr Jaffery to repay his salary and bonuses. The case was to be distinguished from one where an agent acted with disloyalty in relation to the sole subject matter of the agency. Here although Mr Jaffery had acted with disloyalty in relation to particular loans, in other respects he had been a valuable and diligent employee and worked long hours over several years. Further the bank could be fully compensated on ordinary principles by requiring him to disgorge his profits or pay equitable compensation. If Mr Jaffery had complied with his duty of disclosure he would have been dismissed, but that did not make it equitable for him now to have to repay his salary and bonuses. 16.95  Jaffery was distinguished in Avrahami v Biran where one of the parties to a joint venture agreement had misappropriated substantial sums, acting in dishonest breach of fiduciary duty over several years. The Court concluded that forfeiture of monthly management fees over the period was neither disproportionate nor inequitable. The principle was also applied in Hosking v Marathon Asset Management LLP [2017] Ch 157 (Ch) (16.91) to deprive an LLP member of that part of his profit share which was in substance remuneration relating to a period of six months during which he was found to have acted in breach of fiduciary duty by discussing proposals to set up a new business with four employees of the LLP. 16.96 In Gamatronic (UK) Ltd v Hamilton [2017] BCC 670 (4.199–4.201), the decision in Avrahami was explained on the basis that the dishonest conduct had existed throughout the period when fiduciary duties were owed. The Court preferred to follow the approach in Jaffery on the basis that whilst there were breaches in preparing to compete, it had not been shown that the defendants had failed to dedicate proper time and attention to their work for the claimant. The breaches of duty found had to be viewed in the context of the employment as a whole and in that context (at paragraph 179) it was regarded as unfair and inequitable to require the defendants to repay their salaries for the whole of the period from October 2010. See also Milanese v Leyton Orient Football Club Limited [2016] IRLR 601 (referred to at 4.14) where the Court similarly concluded (at paragraph 140(i)) that even if the particular breach of duty found to have been committed by a director of football had involved a breach of fiduciary duty, there was no reason for him to repay all of his salary and benefits during employment as there had been no failure of consideration; he had been in his employment for several months and many aspects of his performance had not been the subject of criticism. 16.97  An alternative argument sometimes pursued in order to seek to recover the remuneration paid, is that if there had been compliance with duties of disclosure, 1073

16.98  Final remedies

the employment would have terminated earlier. Generally such arguments have not met with success. It failed in Stupples, and again in Brandeaux Advisers (UK) Limited v Chadwick [2011] IRLR 225, due to absence of proof of loss. In Brandeaux the Court emphasised that the employer had the benefit of the work carried out by the defaulting employee and, in the absence of evidence to the contrary, its value was to be taken as the salary paid by the company, notwithstanding that it had been seeking to dismiss her on redundancy grounds. However in Wey Education Plc and another v Zenna Atkins [2016]  EWHC  1663 (see 4.237) it was found (at paragraph 150) that dismissal would have been brought forward by a period corresponding to the period of delay in making full disclosure (one month) and damages were therefore awarded of equivalent to one month’s salary and benefits. 16.98  Different arguments arise in relation to payments made on termination rather than as remuneration for services. Here there may be more straightforward arguments that payment would not have been made if there had been compliance with a duty of disclosure (see eg  Cavenagh v William Evans Ltd [2013] 1 WLR 238 (CA) per Mummery LJ at paragraph 19). In addition, failure to comply with a duty of disclosure may provide a basis to recover sums paid under a termination agreement by exercising a right to rescind the agreement. Public policy defence to claims based on profit from breach of fiduciary duty 16.99  A breach of fiduciary duty may also have an impact on the claims which the defaulting fiduciary can pursue where the relief sought would involving profiting from the wrongdoing. As illustrated by the decision in Medsted Associates Ltd v Canaccord Genuity Wealth (International) Limited [2017]  EWHC  1815 (Comm), the impact of public policy is not limited to the refusal of equitable remedies where the claimant does not have ‘clean hands’. It may also impact on common law claims. Medsted had entered into a contract with Canaccord under which it had agreed to introduce clients for trading purposes in return for a share of the commission paid by clients. Subsequently Canaccord entered into business directly with the clients. The court (Teare J) held that Canaccord had acted in breach of the agreement with Medsted by failing to inform it of all the trades done by the introduced clients, and thereby depriving Medsted of the ability to exercise its right to commission. However he also found that Medsted owed fiduciary duties to the clients which it introduced, which it breached by failing to inform them of the division of commission between itself and Canaccord. Although the fiduciary duty was not owed to Canaccord, Teare J (at paragraph 135) applied the principle that the remedy of damages can be denied on grounds of public policy, and in particular that damages cannot be claimed where the root of the damage was the claimant’s own wrongdoing (following Weld-Blundell v Stephens [1920] AC 956 at page 976). Whilst Teare J acknowledged that authority to this effect might be explained on the basis of causation, he considered that, more broadly, the court should not assist Medsted to profit from its own breach of fiduciary duty to its clients. Medsted’s own breach of fiduciary duty was the root of the loss. 1074

Remedies for breach of fiduciary duty 16.102

11(a)(iv)  Sums diverted to the fiduciary’s company or partnership/ joint venture 16.100 Where profits resulting from a breach of fiduciary duty are paid to a partnership of which the defaulting fiduciary is a partner, he is accountable in full for the profits even if the partners are entitled to part of the profit and are ignorant of the breach of fiduciary duty: CMS Dolphin Limited v Simonet [2001] 2 BCLC 704 at paragraph 131; Ultraframe at paragraph 1565. The same applies if the profits are diverted by the fiduciary to a joint venture to which the fiduciary is a party: National Grid Electricity Transmission Plc v McKenzie and others [2009] EWHC 1817, at paragraph 118. However for this purpose the joint venture must involve an economic activity under the joint control of the fiduciary and another, and in which there is some sharing of benefit, rather than merely a sharing of effort. On that basis in Breitenfeld UK Ltd v Harrison [2015] 2 BCLC 275 (at paragraph 64), there was held not to be a joint venture in the relevant sense where the fiduciary (the managing director of the claimant company) assisted other employees (his son and daughter-in-law) to set up a rival company in breach of his fiduciary obligations but did not derive any personal benefit in doing so. However, see also Airbus Operations Ltd v Withey [2014] EWHC 1126 where (at paragraphs 448, 449), distinguishing National Grid Electricity Transmission Plc v McKenzie, HHJ Havelock-Allan QC held that where X and Y, essentially as coventurers, had each received a bribe in breach of their fiduciary obligations, X was not liable to account for sums paid to Y in the absence of loss caused by the bribe. 16.101  Where the profits are instead paid to a company rather than directly to the defaulting fiduciary, the fiduciary and the company will be jointly and severally liable to account for the profits where the company that has received the profits is merely a device or façade concealing that the fiduciary is the beneficial owner or where it is possible to pierce the corporate veil. That will be the case where a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evaded, or the enforcement of which he deliberately frustrated, by interposing a corporate entity. In those circumstances the corporate veil can be pierced but only for the purpose of removing the advantage that would otherwise have been obtained by the separate legal personality: Prest v Petrodel Resources Limited [2013] 2 AC 415 (SC) per Lord Sumption at paragraph 16–35. 16.102  Subject to the need to avoid double-recovery, the fiduciary may also be liable to account if he received the profit in breach of fiduciary duty and then paid it to a third party, since liability for knowing receipt of sums paid in breach of fiduciary duty depends on receipt, not retention, of the profits: Ultraframe (UK) Limited v Fielding [2005] EWHC 1638 (Ch D) at paragraphs 1576–1578. However, the mere fact that a fiduciary has a substantial interest in, or wholly owns, a company to which profits resulting from a breach of fiduciary duty are paid, does not make the fiduciary personally liable to account for the profits received by the company (Ultraframe at paragraphs 1561–1576 per Lewison J, criticising the reasoning of Lawrence Collins J  on this issue in CMS  Dolphin Limited v Simonet [2001] 2 BCLC 704). The company will be liable to account if it knew that the profits were received in breach of fiduciary duty, as will be the 1075

16.103  Final remedies

case where the defaulting director was also a director of that company (see El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 (CA)). Liability of a third party in relation to knowing receipt is considered further below (at 16.104).

11(b) Remedies against third parties in connection with breach of fiduciary duty 11(b)(i)  Dishonest assistance 16.103  In addition to the defaulting fiduciary, a third party who does not receive sums diverted in breach of fiduciary duty may still be liable on the basis of dishonest assistance in a breach of fiduciary duty. In summary, the following principles apply (see Ultraframe per Lewison J at paragraphs 1480–1481, 1495–1510, 1589–1601; Starglade Properties Limited v Nash [2010] EWCA Civ 1314; Otkritie International Investment Management Limited v Urumov [2014] EWHC 191 at paragraphs 74–79; Goldtrail Travel Limited v Aydin [2014] EWHC 1587 at paragraphs 126–131, 143–150,158–171): (1) Dishonesty is required. As to this: (a) Dishonesty is to be assessed on the basis of what the person alleged to have acted dishonestly actually knew at the time, as distinct from what a reasonable person would have known or appreciated (Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 (PC)); Ivey v Genting Casinos (UK) Ltd (trading as Crockfords) [2017] 3 WLR 1212 (SC) at paragraph 74. This is subject to the qualification that suspicion combined with a conscious decision not to make enquiries about a matter may result in a person being treated as having knowledge of that matter (Barlow Clowes Limited v Eurotrust International Limited [2006] 1 WLR 1476 (PC) at paragraphs 10 and 28; Attorney-General of Zambia v Meer Care & Desai [2007] EWHC 952 at paragraph 371). Further, a person may have sufficient knowledge of the underlying transaction to have acted dishonestly without knowing all the details of that transaction. As noted in Barlow Clowes (at paragraph 28), a person can know, or suspect, that he is assisting in misappropriation of money without knowing that the money is held on trust, or even what a trust means. (b) On the basis of that state of knowledge, the standard by which the court determines whether there is dishonesty is the objective one of the ordinary standards of honest behaviour: Barlow Clowes v Eurotrust; Ivey v Genting Casinos. (c) In Twinsectra v Yardley [2002] 2 AC 164, the majority of the House of Lords considered that, in addition, there would not be dishonesty unless the alleged dishonest assistant was aware that he was transgressing ordinary standards of honest behaviour (at paragraphs 5 and 6 per Lord Slynn, paragraph  20 per Lord Hoffmann, at paragraphs 35–36 per Lord Hutton). However, in Barlow Clowes the Privy Council rejected the requirement for an awareness that ordinary honest 1076

Remedies for breach of fiduciary duty 16.103

standards were being contravened. It was sufficient to have knowledge of those aspects of a transaction which meant it contravened normally acceptable standards of honest conduct, irrespective of whether the alleged dishonest assistant had given any thought to what were those standards. That approach was confirmed by the Supreme Court in Ivey v Genting Casinos (at paragraph 74). (d) Recklessness of itself is not sufficient, though it may be evidence of dishonesty: Clydesdale Bank Plc v Workman [2016] PNLR 18 (CA) per Lewison LJ at paragraphs 48–51. But see First Subsea Ltd v Balltec [2017] 3  WLR  896 (CA) where, at paragraph  64, Patten LJ expressed the view (obiter) that dishonesty ‘can include being reckless as to the consequences of the action complained of’. (2) It is not necessary to have knowledge of the precise form that the dishonest assistance will take. Thus, where a party to an intended transaction (A) deals with the agent for the other party (B) secretly and behind B’s back, and dishonestly assists that agent to abuse his fiduciary duties to B so as to bring that transaction about, then A’s conscience may be affected not merely by the particular form of abuse by the agent of which A actually knew, but also by any other abuse which the agent chose to employ to bring about the transaction with B: UBS AG (London Branch) and another v Kommunale Wasserwerke Leipzig GmbH [2017]  EWCA  Civ 1567 per Briggs and Hamblen LJJ at paragraph  113 (concluding that where UBS dishonestly assisted third parties in a breach of fiduciary duty, it was no answer to a claim of rescission that UBS was not aware that the third parties’ breach of fiduciary duty involved bribery). (3) It is the assistant, rather than the fiduciary, who must be dishonest (Ultraframe at paragraph 1499). (4) The assistance need not be given at the same time as the breach of fiduciary duty; it may be given after the event as part of a cover up (Ultraframe at paragraph 1497). (5) Passive receipt of trust property does not by itself count as assistance: Ultraframe at paragraph 1509. See also Brown v Bennett [1999] BCC 525 (CA) at page 533 per Morritt LJ, referring to the need for some ‘causative effect’, and Brink’s Limited v Abu-Saleh [1996]  CLC  133, where accompanying a husband on money-laundering trips was not regarded by Rimer J as ‘of a nature sufficient to make her an accessory’. (6) The dishonest assistant is jointly and severally liable for any loss caused by the breach of trust/fiduciary duty which he has assisted. Unlike in relation to a claim against a fiduciary, common law rules of remoteness apply by analogy: Novoship (UK) Ltd v Mikhaylyuk [2015] QB 499 (CA) at paragraph 107. (7) Alternatively there may be an account of profits: see Fiona Trust & Holding Corp v Privalov [2010] EWHC 3199 (Andrew Smith J) at paragraphs 62–66; Novoship (UK) Ltd v Mikhaylyuk [2015] QB 499 (CA) at paragraph 93. The liability is to account for profits made by the dishonest assister resulting 1077

16.104  Final remedies

from the breach of the fiduciary duty which was assisted, and it is no answer to contend that the breach would have occurred in any event without that assistance: Privalov at paragraph 67. (8) Unlike in relation to a claim against a fiduciary, the test of causation is not simply a but for test, but whether the dishonest assistance was the effective cause of the loss or profit: Novoship (UK) Ltd v Mikhaylyuk [2015] QB 499 (CA) at paragraphs 94–115. The distinction is illustrated by the decision in Novoship. This included a claim of dishonest assistance in the breach of fiduciary duty by the claimant’s former manager and director in arranging charters in return for bribes. The defendants responsible for the dishonest assistance were not required to account for the profit made from the charters. Although the profit would not have been made but for entry into the charters, dishonest assistance only resulted in the use of the vessels at the market rate. The real or effective cause of the profit was the unexpected change of the market and the fact that the market had been judged well. By contrast, if the claim had been based on breach of fiduciary duty, then applying the but for test of causation there would have been a requirement to account for the profit. (9) Irrespective of whether there is a discretion to refuse an account of profits against a fiduciary, there is such a discretion where the claim is against a non-fiduciary, as in the case of a claim based on dishonest assistance. In Novoship an account of profits was refused due to an absence of sufficient causal connection between the dishonest assistance and the profit, but the court also stated that it would have been refused in any event due to being a disproportionate remedy on the facts. (10) There may also be an order for rescission of any contract entered into between the principal and the dishonest assistant where this was tainted by the corrupt arrangement between the fiduciary and the dishonest assistant, subject to consideration of whether the discretion should be exercised to refuse rescission as unfair and disproportionate: UBS AG (London Branch) and another v Kommunale Wasserwerke Leipzig GmbH [2017] EWCA Civ 1567 at paragraphs 157–177. Further, where A  dishonestly assisted in a breach of fiduciary duty by B’s agent, the knowledge of B’s agent is not to be attributed to B in relation to any claim as between A and B (eg on the issue of clean hands or whether a contract has been affirmed): see UBS AG at paragraphs 170–177. (11) The better view is that there is no proprietary claim against the dishonest assistant as there is no fiduciary relationship (Novoship). 11(b)(ii)  Knowing receipt 16.104  An account of profits may also be obtained against a third party on the basis of knowing receipt of sums received in breach of fiduciary duty or breach of trust. Whereas dishonest assistance is fault-based, the claim for knowing receipt is receipt-based. Liability for knowing receipt requires: (a) disposal of assets in breach of fiduciary duty; (b) beneficial receipt by the third party of assets traceable as representing assets of the claimant; and (c) knowledge on 1078

Costs 16.107

the part of the third party that the assets are traceable to a breach of fiduciary duty, being such knowledge as to render it unconscionable for the defendant to retain the benefit of the receipt. Liability to account depends on receipt of the sums in breach of fiduciary duty, but does not depend on retention of them. See the summary in Ultraframe at paragraphs 1478, 1479, 1486 and 1577–1578 per Lewison J and in Otkritie International Investment Management Limited v Urumov [2014] EWHC 191 at paragraph 81. 11(b)(iii)  Proprietary claim 16.105  In addition to the personal remedies of compensation or an account of profits, a proprietary claim can be made against a recipient of trust property or its traceable proceeds, other than a purchaser in good faith for value. As set out at 16.78, this includes company property misapplied by a director. The claim does not depend on knowledge of the breach of trust, but does depend on the defendant having both received and retained the property (see Foskett v McKeown [2001] 1 AC 102; Ultraframe at paragraphs 1518–1522).

11(c) Limitation 16.106  Although the Limitation Act 1980 does not expressly refer to claims for breach of fiduciary duty, a limitation period may apply by virtue of either sections 21 or 36 of the Act. In addition where there is a claim for an account, this is subject to the same time limit (if any) as would apply to the claim which is the basis for the duty to account (section 23 Limitation Act 1980). Where there is an applicable time limit, but the claim is based on fraud of the defendant or any fact relevant to a claim has been deliberately concealed from the claimant, time does not begin to run until the claimant has discovered the fraud or concealment or could with reasonable diligence have discovered it (section 32 Limitation Act 1980). The principles applicable to limitation periods for breach of fiduciary duty are currently in a state of some complexity, but have been clarified by several relatively recent decisions relevant to the business protection context. For that reason we set out a summary of the applicable principles in such cases in the annex to this Chapter. Limitation in general, however, is outside the scope of this book, and the reader is referred to Limitation Periods (7th edition) by Professor Andrew McGee, for a comprehensive survey.

12. COSTS 16.107  Costs at the interim stage are dealt with at 14.145–14.166. In relation to costs at trial the normal rule is that they follow the event, ie the successful party recovers his costs against the unsuccessful party. Usually costs are granted on the standard basis, meaning that the successful party will recover an amount which may be in the region of 70% of his actual costs (although in exceptional cases they may be granted on a more generous ‘indemnity’ basis). Sometimes, 1079

16.108  Final remedies

however, costs will be granted on an issues basis, so that if a party has acted unreasonably in pursuing certain issues, then even if he is successful overall, his costs in relation to such issues may be disallowed – or even granted against him. Costs of litigation are, since the Jackson Reforms, subject to detailed costs management, as set out by CPR rr 3.12–3.18 and PD 3E on Costs Management. All parties except litigants in person are required to file and exchange budgets setting out their estimated costs for each stage in the proceedings. In employment competition cases however, where a speedy trial is ordered, the parties often seek an order that the costs management provisions be dis-applied. A party who acts unreasonably in failing to submit a dispute to mediation may be penalised in costs: 18.235–18.243. Costs may also be awarded against a successful party where the other party has made a Part 36 offer to settle the dispute which the successful party fails to beat at trial. The main provisions regarding costs and the way in which they are awarded and assessed are contained in CPR, Pts 44–48. This is not a code – other provisions relating to costs may be found in other rules, including in particular Part 36 (Offers to settle).

ANNEX:  LIMITATION AND BREACH OF FIDUCIARY DUTY A. Overview 16.108  1. The starting point is to determine whether there is a potential limitation issue, having regard to: 1.1 When the cause of action accrued. Ordinarily this will be when the breach of fiduciary duty occurred. However there may be a continuing duty. That would be the case in relation to a director’s disclosure obligation arising under section 172 CA 2006, in which case the time does not start to run until the duty comes to an end, upon ceasing to be a director: Haysport Properties Limited v Ackerman [2016] BCC 676. 1.2 Whether, subject to being disapplied or extended, there is an applicable limitation period. Usually in fiduciary duty claims this will be a sixyear period either under section 21(3) or section 36 Limitation Act 1980 by analogy with section 21(3) or with the limitation periods for tort or breach of contract (Gwembe Valley Development Co Limited v Koshy [2004] 1 BCLC 131 (CA) per Mummery LJ at paragraph 111). There is no primary limitation period for unfair prejudice petitions under section 994 CA 2006, but delay may be an important factor in relation to whether to grant relief. See Hollington on Shareholders’ Rights (2017, 8th edn, Sweet & Maxwell), paragraph  7-205; Re Grandactual Limited [2006] BCC 73 at paragraph 20. 1.3 When (if at all) the claim was brought or, in the case of a winding up, the date of the winding up (Financial Services Compensation Scheme Limited v Larnell (Insurances) Limited (In Liquidation) [2006] QB 808 (CA)), and whether this was within the primary limitation period (if any). 1080

Annex:  limitation and breach of fiduciary duty 16.109

2. An important distinction is to be drawn between claims in relation to a constructive trust (i) arising from a fiduciary obligation owed prior to the alleged wrongdoing in respect of property to which the duty applies (a class 1 constructive trust), and (ii) a remedial constructive trust imposed consequent upon wrongdoing (a class 2 constructive trust). In relation to a class 2 constructive trust a six year period will invariably apply (see 16.115–16.118). If the claim concerns a breach of duty in relation to a class 1 constructive trust, there will be no limitation period if the claim falls within section 21(1) Limitation Act 1980 (ie either: (a) fraud or fraudulent breach of trust, or (b) proceedings to recover trust property in the possession of the fiduciary or converted to his use, including where a benefit is conferred on a company controlled by the fiduciary). Section 21 does not apply in the case of: 2.1 Accessory liability (knowing receipt or dishonest assistance of a breach of fiduciary duty/ breach of trust). 2.2 Profits earned through breach of fiduciary duty but which were not previously property of the employer/company. This would apply in relation to employees who are found to owe fiduciary duties, but the position is different as regards directors (as to which see (3) below). 2.3 Property transferred away by a fiduciary but not transferred to the fiduciary’s possession or converted to their use. 3. A  director is a class 1 trustee in respect of the company and its assets. A breach of fiduciary duty owed to the company is therefore a breach of trust and as such falls within section 21 Limitation Act 1980. Where the breach does not involve misappropriation of company property (pre-existing prior to the breach of duty), it does not fall within section 21(1)(b), but if the breach of duty is fraudulent, in the sense that it is not only deliberate but also involves an absence of honesty or good faith, it falls within section 21(1)(a): First Subsea Ltd v Balltec [2017] 3 WLR 896 (CA). 4.

Where there is a primary limitation period which is not disapplied under section 21(1), it may be postponed under section 32 Limitation Act 1980 in cases of fraud, deliberate concealment or mistake.

5.

Even if there is no primary limitation period, a claim may still be barred by the doctrine of laches.

B.  Section 21 Limitation Act 1980 16.109  Section 21 Limitation Act 1980 concerns claims of breach of trust. It provides: ‘(1) No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action— (a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or 1081

16.110  Final remedies

(b) to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his use. … (3) Subject to the preceding provisions of this section, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Act, shall not be brought after the expiration of six years from the date on which the right of action accrued.’

(a) Williams v Central Bank of Nigeria 16.110 The effect of section 21 is therefore that a six-year limitation period applies if the case falls within section 21(3), unless either of subparagraphs (1)(a) or (1)(b) apply, in which case there is no limitation period. The section was considered by the Supreme Court in Williams v Central Bank of Nigeria [2014] AC 1189 in the context of claims of dishonest assistance and knowing receipt. The claimant’s contention was that he had been the victim of a scam, in which he had paid $6.5m to a solicitor, Mr Gale, who had in turn paid out $6m to the Nigerian Central Bank, who were alleged to be party to the alleged fraud. The claimant sought to recover money from the Nigerian Central Bank on the basis of dishonest assistance in Mr Gale’s breach of trust or knowing receipt. By a majority the Court concluded that claims for dishonest assistance and knowing receipt did not fall within section 21, and were subject to a six-year limitation period. The majority reasoning was set out in the speeches of Lord Sumption (with whom Lord Hughes agreed) and Lord Neuberger (with whom Lord Hughes also agreed), each of whom also agreed with the other’s reasoning. In summary it follows from their reasoning, that: 1. A  trust includes a constructive trust (section 38 Limitation Act 1980, applying section 68(17) Trustee Act 1925). However it is necessary to distinguish two types of constructive trust: 1.1 Where the defendant has assumed the duties of a trustee or fiduciary before the breach of trust/duty of which complaint is made (a class 1 constructive trust); and 1.2 A remedial constructive trust, where the duty arises only in consequence of the wrongful act which is the basis of the claim against the defendant (as in the case of accessory liability) (a class 2 constructive trust). The reference to a trust in section 21 only refers to a class 1 constructive trust. 2. The dishonest assister or knowing recipient does not owe fiduciary obligations prior to the wrongdoing. As such in neither case (including in relation to a remedial constructive trust imposed on a knowing recipient) is there any trust within the meaning of section 21. It followed that section 21(1)(b) did not apply. 1082

Annex:  limitation and breach of fiduciary duty 16.112

3. Section 21(1)(a) also did not apply. In relation to this subparagraph the phrase ‘in respect of’ did not mean that it covered a claim against a stranger to the trust (the Nigerian Central Bank) in respect of a breach of trust by someone else (in this case Mr Gale). It only covers other trustees (in the narrow sense excluding a remedial constructive trust) who were a party or privy to the fraud. 4.

However in section 21(3) the phrase ‘in respect of’ has a broader meaning. Here it did cover a claim against the dishonest assister or knowing recipient in respect of the breach of (at class 1) trust by another (in this case Mr Gale): per Lord Neuberger at paragraph 97. This was however based in part on it being common ground that section 21(3) applied. (Lord Clarke who dissented on the construction of section 21(1)(a) on the basis in part that it was inconsistent with the construction of section 21(3), specifically recorded, at paragraph 174, that he agreed with this view of section 21(3).) It therefore followed that the six year limitation period applied. But the reasoning to this effect turned on there being a breach of trust by Mr Gale. It would not apply if the primary liability only involved a class 2 trust (unless, read together with section 36 Limitation Act 1980, it could be applied by analogy).

(b)  Section 21(3) and company directors 16.111  For the purposes of section 21 a company director is treated as being a trustee of the property of the company: Burnden Holdings (UK) Limited v Fielding [2018] 2 WLR 885 (SC) at paragraph 19; Williams v Central Bank of Nigeria per Lord Sumption at paragraph  9; First Subsea Ltd v Balltec [2017] 3 WLR 896 (CA) at paragraphs 58–63. As explained in First Subsea, a breach of fiduciary duty owed to the company entails a breach of a class 1 trust which is sufficient to bring the matter within section 21(3). That is so whether or not the breach of fiduciary duty involves dealing with pre-existing property of the company. However the distinction based on whether there has been misapplication of pre-existing property remains potentially significant in relation to the application of section 21(1)(b). (c)  Section 21(1)(b): recovery of trust property 16.112  Section 21(1)(b) Limitation Act 1980 applies to recovery of trust property in the possession of the trustee. Again, this refers only to a class 1 trust. As explained in First Subsea, whilst the decision in FHR European Ventures LLP v Cedar Capital Partners LLP  [2015] AC  250 (SC) established that a bribe or secret commission received in breach of fiduciary duty will be held on constructive trust for the principal, this is a class 2 constructive trust. Thus it does not fall within section 21(1)(b). That applies also where a secret profit/ commission is received by a director. Although the director is a class 1 trustee, and the breach of fiduciary duty is a breach of trust, that does not entail that secret commission is class 1 trust property; that would only apply to the pre-existing property of the company. (See to similar effect Gwembe Valley Development Co Limited v Koshy [2004] 1 BCLC 131 (CA), which was approved in First Subsea.) 1083

16.113  Final remedies

16.113  Section 21(1)(b) covers not only an order for return of trust property, but also a claim for equitable compensation (but not an account of profits) arising from an interest in a trust assets having been converted to the use of the trustee (including a director in relation to pre-existing company property): Burnden Holdings (UK) Limited v Fielding [2017] 1 WLR 39 (CA) at paragraph 38 (there was no appeal on this issue in the Supreme Court: see [2018] 2 WLR 885 at paragraph 13). It also applies to a claim for equitable compensation arising from breach of fiduciary duty where the fiduciary has conferred a benefit on a company s/he controls: Burnden Holdings (CA) at paragraphs 34–39. An instance of this was in Haysport Properties Limited v Ackerman [2016] BCC 676. Here the defendant, Mr Ackerman, was held to have acted in breach of his duty as a director of the two claimant companies in causing them to grant security over various properties held by them in order to support a facility obtained by another company (NLPH) owned by a discretionary trust of which Mr Ackerman was a beneficiary. Section 21(1)(a) did not apply as Mr Ackerman was not found to have been dishonest. But section 21(1)(b) applied as: (a) by being appointed as a director he came into possession of the company’s property by a lawful transaction that preceded any wrongdoing (ie it was to be treated as a class 1 constructive trust), and (b) in causing the claimants’ property to be handed over to a company in which he was interested he was to be regarded as having converted the company’s property to his own use. However, where company property is transferred away by a director or other person owing fiduciary duties in relation to the property, that is not sufficient to give rise to a class 1 constructive trust if the property is not transferred to the defendant’s possession or otherwise converted to their use: see Gresport Finance Ltd v Battaglia [2016] EWHC 964. (d)  Section 21(1)(a): Fraud/ fraudulent breach of trust 16.114 In contrast to section 21(1)(b), the time limit may be disapplied under section 21(1)(a) on the basis of a breach of trust which does not involve misappropriation of class 1 trust property. Thus whilst section 21(1)(b) does not apply in relation to a director who receives a secret profit (because this does not concern pre-existing company property), section 21(1)(a) will apply if the breach was fraudulent: First Subsea Ltd v Balltec [2017] 3 WLR 896 (CA). In this context, a fraudulent breach connotes both deliberate breach and a lack of good faith or honesty: First Subsea at paragraph 64. It connotes at minimum an intention on the part of the trustee/fiduciary to pursue a course of action knowing it is contrary to the interests of the company or being recklessly indifferent to whether that is the case: Gwembe paragraphs 131, 132 (but as to whether recklessness will suffice or is only evidence of dishonesty see 16.103(1)(d)). It includes deliberate concealment of a material interest which the fiduciary knew should be disclosed: Norcross v The Estate of Christos Georgallides [2015] EWHC 2405 (Comm) at paragraph 178.

C.  Section 36 Limitation Act 1980 16.115  Where the claim does not fall directly under section 21, because it does not relate to a class 1 trust, in order to identify a relevant limitation period reliance 1084

Annex:  limitation and breach of fiduciary duty 16.118

needs to be placed on a process of analogy imported by section 36 Limitation Act 1980. This provides that the time limit for (amongst other things) tort and breach of contract do not apply to a claim for equitable relief unless that time limit may be applied by analogy ‘in like manner as the corresponding time limit under any enactment repealed by the Limitation Act 1939 was applied before 1st July 1940’. The approach is of particular importance in relation to employees with fiduciary duties since they do not have a similar general trusteeship to that applicable for directors. 16.116 As explained in Cia de Seguros Imperio v Heath (REBX) Limited and another [2001] 1 WLR 112 (CA), this requires consideration of whether a court of equity would have applied a limitation by analogy, rather than whether it in fact did so. That in turn depends on whether there is a sufficiently close similarity between the equitable right and the common law claim. On that basis, the court considered that a claim for equitable compensation for alleged breach of fiduciary duty by insurance brokers was time-barred since the facts upon which the claims were founded were the same as those on which claims could have been (and were) brought in contract and tort. Whilst there was an additional element of intention, that did not detract from the fact that the essential factual allegations were the same. 16.117 In Gwembe Valley Development v Koshy and others (No3) [2004] 1 BCLC 131 (CA) Mummery LJ suggested (at paragraph 112) that: ‘The starting assumption should be that a six year limitation period will apply — under one or other provision of the Act, applied directly or by analogy — unless it is specifically excluded by the Act or established case-law. Personal claims against fiduciaries will normally be subject to limits by analogy with claims in tort or contract (1980 Act s  2, 5; see Seguros). By contrast, claims for breach of fiduciary duty, in the special sense explained in Mothew, will normally be covered by s. 21. The six-year time-limit under s. 21(3), will apply, directly or by analogy, unless excluded by subsection 21(1)(a) (fraud) or (b) (Class 1 trust).’

16.118 Consistently with this, the approach has tended to be followed that, subject to section 32 Limitation Act 1980, a six year period applies to breach of fiduciary claims, whether by analogy with section 21(3) or with claims in tort or contract (see eg  Havai v Solland and another [2008]  EWHC  3280 at paragraph 65), unless section 21(1) applies or the claim is of a type to which a different period is specifically applied or to which it has otherwise been determined that no period specifically applies (eg  unfair prejudice petitions – see 16.108(1.2)). However, the scope of the provision to apply limitation periods by analogy remains a developing area. See eg P&O Nedlloyd BV v Arab Metals Co and other (No2) [2007] 1 WLR 2288 (CA) where it was determined that a claim for specific performance of a contract did not fall within section 36 Limitation Act 1980 due to the absence of any remedy at common law equivalent to specific performance. The emphasis on the unavailability at common law of the particular relief might open the way for argument in other areas that the claim is not governed by the Limitation Act 1980. 1085

16.119  Final remedies

D.  Action for an account 16.119 As noted at 16.104, an account may be ordered against a person who holds or held money or other property for another in a fiduciary position. Section 23 Limitation Act 1980 provides that an action for an account cannot be brought after the expiration of any time limit under the Act applicable to the claim which is the basis for the account. As explained in Gwembe Valley Development v Koshy (No 3) [2004] 1 BCLC 131 (at paragraph 86), applying dicta of Millett LJ in Paragon Finance plc v D B Thakerar & Co. [1999] 1 All ER 400 at 415H to 416A: ‘Unless the account sought is of property subject to a trust, a claim for an account in equity will be based on legal rights, as, for example, in the case of an action for an account by a principal against an agent, where the claim is based on a contractual relationship. Even if the relationship is not contractual, but is exclusively equitable, a limitation period may be applied by the court under s.36 by analogy in the light of the position before 1 July 1940.’

16.120  Thus the duty of a contractual agent to account, despite being owed by a fiduciary, is a contractual duty and subject to the six-year limitation period in section 5 Limitation Act 1980: Coulthard v Disco Mix Club Limited [2000] 1 WLR  707. The same would apply to an employee where a duty to account arises by reason of any relevant fiduciary obligations. It would also be likely to apply to an executive director given that he or she would ordinarily be working pursuant to a contract. The same may apply in the case of a non-executive director by virtue of proceeding by way of analogy.

E.  Accrual of the case of action 16.121  Where the limitation period is derived from section 21(3) the cause of action accrues as soon as the breach of trust has been committed, rather than on the date (if later) when the beneficiary (ie the company in a claim against the director) suffers loss: Thorne v Heard [1894] 1 Ch 599 (CA). The same would apply if proceeding by analogy with a contractual claim. However, it may be possible to show that there was a continuing duty, and that therefore time does not begin to run until the duty came to an end. An argument to that effect succeeded in Haysport Properties Limited [2016] BCC 676 where there was a breach of the duty upon the defendant director to disclose his own wrongdoing, by virtue of section 172 CA 2006. The duty was held to continue until the defendant ceased to be a director (paragraph 117). 16.122 In Barnett v Creggy [2017] 2 WLR 1054 (CA) an alternative argument to postpone the running of time was relied upon. This was founded on section 29(5) Limitation Act 1980, which provides that where any right of action has accrued to recover ‘any debt or other liquidated pecuniary claim’, and ‘the person liable or accountable for the claim acknowledges the claim or makes any payment in respect of it’, the right is to be treated as accruing only on the date of the acknowledgement or payment. In Barnett the defendant, a solicitor, had 1086

Annex:  limitation and breach of fiduciary duty 16.124

acted in breach of fiduciary duty in causing certain unauthorised payments to be made from Liberian companies. The payments had been made much more than six years prior to the claim, but it was argued that section 29(5) applied on the basis that the debt had been acknowledged within the six year period. The argument succeeded at first instance, but was rejected on appeal. A majority of the Court (Sir Terence Etherton MR and Sales LJ) considered that if there had been a claim in relation to trust monies improperly paid away by the trustee, this would have been sufficiently analogous to a claim at common law for a fixed sum of money as to be a claim for a ‘debt or other liquidated pecuniary claim’ and so would have fallen within section 29(5) of the 1980 Act. But that was not the case here; the claimants owned the companies from whose account the payments were made, but it was the company rather than the claimants who beneficially owned the sums paid away (and nor were the sums paid to the defendant or converted to his use). The court concluded that a claim for compensation for breach of fiduciary duty, in a case which did not involve a person in the position of a trustee improperly paying away trust money, could not be regarded as comprising ‘a debt or other liquidated claim’. Section 29(5) Limitation Act 1980 therefore did not apply.

F.  Section 32 Limitation Act 1980 16.123  Section 32(1) Limitation Act 1980 provides: ‘(1) Subject to subsections (3) and (4A) below, where in the case of any action for which a period of limitation is prescribed by this Act, either— (a) the action is based upon the fraud of the defendant; or (b) any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant; or (c) the action is for relief from the consequences of a mistake; the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it. References in this subsection to the defendant include references to the defendant’s agent and to any person through whom the defendant claims and his agent.’

(a)  Reasonable diligence 16.124 Where a six-year limitation period applies, and is not disapplied by section 21(1) Limitation Act 1980, it may therefore still be postponed until the fraud, concealment or mistake was discovered or could with reasonable diligence have been discovered. In relation to the ‘reasonable diligence’ test, as explained in Allison and another v Horner [2014] EWCA Civ 117 at paragraphs 14–16: “14. … the phrase “the plaintiff has discovered the fraud” in section 32(1) refers to knowledge of the precise deceit which the claimant alleges had been 1087

16.125  Final remedies

perpetrated on him. It follows that knowledge of a fraud in a more general sense is not enough to start the limitation period running under section 32(1). 15. … in Peco Arts Inc v Hazlitt Gallery Ltd [1983] 3 All ER 193 Webster J held that the acts or omissions of an agent of the claimant were not to be attributed to the claimant for the purposes of section 32(1). Thus knowledge of the deceit alleged on the part of a claimant’s agent will be insufficient to start the limitation period running under section 32(1). Similarly, the fact that the claimant’s agent could with reasonable diligence have discovered the alleged deceit does not start the limitation period running. I would accept this construction of section 32(1) for the reasons that Webster J  gives at page 202G-H  of the report. It follows that the knowledge of agents of Mr Horner concerning the fraudulent representations is not to be attributed to him. 16. … in Paragraphgon Finance PLC v Thakerar & Co [1999] 1 All ER 400 Millett LJ (with whom Pill and May LJJ agreed on this point) held that section 32(1) was concerned with whether the claimant could (rather than should) with reasonable diligence have discovered the relevant deceit at any particular time. This meant that the burden of proof was on a claimant to establish that he could not have discovered the fraud without taking exceptional measures which he could not reasonably have been expected to take. In the business context, this meant “how a person carrying on a business of the relevant kind would act if he had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency”. … there must be an assumption that the claimant desires to discover whether or not there had been a fraud committed on him.’

16.125  In addition knowledge of the alleged wrongdoers themselves is not to be attributed to the principal for the purposes of identifying what was known or could have been discovered by reasonable diligence: Burnden Holdings (UK) Limited v Fielding [2017] 1 WLR 39 (CA) at paragraph 49 (and the same applies as between the principal and a person who dishonestly assisted the fiduciary: see UBS AG (London Branch) and another v Kommunale Wasserwerke Leipzig GmbH [2017] EWCA Civ 1567 at paragraphs 147–153). (b)  Action based upon defendant’s fraud 16.126  An action is regarded as being based on fraud only if fraud is an essential part of the cause of action: Beaman v ARTS  Limited [1949] 1  KB  550 (CA) at 558, 567, 571. A claim based on unconscionable behaviour is not sufficient: Chagos Islanders v The Attorney General [2003]  EWHC  2222 at paragraphs 618–620. In relation to the position aside from Companies Act 2006, there was authority that fraudulent or dishonest breach of fiduciary duty was a distinct cause of action from ‘simple breach of fiduciary duty’, and as such fraud could be regarded as a necessary element of the cause of action: Madoff Securities International Limited (in Liquidation) v Raven [2013] EWHC 3147 (Comm) at paragraph 323 (in the context of section 21(1)(a) CA 2006), following Paragon Finance Plc v D  B  Thakerar & Co. [1999] 1 All ER  400 at 406C–F. That is not the case in relation to the general duties in sections 172–177. As such it is doubtful whether, even where there is a fraudulent breach, that will suffice for 1088

Annex:  limitation and breach of fiduciary duty 16.127

section 32(1)(a) Limitation Act 1980, though it may be argued that the pre-Act approach still applies by virtue of the interpretive approach required by section 170(4) CA 2006 (see 4.93–4.94) and/or that a breach of section 172, since it is based on want of good faith, equates to lack of honesty (see GHLM Trading Ltd v Maroo [2012] 2 BCLC 369 at paragraphs 203, 204). Further if this was not the case this would give rise to the anomaly that whereas dishonest assistance in a breach of the fiduciary duty would fall within section 32(1)(a) (see eg Cattley v Pollard [2007] Ch 353 at paragraphs 105–110), the breach of fiduciary duty itself would not. (c) Concealment 16.127 The deliberate concealment extension in section 32(1)(b) can apply where deliberate concealment of a relevant fact occurs after the cause of action has accrued as well as at the time when it accrued: Sheldon v RHM Outhwaite (Underwriting Agencies) Ltd [1996] AC 102 (HL). Four further aspects were identified by Park J in Williams v Fanshaw Porter & Hazelhurst [2004] 1 WLR 3185 (CA), Park J (at paragraph 24): ‘(i) The paragraph does not say that the right of action must have been concealed from the claimant: it says only that a fact relevant to the right of action should have been concealed from the claimant. (ii) Although the concealed fact must have been relevant to the right of action, the paragraph does not say, and in my judgment does not require, that the defendant must have known that the fact was relevant to the right of action. In most cases where section 32(1)(b) applies the defendant probably will have known that the fact or facts which he concealed were relevant, but that is not essential. All that is essential is that the fact must actually have been relevant, whether the defendant knew that or not. … (iii) The paragraph requires only that any fact relevant to the right of action is concealed. It does not require that all facts relevant to the right of action are concealed. (iv) The requirement is that the fact must be “deliberately concealed”. It is, I think, plain that, for concealment to be deliberate, the defendant must have considered whether to inform the claimant of the fact and decided not to. I would go further and accept that the fact which he decides not to disclose either must be one which it was his duty to disclose, or must at least be one which he would ordinarily have disclosed in the normal course of his relationship with the claimant, but in the case of which he consciously decided to depart from what he would normally have done and to keep quiet about it.’

Mance LJ (at paragraphs 34–37) preferred not to express a view on the issue in paragraph (ii) above. Brooke LJ did not refer to it expressly but his reasoning (at paragraph 51) indicated agreement with Park J in that he regarded it as sufficient that the claimant did not know a relevant fact because the defendant (solicitor) intentionally concealed it from her when he was under a duty to tell her about it. 1089

16.128  Final remedies

16.128  In addition, an alternative basis for satisfying the deliberate concealment test is set out in s. 32(2) of the 1980 Act which provides: ‘For the purposes of subsection (1) above, deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty.’

Section 32(1)(b) deals with active concealment, whereas section 32(2) sets out cases where active concealment is not required: Williams v Fanshaw Porter & Hazelhurst [2004] 1 WLR 3185 (CA) per Park J at paragraph 23, per Mance LJ at paragraph 35. As explained by Morgan J in IT Human Resources Plc v Land [2014] EWHC 3812, at paragraph 135: ‘Section 32(2) refers to deliberate commission of a breach of duty amounting to deliberate concealment of the facts involved in “that breach” of duty. Where s.32(2) is relied upon the relevant circumstances are those surrounding the relevant breach of duty. Section 32(2) will not operate to cover an earlier breach of duty to which s.32(2) was not separately applicable. In order for there to be a “deliberate commission of a breach of duty” within s.32(2) there must be a deliberate breach of duty, that is, a breach of duty which is committed intentionally. The distinction for the purposes of s.32(2) is between intentional wrongdoing on the one hand and negligence or inadvertent wrongdoing on the other: Cave v Robinson Jarvis & Rold [2003] 1 AC 384 (HL) at paras 17 and 25 per Lord Millett and at paras 58 and 60 per Lord Scott.’

16.129  Deliberate commission requires that at the time of the alleged breach of duty the defendant not only intended to do an act which constituted a breach of duty, but also realised that the act involved a breach of duty: Williams v Fanshaw Porter & Hazelhurst [2004] 1 WLR 3185 (CA) per Mance LJ at paragraph 31; Mortgage Express v Abensons Solicitors [2012] EWHC 1000 at paragraph 13. However the concealment must be in relation to a fact which it is necessary to plead for the claimant to establish the cause of action, rather than only something which is helpful but not essential: Arcadia Group Brands Ltd & Ors v Visa Inc & Ors [2015] 2 CLC 437 (CA); First Subsea Limited v Balltec Limited [2014]  EWHC  866 at paragraph  476(d); Norcross v The Estate of Christos Georgallides [2015] EWHC 2405 (Comm) at paragraph 181. 16.130  Deliberate concealment may therefore be established where a director acts in breach of a duty to disclose his or her own wrongdoing arising by virtue of section 172 CA 2006 or the duty to act in good faith in the best interests of the employer, provided that the defendant considered whether to make the disclosure and decided not to do so. In IT Human Resources Plc v Land [2014] EWHC 3812, at a time when the defendant, Mr Land, was a director of the claimant, he provided a third party with computer software in which the claimant held copyright. He was found to have acted in breach of fiduciary duty in supplying the copyright material. He also breached his duty under section 172 in failing to disclose his wrongdoing in doing so, since he knew that disclosure would have been in the best interests of the claimant as it could then have stopped further provision of the material, and in any case had he thought about the matter in good faith he 1090

Annex:  limitation and breach of fiduciary duty 16.132

would have realised that disclosure of his wrongdoing was in the claimant’s best interests. 16.131  Those findings also led the Court (Morgan J) to the conclusion that in relation to supply of the copyright more than six years’ prior to issuing the claim, both section 32(1)(b) and section 32(2) applied. In relation to section 32(1)(b) there was deliberate concealment of facts relevant to liability, and in relation to section 32(2) there was knowing and intentional wrongdoing. That conclusion was unsurprising to the extent that Mr Land was found to have considered disclosing his wrongdoing and realised it was in the company’s best interests. It was however questionable in so far as the finding of breach of duty was based (in the alternative) only on the fact that Mr Land would have considered it in the interest of the claimant to make disclosure if he had thought about it. Whilst that would be sufficient to establish a breach of the section 172 duty (see 4.103) it would not seem necessarily to follow that this amounted to deliberate concealment if no consideration was given to whether there should be disclosure. A similar approach was however adopted in Haysport Properties Limited v Ackerman [2016] BCC 676 (the facts of which are set out at 16.113 above). Without distinguishing whether the breach of duty was deliberate or otherwise, the court proceeded on the basis that the claimant had acted in breach of fiduciary duty in failing to disclose his own wrongdoing, and the failure to do so was treated (at paragraphs 116 and 117) as necessarily entailing that there had been deliberate concealment of the breaches of fiduciary duty, and also a continuing breach of fiduciary duty in relation to the failure to disclose the wrongdoing.

G. Laches 16.132 Where there is no period of limitation prescribed by the Limitation Act 1980, relief may still be withheld by the doctrine of laches: Re Loftus [2007] 1 WLR  591 at paragraphs 34–41. The court applies a broad approach directed at whether the claimant’s actions, including delay, are such as to make it unconscionable to be permitted to assert the claim: Re BW  Estates Limited (No.2) [2016] BCC 814 at paragraphs 59–61. At least if there is an applicable statutory limitation period, mere delay will not be a sufficient basis for laches to bar a claim. In P&O Nedlloyd BV v Arab Metals Co and other (No2) [2007] 1 WLR 2288 (CA), at paragraph 61, it was said that unjustified delay coupled with an adverse effect of some kind on the defendant or a third party might be capable of providing a laches defence even before expiry of the limitation period on the basis that it would be inequitable to grant relief. It may be though that this is better explained on the basis of acquiescence rather than laches: Lewin on Trusts (2016, 19th ed, Sweet & Maxwell) paragraphs 39-112, 44-048.

1091

CHAPTER 17

International elements Gavin Mansfield QC Introduction 

17.1

1. Jurisdiction  1(a) The Recast Brussels I Regulation  1(a)(i) Scope of application  1(a)(ii) The scheme of the rules  1(a)(iii) Domicile  1(a)(iv) Jurisdiction over individual contracts of employment  1(a)(v) Proceedings not relating to individual contracts of employment  1(a)(vi) Rules applicable where there are multiple defendants or claims  1(b) Cases outside the Recast Brussels I Regulation  1(c) Jurisdiction to grant provisional relief 

17.6 17.8 17.8 17.11 17.14 17.17

2. Competing jurisdictions  2(a) Cases within the Recast Brussels I Regulation  2(b) Cases outside the Recast Brussels I Regulation  2(b)(i) Stay of English proceedings  2(b)(ii) Anti-suit injunctions 

17.68 17.69 17.70 17.71 17.72

17.43 17.52 17.54 17.60

3. Applicable law  3(a) Claims in contract  3(a)(i) Contracts: the general position  3(a)(ii) Individual employment contracts  3(a)(iii) Public policy  3(b) Claims other than in contract  3(b)(i) Tort  3(b)(ii) Directors’ duties and fiduciary duties  3(b)(iii) Unjust enrichment  3(c) Concurrent claims  3(d) Type of relief claimed 

17.90 17.95 17.95 17.100 17.104 17.114 17.116 17.120 17.125 17.126 17.127

4. Evidence  4(a) Proceedings in England  4(a)(i) Witnesses  4(a)(ii) Documents  4(a)(iii) Depositions  4(a)(iv) The judge as examiner  4(b) Overseas proceedings 

17.131 17.132 17.135 17.137 17.138 17.146 17.149

1093

17.1  International elements

5. Recognition and enforcement of judgments  5(a) Recast Brussels I Regulation Member States  5(b) Recognition and enforcement of judgments where the Recast Brussels I Regulation does not apply  5(b)(i) Recognition and enforcement in England  5(b)(ii) Recognition and enforcement in non-Member States 

17.152 17.155 17.161 17.161 17.166

INTRODUCTION 17.1  Given the international nature of many businesses, the interests which a company may seek to protect may be located in one or more foreign jurisdictions. Companies now commonly demand mobility from their employees across international borders. 17.2 Advances in technology make it easier for work to be done outside the country in which the business is located. Employees may be engaged by English companies to work in one or more foreign jurisdictions or, vice versa, overseas employers may send employees to work in England. 17.3  Where litigation is in prospect relating to employee competition, more than one country may be involved. Such situations give rise to a number of fundamental questions: •

Which country or countries have jurisdiction over the dispute?

•

If the courts of more than one country have jurisdiction over the dispute, how can parties control where the dispute will be resolved?

•

What is the applicable law?

•

Where proceedings are on foot in England, what mechanisms are available to obtain evidence from a foreign jurisdiction?

•

To what extent can a court order obtained in England be recognised and enforced in a foreign jurisdiction? Vice versa, to what extent will a foreign judgment or order be recognised and enforced in England?

17.4  The answers to these questions will inform a litigant’s tactics as to where they will seek to sue, and the scope of the relief that they will seek to obtain. Where the courts of more than one country have jurisdiction, or where there is room for debate as to the applicable law, a further important tactical consideration will be a comparison between the effect on the case of the laws of each country. Such a comparative analysis as to the treatment of employee competition in different jurisdictions is outside the scope of this work, but must be borne in mind by practitioners. Expert advice on the application of the foreign law should be sought at the earliest possible stage. The tactical considerations as to where a litigant may wish to sue and what system of law he would wish to be applicable may include: 1094

Jurisdiction 17.7

•

Practical considerations arising from running a case in one country rather than another, eg the availability of witnesses (both during trial and preparation), and the location of documents.

•

Procedural advantages: eg US states permit extensive pre-trial examination of witnesses by deposition, a process not available in England.

•

Differences in treatment of legal costs.

•

Differences in the availability of interim and final remedies.

17.5  The topics covered in this chapter are substantially affected by EU law. At the time of writing, the consequences of ‘Brexit’, the termination of the UK’s membership of the EU, are unknown. It is beyond the scope of this work to predict whether and how significantly the current system of rules governing such matters, perhaps most notably jurisdiction and recognition and enforcement of judgments, will change. The law is described as it stands on 28 February 2018. What follows is an outline of the principles of private international law, and High Court procedure, with specific focus on the types of disputes covered by this book. For a fuller treatment of the issues, practitioners should consult specialist works, such as Dicey, Morris & Collins The Conflict of Laws (15th edition, 2015) (‘Dicey’).

1. JURISDICTION 17.6 Where a dispute has a connection with more than one country, the first question is to determine which court or courts have jurisdiction to hear the dispute. For an English court there are two principal regimes which govern the allocation of jurisdiction depending on whether or not the country other than England is another EU Member State: •

EU  Member State: the question will be determined by reference to the EU Council Regulation on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (Recast) 1215/2012 (‘the Recast Brussels I  Regulation’). That Regulation is directly applicable in English law and was adopted on 12 December 2012 (superseding regulation (EC) No 44/2001: ‘the 2001 Brussels I Regulation’). The Recast Brussels I  Regulation applies to proceedings instigated on or after 10  January 2015. In this chapter, states bound by the Regulation will be referred to as ‘Member States’.

•

Any other state: jurisdiction is determined according to English common law principles. These principles depend on whether proceedings would need to be served out of the jurisdiction, and whether permission is required to do so under CPR, r 6.36 and PD 6B.

17.7  The Lugano Convention applies to the EFTA states (Norway, Iceland and Switzerland). The Lugano Convention applies the Brussels regime to those states, but is based upon the 2001 Brussels I Regulation, not the Recast Brussels 1095

17.8  International elements

I  Regulation. The Brussels Convention of 1968, the predecessor of the 2001 Brussels I  Regulation, still applies to Aruba and French Overseas Collectives (formerly the French Overseas Territories). Disputes raising issues as to the jurisdiction of the latter territories are likely to be uncommon and are not considered further in this work.

1(a) The Recast Brussels I Regulation 1(a)(i)  Scope of application 17.8  The Recast Brussels I Regulation applies in civil and commercial matters, subject to a small number of specific exceptions set out in Article 1(2). 17.9  The Recast Brussels I Regulation applies to persons domiciled in a Member State. If a defendant is not domiciled in a Member State, jurisdiction is determined by application of the national rules of conflict of laws of each Member State (Article 4 and Article 6). 17.10  A court of a Member State must apply the Recast Brussels I Regulation whenever it comes to make a decision about jurisdiction in relation to a dispute concerning a defendant domiciled in a Member State. An English court must apply this Regulation to determine whether it has jurisdiction to hear a dispute, regardless of whether the other state which may have jurisdiction is a Member State or not. In Owusu v Jackson [2005] QB 801 (ECJ), the ECJ held that where the 2001 Brussels I Regulation gave the English courts jurisdiction under Article 2 (because of the defendant’s domicile) the court had no power to stay its proceedings on grounds that it was not the appropriate forum, in favour of the courts of Jamaica (not a Member State). If a claim was within the scope of the 2001 Brussels I Regulation, and if the defendant was domiciled in a Member State, it was irrelevant whether the claimant was domiciled in another Member State, or in a nonMember State (see also Universal General Insurance v Group Josi [2001] QB 68 (ECJ); Samengo-Turner v J&H Marsh McLennan (Services) Ltd [2008] ICR 18). Given the materially identical wording of the relevant provisions of the Brussels I Regulation in its original and recast forms, there is no reason to doubt that these principles apply in the same way under the Recast Brussels I Regulation. 1(a)(ii) The scheme of the rules 17.11  The basic rule is that persons domiciled in a Member State, whatever their nationality, shall be sued in the courts of that Member State (Article 4(1)). This rule may, however, be displaced in a variety of situations: •

1096

Section 2 (Articles  7–9) provides for special jurisdiction in relation to particular types of claim, notably for present purposes contract (Article 7(1)), tort, delict and quasi-delict (Article  7(2)). Article  8 deals (among other things) with a defendant who is sued as one of a number of defendants, and with counterclaims.

Jurisdiction 17.16

•

Section 5 (Articles 20–23) provides a separate mandatory scheme of rules where a claim relates to an individual contract of employment.

•

Article 24 provides for jurisdiction in various proceedings of a company law nature.

•

Article 25 deals with agreements as to jurisdiction.

17.12 It is, of course, most likely that in an employee competition dispute the rules concerning individual contracts of employment will be engaged (see 17.17–17.42). 17.13  However, claims may frequently arise which are not based on the contract of employment, eg claims in tort, for breach of fiduciary duty, or for breaches of contracts which are not contracts of employment. In such cases, the starting point is Articles 7–9 (special jurisdiction) and if the claim is not of a type covered by those Articles the general rule in Article  4 will apply. There are a greater number of exceptions to these general rules than apply in the case of claims relating to individual contracts of employment (see 17.43–17.53). Also there is greater scope to give effect to jurisdiction agreements than is the case in respect of employment contracts. 1(a)(iii) Domicile 17.14  The concept of domicile is central. Both Article 4(1) and Article 22 provide for a defendant to be sued in the Member State where he is domiciled. The applicable rules for determining a defendant’s domicile depend on whether the defendant is an individual or a corporation or association. 17.15  Where the defendant is an individual, the court seized of the matter should determine the question of domicile according to its own national law (Article 62). The approach of the English courts is contained in section 41 Civil Jurisdiction and Judgments Act 1982 and the Civil Jurisdiction and Judgments Order 2001, both as amended and applied to the Recast Brussels I Regulation by the Civil Jurisdiction and Judgments (Amendment) Regulations 2014). An individual is domiciled in the United Kingdom if and only if he is resident in the United Kingdom and the circumstances of the residence indicate that the individual has a substantial connection with the United Kingdom. Where an individual has been resident for the last three months or more, the requirement of substantial connection is presumed unless the contrary is proved. 17.16  Where the defendant is a corporation or association it is domiciled at the place where it has its statutory seat, or central administration, or principal place of business (Article 63(1) of the Recast Brussels I Regulation). In the context of the UK, ‘statutory seat’ means registered office or, where there is no such office, the place of incorporation or, where there is no such place, the place under the law of which the formation took place (Article 60(2)). 1097

17.17  International elements

1(a)(iv)  Jurisdiction over individual contracts of employment 17.17  Contracts of employment warrant special treatment as a type of relationship where the weaker party should be protected by rules of jurisdiction more favourable to his interests than the general rules (Recital 18). The rules for claims relating to individual contracts of employment are set out in Section 5 (Articles 20–23). They draw a distinction between claims against employers and claims against employees. Employees have greater flexibility as to the Member State in which they may bring proceedings. Claims by employers 17.18  •

Proceedings may generally be begun only where the employee is domiciled (Article 22(1)).

•

The scope to confer jurisdiction on another state by agreement is narrowly circumscribed. By Article 23, such an agreement must be made between the parties after the dispute between the parties arose. As to when a dispute arises for the purposes of Article 23 see Yukos International UK BV v Merinson [2018] EWHC 335 (Comm) paragraph 61. A jurisdiction clause in a contract of employment (which must necessarily have been entered into prior to the dispute arising) will not be effective for the purposes of Article 23, and will not displace the jurisdiction of the state in which the employee is domiciled. Article  25(4) further provides that an agreement conferring jurisdiction shall have no legal force if it is contrary to Article 23. It follows, therefore, that when drafting a contract of employment for an employee domiciled in a Member State, an exclusive jurisdiction clause is likely to be ineffective if the chosen jurisdiction is not the state of domicile of the employee. The narrow scope to enter into a jurisdiction agreement is in contrast to the wider right to do so under Article 25, which applies to cases not relating to individual contracts of employment.

Claims against employers 17.19  The employee has more choice as to where to bring proceedings against the employer. The employee’s options are: •

•

1098

Under Article 21 an employer may be sued: >

in the place where the employer is domiciled (Article 21(1)(a)); or

>

in the place where the employee habitually carries out work (or last did so) (Article 21(1)(b)(i)); or

>

where the employee does not habitually carry out work in any one country, in the place in which the business which engaged him is situated (Article 21(1)(b)(ii).

By Article 21(2) an employer may be sued in the court of a Member State in accordance with Article 21(1)(b) even if the employer is not domiciled in a Member State.

Jurisdiction 17.22

•

The parties may enter into a jurisdiction agreement which allows the employee to sue the employer in a state other than the employer’s state of domicile (Article 23(2)).

17.20  Either party: •

May counterclaim in pending proceedings brought against them in accordance with Articles  20–23 regardless of whether those proceedings are in the state of the employee’s domicile (Article 22(2)).

•

May be sued in another state if he submits to the jurisdiction by entering an appearance in the proceedings (Article 26).

Proceedings ‘relating to an individual contract of employment’ 17.21  The meaning of ‘relating to an individual contract of employment’ for the purposes of the Recast Brussels I  Regulation is a matter of autonomous EU law: Holterman Ferho Exploitatie BV  v Spies von Bullesheim (C-47/14) [2016]  ICR  90, Mahamdia v People’s Democratic Republic of Algeria [2013] ICR 1. In Holterman the CJEU took the following approach to the meaning of ‘contract of employment’ (paragraphs 39–45): •

contracts of employment have ‘certain particularities’, namely that ‘they create a lasting bond which brings the worker to some extent within the organisational framework of the business of the undertaking or employer, and they are linked to the place where the activities are pursued, which determines the application of mandatory rules and collective agreements’ (relying on Shenavai v Kreischer [1987] ECR 239, paragraph 16);

•

‘the essential feature of an employment relationship is that for a certain period of time one person performs services for and under the direction of another in return for which he receives remuneration’ (relying on LawrieBlum v Land Baden-Württemberg [1987] ICR 483, paragraphs 16 and 17).

•

it was for the national court to determine whether the claimant ‘for a certain period of time performed services for and under the direction of that company in return for which he received remuneration and was bound by a lasting bond which brought him to some extent within the organisational framework of the business of that company’;

•

‘With regard to the relationship of subordination, the issue whether such a relationship exists must, in each particular case, be assessed on the basis of all the factors and circumstances characterizing the relationship between the parties’.

17.22  WPP Holdings Italy Srl v Benatti [2007] 1 WLR 2316 illustrates a common problem arising in this context: the case concerned an agreement which was either a consultancy agreement or a contract of employment. If it was a consultancy agreement, then an exclusive jurisdiction clause in favour of the English courts was effective. If the contract was a contract of employment, the employee could only be sued in Italy, his state of domicile. The Court of Appeal held that 1099

17.23  International elements

the agreement was not a contract of employment, and therefore the jurisdiction agreement in favour of the English courts was effective. At first instance Field J identified the following three criteria of an employment contract for the purposes of Section 5: ‘(i) the provision of services by one party over a period of time for which remuneration is paid; (ii) control and direction over the provision of the services by the counterparty; and (iii) integration to some extent of the provider of the services within the organisational framework of the counterparty’. The Court of Appeal agreed with the conclusion, although there were different views as to whether the question was a matter of English law or Community law (see Buxton LJ at paragraph 76, Sir Anthony Clark MR at paragraph 100). That question is resolved by the cases referred to at 17.21: it is a matter of EU law. 17.23 In Benatti the question was whether there was a contract of employment at all. In other cases, the issue may be whether a particular agreement forms part of a contract of employment. In financial institutions part of an employee’s remuneration is commonly awarded in the form of deferred cash or stock. Such awards are often subject to terms set out in an agreement purporting to be separate from the contract of employment, and often emanating from a different entity to the employer (eg a parent company). In Samengo-Turner v J&H Marsh McLennan (Services) Ltd [2008] ICR 18 the employees were domiciled in England, worked in England, and were employed by an English subsidiary of a US-based group of companies. The employees had contracts of employment made in England and governed by English law. Stock options and other long-term incentive plan benefits (‘LTIPs’) were granted by the US parent company, subject to terms set out in an agreement separate from the contract of employment (referred to by the Court of Appeal as ‘the bonus agreement’). The bonus agreement contained certain covenants said to be subject to the law and exclusive jurisdiction of England, but also certain covenants said to be subject to the law and exclusive jurisdiction of New York. The ‘New York’ covenants included a covenant that the employees would provide such information relating to their ‘other commercial activities’ as the US parent may reasonably request (a ‘co-operation covenant’). The employees resigned and were placed on garden leave. In an attempt to find evidence of a suspected team move, the US parent sued the employees on the co-operation covenant in New York, and sought early depositions and discovery in those proceedings. The employees brought an application in England for an anti-suit injunction (17.78), on the basis that the claim brought in New York fell within Section 5 2001 Brussels I Regulation, and could only be brought against them in England, their state of domicile. 17.24  The issues for the English court were whether the bonus agreement was a contract of employment, and whether the US parent company was the employer for the purposes of Section 5. The Court of Appeal held that: •

1100

The bonus agreement formed part of the contract of employment of each employee. The award under the agreement was stated to be an incentive to remain with the US parent or any of its subsidiaries; payment was subject to continued employment. The bonus agreement added to or varied the provisions of the contract of employment relating to notice, confidentiality,

Jurisdiction 17.26

disclosure and restrictive covenants. One could not ascertain the terms on which the employees were employed without looking at both the contract of employment and the bonus agreement (at paragraph 31). •

The US parent was to be regarded as an employer for the purposes of ­Section 5. In substance, the claim was an employment claim against employees. The court purported to recognise the realities of the situation without adopting an over formalistic approach to corporate identity (the Court of Appeal referring also to Beckett Investment Management Group Ltd v Hall [2007] ICR 1539). Tuckey LJ commented that the fact that the US parent was to be treated as employer for the purposes of allocation of jurisdiction did not mean that they should be so treated for other purposes (at paragraph 34).

•

The result, therefore, was that the Court of Appeal granted an anti-suit injunction to restrain the US parent (or its subsidiaries) from pursuing proceedings against the employees in New York.

17.25  This aspect of the decision in Samengo-Turner was the subject of academic criticism: see, for example, Professor Adrian Briggs’ view that it causes ‘havoc’ to the legitimate organisation of corporate affairs: A  Briggs, ‘Who is bound by the Brussels Regulation?’ [2007] LMCLQ 433–438. 17.26  In Petter v EMC Europe Ltd [2015] IRLR 847 The Court of Appeal considered the application of Section 5 of the Recast Brussels I Regulation on facts similar to Samengo-Turner. The contractual documentation differed from that in Samengo-Turner. There was greater separation between the English employment contract and the US incentive documents, so that it could not so easily be said (as it was in Samengo-Turner) that one could not ascertain the employment terms without looking at both sets of documents. The Court declined to make a reference to the CJEU and followed Samengo-Turner in holding that the dispute related to an individual contract of employment for the purposes of Section 5. Three points in particular are noteworthy: •

Moore-Bick LJ (with whom the other members of the court agreed) reaffirmed that the expressions ‘employer’, ‘employee’ and ‘employment’ must be given an autonomous meaning which may not be the same as would be given in domestic law (paragraph 16). Moore-Bick LJ considered the three characteristics set out by Field J at first instance in WPP Holdings v Benatti (17.22) to be helpful. However, he emphasised that it is of equal importance to interpret Section 5 in a way consistent with its underlying purpose, namely the protection of employees (paragraphs 17–19).

•

Moore-Bick LJ also considered the expression ‘relating to’, and held that it is capable of being given a broad interpretation (citing Alfa-Laval Tumba AB  v Separator Spares International Ltd [2013]  ICR  455). In this case the dispute did ‘relate to’ Mr Petter’s contract of employment as the court considered that both parties would have regarded the stock agreement to be ‘intrinsically bound up with’ the contract of employment (paragraph 20). This was the case even though the stock agreement was not between 1101

17.27  International elements

Mr Petter and EMC Europe Ltd (the company for whom he worked and with whom he had a contract of employment) but between Mr Petter and EMC Corporation, the US parent of EMC Europe. •

In any event, Moore-Bick LJ considered Samengo-Turner to be binding authority for the proposition that ‘a company which provides benefits to employees of associated companies within the same group may be regarded as an employer for the purposes of the Regulation if it provides those benefits in order to reward and encourage those employees for the benefit of their immediate employer and the group as a whole’ (paragraph 21). In this regard, and in its application of the Alfa-Laval decision, the Court of Appeal seemed to go considerably further than the Samengo-Turner decision. EMC obtained permission to appeal this decision to the Supreme Court, but in the event the matter was resolved before the appeal was heard.

17.27  The result of Samengo-Turner and EMC is that a court will take a broad approach to determining whether a contractual obligation ‘relates to an individual contract of employment’ for the purposes of jurisdiction. In cases where there are complex sets of agreements between various group companies, this is likely to favour the employee who seeks to rely on their Section 5 rights to be sued in their Member State of domicile. It remains the case, as in Benatti, that a court may still have to determine whether a contract is a contract of employment at all, or a contract of a different character. The test in Holterman, focussing on performance of services for and under the direction of the employer, is also likely to favour those claiming to be employees. 17.28  Further complications may arise where the defendant has more than one capacity, for example as employee and as a director and/or shareholder; or where the claim incorporates different causes of action, some of which may not depend on the contract of employment. In a team move dispute, for example, the departing employees may be sued for breach of their contracts of employment, but also for breach of fiduciary duty, breach of equitable duty of confidence, or various economic torts. In such cases the court needs to determine whether the claims are ‘matters relating to an individual contract of employment’ (so as to engage Section 5); or ‘matters relating to a contract’ (so as to engage Article 7(1)); or ‘matters relating to tort, delict or quasi-delict’ (so as to engage Article 7(2)). The applicable principles for characterizing claims have not always been clear from the English and European courts. Is it sufficient that a claim could be pleaded as a breach of contract in order for it to be a matter relating to an individual contract of employment, or need there be something more? If there need be something more, what is the test? 17.29 In Swithenbank Foods Ltd v Bowers [2002] 2 All ER (Comm) 974, nine employees of the claimant attempted unlawfully to interfere with the claimant’s relationship with a supplier. The claim pleaded breaches of the defendants’ contracts of employment and conspiracy, both causes of action arising from the same facts. One defendant argued that he could only be sued in France (his state of domicile): both the breach of contract claim and the conspiracy claim related to his contract of employment. HHJ McGonigal held that Section 5 2001 Brussels 1102

Jurisdiction 17.32

Regulation applied only where the contract of employment was ‘legally relevant’; and the contract was only legally relevant where the employer was seeking to rely on the contract of employment in order to bring his claim (paragraph 24). Section 5 applied only where there was a claim ‘under’ the contract of employment. Accordingly the court had jurisdiction over the conspiracy claim, but not the claim under the contract of employment. 17.30  A broader view of ‘legal relevance’ was taken by Silber J in CEF Holdings Ltd v Mundey [2012]  IRLR  912, a case concerning allocation of jurisdiction between England and Scotland under equivalent provisions of the Civil Jurisdiction and Judgments Act 1982. Silber J held that the provisions applied to all claims where the status of the defendant as an employee is ‘legally relevant’ to the claim. That meant that a tortious claim arising from the employment relationship could fall within Section 5. 17.31  However, the Court of Appeal in Alfa Laval Tumba AB v Seperator Spares International Ltd [2013]  ICR  455 overruled both Swithenbank and CEF. The Court held that ‘legal relevance’ was not an appropriate test at all; nor was the question of whether the claim was ‘under’ the contract of employment. The words of the 2001 Brussels I Regulation itself (‘matters relating to an individual contract of employment’) provided a broad test which should be comparatively easy to apply. A claim may relate to an individual contract of employment even if it was pleaded in tort or otherwise without reference to the contract of employment. It may be helpful in many cases to ask whether the acts complained of amounted to breaches of contract by the employee. Thus, in Alfa, a claim against the defendant employee was held to fall within Section 5 even though it was pleaded as breach of copyright and misuse of confidential information without relying on the contract of employment. The Court of Appeal thus disapproved of earlier glosses on the Regulation, without giving clear guidance as to when a claim framed in tort can be said to relate to the defendant’s contract of employment. 17.32  The relationship between matters relating to a contract and matters relating to a tort was explored by the CJEU in Brogsitter v Fabrication de Montres Normandes EURL [2014] QB 753. The court held (paragraphs 23–27 and 29): ‘23 …the mere fact that one contracting party brings a civil liability claim against the other is not sufficient to consider that the claim concerns “matters relating to a contract” within the meaning of article 5(1)(a) of Regulation No 44/2001. 24 That is the case only where the conduct complained of may be considered a breach of contract, which may be established by taking into account the purpose of the contract. 25 That will a priori be the case where the interpretation of the contract which links the defendant to the applicant is indispensable to establish the lawful or, on the contrary, unlawful nature of the conduct complained of against the former by the latter. 26 It is therefore for the referring court to determine whether the purpose of the claims brought by the applicant in the case in the main proceedings is to seek damages, the legal basis for which can reasonably be regarded as a breach of 1103

17.33  International elements

the rights and obligations set out in the contract which binds the parties in the main proceedings, which would make its taking into account indispensable in deciding the action. 27 If that is the case, those claims concern “matters relating to a contract” within the meaning of article 5(1)(a) of Regulation No 44/2001. Otherwise, they must be considered as falling under “matters relating to tort, delict or quasi-delict” within the meaning of article 5(3) of Regulation No 44/2001. …. 29 Therefore, the answer to the question referred is that civil liability claims such as those at issue in the main proceedings, which are made in tort under national law, must none the less be considered as concerning “matters relating to a contract” within the meaning of article 5(1)(a) of Regulation No 44/2001, where the conduct complained of may be considered a breach of the terms of the contract, which may be established by taking into account the purpose of the contract.’

17.33  That passage may be thought to contain some conflicting messages, as the question of whether the conduct ‘may be considered a breach of contract’ might be thought to be a rather different one to the question of whether the interpretation of the contract, or taking it into account, is ‘indispensable’. The first may point to a suggestion that a matter relates to a contract of employment if it is capable of being pleaded as a breach of contract; the second suggests that Section 5 may be avoided if it is possible to plead the claim without reliance on the contract. Either approach might seem to be overly formalistic. 17.34 In Holterman (17.21) a Dutch group of companies sued its German domiciled director and manager for ‘deceit or recklessness’ in the performance of duties under his contract, and for breach of duties owed under company law. The following questions were referred to the CJEU: •

whether the claim related to an individual contract of employment, so as to fall within Section 5 of the Recast Brussels I Regulation;

•

whether the company law claims were within the concept of ‘matters relating to a contract’ or ‘matters relating to tort, delict or quasi-delict’.

17.35  The CJEU held that where a company sued a person who performed the duties of director and manager for improper performance of his duties the claim related to an individual contract of employment if the defendant was bound by an individual contract of employment. 17.36  The CJEU considered that the action by the company against its former manager on the basis of an alleged breach of his obligations under company law came within the concept of ‘matters relating to a contract’, since the relationship between the parties was contractual in nature (paragraph 65). A claim by a company for wrongful conduct by a manager may fall within the rules for jurisdiction over torts only if ‘it does not concern the legal relationship of a contractual nature between the company and the manager. If the conduct complained of may be considered a breach of the manager’s contract, then the “matters relating to 1104

Jurisdiction 17.40

contract” rules apply; if not, the rules relating to tort may apply (paragraphs 70–71)’. 17.37  The CJEU’s decision suggests a broad approach to the question of whether a claim relates to an individual contract of employment. However, the analysis is thin, and much of the judgment on this issue is taken up with the question of classifying whether a contract is a contract of employment or not. Little attention was paid to the more significant question of the nexus required between the contract and the claims brought. In the same case the Advocate General’s opinion suggested a rather narrower view that Section 5 only applies where: (a) the defendant is sued in the capacity of a party to an individual contract of employment; and (b) ‘the subject matter of the proceedings should derive from that very contract’ (paragraph 33). 17.38 The Advocate General, relying on Brogsitter, stated that the second of these criteria would be fulfilled only if the conduct complained of might be considered a failure to perform contractual obligations. That would, a priori, be the case if the interpretation of the contract linking the defendant to the applicant was indispensable in order for it to be established whether the conduct imputed to the former by the latter is lawful or not (relying on Brogsitter, paragraphs 23–25). That part of the reasoning of the Advocate General was not expressly adopted or disavowed by the CJEU. 17.39 In Bosworth v Arcadia Petroleum Ltd [2016] EWCA (Civ) 818 the Court of Appeal noted that although the CJEU in Holterman has not adopted ‘wholesale’ the Advocate General’s Opinion in that case, the Opinion revealed ‘careful scrutiny’ of the scope of Section 5 and the CJEU had in effect applied Brogsitter ‘by analogy’ (paragraphs 58–60). In Bosworth (a case under the equivalent provisions of the Lugano Convention) the claimants sued ten defendants alleging an unlawful means conspiracy to defraud the claimants. Two of the defendants were the ‘de facto’ CEO and CFO of the claimants who had been employed from time to time by various of the claimant companies. They were alleged to have participated in the conspiracy, and to have committed breaches of fiduciary duty. The claim as originally pleaded included allegations of breach of their contracts of employment, though these claims were subsequently removed, seemingly in an attempt to avoid the application of the ‘individual contract of employment’ provisions of the Convention. The two defendants argued those provisions applied so that they could only be sued in their state of domicile (Switzerland), the claimants argued that the claims were in tort and all the defendants could be sued together in England. 17.40  The Court of Appeal rejected the defendants’ arguments that the claim ‘related to’ the individual contracts of employment if they could have been pleaded as breaches of contract of employment. The Court regarded itself as bound by Alfa-Laval (17.31); however, the true ratio of that case was that the courts should stick to the words of the article (‘relating to an individual contract of 1105

17.41  International elements

employment’) without gloss. The words of the article posed a broad and unqualified test that required a material nexus between the claim and the contract, having regard to the substance of the matter. In many cases it may be helpful to ask whether the acts complained of constituted a breach of contract, but that question should not be elevated to a touchstone (paragraph 65 per Gross LJ). According to the Court that question was not inconsistent with Brogsitter or Holterman. The true ratio of Brogsitter was not that it was sufficient to ask the literal question of whether the conduct ‘may be considered a breach of contract’. Instead (per Gross LJ paragraph 66): ‘the requirement that the legal basis of the claim “can reasonably be regarded” as a breach of contract, assists in directing the focus of the inquiry to the substance of the matter, with the result that it is “indispensable” to consider the contract in order to resolve the matter in dispute. This is a test and an approach indistinguishable to my mind from that adopted in Alfa Laval, so that (in Davis LJ’s words) there will be a material nexus between the conduct complained of and the individual contract of employment.’

17.41  It remains to be seen whether Gross LJ’s attempted reconciliation of the cases will stand the test of time. At the time of writing a reference to the CJEU in Bosworth is pending, the Supreme Court having made the reference in October 2017. Settlement agreements: ‘relating to an individual contract of employment’? 17.42  Often, restrictive covenants will be included in a settlement agreement which brings an employee’s employment to an end. It is unclear whether a claim for breach of such an agreement is a claim relating to an ‘individual contract of employment’ for the purposes of Section 5 of the Recast Brussels I Regulation. Following the decision of the Court of Appeal in Petter v EMC it appears likely that the term ‘relating to’ is sufficiently broad to bring claims based on settlement agreements within Section 5. The purposive approach taken by Moore-Bick LJ, by which the provision is construed in line with the purpose of protecting employees, would seem to be relevant to a settlement agreement (given that the employee remains the weaker party). Further, any settlement agreement could clearly be said to be ‘intrinsically bound up with’ a contract of employment, insofar as it brings a contract of employment to an end. That was the approach taken by the High Court in Yukos International UK BV v Merinson [2018] EWHC 335 (Comm) where a claim to set aside a settlement agreement, so as to be able to sue for breach of an employment contract, was held to be a matter relating to an individual contract of employment. 1(a)(v)  Proceedings not relating to individual contracts of employment Contracts other than individual contracts of employment 17.43  A separate set of rules applies to contracts which are not individual contracts of employment, eg consultancy agreements, or commercial contracts. Such contracts are governed by Articles 4 and 7(1) Recast Brussels I Regulation. As we have seen, Article 4(1) provides the starting point, which is that the defendant may be sued in the state in which he is domiciled. 1106

Jurisdiction 17.47

17.44  However, in matters relating to contract, a person may also be sued in the courts for the place of performance of the obligation in question. In the case of provision of services, the place of performance is the place where, under the contract, the services were provided or should have been provided (Article 7(1)). 17.45  The obligation in question means the obligation which is relied on as the basis of the claim (Case 14/76: De Bloos Sprl v Bouyer SA [1976] ECR 1497). Where there are a number of obligations in question, the court should identify the principal obligation, and this will be the ‘obligation in question’ for the purposes of Article 5(1) (Shenavai v Kreischer [1987] ECR 239). 17.46  One of the most crucial practical differences to disputes relating to contracts of employment is that, in relation to non-employment contracts, the parties may use a jurisdiction clause to agree to the jurisdiction of the courts of another Member State (Article  25): eg  Benatti (see 17.22). Such a jurisdiction clause will confer exclusive jurisdiction on the courts of that Member State, unless the parties have agreed otherwise (Article 25(1)). Proceedings relating to tort 17.47 The characterisation of a claim as a matter relating to a contract (Article  7(1)) or a matter relating to tort, delict or quasi-delict (Article  7(2)) was considered in Brogsitter v Fabrication de Montres Normandes EURL (Case C-548/12) [2014]  QB  753 (17.32). The two Articles are mutually exclusive, and the matter may only fall within Article 7(2) if it is not a matter relating to contract within Article 7(1). Subject to that, Article 7(2) covers a wide range of civil liability claims. The concept of matters relating to tort, delict or quasi delict is an autonomous matter of EU law. The CJEU in Brogsitter said that it was settled law (following Kalfelis v Schroder [1988] ECR 5565) that the concept of ‘matters relating to tort, delict or quasi-delict’ covers all actions which seek to establish the liability of a defendant and which do not concern matters relating to a contract. The concept would appear to be broad enough to cover a claim for a breach of a non-contractual duty of confidence. However, the English Courts have taken a narrower approach to the breadth of what is now Article 7(2): in Kitechnology v Unicor [1995] FSR 765 the Court of Appeal held that as a matter of English law a non-contractual claim for breach of confidence was equitable, not tortious. The Court expressed doubt as to the meaning of the passage in Kalfelis referred to above, but expressed no concluded view on the interpretation of what is now Article  7(2). The House of Lords in Kleinwort Benson Ltd v Glasgow City Council [1999] 1 AC 153 held that an equitable claim for unjust enrichment did not fall within the equivalent provision relating to tort or delict in the Civil Jurisdiction and Judgments Act 1982. Thus the equitable claim could only be brought in the state in which the defendant was domiciled under the equivalent of what is now Article 4(1). The Court of Appeal in VidalHall v Google Inc [2016] QB 1003 (a case about service out of the jurisdiction under English law rules) regarded Kitechnology as binding on the question of whether breach of confidence was a tort, though it doubted whether there was a sound policy basis for the equity/tort classification to be determinative of the 1107

17.48  International elements

approach to service out of the jurisdiction (see paragraphs 46–50). The correct classification is unclear, though the better view is that a non-contractual breach of confidence, for jurisdictional purposes, should be regarded as a matter relating to tort, delict or quasi delict governed by Article 7(2). The same issue arises in relation to applicable law, and is addressed at 17.125 below. Where the matter relates to tort, Article 4(1) provides the starting point: a person may be sued in the Member State in which he is domiciled. 17.48  In addition, a person may be sued in the courts for the place where the harmful event occurred or may occur (Article 7(2)). That may be the place where the damage occurred or the place of the event giving rise to it: Handelskwekerij G J Bier BV v Mines de Potasse d’Alsace SA [1978] QB 708. In JSC BTA Bank v Khrapunov [2018] UKSC 19, an unlawful means conspiracy claim, the place of the event which gave rise to the damage was held to be the place where the conspiratorial agreement was made, not the place where acts pursuant to the conspiracy were done (see paragraph 41). Article 25 applies to claims in tort, so that the parties may effectively bind themselves by a jurisdiction clause. Breach of directors’ duties and fiduciary duties 17.49  Care should be taken if the claim involves breach of directors’ duties. Article 24(2) Recast Brussels I Regulation provides that proceedings having as their object the validity of the constitution, nullity or dissolution of companies or associations of legal or natural persons, or the validity of the decisions of their organs, must be brought in the Member State where the relevant body has its ‘seat’. This is a rule of compulsory jurisdiction. 17.50  However, it is necessary to consider whether a claim against a director properly falls within this article. A claim against a director for breach of fiduciary duty (eg for diverting a corporate opportunity) may not entail any challenge to the validity of a decision of the board of directors, nor even of the individual director. Careful analysis is needed as to the nature of the claim: • In Newtherapeutics Ltd v Katz [1991] Ch 226, a claim that directors had acted without authority of the board was within the predecessor of Article 24(2). However, a claim that the directors committed the company to a transaction so detrimental that no reasonable board could have consented to it was outside the article. • In Grupo Torras SA v Sheikh Fahad Mohammed Al-Sabah [1996] 1 Lloyd’s Rep 7, the claim was fraudulent conspiracy by directors. The Court of Appeal held that the subject matter of the claim was the fraud, and did not fall within the predecessor to Article 24(2). •

1108

In Case C-144/10 Berliner Verkehrsbetriebe v J  P  Morgan Chase Bank [2011]  ECR  I-396 the defendant had refused to perform a contractual obligation and argued that the decision of the company’s board to enter into the contract was invalid as it was ultra vires. The CJEU held that the dispute over the validity of the decision to enter into the contract was ancillary to the claim, and so the matter fell outside the article.

Jurisdiction 17.53

17.51 Where the fiduciary duties arise not from a directorship but from some other fiduciary relationship Article  24 is not engaged. In WPP  Holdings Italy Srl v Benatti [2007] 1 WLR 2316, one of the claims was for breach of fiduciary duty, where the fiduciary duty was said to arise out of the consultancy relationship between the claimants and the defendant. The defendant was not a director of the claimant company. Toulson LJ regarded jurisdiction for the fiduciary duty claim as governed by Article 5(3) of the 2001 Brussels I Regulation (now Article 7(2)), ie he treated it as a claim in ‘tort, delict or quasi-delict’ (at paragraph 58). There was therefore jurisdiction in the courts of the place where the harmful event occurred. In Holterman (17.34–17.38) the claimant company brought a claim against its director for improper performance of duties under company law, and a claim for breach of his duties under his managerial contract. The CJEU held that the claims could fall within matters relating to a contract, as the relationship between the parties was contractual in nature; indeed it held that the claim related to a contract of employment. A claim would only fall within ‘matters relating to tort’ where the conduct complained of did not concern the legal relationship of a contractual nature between the parties. There was no consideration of Article 24. In Bosworth (17.39–17.41) the Court of Appeal upheld the first instance judge’s decision that the breach of fiduciary duty claims were to be separated into two groups: those claims where there was a contractual nexus between the relevant parties were matters relating to an individual contract of employment; those claims where there was no such contractual nexus were treated as matters relating to tort (per Gross LJ paragraphs 75 and 94–100). 1(a)(vi)  Rules applicable where there are multiple defendants or claims 17.52  Section 2 of the Recast Brussels I Regulation contains a number of rules of ‘special jurisdiction’. These do not apply to claims relating to individual contracts of employment. They do apply to other claims, eg to claims concerning a commercial contract, or a claim in tort or restitution. Such rules permit a person to be sued in a Member State other than his state of domicile: •

Where a person is one of a number of defendants, he may be sued in the courts for the place where any of them is domiciled, provided the claims are so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings (Article 8(1)).

•

A person may be sued in third party proceedings in the court seized of the original proceedings (provided those proceedings were not instituted with the object of removing him from the jurisdiction of the court which would otherwise be competent) (Article 8(2)).

•

A person may be sued on a counter-claim arising from the same contract or facts on which the original claim was based, in the courts for which the original claim is pending (Article 8(3)). (Note that a similar rule applies to claims by employees relating to individual contracts of employment (see 17.20).

17.53  Where a defendant is domiciled in a Member State, the following table summarises the state(s) in which that defendant may be sued, according to the provisions of the Recast Brussels I Regulation. 1109

State in which employee domiciled (Article 22(1))

1110

State in which employer is domiciled (Article 21)

State in which D domiciled (Article 4(1))

State in which D domiciled (Article 4(1))

Contract of employment: claim against employer

Other contract

Tort

State in which harmful event occurred (Article 7(2))

State in which principal obligation in question performed (Article 7(1))

State where employee habitually carries out work (Article 21)

State in which D submits to jurisdiction (Article 26)

State in which D submits to jurisdiction (Article 26)

State in which D submits to jurisdiction (Article 26)

State in which D submits to jurisdiction (Article 26)

State in which defendant (D) may be sued

Subject matter of claim Contract of employment: claim against employee

State nominated in jurisdiction agreement under (Article 25)

State nominated in jurisdiction agreement under (Article 25)

State nominated by jurisdiction agreement made after dispute arises (Article 23(1)) State nominated in jurisdiction agreement under Article 23(2)

By counterclaim in state in which original claim pending (Article 8(3))

By counterclaim in state in which employee has brought proceedings (Article 22(2)) By counterclaim in state in which employer has brought proceedings (Article 22(2)) By counterclaim in state in which original claim pending (Article 8(3))

State in which another D is sued on a closely connected claim (Article 8(1))

State in which another D is sued on a closely connected claim (Article 8(1))

State in which another D is sued on a closely connected claim (Article 8(1)) By third party proceedings in state in which original proceedings pending (Article 8(2)) By third party proceedings in state in which original proceedings pending (Article 8(2))

17.53  International elements

Other fiduciary duty

Subject matter of claim Director’s duty, claim concerning validity of decision of organ of company Other director’s duty

State in which D domiciled (Article 4(1))

State in which D domiciled (Article 4(1))

State in which company has its seat (Article 24(2))

State in which harmful event occurred (Article 7(2))

State in which harmful event occurred (Article 7(2))

State in which D submits to jurisdiction (Article 26)

State in which D submits to jurisdiction (Article 26)

State in which defendant (D) may be sued

State nominated in jurisdiction agreement under (Article 25)

State nominated in jurisdiction agreement under (Article 25)

By counterclaim in state in which original claim pending (Article 8(3))

By counterclaim in state in which original claim pending (Article 8(3))

State in which another D is sued on a closely connected claim (Article 8(1))

State in which another D is sued on a closely connected claim (Article 8(1))

By third party proceedings in state in which original proceedings pending (Article 8(2)) By third party proceedings in state in which original proceedings pending (Article 8(2)) Jurisdiction 17.53

1111

17.54  International elements

1(b)  Cases outside the Recast Brussels I Regulation 17.54  Article 6 of the Recast Brussels I Regulation preserves the common law conflicts of law rules for disputes falling outside the scope of the Regulation. Article 6(1) provides that if a defendant is not domiciled in a Member State the jurisdiction of the courts of each Member State shall (subject to Articles 18(1), 21(2), 24 and 25) be determined by the law of that Member State. 17.55  In England, the jurisdiction of the court depends on service of the claim on the defendant. Service can be made, as a matter of right, if the defendant is within the jurisdiction: see CPR, rr 6.3–6.29 for the rules on service – in particular r 6.9, which sets out where different types of legal person may be served. If the defendant is outside the jurisdiction, and has not appointed an agent within it to receive service, permission of the court is required to serve outside the jurisdiction. 17.56  The principles upon which the court will grant permission to serve process out of the jurisdiction are contained in CPR, r 6.36 and PD 6B at paragraph 3.1. Relevant grounds for serving out of the jurisdiction in relation to employee competition may be the following: •

PD 6B, paragraph 3.1(1) where the defendant is domiciled in the jurisdiction (although this rule is of no real practical effect: if the defendant is domiciled in England, then the Recast Brussels I Regulation would apply).

•

PD  6B, paragraph  3.1(2): a claim is made for an injunction ordering the defendant to do or to refrain from doing an act within the jurisdiction. The injunction need not be the only relief claimed, but the claim must be bona fide and not for the purposes of simply obtaining jurisdiction. Permission will be refused if a foreign court can more conveniently deal with the question: Rosler v Hilbery [1925] Ch 250.

•

PD 6B, paragraph 3.1(3): a claim is made against someone on whom the claim form has been or will be served and: >

there is between the claimant and that person a real live issue which it is reasonable for the court to try; and

>

the claimant wishes to serve the claim form on another person who is a necessary or proper party to that claim.

•

PD  6B, paragraph  3.1(4): a claim is an additional claim under Part 20, and the person to be served is a necessary or proper party to the claim or additional claim.

•

PD  6B, paragraph  3.1(5): a claim is made for an interim remedy under section 25(1) Civil Jurisdiction and Judgments Act 1982 (as to which see 17.60–17.67).

•

PD 6B, paragraph 3.1(6): a claim is made in respect of a contract where the contract: >

1112

was made within the jurisdiction; or

Jurisdiction 17.58

>

was made by or through an agent trading or residing within the jurisdiction; or

>

is governed by English law; or

>

contains a term to the effect that the court shall have jurisdiction.

•

PD 6B, paragraph 3.1(7): a claim is made in respect of a breach of contract committed within the jurisdiction.

•

PD 6B, paragraph 3.1(8): a claim is made for a declaration that no contract exists where, if the contract was found to exist, it would comply with PD 6B, paragraph 3.1(6).

•

PD  6B, paragraph  3.1(9): a claim in tort is made where damage was sustained within the jurisdiction, or the damage sustained resulted from an act committed within the jurisdiction.

•

PD  6B, paragraph  3.1(16): a claim is made for restitution where (a) the defendant’s alleged liability arises out of acts committed within the jurisdiction; or (b) the enrichment is made within the jurisdiction; or (c) the claim is governed by the law of England and Wales.

•

PD  6B, paragraph  3.1(21): a claim is made for breach of confidence or misuse of private information where (a) detriment was suffered, or will be suffered within the jurisdiction; or (b) detriment which has been, or will be suffered results from an act committed, or likely to be committed, within the jurisdiction.

• In Twin Benefits Ltd v Barker [2017] EWHC 1412 (Ch) at paragraphs 110– 114, Marcus Smith J  pointed out that there was no specific reference in PD 6B paragraph 3.1 to breach of fiduciary duty. Such claims are capable of different characterisations, depending on what is alleged. They may in substance be contractual claims or tortious claims for the purpose of the jurisdictional gateways in paragraph  3.1, depending what in substance is the nature of the claim. •

A  claim for these purposes includes a petition and any application made before action, thus there is jurisdiction to give permission to serve a preaction disclosure application out of the jurisdiction: ED&F  Man Capital Markets LLP v Obex Securities LLC [2017] EWHC 2965 (Ch).

17.57  The party must show that (see Seaconsar Far East Ltd v Bank Markazi Jomhuri Islam Iran [1994] 1 AC 438): •

there is a good arguable case that the case falls within one or more of the limbs of what is now PD 6B, paragraph 3.1 (formerly r 6.20);

•

there is a serious issue to be tried in respect of each cause of action; and

•

that England is the proper place in which to bring the claim.

17.58  In determining whether England is the proper forum (‘forum conveniens’) the principles in Spiliada Maritime Corporation v Cansulex Ltd [1987] AC 460 1113

17.59  International elements

apply: in considering whether there was another forum which was more appropriate the court would look for that forum with which the action had the most real and substantial connection, eg in terms of convenience or expense, availability of witnesses, the law governing the relevant transaction, and the places where the parties resided or carried on business. 17.59  English proceedings must be served, other than in very limited circumstances. See CPR, r 6 for methods of service, and r 6.16 for the court’s power to dispense with service. The CPR sets out the various forms of assistance which foreign judicial bodies can give (CPR, r 6.40 and following). Service outside of the UK can be effected in the following three ways: •

through diplomatic channels, judicial authorities, or British consular authorities under the provisions of the Hague Convention, or of a bilateral convention, or the EU Service Regulation (1348/2000) (CPR, r 6.40(3)(a) and (b));

•

by a method permitted by the law of the country in which it is to be served (CPR, r 6.40(3)(c)); or

•

in the case of service on a state, under the rules set out in CPR, r 6.44 (CPR, r 6.40(3)(a)(iii)).

1(c)  Jurisdiction to grant provisional relief 17.60  Application of the jurisdiction rules set out above may lead to a country other than England having jurisdiction over the substantive dispute. However, there may be situations in which the parties to the proceedings in that foreign court may require interim relief in England. For example, a claimant in foreign proceedings may seek a freezing injunction in relation to assets in England. In some circumstances a search order or other interim injunction may be required in support of foreign proceedings. 17.61  The English court may have jurisdiction to grant provisional relief in support of foreign proceedings, even though the English court does not have jurisdiction over the substantive proceedings. The position is dealt with by section 25 Civil Jurisdiction and Judgments Act 1982 (‘CJJA 1982’). 17.62  Section 25 CJJA 1982 applies whether the foreign substantive proceedings are in a Member State or elsewhere. The Recast Brussels I Regulation provides in Article 35 for a Member State to have jurisdiction in relation to provisional measures, even though that state does not have substantive jurisdiction in relation to that dispute, and even though another Member State does have such jurisdiction. Article 35 was given effect by section 25 CJJA 1982. However, the reach of section 25 was extended by the Civil Jurisdiction and Judgments Act 1982 (Interim Relief) Order 1997 (SI 1997/302) to cases where the state with substantive jurisdiction is not a Member State, and to cases where the subject matter of the dispute is not within the scope of the Recast Brussels I Regulation. 1114

Jurisdiction 17.67

17.63  Under Article 35, the type of relief available is a matter of the internal law of the Member State to which the application is made. Thus on an application under section 25 CJJA 1982, the English court can grant any interim relief available under English law, save for two exceptions (section 25(7)): a warrant for the arrest of property or a provision for obtaining evidence. 17.64  By section 25(2)  CJJA  1982 the court may refuse to grant relief if, in the opinion of the court, the fact that the court has no jurisdiction over the substantive dispute makes it inexpedient for the court to grant relief. The English court will have to be persuaded that there is a ‘real connecting link’ between England and the subject matter of the measures sought (Van Uden Maritime BV v Kommanditgesellschaft in Firma Deco Line [1998] ECR I-7091). The fact that the foreign court could have granted the relief but did not do so may weigh against the grant of relief. 17.65  The relief sought must be provisional. The foreign claim must be such that the relief sought in England can be identified as interim relief in relation to the final order sought abroad in the proceedings relied on: Fourie v Le Roux [2005] EWCA Civ 204 at paragraph 45 (appealed to the House of Lords on other grounds – [2007] 1 WLR 320). 17.66  The relief available under section 25  CJJA  1982 is wide in scope. It is most commonly invoked in relation to freezing injunctions, search orders and anti-suit injunctions. However, in principle there is no reason why other forms of interim injunction may not be applied for under section 25, such as restrictive covenant and garden leave injunctions – but see 17.104–17.113 regarding public policy considerations in this regard and 17.127–17.130 as to possible limits regarding the type of relief claimed. Alternatively, in some circumstances, it may be possible to enforce in the English courts an injunction obtained in foreign proceedings: see 17.155–17.160 (mutual recognition and enforcement of judgments and interim measures between Member States) and 17.161–17.165 (recognition and enforcement of final injunctions of nonMember States). 17.67  The interim measures permitted by section 25 CJJA 1982 do not extend to the gathering of evidence (section 25(7)). For the gathering of evidence in one state for use in proceedings in another state, see 17.131–17.151. However, note: •

Orders for provision of evidence may, where necessary, be made in order to ensure the effectiveness of a freezing order.

•

A distinction is to be drawn between an order for the gathering of evidence, and an order for the preservation of evidence or property. Preservation orders may be made under section 25, and thus orders such as search orders may be made. 1115

17.68  International elements

2. COMPETING JURISDICTIONS 17.68  In certain instances, application of the jurisdiction rules set out above may lead to a situation where more than one state has jurisdiction. This is so whether the Recast Brussels I Regulation or the common law rules are applied. Naturally, courts wish to avoid a multiplicity of proceedings.

2(a)  Cases within the Recast Brussels I Regulation 17.69  In a case falling within its scope, the Recast Brussels I Regulation covers the situation where there are actions in more than one Member State in respect of the same cause of action or related causes of action. The general principle is that the court first seised shall have jurisdiction, unless an agreement under Article 25 confers jurisdiction on another state. Any court subsequently seised must decline jurisdiction where the cause of action is the same; or may stay its proceedings or decline jurisdiction where the claim is related. Related claims are claims so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments. (see Articles 29–34).

2(b)  Cases outside the Recast Brussels I Regulation 17.70  In a case outside the scope of the Recast Brussels I Regulation, each court will apply its own national conflict of law principles. In England, there are three mechanisms by which the courts control the risk of multiple proceedings in different jurisdictions: •

by the grant or refusal of permission to serve proceedings out of the jurisdiction (discussed at 17.54–17.59);

•

by the grant of a stay of English proceedings on the ground of forum non conveniens;

•

by the grant of an anti-suit injunction, requiring a person within the jurisdiction of the English court to desist from instituting or continuing with proceedings in another jurisdiction.

2(b)(i)  Stay of English proceedings 17.71  The English court will stay proceedings on grounds of forum non conveniens if there is another court which is more appropriate for the determination of a particular dispute: the principles in Spiliada apply (see 17.58). 2(b)(ii)  Anti-suit injunctions 17.72  An anti-suit injunction is an order granted by the English court, against parties before it, to refrain from instituting or continuing with proceedings in 1116

Competing jurisdictions 17.77

another jurisdiction, or to refrain from taking particular steps in overseas proceedings. The order thus prevents the mischief of a party being sued on the same (or similar) matters in more than one jurisdiction. 17.73 Where the competing states are parties to the Recast Brussels I Regulation, the scheme of rules under the Regulation provides for allocation of the dispute between states (see 17.69). The Regulation precludes the grant by a Member State of an injunction prohibiting a party to proceedings before it from commencing or continuing proceedings before the courts of another Member State: Turner v Grovit [2004] ECR I-3565 (ECJ). Thus, the potential for anti-suit injunctions should only arise where the competing court is in a non-Member State. 17.74  An injunction will only be granted against a person who is amenable to the jurisdiction of the court, either because he is present in the jurisdiction, or has been properly served out of the jurisdiction: Donohue v Armco [2002] Lloyd’s Rep 425 (HL). 17.75  Although the injunction is aimed at the party, not at the foreign court, as the impact of the order is to interfere with the continuation of proceedings in another jurisdiction, the courts will only grant an injunction with great caution. The anti-suit injunction is an equitable remedy, and the categories for its grant are not fixed. However, an anti-suit injunction may commonly be granted in a number of situations: •

Where foreign proceedings have been commenced in breach of a right of a party to be sued in England, and not elsewhere.

•

Where foreign proceedings are unconscionable.

Proceedings in breach of agreement or statutory right 17.76 An anti-suit injunction may be granted in favour of a party where the foreign proceedings are brought by another party in breach of the first party’s rights. The first party may have a right to be sued only in England, or a right not to be sued in the jurisdiction in which the proceedings to be restrained have been brought. The right will most commonly arise under an exclusive jurisdiction clause. For example: A and his employer, B, agree that any dispute under A’s contract of employment will be subject to the exclusive jurisdiction of country X; B sues A in country Y; A may apply for an anti-suit injunction to restrain B from breaching his contract by pursuing the proceedings in Y. 17.77  An exclusive jurisdiction clause will ordinarily be enforced by injunction, unless there are strong reasons not to do so: Donohue v Armco [2002] Lloyd’s Rep 425. Strong reasons may include the risk of multiple proceedings, and inconsistent judgments if the jurisdiction clause is enforced (eg if proceedings relating to the same subject matter are under way in the foreign state against defendants not bound by the jurisdiction clause). 1117

17.78  International elements

17.78  Alternatively, an anti-suit injunction may be granted to restrain proceedings brought in breach of a statutory right. In Samengo-Turner v J&H  Marsh McLennan (Services) Ltd [2008]  ICR  18 English domiciled employees were sued in New York for breach of an agreement which contained an exclusive jurisdiction clause in favour of New York. The agreement was found to form part of their contracts of employment. Under Section 5 of the Recast Brussels I Regulation, they could be sued by their employer only in their state of domicile (England), and not in New York. An injunction was thus granted against their employer to restrain the continuation of the New York proceedings. Although proceedings were in due course commenced in the English courts, the injunction was granted to protect the right not to be sued other than in the state provided for by the Regulation, it would seem that the existence of substantive proceedings in the English courts was not a prerequisite for the grant of the injunction. The decision in Samengo-Turner (as regards anti-suit relief) has been heavily criticised, particularly on the grounds that it interpreted what was properly a procedural rule as a ‘right not to be sued’ capable of founding an anti-suit injunction, and granted an anti-suit injunction on the basis of the Brussels regime despite such relief being inimical to that regime and virtually unknown in other Member States: see for example A Briggs, ‘Who is bound by the Brussels Regulation? Samengo-Turner v Marsh & McLennan’ [2007] LMCLQ 433–438; A Dickinson ‘Resurgence of the Anti-Suit Injunction: the Brussels I Regulation as a source of civil obligations?’ (2008) 57 ICLQ 465. 17.79  The question of whether and when anti-suit relief can be granted on the basis of the provisions of Section 5 came before the courts again in Petter v EMC Europe [2015] IRLR 847. At first instance, Cooke J considered that he had the power to grant anti-suit relief on the basis of the Brussels regime (here the Recast Brussels I Regulation), but rejected the submission that he was bound to do so by Samengo-Turner, on the basis that an injunction is a discretionary remedy. As a matter of discretion, Cooke J declined to grant the relief sought on grounds of comity (ie mutual respect and recognition for the legislative and judicial acts of other nations). There was force in the academic criticism of Samengo-Turner, anti-suit relief was ‘essentially inimical to the Regulation’; and the parties had agreed a Massachusetts exclusive jurisdiction clause (see paragraphs 54–71). 17.80  The Court of Appeal disagreed, and granted anti-suit relief. Moore-Bick LJ considered that the judge was not entitled to depart from the approach adopted in Samengo-Turner. The principle which emerges from Samengo-Turner is that in a case falling within Section 5 of the Regulation an anti-suit injunction should ordinarily be granted to restrain an employer from bringing proceedings outside the Member States in order to protect the employee’s rights (paragraph 31). Vos LJ (with some apparent reluctance) also considered the court to be bound by Samengo-Turner. Sales LJ regarded the conclusions drawn in Samengo-Turner to be correct, but on a more novel, policy-driven basis, involving a comparative evaluation of the policies of the foreign forum. 17.81  This decision has also been the subject of academic criticism, for the reasons articulated in relation to Samengo-Turner and a broader sense that on the 1118

Competing jurisdictions 17.83

current state of the law the approach of the English courts to anti-suit injunctions is inconsistent with principles of comity and amounts to ‘do as I say, not as I do’ (T Raphael, ‘Do as you would be done by? System-transcendent justification and anti-suit injunctions’ [2016] LMCLQ 256–274). 17.82  EMC was granted permission to appeal to the Supreme Court but the case was settled prior to the hearing. One ground of appeal concerned the grant of anti-suit relief (for the other, concerning the scope of Section 5, see 17.26). This would seem to be a point ripe for consideration at the highest level (perhaps by way of a leapfrog appeal). Unconscionable conduct in foreign proceedings 17.83 The court may issue an anti-suit injunction if the conduct of foreign proceedings is unconscionable. Where a party is properly before the English court, a claim for an anti-suit injunction on this ground is not a separate claim requiring its own cause of action and its own basis in jurisdiction. The right to apply for an injunction is ancillary to the substantive English proceedings: Masri v Consolidated Contractors International Co SAL [2008] 2 Lloyd’s Rep 301. The principles upon which an injunction may be granted on this ground are conveniently summarised in Royal Bank of Canada v Centrale RaffeisenBoorenleenbank [2004] 1 Lloyd’s Rep 471; see also the leading case of Société Nationale Industrielle Aerospatiale v Lee Kui Jak [1987] 1 AC 871: •

A person may show a right to be sued in a particular forum if there is a contractual provision conferring such a right, or if he can point to clearly unconscionable conduct on the part of the party sought to be restrained.

•

There will be unconscionable conduct if the pursuit of the foreign proceedings is vexatious or oppressive, or interference with the due process of the English court.

•

The fact that there are concurrent proceedings does not in itself mean either set of proceedings is unconscionable, or itself justify the grant of an injunction.

•

However, the court recognises the undesirable consequences that may result if concurrent actions in respect of the same subject matter proceed in two different countries.

•

The court may conclude that a party is acting vexatiously and oppressively in foreign proceedings if: (a) the English court is the natural forum for the dispute; and (b) justice does not require that the action should be allowed to proceed in the foreign court and, more specifically, that there is no advantage to the party sought to be restrained in pursuing the foreign proceedings of which he would be deprived and of which it would be unjust to deprive him.

•

Regard must be had to international comity, and the jurisdiction must be exercised with caution. 1119

17.84  International elements

17.84  In considering whether the foreign proceedings are vexatious and oppressive, consideration will be required of the purpose served by those proceedings and the relief claimed. The English court must consider whether an injunction would deprive the party against whom the injunction is sought of a legitimate juridical advantage of which it would be unjust to deprive him. Such an advantage may arise from the availability of causes of action, remedies, or procedural advantages in the foreign proceedings. An injunction may also be granted on grounds of unconscionable conduct where a party seeks to re-litigate abroad matters which are res judicata as a result of a judgment of an English court: Masri v Consolidated Contractors International Co SAL [2008] 2 Lloyd’s Rep 301. 17.85  An application for an injunction to restrain foreign proceedings may arise where the defendant in the foreign proceedings is exposed to more wide-ranging or draconian measures for gathering evidence than would be available in the English proceedings. The question arises as to whether the use of evidencegathering methods permitted by the foreign court is an interference with the due process of justice in the English proceedings. The problem may in particular arise where the ‘competing’ proceedings are in the USA. Many states of the USA have procedures for wide-ranging disclosure and examination of witnesses by way of pre-trial discovery on deposition. Such procedures may arise either in the context of substantive proceedings in the USA, or in proceedings brought specifically for the purposes of gathering evidence for overseas proceedings under section 1782, Title 28 of the United States Code (Assistance to foreign and international tribunals and to litigants before such tribunals). 17.86 In South Carolina Insurance Co v Assurantie Maatschappij [1987] AC 24 HL, proceedings were pending in England and an application was brought for pre-trial discovery in the USA using the section 1782 procedure. An anti-suit injunction was sought on the basis that the use of pre-trial discovery in support of the English proceeding was oppressive, vexatious, or interfering with the due process of the English court. The House of Lords held that an injunction should not have been granted, per Lord Brandon: •

The English courts do not in general exercise any control over the way in which a party obtains the evidence it wishes to present to support its case (paragraph 41G–H).

•

By exercising a right potentially available under US law a party is not departing from or interfering with the procedure of the English court (paragraph 42C).

•

The fact that the US proceedings gave access to procedural remedies not available in England did not amount to unconscionable conduct.

17.87  This general position was affirmed in Royal Bank of Scotland Plc v Hicks [2011] EHWC 287, where it was observed that ‘generally speaking, the English court does not exercise control over the manner in which litigants choose to obtain the evidence which they need to support their case’, and that when the English court has restrained such efforts this has been done ‘where the procedure 1120

Applicable law 17.91

was likely to burden English proceedings with excessive or unnecessary disclosure or pre-trial depositions’ (paragraph 95). 17.88  It should be noted, however, that by the time South Carolina reached the House of Lords, the application in the US related only to documents. A number of cases indicate that the English court may be more amenable to restrain foreign proceedings aimed at taking oral pre-trial depositions: •

•

Depositions of witnesses were restrained in Omega Group Holdings Ltd v Kozeny [2002] CLC 132; two factors rendered it unconscionable for the deposition of witnesses in the USA to go ahead (paragraphs 140F–140G): >

witnesses would be subject to unwarranted ‘double cross-examination’;

>

there was a real risk that witnesses once deposed might be discouraged from attending trial in England.

See also Benfield Holdings Ltd. v Richardson [2007]  EWHC  171 (QB), where the judge also relied on the fact that deposition of witnesses in the USA might interfere with the parties’ preparations under a tight timetable for a speedy trial in England.

• Contrast Nokia Corp v Interdigital Technology Corp [2004] EWHC 2920 and Arab Monetary Fund v Hashim (No 6) (1992) Times, 24 July, where on the particular facts the gathering of evidence through foreign proceedings was not restrained. 17.89  It may not be appropriate in all cases to restrain the pursuit of the foreign proceedings altogether. Where the unconscionable conduct lies in obtaining evidence in a manner which interferes with the English trial process, it may be sufficient to restrain the gathering of such evidence, rather than the proceedings themselves: thus, in Benfield Holdings Ltd v Richardson [2007] EWHC 171 (QB), the claimants in New York proceedings were restrained from taking pretrial depositions from certain witnesses until after the trial of the English claim.

3. APPLICABLE LAW 17.90  Once it is determined which court has jurisdiction to determine a particular dispute, the next question is what will be the applicable law. The rules relating to the applicable law for any given dispute depend on the cause of action relied on. The rules are discrete from those used to determine jurisdiction. They may produce different answers: thus, it is quite possible for an English court to have jurisdiction to hear a claim, but for the law of New York, for example, to be the law which the court must apply. 17.91  If foreign law is to be applied by an English court, it will be treated as a matter of fact, for which an expert witness report will be essential. In the absence of such evidence, the English court will assume the foreign law to be the same as English law. 1121

17.92  International elements

17.92  Determination of the applicable law relating to contractual and non-contractual obligations has been dominated by the regime in place between members of the European Union. Since 17 December 2009 EU Regulation 593/2008 (‘the Rome I Regulation’) applies to govern questions of the law applicable to contractual obligations. Prior to the Rome I Regulation the position was governed by the Contracts Applicable Law Act 1990, which gave effect to the EEC Convention on the Law Applicable to Contractual Obligations (‘the Rome Convention’), which was to broadly similar effect as the Rome I Regulation. 17.93 The applicable law in cases of non-contractual obligations (other than invasion of privacy and defamation) is governed by the EU Regulation on the law applicable to non-contractual obligations (Rome II) (864/2007) (‘the Rome II Regulation’). The Rome II Regulation applies to cases commenced on or after 11 January 2009 relating to events giving rise to damage after 19 August 2007. 17.94  Both of these Regulations are of ‘universal application’: the law specified by application of the terms of the Regulations shall be applied whether or not it is the law of a Member State (Rome I regulation Articles 1 and 2, Rome II Regulation Article 3). If a dispute is litigated in the English Court (or the court of another Member State) the relevant Regulation will be applied to determine the applicable law, even where the parties or the facts of the dispute are not connected to a Member State. The effect of Brexit on these established legal principles is unclear at the time of writing.

3(a)  Claims in contract 3(a)(i)  Contracts: the general position 17.95  Under the Rome I Regulation the starting point is that contracts are to be governed by the law chosen by the parties (Article  3(1)). That choice may be express or demonstrable by the terms of the contract and the circumstances of the case: see 5.145 for a precedent choice of law clause. 17.96 The Rome I  Regulation makes specific provision in Article  4(1) for a number of different types of contract. The only situation likely to be relevant for the purposes of this chapter is Article 4(1)(b), which provides that a contract for the provision of services shall be governed by the law of the country where the service provider has his habitual residence. Outside the specific cases provided for in Article 4(1), Article 4(2) provides that the contract shall be governed by the law of the country where the party ‘required to effect characteristic performance’ has his habitual residence. 17.97 A  person habitually resides in a country if he has adopted that country voluntarily and for settled purposes is part of the regular order of life for the time being (R v Barnet London Borough Council, ex p Nilish Shah [1983] 2 AC 309, 344). Clearly, determining habitual residence may be complicated in the case of itinerant service providers, but the emphasis on residence, rather than place of 1122

Applicable law 17.102

work, may avoid some of the complications that arise in determining where an itinerant worker works. 17.98  However, if it is clear that the contract is manifestly more closely connected with a country other than the country indicated in Article 4(1) or 4(2), the law of that other country shall apply (Article 4(3)). If the applicable law cannot be determined pursuant to Article 4(1) or 4(2), the contract shall be governed by the law of the country with which it is most closely connected. 17.99 Where all elements are connected with one country only, a choice of foreign law cannot prejudice the application of mandatory rules of that country, eg the Unfair Contract Terms Act 1977 (Rome 1 Regulation, Article 3(1)). Similarly, nothing shall restrict the application of the overriding mandatory provisions of the law of the forum (Rome I Regulation, Article 9(2)). The Rome I  Regulation also provides that effect may be given to the mandatory rules of law of the place of performance, in so far as those rules render performance unlawful. In considering whether to give effect to those provisions, regard shall be had to their nature and purpose and to the consequences of their application or non-application (Article 9(3)). 3(a)(ii)  Individual employment contracts 17.100 Article  8 of the Rome I  Regulation makes special provision for individual employment contracts. 17.101  Whilst the parties are in general terms free, under Article 3, to choose the law applicable to an employment contract, a choice of law made by the parties shall not have the result of depriving the employee of the protection afforded to him by provisions that cannot be derogated from by agreement under the law that would be applicable in the absence of choice (Rome I Regulation, Article 8(1)). Thus, for example, if an employee is employed in Great Britain, a choice of foreign law cannot deprive him of the protection of mandatory rules of UK employment law, such as those provided by the Employment Rights Act 1996. 17.102  If there is no choice of law: •

the employment contract will be governed by the law of the country in which the employee habitually carried out his work in performance of the contract, even if he is temporarily employed in another country (Rome I Regulation, Article 8(2)).

•

If the employee does not habitually carry out his work in any one country, the contract will be governed by the law of the country in which the place of business through which he was engaged is situated (Rome I Regulation, Article 8(3)).

•

Where it appears from the circumstances as a whole that the contract is more closely connected with a country other than that indicated in Articles 8(2) 1123

17.103  International elements

or 8(3) the law of that other country shall apply (Rome I  Regulation Article 8(4)). 17.103  In many cases there may be room for argument as to where an employee habitually works, or as to whether he habitually works in one country, or in ­several countries. Cases under the 2001 Brussels I Regulation have defined the place where an employee habitually carries out his work as the place where he has established ‘the effective centre of his working activities’ (Pugliese v Finmeccanica SpA [2003]  ECR  I-2013). If an employee is based in an office in one country, but has regular trips abroad, then he is likely to be found to be habitually working in the place where the office is located. At the other end of the scale, where an employee is truly itinerant between different premises, or has no fixed premises at all, it is likely that he will be found to have no habitual place of work, and therefore Rome I Regulation, Article 8(3) will apply to make the law of the place of his employer’s business the applicable law. In Pitzolu v Banca Gesfid SA  [2009]  I.L.Pr. 27 (a case of the Italian Corte di Cassazione) it was observed that the case law of the Court of Justice sets out three guiding principles: •

in relation to tasks of an operational character, the applicable place will be the place where the employee carried out the majority of his working time on behalf of the employer;

•

in relation to professional tasks involving a choice of place, the applicable place will be the place where the employee has established the effective centre of his professional activity;

•

where the above two criteria do not allow the court to determine the habitual place of work, the employee has the choice of proceeding before the courts of the place of business of the employer or the courts of the state in which the employer is domiciled.

Clearly, there may be shades of grey between the two extremes. Uncertainty can be avoided by an express choice of law clause in the contract of employment: see 5.145 for a precedent choice of law clause. 3(a)(iii)  Public policy 17.104  A question of great significance in restrictive covenant cases is the extent to which the public policy rules of the forum will be applied, regardless of the applicable law. 17.105  The question arises in this way: the English court has before it a dispute concerning a contract, to which the law of country ‘B’ applies. The contract must be interpreted and enforced in line with the law of B. However, the approach of the law of B to restraint of trade may differ from the approach of English law. Should the English court apply and enforce the contract in accordance with the law of B? Or, being an English court determining a dispute in England, should it apply the English law public policy doctrine of restraint of trade? 1124

Applicable law 17.112

17.106 It has long been the practice of the English courts to apply English law principles of public policy, following the decision in Rousillon v Rousillon [1880] 14 Ch 351. In that case the court declined to enforce a covenant which was enforceable under the law of France (the law applicable to the contract), but which would not have been enforceable under English law. 17.107  The Rome I Regulation recognises the role of the public policy of the forum in Article 21, which provides that the application of a rule of the law of any country specified by this Convention may be refused only if such application is manifestly incompatible with the public policy (‘ordre public’) of the forum. 17.108  For over 100 years the approach in Rousillon has been thought to be good law. There are, perhaps surprisingly, no decisions of the appellate courts addressing the situation in the light of the Rome I Regulation or the earlier Rome Convention. In Holdings TFS v Cantor Fitzgerald (UK) Ltd v McGarr (23 October 1992, unreported) (QBD), the High Court applied the Rousillon principle, but did so without any reference to the 1990 Act or the Rome Convention. 17.109 In Duarte v Black and Decker Corporation [2007] EWHC 2720 (QB) the High Court considered the application of restraint of trade principles within the framework of the Rome Convention. The facts are illustrative of the kind of problem which can commonly arise. D was a Portuguese national employed in England by a European subsidiary of a Maryland company. Restrictive covenants contained in an LTIP plan (which was held to form part of his contract of employment) were expressly stated to be governed by the law of Maryland. D left the employer in order to work for a competitor, prima facie in breach of a non-competition covenant. The employer sought an injunction in the English courts. D argued that the non-competition provision was an unlawful restraint of trade. The question arose as to whether the applicable principles of restraint of trade where those of Maryland law, or those of English law. 17.110  Two Articles of the Rome Convention were in issue: Article 16 the ‘public policy’ article (the predecessor of Rome I Regulation Article 21); and Article 6(1) (predecessor of Article 8(1)), the ‘mandatory provision’ article which provides that a choice of law clause cannot exclude the effect of mandatory provisions of the law which would apply in the absence of choice (the predecessor of Rome I Regulation Article 8(1)). 17.111  Field J held that Article 6(1) was not applicable: English law principles of restraint of trade were not mandatory provisions of English law (contrast, for example the rights contained in the Employment Rights Act 1996). 17.112 Field J  went on to hold that Article  16 (dealing with public policy) operated to require English law principles of restraint of trade to be applied: if the covenants were valid and enforceable under Maryland law, but invalid and unenforceable under English law, the English court would treat the covenants as invalid and unenforceable. In reaching this conclusion Field J  considered the meaning of ‘manifestly incompatible’. It was argued that if the laws of the 1125

17.113  International elements

two states were substantially similar, the fact that in a particular case they may achieve different results did not mean that the application of Maryland law was manifestly incompatible with English law. Field J  rejected that argument. The question was whether the result of the application of the specified law was manifestly incompatible with the public policy of the forum. The covenants concerned an employee working in England, and sought to restrain him from taking up new employment in England under a contract governed by English law. If the covenants were enforced by an English court applying Maryland law, when they would be unenforceable under English law, the result of the application of the specified law would be ‘manifestly’ incompatible with the public policy of the forum. It remains an open question whether a different result may be achieved in circumstances less closely connected to England. 17.113  It should be noted that the decision as to the effect of the then applicable Article 16 was technically obiter: Field J, having heard evidence as to the law of Maryland, held that the covenants in question would be unenforceable under the law of Maryland, just as they were unenforceable under English law.

3(b)  Claims other than in contract 17.114  Disputes concerning employee competition frequently throw up a variety of claims other than claims based upon contract: for example, claims in tort (in particular, inducement of breach of contract and conspiracy); claims for breach of fiduciary duty, and claims for breach of equitable duties, such as an equitable duty of confidence. 17.115  Each of these different types of claim is subject to different sets of rules. 3(b)(i) Tort 17.116  Claims in tort are governed by the Rome II Regulation. As a general rule, the law of the country where damage occurs will apply (Article 4), unless either: (1) the person sustaining damage and the tortfeasor have their habitual residence in the same country, in which case the law of that country will apply (Article 4(2)); or (2) the tort is manifestly more closely connected with another country, in which case the law of that country will apply (Article 4(3)). 17.117  In cases governed by Article 4, parties are free to enter into a choice of law agreement after the occurrence of the act giving rise to damage (Article 14(1) (a)). Indeed, where all parties engaged in the dispute are ‘pursuing a commercial activity’ they may make a choice of law agreement before the event occurs (Article  14(1)(b)). However, where the tort is only linked with one country, the parties cannot by agreement exclude the mandatory rules of that country (Article 14(2) and 14(3)), and the parties cannot by agreement exclude the mandatory rules and public policy of the forum (Articles 16 and 26). 1126

Applicable law 17.122

17.118  Special rules apply to acts of ‘unfair competition’ (Article 6). The application of this article in an English law context is unclear, as English law has no tort of unfair competition. It may include economic torts, or breach of confidence, but this remains to be determined by the CJEU. In Force India Formula One Team v 1 Malaysia Racing Team SDN BHD [2012] RPC 29 Arnold J considered that Article 6 did encompass breach of confidence (see paragraph 388). Under Article  6 torts affecting exclusively the interests of a specific competitor are governed by the general rules in Article 4. However, different rules apply where the act complained of affects consumers or markets more generally (Article 6(1) and Article 6(3)). It seems likely that the type of disputes with which this book is concerned would be taken to affect only specific competitors, and thus the general rules in Article 4 would apply. 17.119  A number of types of claim which may arise in employee competition disputes are subject to specific provision, or are expressly excluded from the Regulation. Infringements of intellectual property rights (including database rights) are governed by the law under which protection of the right is claimed (Article 8). Cases of invasion of privacy and libel are excluded from the Rome II Regulation (Article 1(2)(g)). Other types of claim which may arise in employee competition disputes are addressed in the following paragraphs. 3(b)(ii)  Directors’ duties and fiduciary duties 17.120  Questions as to the nature and extent of duties owed by directors to a company are determined by the law of the place of incorporation of the company (see Pergamon v Maxwell [1970] 1 WLR 116; Base Metals v Shamurin [2005] 1 WLR 1157; Fiona Trust & Holding Corp v Privalov [2010] EWHC 3199). 17.121 In Shamurin the Court of Appeal treated questions as to the existence and extent of a director’s duties as being questions of the internal management of the company. They therefore fell to be determined by the law of the company’s place of incorporation (per Tuckey LJ at paragraph 56); per Arden LJ at paragraph 68: ‘In my judgment, the law of the place of incorporation applies to the duties inherent in the office of director and it is irrelevant that the alleged breach of duty was committed, or the loss incurred in some other jurisdiction. Accordingly, these duties can only be modified by contract to the extent that the law of incorporation allows.’

17.122 Although the duty in issue in the case was an equitable duty of care, the source of that duty was said to be Shamurin’s relationship as a director of the company. In reaching its conclusion, the Court of Appeal relied on earlier authority, in particular Konamaneni v Rolls Royce Industrial Power (India) Ltd [2002] 1 WLR  1269, where Collins J  described as ‘unexceptional and indeed obvious’ the proposition that ‘the extent of the duties of the director of a foreign company is governed by the law of that company’s place of incorporation’ (see Tuckey LJ at paragraphs 52–54). Also see Pergamon Press Ltd v Maxwell [1970] 1 WLR 1167 and Dicey paragraph 30-028. 1127

17.123  International elements

17.123  Some care will need to be taken in claims of breach of fiduciary duty to analyse the nature and source of the fiduciary duty. In treating the equitable duties as governed by the law of the company’s incorporation, the Court of Appeal in Shamurin was influenced by the fact that the claim was against a director, and involved consideration of the scope of a director’s duties to the company. 17.124  Where a fiduciary relationship arises other than from a directorship, the position is less clear. Where the fiduciary obligation arises from a contractual relationship (eg a contract of employment), the applicable law may be the law that governs the contract, as specified by application of the Rome I Regulation (Dicey, paragraph  34–087). There is however no clear authority on the point. There is a fine distinction between those who owe their fiduciary duties as company directors, and those who owe fiduciary duties but are not directors. Shamurin leaves open the possibility that a claim of breach of fiduciary duty, based on the same set of facts, may lead to one applicable law for the director fiduciary, and a different applicable law for the non-director fiduciary. 3(b)(iii)  Unjust enrichment 17.125  Article 10(1) of the Rome II Regulation provides that if a non-contractual obligation arising out of unjust enrichment concerns a relationship between the parties (such as one arising out of a contract or a tort) that is closely connected with that unjust enrichment, it shall be governed by the law that governs that relationship. Where the applicable law cannot be determined on the basis of Article  10(1) and the parties have their habitual residence in the same country when the event giving rise to the unjust enrichment occurs, the law of the country of habitual residence applies (Article  10(2)). Failing that, the law of the country in which the unjust enrichment took place applies (Article 10(3)). Each of the provisions of Article 10 may be ousted if there is a closer connection with another country (Article 10(4)). The position in claims for breach of equitable duty of confidence is unclear. The Court of Appeal in Douglas v Hello! Ltd (No 3) [2006] QB 125 said that the claim for breach of confidence (at least, one claiming unjust enrichment) was restitutionary, and therefore governed by conflict rules on restitution, with the result that the law of the place of enrichment was the applicable law. That decision has been criticised, see eg Dicey 34-092 and 36-059, where the view is expressed that breach of the equitable duty of confidence should be regarded as falling within the rules on tort (now Article 4). See also Vidal-Hall v Google Inc [2016] 1 QB 1003 at paragraph 41.

3(c)  Concurrent claims 17.126  It is of course quite common for a claim to raise a number of different causes of action, particularly for example in a team move situation, where a variety of contractual, tortious, equitable and fiduciary claims may be in issue (see Chapter 19). Application of the principles set out above may lead to different laws applying to different parts of the case. Base Metals Trading Ltd v Shamurin [2005] 1 WLR 1157 illustrates the point. 1128

Applicable law 17.129

•

A Guernsey registered company carried on business in Russia. Shamurin was an employee and director of the company. The company brought proceedings against him in England arising out of certain trades carried out by him on the London Metal Exchange. The company alleged that the trades were in breach of contractual, tortious and equitable duties of care.

•

The Court of Appeal held that the law applicable to the contractual and tortious claims was Russian law. It did so by application of the separate principles relevant to choice of law in contract and tort. However, Tuckey LJ accepted that where there were concurrent claims in contract and tort it was possible that a different law may be applicable to the two claims (at paragraphs 33–35, following Coupland v Arabian Gulf Oil Company [1983] 1 WLR 1136).

•

The law applicable to the claim of breach of equitable duty owed by Shamurin as a director of the company was Guernsey law.

3(d) Type of relief claimed 17.127  As a general principle, the applicable law governs the consequences of breach, including the type of remedies available. However, there are qualifications to this principle. Article 12 of the Rome I Regulation and Article 15 of the Rome II Regulation each provide that the applicable law governs, within the limits of the powers conferred on the court by its procedural law, the consequences of breach, including the assessment of damages, in so far as it is governed by rules of law. It is clear from the language that the English court cannot be required, by application of a foreign applicable law, to grant a remedy which is beyond its powers. 17.128 A more difficult question arises where the English court possesses the power to grant a remedy, but on application of English law principles the court would treat as inappropriate the grant of a remedy which the applicable law may require: •

There is a reluctance in English law to grant specific performance of a contract of employment. What if the applicable law would require it?

•

What if the applicable law would require the enforcement of a covenant by interim injunction, but the English courts would decline an injunction (eg  because of delay, or adequacy of damages, or consideration of other factors on the balance of convenience, applying American Cyanamid principles), or a final injunction at trial, because eg the claimant does not come with clean hands?

17.129  Traditionally, the availability of equitable remedies is exclusively a matter of the law of the forum: ie an English court would apply English law principles as to the availability of a remedy: Baschet v London Illustrated Standard Co [1900] 1 Ch 73. Thus, for example, no injunction would be granted to restrain 1129

17.130  International elements

breach of a foreign contract of employment if the injunction in effect amounted to specific performance of the contract: see Warner Bros Pictures Inc v Nelson [1937] 1 KB 209. 17.130  However, the availability of an injunction or order for specific performance is part of the consequence of breach, which is governed by the applicable law. On this analysis, the availability of an injunction would depend on the availability of an injunction under the applicable law (Dicey, paragraph 32-155 reaches this conclusion ‘with some hesitation’). Further, although it is clear that the English court will only grant a remedy within the limits of the powers conferred on it by its procedural law, it remains a moot point whether the English court can take into account its own principles as to the grant of discretionary relief as going to ‘the limits of the powers conferred on it’.

4. EVIDENCE 17.131  It is not uncommon for proceedings to take place in one country, but for evidence relevant to those proceedings to be located in another jurisdiction. For example, if the dispute is between a US institution and an English based employee, the employer may have documents in the US, and witnesses may be based in the US. In such cases, various methods of judicial assistance may be available to obtain evidence from one country to assist with proceedings in the other. Two situations will be considered: •

Cases where the substantive proceedings are in England, but documents or witnesses are located overseas.

•

Cases where the substantive proceedings are overseas, and the assistance of the English courts is sought to obtain documents or the evidence of witnesses located in England.

4(a)  Proceedings in England 17.132  Before considering the principles relevant to judicial assistance with the gathering of evidence, it is relevant to note a (perhaps obvious) point. In the normal course of litigation between two participating parties, standard case management directions should result in the appropriate evidence being placed before the court, regardless of whether that evidence is located in England or overseas. This is because the parties are present in the jurisdiction, and will need to observe case management orders which bite on them in order to avoid sanction, or to avoid losing their case. Thus: •

1130

Whilst a court cannot compel attendance of a witness who is located overseas, it will often be in the interests of a party to produce such a witness voluntarily. The court may draw negative inferences from the party’s failure to produce the witness.

Evidence 17.137

•

Since an order for disclosure under CPR, r 31 relates to documents which are or have been in a party’s control (CPR, r 31.8), documents which are in a party’s control may be disclosable even though they are overseas.

17.133 Judicial assistance measures are thus more likely to be of relevance where a party, or a witness, is unwilling to provide evidence, is outside the reach of the court, or where there are logistical difficulties which prevent evidence being given in the normal way. A  range of procedural approaches may be of assistance. 17.134  It is further to be noted, that the courts will be wary of the use of foreign proceedings to obtain a procedural or evidential advantage not available to a party in the jurisdiction where the substantive proceedings are underway: see the principles in relation to anti-suit injunctions at 17.72–17.89.

4(a)(i) Witnesses 17.135  In the normal course of events, witnesses will be expected to attend trial and give oral evidence, even if they are based outside the jurisdiction. The court has a number of means at its disposal by which evidence may be put before the court from a witness unable (or unwilling) to attend trial in England: •

Witness statements may be obtained and put in as hearsay evidence.

•

Evidence may be given by video link under CPR, r 32.3.

•

Evidence may be taken on deposition by an examiner appointed by a foreign state pursuant to a letter of request under CPR, r 34.13 (or the Taking of Evidence Regulation: see 17.138–17.145).

•

The trial judge may, in exceptional circumstances, appoint himself as a special examiner and take evidence on deposition in the foreign jurisdiction (see Peer International Group v Termidor Music Publishers Ltd [2005] EWHC 1048 and Kimathi v Foreign and Commonwealth Office [2015] EWHC 3116 (QB)).

17.136  Where a witness is unable to attend court in England, then a video link is likely to be the most effective and economical solution. It is likely to be simpler to arrange and cheaper than a deposition. However, there may be circumstances in which a deposition may be appropriate. For example, where witnesses are unwilling to give evidence, they may be compelled to give evidence by a foreign court pursuant to a letter of request.

4(a)(ii) Documents 17.137 As stated above, an order for disclosure against a party should result in disclosure of documents (including electronic documents) in that party’s 1131

17.138  International elements

possession, even if they are located overseas. However, if the party is not in the jurisdiction and is not co-operating with the proceedings, or if a non-party is outside the jurisdiction and is not co-operating, judicial assistance may be necessary. The procedures for depositions referred to below may be used to obtain documentary evidence as well as witness evidence. 4(a)(iii) Depositions 17.138  The English court may request a judicial authority in another country to take, or order to be taken, evidence of a person within that country. This procedure is governed by CPR, Pt 34 and PD 34. •

In EU  Member States with the exception of Denmark: the position is covered by Regulation 1206/2001 on the taking of evidence in Civil and Commercial matters (‘the Taking of Evidence Regulation’).

•

In other countries: the letter of request procedure applies under CPR, r 34.13. The exact arrangements applicable depend upon whether the requested state is (like the UK) a party to the Hague Convention on the Taking of Evidence Abroad in Civil and Commercial Matters or to a relevant bilateral Treaty (see the White Book 2018 at paragraph 34.13.7).

17.139  Similar procedures apply for foreign courts to make letters of request for assistance from the English courts (see 17.149–17.151). EU Member States (except Denmark) 17.140  Where the Taking of Evidence Regulation applies, the relevant rules are at CPR, r 34.23 and PD 34, paragraph 7.1 and following. It is a similar, but more streamlined, procedure to the letters of request procedure for non-EU countries: •

Each Member State has a list of ‘designated courts’ competent to take evidence in accordance with the Taking of Evidence Regulation (CPR, r 34; PD 34, paragraph 8.1) and a Central Body which co-ordinates requests (CPR, r 34; PD 34, paragraph 9.1).

•

The request may include requests for the taking of witness evidence, inspection of documents or property (Article 4).

•

The request shall be executed in accordance with the law of the requested state (Article 10(2)).

•

There are set time limits for the processing of requests in the receiving Member State (Articles 10, 15 and 17). However, the timescales are such that they do not provide much assistance in urgent cases.

•

Where necessary, the local court in the Member State will apply ‘coercive measures’ (in effect a witness summons) to require that person to attend and give evidence (Article 13).

1132

Evidence 17.148

States to which the Taking of Evidence Regulation does not apply 17.141 Where the foreign country is not a party to the Taking of Evidence Regulation, the letter of request procedure applies: see CPR, r 34.13. A  letter of request is a request to a judicial authority of a country in which the proposed deponent is, to take the evidence of a person or to arrange for it to be taken. 17.142 The grant of a letter of request by an English court is discretionary. A letter may either request answers to specific questions (formulated with the participation of the parties), or may ask for evidence to be given orally (with cross-examination). 17.143  The examination in the foreign country will be in accordance with procedure permitted in that country. The response to the letter of request will be a matter for the foreign judicial authority, subject to any multilateral or bilateral convention in place relating to the taking of evidence. The key multilateral convention is the Hague Convention on Taking of Evidence Abroad in Civil and Commercial Matters. The Foreign Process Office of the RCJ (Room E14) can provide information as to provisions applicable to any particular state. 17.144  Examination may be by court or by consular officer, depending on the state and terms of the applicable convention. 17.145  A letter of request may provide for compulsion of a witness to give evidence or supply documents. All states of the USA are willing to compel attendance of witnesses on acceptance of a letter of request under CPR, r 34.13: (see the White Book 2018, notes to CPR r 34.13 for further detail concerning other countries). 4(a)(iv) The judge as examiner 17.146  A further option is for the judge himself to seek permission of a foreign court to take evidence himself as a special examiner. Such a procedure is available under the Taking of Evidence Regulation. A requesting state may request to take evidence directly in another Member State, but may do so only if evidence is to be given voluntarily. No ‘coercive’ powers can be used to require attendance of the witness (Article 17(2)), unlike under a letter of request (Article 13). 17.147  Where the foreign country is outside the scope of the Taking of Evidence Regulation, such a procedure may be available by agreement with the foreign court; see, for example, Peer International Group v Termidor Music Publishers Ltd [2005] EWHC 1048, where Lindsay J acted as a special examiner to take evidence from witnesses in Cuba. A witness cannot be compelled to give evidence before the special examiner. 17.148  It will often not be necessary for the judge to travel to the other Member State to act as examiner as, under Article  17(4), the use of video conference 1133

17.149  International elements

technology is encouraged. In Peer International inadequate video link facilities were available. Advances in technology suggest that such a problem is likely to become increasingly rare.

4(b)  Overseas proceedings 17.149  The English court may provide assistance to a foreign court wishing to obtain evidence found within England and Wales. •

Where the requesting state is a party to the Taking of Evidence Regulation, the same provisions apply as those dealt with above where the English court is the requesting court: the arrangements under the Taking of Evidence Regulation are reciprocal. CPR, rr 34.22–34.24 and PD 34 apply.

•

Where the state is not a party to the Taking of Evidence Regulation, the position is governed by the Evidence (Proceedings in Other Jurisdictions) Act 1975 and by CPR, rr 34.16–34.21.

17.150  In either case, where it is satisfied by a request, the court may order a deposition to be taken by an examiner appointed by the court. The relevant rules relating to depositions are set out in CPR, rr 34.8–34.10: •

Evidence is taken on oath, in the same way as if the witness were giving evidence at trial (r 34.9(1)), witness statements, examination in chief and cross-examination.

•

A witness may be compelled to attend to give evidence under deposition under r 34.10.

17.151  In cases under the Evidence (Proceedings in Other Jurisdictions) Act 1975 (see, in particular, Rio Tinto Zinc Corpn v Westinghouse Electric Corpn [1978] AC 547): •

The court may make an order for the purpose of obtaining evidence such ‘as may appear to the court appropriate for the purposes of giving effect to the request’ (section 2(1)). This may include, for example, orders for the examination of witnesses, disclosure of documents, or inspection of property. Presumably, therefore, this could include orders for the examination of computers, such as may be ordered in English proceedings.

•

However, the court will not make a general order for disclosure of documents (section 2(4)(a)), but will require production only of particular documents specified in the request (section 2(2), (3) and (4)).

•

The court will require only steps which could be required by way of obtaining evidence for purposes of civil proceedings in English courts. The court will not permit pre-trial depositions such as used in US. Only questions such as could properly be asked by counsel at trial will be permitted: see eg Golden Eagle Refinery v Associated International Insurance [1998] EWCA Civ 293.

1134

Recognition and enforcement of judgments 17.158

•

The examination will be carried out in accordance with the procedure of the English courts, but the court will seek to give effect to requests, and examination will not be limited to evidence which is admissible in an English court.

5. RECOGNITION AND ENFORCEMENT OF JUDGMENTS 17.152 A  judgment of the English courts can only be enforced within the jurisdiction of the court. It is possible for the court to grant an injunction with international effect, eg an injunction to enforce a restrictive covenant which is not limited to clients or acts of solicitation in the United Kingdom (see eg Scully v Lee [1998] IRLR 259). However, the effect of such an order is dependent upon the party against whom it is made being within the jurisdiction, or at least having assets within the jurisdiction. If not, the order may be toothless and may be ignored. 17.153  One option may be for a claimant to bring his claim in the jurisdiction where the defendant or his assets are located: the principles relevant to jurisdiction and applicable law set out above will need to be considered. Another option is to bring proceedings in England with a view to having the court’s order recognised or enforced in the country where the defendant is to be found. 17.154  The circumstances in which it is possible to do so will depend upon the identity of the foreign state, and the nature of the order sought to be recognised.

5(a)  Recast Brussels I Regulation Member States 17.155  Chapter III of the Recast Brussels I Regulation provides a code for recognition and enforcement of judgments in Member States which will apply both where an English judgment is to be recognised in another Member State, and where the judgment of another Member State is to be recognised in England. 17.156 Article  36(1) provides for mutual recognition of judgments between Member States without the need for any special procedure. If there is a dispute concerning recognition, an application can be made for registration of the judgment (Article 36(2)). In England the application is made under CPR, Pt 74; other Member States will have their own similar procedures. 17.157 There is also mutual recognition of interim measures, eg an interim injunction (Case: 25/79 Denilauer v SNC Couchet Freres [1980] ECR 1553). 17.158  There are four key exceptions to this rule, for the purposes of this chapter: •

Where recognition of the judgment would be ‘manifestly contrary to public policy’ under Article 45(1)(a). The ECJ decisions on the similar provision 1135

17.159  International elements

in the Brussels Convention stress that this provision is to be applied restrictively and only in exceptional cases. The public policy must be that of a rule of law regarded as being fundamental within the enforcing state’s legal order. See Krombach v Bamberski [2000] ECR I-1935 and Hoffmann v Krieg [1988] ECR 645. There can be no ‘back door’ application of national substantive law: Article 52 explicitly provides that ‘under no circumstances may a judgment given in a Member State be reviewed as to its substance in the Member State addressed’. However, it would seem to remain open to an English court to refuse to recognise or enforce in England a judgment which would be an unlawful restraint of trade under English law. For the English court’s approach to the application of English public policy when applying a foreign choice of law in English proceedings, see Duarte v Black and Decker Corporation [2007]  EWHC  2720 (QB) considered at 17.109). •

Where the judgment was given in default of appearance, if the defendant was not served with the document which instituted the proceedings or an equivalent document in sufficient time and in such a way so as to enable him to arrange for his defence, unless the defendant failed to commence proceedings to challenge the judgment when it was possible for him to do so (Article 45(1)(b)).

•

Where it is irreconcilable with a judgment given in a dispute between the same parties in the Member State in which recognition is sought (Article 45(1)(c)).

•

Where it is irreconcilable with an earlier judgment given in another Member State or in a third state involving the same cause of action and between the same parties, provided that the earlier judgment fulfils the conditions necessary for its recognition in the Member State addressed (Article 45(1) (d)).

17.159  Under the Recast Brussels I Regulation, a judgment given in a Member State shall be enforceable in other Member States without any declaration of enforceability being required. This is a departure from the position under the 2001 Brussels I Regulation, under which such a declaration was necessary. However, the Recast Brussels I Regulation retains a procedure by which an interested party can challenge the enforceability of a judgment (Article 39). Article 46 provides that enforcement shall be refused where one of the grounds set out in Article 45 is found to exist. 17.160  Article 41 provides that the procedure for the enforcement of judgments given in another Member State shall be governed by the law of the Member State addressed. The grounds for refusal or suspension of enforcement under the law of the Member State concerned will apply insofar as they are not incompatible with the grounds set out in Article 45 (Article 41(2)). It is not necessary for the party seeking enforcement to have a postal address or an authorised representative in the Member State addressed (unless such a representative is mandatory irrespective of the nationality or domicile of the parties) (Article 41(3)). 1136

Recognition and enforcement of judgments 17.164

5(b) Recognition and enforcement of judgments where the Recast Brussels I Regulation does not apply 5(b)(i)  Recognition and enforcement in England 17.161  The mechanisms for enforcement of judgments of countries not party to the Recast Brussels I Regulation regime is complicated, depending on a mixture of statutory and common law principles. 17.162  In certain instances, judgments may be registered under the Administration of Justice Act 1920 and the Foreign Judgments (Reciprocal Enforcement) Act 1933 – these apply to certain UK overseas dominions and Commonwealth countries. The current list of countries is set out in the White Book 2018 in the notes to CPR r.74.6. The 1920 Act is unlikely to be of practical relevance unless dealing with a judgment emanating from an offshore financial services centre such as Bermuda, the Cayman Islands, or the British Virgin Islands. Its provisions are not considered further in this chapter. The 1933 Act governs registration of judgments from countries such as Australia and Canada. The procedure for registration is contained in CPR, r 74. Once registered, a judgment may be enforced as if it were a judgment of the High Court (section 2(2) 1933 Act). However, a major limitation, for present purposes, of both the 1920 Act and the 1933 Act is that they apply to money judgments and cannot be used to register an overseas injunction. 17.163  If the judgment does not fall to be recognised under any of the abovementioned Acts (eg a judgment from the USA), common law principles apply: •

There is no mechanism for registration of the judgment.

•

At common law, a foreign judgment (for a sum of money, at least) may create an actionable right which can be sued on in England, for the purpose of obtaining an English judgment. In money claims, summary judgment may frequently be obtained.

•

A foreign judgment may give rise to res judicata or issue estoppel in English proceedings.

•

There are a number of grounds upon which the English court will refuse to recognise or enforce a foreign judgment, most notably: >

where the foreign court did not have jurisdiction according to English principles of conflict of laws;

>

where the judgment was obtained by fraud;

>

where enforcement or recognition would be contrary to public policy; and

>

where the judgment was obtained in breach of natural justice.

17.164 There is little authority dealing with enforcement or recognition at common law in England of a final injunction granted by a foreign court. The 1137

17.165  International elements

traditional rule is that English courts will only recognise and enforce a foreign judgment for a definite sum of money. However, whilst the English court will not directly enforce an overseas injunction, the overseas judgment underpinning the injunction may give rise to a cause of action or issue estoppel which could be relied on in English proceedings brought for an injunction. Two limitations should be noted. First, as a matter of general principle noted in the previous paragraph, the English court will refuse to give effect to a foreign judgment which is contrary to public policy. The court may therefore refuse an injunction, despite the foreign judgment, if to grant it would result in an unlawful restraint of trade. Secondly, it would seem likely that the English court would be entitled to reach its own conclusions (rather than being bound by the foreign court’s conclusions) on matters relevant to the grant of discretionary relief (eg delay, whether the parties have clean hands). Given the absence of authority, these views are offered with some hesitation. An interesting discussion of the need at common law for greater flexibility in enforcing foreign injunctions and equitable orders is to be found in the Supreme Court of Canada’s judgment in Pro-Swing Inc v Elta Golf Inc (2006) DLR (4th) 633. All members of the court agreed that the common law should permit enforcement of an overseas injunction in appropriate circumstances, although the court was divided as to the limits of this principle and the application to the particular facts. 17.165  To be recognised or enforced, the judgment must be final and conclusive. A foreign order for interim relief will not be enforceable in England. However, where foreign proceedings are still pending, an interim order may be obtained from the English courts to assist those proceedings under section 25 Civil Jurisdiction and Judgments Act 1982 (see 17.60–17.67). 5(b)(ii)  Recognition and enforcement in non-Member States 17.166  The recognition and enforcement of an English judgment in a country which is not party to the Recast Brussels I Regulation will depend on the laws of that particular country, and specialist advice should be sought.

1138

CHAPTER 18

Discovering competitive activity: the immediate practical issues Kate Brearley, Kiersten Lucas and Alexander Robson (Case Study 2) Introduction 18.1 Overview18.1 Ambit of this chapter 18.3 1. Reacting to the discovery of competitive activity 2. Preliminary issue 1: instructing the legal team and other advisers 2(a) The legal team 2(a)(i) Specific considerations for the (ex-)employer 2(a)(ii) Specific considerations for the (ex-)employee and poaching employer 2(b) Forensic IT, accountancy and public relations advisers 2(b)(i) Forensic IT advisers 2(b)(ii) Accountancy advisers 2(b)(iii) Public relations advisers 2(b)(iv) External advisers – general considerations

18.7 18.11 18.15 18.19 18.20 18.28 18.29 18.31 18.32 18.37

3. Preliminary issue 2: allocation of responsibilities to the (ex-)employer’s core internal management team

18.40

4. Preliminary issue 3: should the employee be suspended? 4(a) An express right to suspend 4(b) An implied right to suspend 4(c) Pay during suspension 4(d) Restraining suspension 4(e) The suspension meeting and letter 4(f) Disadvantages to the employer of suspension

18.46 18.50 18.54 18.55 18.56 18.60 18.64

5. Applying the three basic steps: discovery of competitive activity during employment 5(a) Gathering information 5(a)(i) What is the nature and scope of the competitive activity? 5(a)(ii) Has the competitive activity involved any breaches of the obligations owed by the employee to the employer or is it likely to do so? 5(a)(iii) What are the terms of employment, role and importance of the employee? 5(a)(iv) What sort of threat does the competitive activity pose to the employer’s business? 5(b) Taking key decisions

18.65 18.66 18.67 18.69 18.79 18.83 18.84 1139

Discovering competitive activity: the immediate practical issues

5(b)(i) Retention or dismissal? 5(b)(ii) Should legal proceedings be threatened/issued against the employee? 5(b)(iii) Should legal proceedings be threatened/issued against any third party? 5(b)(iv) Are there steps that should be taken to protect or consolidate the employer’s position with customers? 5(b)(v) Are there steps that should be taken to reassure and motivate other employees/independent contractors? 5(c) Settling a strategy to reflect the key decisions 6. Applying the three basic steps: discovery of competitive activity after employment has ended 6(a) Gathering information 6(b) Taking key decisions 6(c) Settling a strategy to reflect the key decisions

18.85 18.102 18.120 18.124 18.133 18.140 18.142 18.142 18.147 18.151

7. Letters before claim 7(a) Letters before claim to the (ex-)employee 7(a)(i) Content 7(a)(ii) Relevant background to the employment 7(a)(iii) Directorships held, and/or fiduciary obligations owed, by the (ex-)employee 7(a)(iv) Termination of employment 7(a)(v) Alleged/anticipated breaches 7(a)(vi) Disclosure 7(a)(vii) Return of property 7(a)(viii) Preservation of evidence 7(a)(ix) Financial loss and undertakings 7(a)(x) Timetable 7(a)(xi) Threat of proceedings 7(a)(xii) Alternative dispute resolution 7(a)(xiii) Recommendation to take legal advice and reference to the effect of the Practice Direction on Pre-Action Conduct and Protocols (‘Pre-Action PD’) 7(a)(xiv) Explaining delay 7(a)(xv) Reservation of rights 7(a)(xvi) Third party funding and costs insurance 7(a)(xvii) Delivery to the (ex-)employee 7(b) Letters before claim to the poaching employer

18.152 18.155 18.157 18.159

8. Alternative dispute resolution (‘ADR’) 8(a) Why should the (ex-)employer mediate? 8(a)(i) The parties’ obligations to consider mediation 8(a)(ii) Sanctions for failing to consider mediation 8(b) What are the advantages of mediation? 8(b)(i) Control over the mediation process 8(b)(ii) Privacy and confidentiality of mediation

18.222 18.228 18.229 18.235 18.244 18.245 18.246

1140

18.160 18.161 18.163 18.164 18.192 18.194 18.195 18.200 18.202 18.203 18.207 18.209 18.210 18.211 18.213 18.215

Introduction 18.1

8(b)(iii) The application of the ‘without prejudice’ rule and privilege in the context of mediation 8(b)(iv) The remedies available in mediation 8(b)(v) Avoiding a final (public) determination regarding the restrictive covenants 8(b)(vi) Cost effectiveness of mediation 8(b)(vii) Flexibility of the mediation arrangements 8(b)(viii) Laying the groundwork for a later settlement 8(c) When should the mediation process be started? 8(d) What are the cost consequences of mediating the dispute? 8(e) What other factors need to be taken into account?

18.247 18.249 18.250 18.251 18.252 18.254 18.255 18.260 18.265

Appendix 1 – Customer/client risk analysis regarding the (ex-)employee's competitive activity Appendix 2 – Key decisions and strategy – Case Study 1 Appendix 3 – Key decisions and strategy – Case Study 2 Appendix 4 – Letter before claim to the ex-employee in Case Study 2 Appendix 5 – Documentation for proceedings against the ex-employee in Case Study 2 Appendix 6 – Arbitration: an overview Appendix 7 – Alternative Dispute Resolution (‘ADR’): an overview Appendix 8 – Useful materials

INTRODUCTION Overview 18.1  There are three broad categories of competitive activity in which the (ex-) employee may be involved, or is proposing to be involved: •

Competition during employment.

•

Acts preparatory to competing after employment has ended.

•

Competition after employment has ended.

Often the (ex-)employee’s conduct involves more than one of these categories, normally the second and third, and in some cases all three. See, for example: Balston Ltd v Headline Filters Ltd [1987] FSR 330 (Ch), where the employee competed during employment; Helmet Integrated Systems Ltd v Tunnard [2007] IRLR 126 (CA), where, during employment, the employee took preparatory steps to compete after employment had ended; QBE Management Services (UK) Ltd v Dymoke & Ros [2012] IRLR 458 (QB), Ranson v Customer Systems 1141

18.2  Discovering competitive activity: the immediate practical issues

plc [2012]  IRLR  769 (CA), Imam-Sadeque v BlueBay Asset Management (Services) Ltd [2013]  IRLR 344 (QB), Thomson Ecology Ltd and another v APEM  Ltd and others [2014]  IRLR 184 (Ch) and Allfiled UK  Ltd v Eltis [2016] FSR 11 (Ch), where the employee took preparatory steps to compete and also competed after employment had ended; and Whitmar Publications Ltd v Grange [2013] EWHC 1881 (Ch), where the employee did all three – competing during employment, taking preparatory steps during employment to compete after employment had ended and competing after employment had ended. 18.2  Discovering that an (ex-)employee has engaged in any of these competitive activities, or is proposing to do so, frequently produces a reaction of outrage by the (ex-)employer. Often the (ex-)employer regards the competitive activity as a form of serious personal attack, irrespective of the real commercial threat, and reacts with a degree of haste and irrationality. For example, a common reaction by an employer who discovers that an employee is to join a competitor is to terminate the employment immediately, have the employee clear his desk under supervision and then march him unceremoniously off the premises. While this may make the employer feel better, as a course of action it is neither commercially nor legally sensible. The employer almost certainly will have deprived himself of any opportunity to retain the employee. He will also have released the employee from the obligation to give or serve out his notice period and deprived himself of the opportunity to place the employee on garden leave (and then seek a garden leave injunction – see 15.3–15.73). Where the employer’s conduct amounts to a repudiatory breach of the contract (see 9.63–9.122) which is accepted by the employee, he will also have released the employee from all future obligations under the contract. Last, but not least, where the employee has sufficient continuous service (currently two years), the dismissal is likely to be unfair, at least procedurally, under section 98 Employment Rights Act 1996 (see further 18.98–18.101). In short, as a result of his actions the employer will have worsened rather than improved his own position. That said, there may, of course, be situations where the commercial risk posed by the employee’s actual or proposed competitive activity is so great that the employer feels he has little option but to remove the employee from the business as soon as possible. Whatever the particular circumstances, to avoid (or at least mitigate) potential pitfalls such as those identified above, it is imperative that the employer takes stock of the situation, takes legal advice and devises his strategy before reacting.

Ambit of this chapter 18.3 Chapter 8 looked at the practical steps employers can take to motivate and reward employees (with a view to discouraging competition) and to detect the first signs of competition. In this chapter we will look at the steps the (ex-) employer should take when he discovers actual or proposed competitive activity, including the drafting of letters before claim. We will also look briefly at the increasing emphasis placed by the courts on the use of alternative dispute resolution and the role mediation, in particular, can play in securing successful and creative solutions in cases of employee competition disputes. 1142

Introduction 18.6

18.4 This chapter focuses on the discovery of competitive activity from the perspective of the (ex-)employer, and the situation where the (ex-)employee moves to a competitor organisation in the same or similar capacity. Of course, that may not always be the case. The (ex-)employee may set up an entirely new enterprise (whether as a company, partnership or limited liability partnership) or enter into a joint venture. The new enterprise or joint venture may be self-funded, or may receive financial support from individual or corporate investors. Where necessary, we will refer to these alternative structures/third parties. This chapter also looks primarily at the steps the (ex-)employer should take when he discovers competitive activity by a single (ex-)employee; the situation where the (ex-) employer is facing a team move is explored in Chapter 19. 18.5  In summary, the specific topics covered in this chapter are as follows: •

Preliminary issues, including assembling the team of external advisers and the core internal management team who will help the employer respond to the competitive threat (18.11–18.45) and deciding whether the employee should be suspended (18.46–18.64).

•

The basic steps to be taken by (ex-)employers when competitive activities are discovered during, or after the termination of, employment, namely: gathering information; taking key decisions; and settling the strategy to reflect those key decisions (18.65–18.151).

•

Letters before claim to the (ex-)employee and, potentially, the poaching employer or the (ex-)employee’s new business enterprise or joint venture (18.152–18.221).

•

Alternative dispute resolution, with a particular focus on mediation (18.222–18.266):

18.6  Finally, the Appendices to this chapter contain the following: •

A  template table for customer/client risk analysis regarding the (ex-) employee’s competitive activity (Appendix 1).

•

Two case studies illustrating the approaches we have described applied in particular factual scenarios and where the objectives to be achieved are quite different (Appendices 2 and 3).

•

A letter before claim to the ex-employee in Case Study 2 (Appendix 4).

•

Documentation for proceedings against the ex-employee in Case Study 2 (Appendix 5).

•

An overview of arbitration (Appendix 6).

•

An overview of Alternative Dispute Resolution (‘ADR’) (Appendix 7).

•

A number of useful materials, including: the Practice Direction on Pre-Action Conduct and Protocols, which came into force on 6  April 2015 (the ‘PreAction PD’); the detailed guidance on pre-action conduct for the types of dispute covered by this book that was contained in Annex A to the Pre-Action PD’s predecessor, the general Practice Direction on Pre-action Conduct; and the Law Society’s June 2015 publication entitled Litigants in person: 1143

18.7  Discovering competitive activity: the immediate practical issues

guidelines for lawyers (Appendix 8). For ease the Practice Direction on Pre-Action Conduct and Protocols and its predecessor the general Practice Direction on Pre-Action Conduct shall be referred to throughout the rest of this chapter as the ‘Pre-Action PD’ and the ‘PDPAC’ respectively.

1. REACTING TO THE DISCOVERY OF COMPETITIVE ACTIVITY 18.7  In every case where actual or threatened competitive activity is discovered (whether before or after termination of employment) the (ex-)employer must take the following three basic steps: (a) Gather information; (b) Take key decisions; and (c) Settle a strategy to reflect the key decisions. 18.8  It is also imperative that the (ex-)employer takes these steps without delay. This is commercially important because the (ex-)employer needs to react to the competitive activity promptly in order to minimise the damage or potential damage to his business. It is also legally important, primarily because delay is likely to prejudice any application the (ex-)employer may make for an interim injunction (or other interim relief). See 14.23 and 14.43 on the issue of delay in relation to interim injunction applications. 18.9  The three basic steps are the same for each type of competitive activity referred to at 18.1. In practice, however, there are differences in the factors that have to be taken into account and the options available to the (ex-)employer, depending on whether he discovers the actual or proposed competitive activity while he is still the employer or after the employment has ended. For this reason, we will look first at how the steps should be taken where the discovery is made during employment (18.65–18.141), and then highlight the differences where the discovery is made after termination of employment (18.142–18.151). 18.10 Before turning to that exercise, it is worth pausing to consider three important preliminary issues which are: (a) The assembly and instruction of the team of legal and other appropriate advisers (18.11–18.39); (b) The assembly of the (ex-)employer’s core internal management team and the allocation of responsibilities for the legal and commercial issues between them (18.40–18.45); and (c) Whether the employee should be suspended (18.46–18.64).

2. PRELIMINARY ISSUE 1: INSTRUCTING THE LEGAL TEAM AND OTHER ADVISERS 18.11 To follow the three basic steps effectively the (ex-)employer will need the help of experienced advisers. The legal team will be the key advisers and 1144

Preliminary issue 1: instructing the legal team and other advisers 18.13

solicitors should always be appointed first. The (ex-)employer may also need other advisers, the most common examples being accountancy, forensic IT and public relations advisers. It is vital to maximise the contribution made by each adviser, and ensure they work efficiently as a co-ordinated team. To achieve this, ideally they should all be appointed as soon as possible after the (actual or proposed) competitive activity has been discovered and be factored into (and invited to contribute to) the overall strategy and key decisions to be taken. 18.12  The scope of each adviser’s instructions should be set out clearly in their respective terms of engagement with the (ex-)employer, and any standard terms of business or standard operating procedures need to be reviewed carefully. For example, most forensic IT advisers will have protocols for the preservation and extraction of evidence, which the (ex-)employer needs to be aware of from the outset and before any irreversible steps have been taken. All the advisers should be fully briefed on the factual background and division of responsibilities, and the methods and channels of communication should be clearly established at the outset. In particular, the (ex-)employer should ensure that everyone on the legal or advisory team (and the core internal management team) understands the basic ‘rules of engagement’ of the exercise they are about to undertake, namely: (a) what the (ex-)employee can or cannot do legitimately within the confines of his ongoing legal obligations (eg  as to confidentiality and restrictive covenants); (b) what contact each team member should or should not have with customers or other employees/independent contractors; (c) the importance of exercising care when creating documents that may become discloseable in any subsequent litigation, or need to be provided to the (ex-)employee in response to a data subject access request (see 18.186– 18.191); (d) any restrictions on deleting, marking, annotating, accessing, amending, printing, circulating, or requesting from third parties, any documents that might be relevant to the dispute; and (e) what statements should or should not be made either internally or externally particularly, in today’s digital environment, on social media sites such as Facebook, LinkedIn, WhatsApp and Twitter. 18.13  From the perspective of the poaching employer/(ex-)employee (and their respective legal, advisory or management teams), such ‘rules of engagement’ can take on even greater significance. In particular, any instructions issued as regards the perceived scope and application of any restrictive covenants, and what can or cannot therefore be done regarding the (ex-)employer’s customers or other employees/independent contractors, can form important evidence in defence of claims for breach of, or inducement to breach, any ongoing legal obligations to which the (ex-)employee is subject. 1145

18.14  Discovering competitive activity: the immediate practical issues

18.14  Demonstrating early in the process that the (ex-)employer’s advisory team has been assembled, is fully briefed and ready to take action, shows the strength of the (ex-)employer’s resolve and that the matter is being taken seriously. It can send a powerful message to the (ex-)employee and poaching employer, which can be enough to convince some would-be defendants to agree terms with the (ex-)employer (eg undertakings) rather than face the prospect of expensive and time-consuming litigation.

2(a) The legal team 18.15  It is vitally important for the parties to an employee competition dispute to seek advice from a solicitor (and, at the appropriate stage, counsel) before any irrevocable steps are taken. The key reasons for this are threefold. First, and often most importantly, where employment is ongoing, the solicitor/counsel can help the employer (or employee) avoid committing a repudiatory breach of contract. Secondly, in cases of competitive activity, court proceedings can become imperative at very short notice. Instructing a solicitor/counsel at the last minute can result in valuable time being lost and, in some cases, poor quality instructions being given, resulting in an unsuccessful court application. Finally, a solicitor/counsel, particularly one used to dealing with employee competition disputes, will be able to give valuable and speedy advice on practical and strategic matters, as well as the prospects of success of any litigation. For example, the experienced solicitor/ counsel will be able to advise on the likely enforceability of the covenants and the strength of any evidence gathered. Deciding whether or not to litigate is one of the key decisions the (ex-)employer has to take. Without proper legal advice it may be difficult (if not impossible) for him to make informed decisions. 18.16  Save in the rare cases where the client has instructed a solicitor advocate, or counsel has accepted direct instructions through the ‘public access’ arrangements set out in Section 2.D2 of the Bar Standards Board Code of Conduct (9th Edition, which is found in Part 2 of the Bar Standards Board Handbook, 3rd Edition, 1 February 2018), counsel will need to be instructed separately. One frequently asked question is at what stage this should be done. Understandably, parties wanting to contain costs may be reluctant for counsel to be instructed at the very initial stages. However, because at that stage it is often difficult to predict with certainty whether court proceedings will become necessary, it is generally a good idea to identify appropriate counsel at an early stage and to have them on standby, should they be required. Precisely when formal instructions should be delivered will depend on a variety of factors, including the complexity of the legal and commercial issues and the likelihood that court proceedings will be necessary. At the very latest counsel should be instructed as soon as court proceedings are a real likelihood. In most cases, counsel should be instructed to assist with the preparation of letters before claim since these invariably form the basis of any later pleadings, which are usually settled by counsel. 18.17 Ideally, comprehensive formal instructions to counsel should be sent, although this will not always be possible in the time available. Increasingly, 1146

Preliminary issue 1: instructing the legal team and other advisers 18.19

initial instructions to counsel comprise a set of material documents and a verbal briefing from solicitors, particularly where time pressures are great. If this is the case, we advise taking a trainee or junior solicitor to the first conference with counsel to take a full note. That note should be circulated straight after the conference and should include: the factual background and timeline; a list of ‘who’s who’ in the dispute; and a summary of the key action points agreed and by whom they are to be undertaken. 18.18 Where counsel is not being instructed immediately after competitive activity has been discovered, one practical tip for solicitors is, as documents and information are received, to index them and retain a set on a separate file which can then be despatched to counsel at very short notice. The index should include, where possible, the provenance of the documents (that is, from whom they were received and when) as these details often get lost or forgotten as a matter progresses. The index created also serves as a useful source for cross-checking documents to be exhibited to witness statements or the basis for the ‘bundle’ of material documents in any subsequent court proceedings. 2(a)(i)  Specific considerations for the (ex-)employer 18.19  In selecting the legal team the key elements the (ex-)employer should take into account are: (a) Conflict checks – Solicitors and counsel alike are subject to strict codes of conduct regarding potential conflicts of interest. Respectively, these are the Solicitors Regulation Authority SRA Code of Conduct 2011 (which is found in the SRA Handbook, version 19, published 1 October 2017) and the Bar Standards Board Code of Conduct (9th Edition, which is found in Part 2 of the Bar Standards Board Handbook, 3rd Edition, 1 February 2018). For ease, these will be referred to as the ‘SRA Code of Conduct’ and the ‘Bar Standards Board Code of Conduct’ throughout the rest of this chapter. The SRA Handbook, for example, sets out ten mandatory ‘SRA Principles’, which must be complied with at all times, as supplemented by the mandatory SRA ‘Outcomes’ set out in the SRA Code of Conduct itself. Achieving those Outcomes helps solicitors ensure that they are complying with the ‘Principles’. The Outcomes are further supplemented by non-exhaustive lists (for each ‘Outcome’) of non-mandatory ‘Indicative Behaviours’ which, essentially, set out examples of ways in which solicitors can comply with the Outcomes. Solicitors should note that the Solicitors Regulation Authority has proposed fairly radical changes to the SRA Code of Conduct, which include: having two separate codes (one for individuals and one for firms); having a reduced list of mandatory requirements (which will be described as ‘standards’); and removing the lists of Indicative Behaviours (and so placing the burden of working out what amounts to compliance squarely on the individual solicitors and firms). The second round of consultation on the new rules closed in December 2017, but as yet there is no confirmed date for when changes will be implemented. Pursuant to the rules currently in place 1147

18.19  Discovering competitive activity: the immediate practical issues

save in limited circumstances, solicitors and counsel cannot act where they have a client conflict (or there is a significant risk of a client conflict), or where they risk breaching one client’s confidentiality in favour of another (see further at 18.20–18.27). It is imperative, therefore, that comprehensive conflict checks are conducted at the outset of the dispute on all parties who may be involved. Not all potential parties will be known in the very early stages, and so conflict checks will frequently be an ongoing exercise as more information comes to light. Initially, the only known party may be the (ex-) employee and possibly his colleagues where there is a team move. Other obvious parties, as they become known, will include the (ex-)employee’s new enterprise/joint venture and/or the poaching employer, and any former employee acting as a ‘recruiting sergeant’. Less obvious parties, who can be overlooked, include: companies associated with the new enterprise/joint venture or poaching employer; other employees/independent contractors or directors; third parties providing financial or other support (eg guarantees), such as individual or corporate funders, investors or insurers; head-hunters used by the (ex-)employee or by the poaching employer to help extract an individual or team of employees; or other individuals, perhaps family members. Counsel should check whether members of their Chambers are involved with any of the relevant parties and, if so, what arrangements are to be put in place, eg information barriers/‘ethical’ or ‘Chinese’ walls, and which clerks will assist which counsel team. Information barriers/‘ethical’ or ‘Chinese’ walls may also be needed within the solicitor’s firm. Although it would not necessarily amount to a strict conflict, counsel should also be asked to disclose whether they have acted for any relevant party previously. If conflicts are not identified until the matter is well-advanced, solicitors/ counsel may be professionally embarrassed and unable to continue acting, with the inevitable disruption and significant adverse cost consequences that may result for the (ex-)employer. (b) Funding arrangements – Consideration must also be given to how the legal and advisory teams’ fees will be funded and avoiding any prohibited types of fee arrangement: SRA  Code of Conduct, Outcome 1.6; Bar Standards Board Code of Conduct, Rule, rC9.7. Solicitors are additionally required to enter into fee arrangements that ‘are suitable for the client’s needs and take account of the client’s best interests’ (SRA Code of Conduct, Outcome 1.6). Solicitors can demonstrate compliance with this obligation in a number of ways, including discussing with the client whether they have any insurance that might cover their fees (SRA  Code of Conduct, Indicative Behaviour 1.16). It is increasingly common for both individuals and corporates to seek third party litigation funding and/or to seek (or already have in place) insurance cover for their (and/or their opponent’s) costs. Discussions about these options should be had as early as possible. It can take some time to identify and agree terms with a third party litigation funder or insurer. In addition, most insurance policies have notification requirements which, if missed, can invalidate the cover. There may also be reporting requirements and pre-approval processes that need to be adhered to in order to ensure full coverage. The fact that a discussion has taken place about how the (ex-) 1148

Preliminary issue 1: instructing the legal team and other advisers 18.19

employer’s costs will be covered should be recorded in the legal team’s terms of engagement. (c) Expertise – Since time will be of the essence, using a legal team with expertise in employee competition disputes (as distinct from general litigators) will be advisable. It may also be beneficial if the legal team has prior knowledge and experience of the sector in which the (ex-)employer operates. (d) Availability – The (ex-)employer needs to be sure that the legal team (including counsel) have both the resources and availability to provide the advice and take the required steps as and when needed. This is particularly important where an application for an interim injunction is a real likelihood, since these tend to require significant time and resource commitments over a very short period. Having the requisite time and resources to deliver services to clients are also mandatory requirements imposed by the SRA  Code of Conduct (Outcomes 1.4 and 1.5) and the Bar Standards Board Code of Conduct (Rule rC21). (e) Impact on the (ex-)employee and his new enterprise/joint venture – Simple though it may seem, instructing ‘heavyweight’ advisers can be the quickest and cheapest way of extracting satisfactory undertakings from the (ex-)employee and, where relevant, the poaching employer. For example, we generally advise that any pre-action correspondence, and certainly letters before claim, come from solicitors rather than the (ex-)employer as this is likely to have a greater impact on the recipient(s). On receipt of a solicitor’s letter, daunted by the prospect of becoming embroiled in lengthy and expensive litigation and realising that his conduct is being taken very seriously, the (ex-)employee will often capitulate at an early stage. This is less likely in the case of more sophisticated (ex-)employees, or those who are assisted by their own (or the poaching employer’s) legal teams and/or have secured indemnities from their future employer against legal costs/damages that might be incurred as a result of litigation by their (ex-) employer. In contrast, where the first letter comes direct from the (ex-) employer, that can be construed by the (ex-)employee as a less serious reaction and may either be ignored completely or cause the (ex-)employee to become more covert in his activities. At best it may elicit vague promises to abide by any enforceable obligations owed by the (ex-)employee. However, that gives the (ex-)employer no information of substance in respect of what unlawful action may have already been taken (eg what confidential information has been misappropriated or misused, or what customers have been approached). See further on letters before claim at 18.152–18.221 and, in particular, the caution with which practitioners should approach their dealings with litigants in person (see 18.207–18.208). (f) Impact on the poaching employer – In sectors where employees move frequently, the (ex-)employer and poaching employer may have encountered each other before in similar circumstances (either as ‘gamekeeper’ or ‘poacher’). The poaching employer’s reaction to receipt of a solicitor’s letter requesting undertakings or threatening litigation will inevitably be influenced by any past encounters. For example, it will have little impact 1149

18.20  Discovering competitive activity: the immediate practical issues

on the poaching employer if he has experience of the (ex-)employer having made empty threats of litigation previously. 2(a)(ii)  Specific considerations for the (ex-)employee and poaching employer 18.20  Although this chapter focusses on the perspective of the (ex-)employer, the key elements when selecting the legal team that are identified at 18.19 should also be taken into account by the (ex-)employee, his new enterprise or joint venture and the poaching employer, namely: conflict checks; funding arrangements; expertise; availability; and the impact on the (ex-)employer. 18.21  In particular, the choice of legal team by the (ex-)employee and the poaching employer or the (ex-)employee’s new enterprise/joint venture can become problematic. A seasoned poaching employer may be keen that the same solicitor represents his new recruit as well as acting (or continuing to act) for the poaching employer, both in terms of managing costs efficiently and streamlining the legal and strategic advice. Any solicitor needs to consider carefully if this is a wise course. The poaching employer and his new recruit undoubtedly have a ‘common interest’ in making the hire a success and resisting litigation by the (ex-)employer. However, that is not to say that their interests are totally aligned on all matters, or that they will remain so throughout the course of any dispute. Sometimes the difference between the poaching employer and his new recruit is essentially a commercial issue which can be resolved relatively easily. For example, to avoid the inevitable costs and distraction of litigation, the poaching employer may prefer his new recruit to accept wider short-term restrictions on his ability to compete with the (ex-)employer than the recruit believes is necessary or appropriate. In such circumstances, the poaching employer and the new recruit arguably still have a ‘substantial common interest’ (as required by the SRA Code of Conduct, Outcome 3.6), for example, in avoiding any litigation, and the solicitor may still be able to act for both, provided that he satisfies certain conditions (see 18.22). On other occasions, the divergence of interest is much more fundamental and may rule out entirely the possibility of joint representation. For example, the new recruit may have committed (and intentionally concealed) a serious breach of his obligations to the (ex-)employer (such as the removal of confidential information or the attempted solicitation of customers) of which the poaching employer is unaware. Breaches of that nature may also adversely affect the prospects of successfully defending any proceedings brought by the (ex-) employer and may even contravene the terms on which the (ex-)employee was recruited by the poaching employer. For instance, it is commonplace for new recruits to be required to warrant that they can accept and commence employment with the poaching employer without breaching any legal obligations owed to the (ex-)employer (such as restrictive covenants). Warranties of this nature are often raised by poaching employers as a shield against claims that they have induced an (ex-)employee to breach his contract with the (ex-)employer. Of course, these warranties will offer little effective protection if the poaching employer knows or suspects (or ought to have known/suspected after having made reasonable enquiries) that the (ex-)employee is in breach of the warranty. 1150

Preliminary issue 1: instructing the legal team and other advisers 18.23

18.22  Chapters 3 and 4 of the SRA Code of Conduct regulate solicitors’ obligations in relation to conflicts of interest and confidentiality. They are much less prescriptive than their predecessors (Rules 3 and 4 of the Solicitors’ Code of Conduct 2007). In broad terms, pursuant to Chapter 3, if there is a conflict of interest, or a significant risk of a conflict, between two or more current clients, a solicitor must not act for all or either of them unless the matter falls within the scope of the limited exceptions set out at Outcomes 3.6 or 3.7. In the context of this book, a conflict (or risk of one) is likely to arise where, for example, it becomes clear to the solicitor acting for the poaching employer and the exemployee that the ex-employee has breached his duties whilst an employee, or one or more of his restrictive covenants, and has concealed this from the poaching employer. In such circumstances, and provided that the two clients still have a ‘substantially common interest’, Outcome 3.6 allows a solicitor to act only if: (a) the solicitor has explained the relevant issues and risks to the clients and has a reasonable belief that they understand those issues/risks; (b) all the clients have given informed consent in writing to the solicitor acting in the circumstances; (c) the solicitor is satisfied that it is reasonable to act for all the clients and that it is in their best interests; and (d) the solicitor is satisfied that the benefits to the clients of acting outweigh the risks. Chapter 3 makes it clear that, in deciding whether to act in these circumstances, the ‘overriding consideration’ will be (d) above (ie the best interests of each of the clients) and, in particular, whether the benefits to them of the solicitor acting for both outweigh the risks. Chapter 4 provides that a solicitor must be able to reconcile his duty of confidentiality to both clients with his duty of disclosure to those clients. Where he cannot do so, his duty to protect confidential information is paramount, and he cannot act, or continue to act, for a client to whom he cannot disclose material information except in very limited circumstances where certain safeguards are put in place (as set out in Outcomes 4.4 and 4.5). In practical terms, those ‘safeguards’ might include putting in place clearly-defined (and segregated) client teams and information barriers/‘ethical’ or ‘Chinese’ walls. Such arrangements can be difficult to police, particularly in small or open plan offices. It is also unlikely that a conflict of interest can be overcome using the above exceptions where there is unequal bargaining power between the clients (Indicative Behaviour 3.4), or where the clients cannot be represented evenhandedly or will be prejudiced by the lack of separate representation (Indicative Behaviour 3.5). 18.23  In practice therefore, even if a solicitor can represent both the poaching employer and his recruit initially (relying on the exceptions set out above), where a conflict of interest emerges and there is an issue regarding the solicitor’s obligations of confidentiality, at best he will normally only be able to act for one of those parties. More commonly he will be able to act for neither. This will be particularly problematic if the poaching employer intends to withdraw either 1151

18.24  Discovering competitive activity: the immediate practical issues

an unaccepted offer of employment (or renege on an accepted one) and/or an indemnity given to the (ex-)employee in respect of legal fees or damages arising out of the dispute. 18.24  For a more detailed analysis of the rules governing when and in what circumstances a solicitor can act, or continue to act, for multiple clients in a matter see Cordery on Legal Services, Division E, Section 1G, paragraphs C[507] and C[509]; and The Solicitor’s Handbook 2015, paragraphs 4.25 to 4.26, by Andrew Hopper QC and Gregory Treverton-Jones QC. 18.25  In substance the rules governing when counsel can act or continue to act for more than one client in a matter are the same. See, in particular, Rules C21.3 and C21.4 of the Bar Standards Board Code of Conduct. 18.26  From the perspective of the (ex-)employer it may seem simpler to deal with a single representative of the ‘opposition’. Further, the possibility of a conflict arising for the opposition’s legal team gives the (ex-)employer the potential tactical advantage that he may be able to force either the poaching employer or the (ex-)employee (or both) to instruct a new legal team at short notice, with the inevitable disruption and significant adverse cost consequences that this may entail. A successful application along these lines at a crucial moment can have a serious effect and can precipitate a quick and favourable settlement for the (ex-)employer. Because of this potential risk, we advise extreme caution be exercised by solicitors and counsel in accepting ‘multiple clients’. Joint representation for the poaching employer and his new recruit should be the exception rather than the rule and should only be undertaken once: (a) all the requirements set out in Chapters 3 and 4 of the SRA Code of Conduct and Rules C21.3 and C21.4 of the Bar Standards Board Code of Conduct regarding the obtaining of both clients’ informed consent have been complied with; and (b) ideally it has been agreed in advance and in writing which client the solicitor will continue to advise in the event that he has to cease acting for both clients but can continue to act for one. Where the new or proposed employer has provided the (ex-)employee with a full indemnity in respect of costs and damages, that may go towards alleviating the prospect of a conflict developing between the two at least on a commercial basis, although it will, of course, do little to prevent a legal conflict arising. 18.27  Given the difficulties in acting for more than one party to an employee competition dispute, as described above, it is not uncommon for the poaching employer and any potential new recruits to be separately represented. Often, the poaching employer will want their solicitors/counsel to be the lead legal team, and for there to be a degree of cooperation, group strategic thinking and information-sharing between the legal teams representing the (ex-)employee(s). Great care must be taken to ensure that legal professional privilege applies to all relevant communications between the respective legal teams and their clients, and as between the different legal teams/represented parties. Legal professional privilege will usually apply to communications and advice passing between each ‘client’ and their respective legal team. However, it may not protect communications 1152

Preliminary issue 1: instructing the legal team and other advisers 18.28

between the client (or his lawyers) and any third party outside of the retainer, eg between the poaching employer and the new recruits/their lawyers, or even between the poaching employer and some of his own current and former employees (depending on how ‘client’ has been defined in the retainer). In contrast, litigation privilege can in principle apply to communications from the client (or their agent) to such a third party, but only where the dominant purpose of the communication was the litigation concerned (eg to gather relevant evidence or to enable legal advice about the litigation to be taken). We commonly see parties in employee competition disputes seeking to rely on legal advice or litigation privilege over, for example, documents created in the course of internal investigations (eg interview notes). However, as the cases of The Director of the Serious Fraud Office v Eurasian Natural Resources Corporation Ltd [2017] Lloyd’s Rep FC 330 (QB), Re the RBS Rights Issue Litigation [2017] 1 WLR 1991 (Ch) and Astex Therapeutics Limited v AstraZeneca AB [2016] EWHC 2759 (Ch) demonstrate, it can be very difficult to rely on privilege in the absence of clear, ideally contemporaneous, evidence available to the court to prove the purpose of the relevant communications. Rather unhelpfully, two apparently conflicting decisions of the High Court make the position even less clear. In Director of the Serious Fraud Office v Eurasian Natural Resources Corporation Ltd, one of Andrew J's findings was that a solicitor’s verbatim note of an investigatory meeting is not, without more, a privileged document. However, in Bilta (UK) Ltd (in liquidation) and others v Royal Bank of Scotland plc and another [2017] EWHC 3535 (Ch), Vos LJ seems to have reached a contradictory view as regards privilege in certain documents created in the course of an investigation, holding that it was necessary to ‘take a realistic, indeed commercial, view of the facts’ (paragraph 66 of his judgment). The Eurasian Natural Resources case has now been appealed, and we await with interest further guidance from the Court of Appeal. Attempts are also often made to rely on other privilege principles in order to share strategy, thinking and information etc, such as joint or common interest privilege. It will often be possible for the different legal teams (eg those of the recruit and those of the poaching employer and/or of other recruits) to rely on their ‘common interest’ to protect the sharing of advice and information between them under the umbrella of common interest privilege. However, this may have its own risks and can be difficult to manage in practice, particularly where the parties’ interests later diverge and arguments arise as to who owns the privilege in particular materials (and on what conditions) and whether that privilege has been waived. If the parties do want to rely on different types of privilege throughout a dispute, we recommend clearly documenting the specific work streams and who is the client or owner/part-owner of the privilege in the material created, eg work done for the purpose of obtaining legal advice, for investigatory purposes, for litigation, for group analysis, etc.

2(b) Forensic IT, accountancy and public relations advisers 18.28  Having appointed the initial legal team, the next step is to consider whether any other advisers are required. The most frequently used advisers are forensic IT, accountancy and public relations advisers. 1153

18.29  Discovering competitive activity: the immediate practical issues

2(b)(i)  Forensic IT advisers 18.29  As discussed in Chapter 8, it is commonplace nowadays for employees to use a vast array of technology to access the employer’s internal IT network/systems in order to carry out their duties. This includes email, social media sites and messaging systems (such as Facebook, LinkedIn, WhatsApp and Twitter), online data-storage platforms (such as the ‘Cloud’ and ‘Dropbox’) and a wide range of portable devices (whether personal or provided by the employer). This presents significant challenges for employers in terms of controlling and monitoring access to, use and dissemination of confidential information. However, it also means that employees have a bigger ‘electronic footprint’ than ever before. Astonishingly, despite having become sophisticated users of e-technology, and endless media coverage of employee competition disputes, many employees still labour under misapprehensions about the recoverability of hidden electronic information (for example, wrongly believing that deleted emails etc cannot be recovered). 18.30  Evidence of competitive activity is frequently found in electronic data. Some (ex-)employers have proficient internal IT personnel with sufficient expertise to uncover the relevant evidence, and to do so in a way which protects the integrity of the evidence from later challenge; however, many do not. The (ex-) employer may also have legitimate concerns about the confidentiality of any interrogation process conducted ‘in-house’ and the risk that the (ex-)employee is alerted to the fact that he is being investigated. Because of these issues it is generally a good idea to consider appointing an external IT forensic adviser to look for electronic evidence of competitive activity and to do so early and (ideally) before any irrevocable steps have been taken. 2(b)(ii)  Accountancy advisers 18.31 Quantifying the actual or potential financial damage done to the (ex-) employer’s business and identifying the most appropriate basis on which to seek recompense is an important exercise. There is little point in an (ex-)employer embarking on expensive litigation if the costs of doing so far outweigh any potential damages. Depending on the particular circumstances, it may be relatively easy for the (ex-)employer’s finance team, and the Finance Director in particular, to quantify the damages suffered, for example, the value of any lost customer contracts. In more complex cases, quantifying any losses suffered will be a more difficult exercise; and external accountancy advice will be required. Often the accountants’ input will not be needed in the very early stages of the process except, for example, where competition has been taking place during employment and detailed analysis of accounts is needed. However, it is prudent to identify the source of any accountancy advice required (and ensure that the preferred accountant does not have a conflict of interest) as part of the process of assembling the advisory team. 2(b)(iii)  Public relations advisers 18.32  Use of traditional media and social media is now common in disputes concerning employee competition. Social media networking sites like Facebook, 1154

Preliminary issue 1: instructing the legal team and other advisers 18.36

LinkedIn, WhatsApp and Twitter are used for business purposes more than ever before, and are frequently used by (ex-)employees to announce their move to a new employer. Often all that is required is a simple update to their personal profile. Given that most (ex-)employees will be ‘LinkedIn with’, or be ‘following/followed by’ colleagues and customers on Twitter etc, with one small step most (if not all) of the (ex-)employer’s business contacts can be notified that the individual has moved on. Poaching employers will also often use the media to publicise their ‘coup’ of having recruited the (ex-)employee, and some will use the potential to do that as leverage in any negotiations with the (ex-)employer. 18.33  It will not be every case in which a public relations adviser is necessary. Some (ex-)employers will elect to use their own in-house communications team; others may need to appoint external advisers; and a third category may simply rely on a trusted nominated director/partner taking responsibility for both public relations issues and internal communications. 18.34  Whichever course is taken, at the outset the legal team should discuss with the (ex-)employer what likely public relations issues might arise, including ones arising from the tactics of a poaching employer, and how they will be addressed. It is also vital that those responsible for public relations issues and internal communications are fully briefed on the factual background and kept up to speed on developments and strategy. They should be informed of all enquiries made and should advise on, and control the content of, all statements made and to whom they are made. The press, looking to make a headline out of a key employee’s (or team’s) departure to a competitor, may well approach a number of his colleagues in an attempt to gather information. Allowing a situation where each of those individuals gives his own view of the (ex-)employee’s departure can create havoc for the (ex-)employer. Rather than a single well-crafted message being given about the departure, the press may create a much more negative picture, potentially causing significant commercial damage to the employer that might otherwise have been avoided or mitigated. It is precisely to avoid this mischief that a person with responsibility for public relations issues should always be nominated. 18.35  To reinforce this strategy it is generally a good idea to include in employees’ (and independent contractors’) contracts a term prohibiting them from talking to the press or other media or making any comment on any form of social media regarding their (or a colleague’s) departure. For a precedent provision see 5.122. A reminder of these obligations can, if necessary, be included as part of the internal communication process concerning the uncovered competitive activity. As soon as a potential employee competition dispute arises, it is also advisable to put in place mechanisms for tracking any statements appearing in the press/on social media, for example, by setting up online press ‘alerts’. 18.36 Irrespective of whether public relations issues might arise, the (ex-) employer will need to plan a coherent strategy for communicating internally with other employees/independent contractors and possibly also externally for customers, suppliers and other business contacts and third parties. Public relations 1155

18.37  Discovering competitive activity: the immediate practical issues

advisers, external or internal, can play a valuable part in formulating this strategy, although implementation will be a task for appropriate members of the (ex-) employer’s core internal management team. See further at 18.130–18.132 and 18.137–18.139. 2(b)(iv)  External advisers – general considerations 18.37  Where the decision is made to appoint external forensic IT, accountancy and/or public relations advisers, it is necessary to ensure they have the relevant expertise, experience (ideally in the (ex-)employer’s sector) and availability. In addition, it will be important to check that any advisers appointed include a person with litigation experience, in particular, of appearing as a witness. In the event that the integrity of the electronic evidence uncovered by the forensic IT adviser is challenged by the (ex-)employee (eg it is alleged that the evidence has been tampered with or is incomplete, or that the underlying metadata has been overwritten or damaged), it will be necessary for the forensic IT adviser to persuade the court (if appropriate) that such challenge is without merit. Generally that evidence would be in the form of a witness statement. However, it is possible that the adviser may have to appear as a live witness, particularly in speedy trials. If that is the case, the individual must be capable, and have experience, of giving cogent and persuasive evidence. 18.38  A word of caution: those advising (ex-)employers should remember the difference between an expert adviser and an expert witness. At the initial stages of discovery of competitive activity the individuals will normally be appointed as expert advisers, with those instructed to produce expert reports and to appear as an expert witness coming later in the process. The differences between an expert adviser and an expert witness are particularly important in respect of their duties and the privilege in communications with the expert adviser/witness. An expert witness’ main function is to provide an independent expert opinion to the court. Their duty is to assist the court, which overrides any obligation to the (ex-)employer who instructs them. The instructions to an expert witness are not privileged from disclosure. In contrast, an expert adviser appointed by the (ex-) employer to assist in the case owes his duty to the (ex-)employer who instructs him. Instructions to an expert adviser are also privileged from disclosure to the other side but only where litigation is on foot or where it is reasonably anticipated. 18.39 Remedies and, in particular, the recovery of damages and litigation expenses are considered in detail in Chapter 16. Whether the fees of advisers appointed prior to the commencement of litigation in an advisory (rather than expert witness) capacity are recoverable largely depends on whether they are a reasonably foreseeable head of loss. Assuming that the (ex-)employer’s claim succeeds, or there is a favourable settlement, we see a clear case for the recovery of forensic IT advisers’ fees where they have been retained at the outset of a matter to identify or secure relevant evidence. Similarly, the fees of accountants who are retained early in the dispute to help quantify the potential loss caused by the 1156

Preliminary issue 2: allocation of responsibilities 18.42

unlawful competitive activity should also be recoverable. Whether the same can be said of public relations advisers’ fees is a moot point amongst practitioners. In some cases, the (ex-)employee, their new enterprise/joint venture and/or the poaching employer may intentionally conduct their competitive activity publicly to maximise the damage to the (ex-)employer’s business and unsettle customers and the market generally. In our view, if public relations advisers are engaged to combat that public ‘war’, with a clear mandate to reduce the impact of the attack, reduce customer losses and protect the (ex-)employer’s market reputation (ie  mitigate the potential damage overall), there is no reason why these costs would not be recoverable.

3. PRELIMINARY ISSUE 2: ALLOCATION OF RESPONSIBILITIES TO THE (EX-)EMPLOYER’S CORE INTERNAL MANAGEMENT TEAM 18.40  Taking the three basic steps outlined at 18.7 generally involves a great deal of work by the (ex-)employer in a relatively short period of time, particularly if the decision is taken to seek interim injunctive relief. In addition to appointing the legal team and other relevant advisers, steps must be taken to allocate responsibilities to relevant members of the (ex-)employer’s core internal management team. Normally the (ex-)employer will want, and indeed should try, to keep those involved in the process to a relatively small number – often no more than four to six people. However, since those individuals will also have to continue running the business, key to the success of the process is a realistic allocation of responsibilities which permits all tasks to be completed within a speedy time-frame, without prejudicing the ongoing running of the business. Keeping the team small also reduces the risk of ‘leaks’ and the chances of the (ex-)employee being ‘tipped-off’ that the (ex-)employer has been alerted to their unlawful competitive activities. 18.41  What then are the tasks to be allocated and what would a typical allocation model look like? To answer these questions we must first identify the particular challenge facing the (ex-)employer. 18.42  In essence, there are two separate and distinct areas of focus and both must be addressed by the (ex-)employer simultaneously. The first relates to the activities of the offending (ex-)employee and those with whom he is in league. The second relates to the consolidation of the (ex-)employer’s relationships with customers and remaining employees/independent contractors. These issues will be examined in more detail at 18.66–18.139. (Ex-)employers, often enraged by what they regard as the treachery of the (ex-)employee, tend to focus on pursuing the (ex-)employee and pay scant attention to the important issue of reinforcing their existing commercial relationships. This, of course, plays into the (ex-) employee’s hands. Customers who are unsettled and possibly disaffected by their treatment, or the prospect of being embroiled in acrimonious litigation between the (ex-)employer and (ex-)employee, are likely to take their business elsewhere. Similarly, other disenchanted (or perhaps opportunistic) employees/independent contractors may decide to leave to join the (ex-)employee or another competitor. 1157

18.43  Discovering competitive activity: the immediate practical issues

In short, it is vital that the (ex-)employer focuses on the two issues simultaneously and allocates tasks to his core internal management team accordingly. 18.43  Wherever practical, allocation of responsibilities is generally best done by dividing the management team into two small groups to reflect the two key issues. Group 1 will focus on working with the legal team and other advisers in dealing with the offending (ex-)employee and his cohorts. Group 2 will focus on monitoring and consolidating relationships with customers and other employees/independent contractors so as to minimise the adverse impact of the offending (ex-)employee’s activities. It is imperative that the strategy and efforts of the two groups remain aligned. To maximise efficiency, each group must devote their energies primarily to their allocated tasks but at the same time ensure that any relevant information that is uncovered is passed to the other group. Key decisions should generally be taken by both groups together, with the implementation of those decisions being undertaken by the relevant group. Where time is of the essence, as it usually will be in an employee competition scenario, it is vital that the members of both groups have sufficient authority to take and implement decisions. Unnecessary, and potentially costly, delays in terms of outcomes can arise if the person appointed to liaise with the legal/ advisory team needs constantly to seek approvals eg from the board of directors or other senior managers. 18.44  Particularly in smaller employers, allocating members of the core internal management team to the two groups can present some challenges. For example, Group 1, which instructs the legal team, should include an employee who can give clear and reliable instructions on the (ex-)employee’s role, with which customers and other employees/independent contractors he interfaced and a realistic assessment of the potential damage flowing from the competitive activities. However, that individual – often the (ex)-employee’s head of department or fellow director – may also be the person best placed to lead Group 2 in monitoring and consolidating the relationship with customers and other employees/ independent contractors. The solution to this challenge will depend on the facts of each particular case. Sometimes, it will be necessary for the person to be in both groups, although generally this is undesirable simply because of unrealistic workloads. Alternatively, it may be possible to delegate certain duties to managers or heads of department further down the ‘chain of command’, eg designated customer account or relationship managers. This can be effective, provided that the individuals are considered trustworthy (and not suspected of being ‘in league’ with the (ex-)employee), are capable of being a credible witness of fact and that the size of the core internal team is still kept to a minimum (as suggested at 18.40). Commonly, the ‘on the ground’ line managers have the best vantage point regarding the (ex-)employee’s activities and their contact with customers or colleagues, and, therefore, the best ability to detect any unusual behaviour which may indicate any actual/proposed competitive activity. 18.45 Representatives from the (ex-)employer’s human resources, audit and finance teams and the IT team, should generally be included in the two groups, primarily Group 1. These individuals can do much to relieve the burden on the 1158

Preliminary issue 3: should the employee be suspended? 18.47

key members of the core internal management team, mainly by gathering and co-ordinating information and circulating it to Groups 1 and 2. In the case of the audit/finance personnel, they can: (a) provide vital information about the volumes of business and profitability of each customer and projections of the financial impact of the competitive activities; and (b): where necessary, liaise directly with any external accountants appointed to assist with this exercise (see further at 18.31). However, key decisions should still be taken, and instructions given to the legal team, by those members of management who were ultimately responsible for the (ex-)employee and who are fully familiar with the overall operation of the business. It is generally those individuals from whom the primary witness statements/oral evidence will be required in any court proceedings and normally only those individuals who will be able to give swift assessments of the impact of the (ex-)employee’s behaviour.

4. PRELIMINARY ISSUE 3: SHOULD THE EMPLOYEE BE SUSPENDED? 18.46 Inevitably the information gathering exercise will take a little time, even where the employer acts expeditiously and with the assistance of external advisers. The employer often feels uncomfortable with the employee continuing to perform his duties while the investigation is ongoing. Where the competitive activity is discovered before the employee resigns, suspension during the investigatory period, and while any disciplinary proceedings are undertaken, is the commonly adopted solution. Where the competitive activity is discovered after notice has been given, by either the employee or the employer, suspension is still an option, and can be particularly useful when the employer is trying to gather evidence for an interim injunction application. An alternative option, but normally only where notice has been given, is to send the employee on garden leave. Garden leave and garden leave injunctions are considered in detail in Chapter 15 at 15.3–15.73. A note of caution for employers in relation to garden leave: sending an employee on garden leave where there is no contractual right to do so is commonly argued to constitute repudiatory conduct. Even where there is a contractual garden leave provision employers must pay close attention to the extent of the right. For a more detailed discussion of the interplay between garden leave, the right to work and repudiatory breach see 9.102–9.108. 18.47  Suspension, as a general rule, is normally only permissible for the purpose of investigating suspected misconduct and in certain other limited circumstances. For example, the non-statutory ACAS publication entitled Discipline and grievances at work: The ACAS guide recognises that suspension may be necessary while investigations are carried out where: (a) relationships have broken down, or there are risks to an employee’s or the company’s property or responsibilities to other parties; or (b) exceptionally where there are reasonable grounds for concern that evidence has been tampered with or destroyed, or witnesses may be pressurised before any disciplinary meeting (see page 18 of The ACAS guide). Consequently, if the competitive activity consists of no more than a stated 1159

18.48  Discovering competitive activity: the immediate practical issues

intention by the employee to join a competitor after the expiry of his contractual notice and that course is not prohibited by the contract, then there is unlikely to be any legal basis for suspension. 18.48 Given the highly emotive nature of employee competition situations, employers can be tempted to suspend an employee at the first hint of competitive activity, perhaps even as a form of punishment or revenge, without fully investigating the facts or considering any alternatives to suspension. Whilst understandable, the courts have cautioned employers against acting too hastily in suspending. In Crawford and another v Suffolk Mental Health Partnership NHS Trust [2012] IRLR 402 (CA), two nurses were suspended following a complaint about the handling of a patient and where the police were notified of potential criminal offences. In a footnote to his judgment Elias J said: ‘… It appears to be the almost automatic response of many employers… to suspend the employees concerned, and to forbid them from contacting anyone, as soon as a complaint is made, and quite irrespective of the likelihood of the complaint being established. As Lady Justice Hale, as she was, pointed out in Gogay v Hertfordshire County Council, even where there is evidence supporting an investigation, that does not mean that suspension is automatically justified. It should not be a knee jerk reaction, and it will be a breach of the duty of trust and confidence towards the employee if it is’ (paragraph 71).

To similar effect, see Agoreyo v London Borough of Lambeth [2017] EWHC 2019 (QB). 18.49  Even where an employer does have reasonable grounds for removing an employee from active duties as soon as possible, he must: (a) establish whether he has an express contractual right to suspend, and whether there are any limitations imposed on the exercise of that right (see 18.50–18.53); (b) consider whether there may be an implied right to suspend in the particular circumstances (see 18.54); (c) establish what the employee is entitled to be paid during suspension (18.55); and (d) understand the extent to which the court can restrain suspension (18.56– 18.59). Failing to address these issues can have serious consequences for the employer, including successful claims by the employee for damages for breach of contract and/or constructive unfair dismissal. Would-be competitor employees frequently allege repudiatory breach as a means of avoiding their restrictive covenants. See 9.49–9.58 for the impact of accepted repudiatory breaches of contract on restrictive covenants. Although less likely to arise in employee competition disputes, separate claims for reputational and/or psychiatric damages flowing from the suspension may also be brought (see: Eastwood v Magnox Electric Plc [2004] IRLR 733 (HL)). 1160

Preliminary issue 3: should the employee be suspended? 18.52

4(a)  An express right to suspend 18.50 The right to suspend an employee while investigations are carried out is often expressly reserved in the contract of employment. Some contracts also include detailed rules about when suspension is allowed, how the employee is to be notified, how he is to be remunerated during the suspension and the maximum duration of the suspension (see 5.87 for a precedent). Where the employer is relying on an express right to suspend, it is important that he: (a) complies strictly with the terms of the contract (Gorse v Durham County Council [1971] 2 All ER 666 (CA)); and (b) does not (without reasonable and proper cause) act in a way that seriously damages the relationship of mutual trust and confidence that is implied into every employment relationship. For example, it was a breach of trust and confidence where: (a) in breach of the Trust’s procedure, it failed to allow the employees representation by their trade union, a friend or colleague at a suspension meeting (Camden v Islington Mental Health & Social Care Trust v Atkinson UKEAT/0058/07); and (b) in breach of the employer’s contractual disciplinary policy, alternatives to suspension were not considered and the suspending manager had previous involvement in the matter, which should have excluded him from the decision to suspend (Holman v Devon County Council UKEAT/0127/15, 3 March 2016). 18.51  That said, employers can take some comfort from the fact that the courts are very alive to the tactic (as noted in 18.49) used by many would-be competitors of alleging repudiatory breach in an attempt to avoid their restrictive covenants. In Elsevier Ltd v Munro [2014] IRLR 766 (QB) Warby J noted that the test to establish breach of trust and confidence is ‘a “severe” one’ (see paragraphs 31 and 32). Similarly, Jack J  in the high profile case of Tullett Prebon Plc v BGC Brokers LP [2010] IRLR 648 stated (quoting, with approval, from an earlier edition of this book) that: ‘The Courts will … continue to scrutinise closely the arguments of employees (particularly highly paid individuals and teams moving to a competitor of their employer) who have already secured alternative employment prior to resigning, and who construct arguments of repudiatory breach as a means of avoiding notice periods and irksome covenants …’ (paragraph 86).

18.52  In addition, the employer may be under an implied obligation to act reasonably in exercising his right to suspend, although he is not bound to apply the rules of natural justice in doing so: McLory v Post Office [1992] ICR 758, which was endorsed in the unreported case of Marjorie Evans v (1) Monmouthshire County Council (2) Governing Body of St Mary’s Senior School, Caldicot (2001). Mr McLory had been suspended on basic pay by the Post Office as a result of being involved in a fight in a pub with other Post Office employees. After certain investigations had been undertaken and Mr McLory had given an assurance that there would be no further violence if he returned to work, he was 1161

18.53  Discovering competitive activity: the immediate practical issues

allowed to do so. Mr McLory subsequently brought a claim in the High Court for loss of overtime payments during the period of suspension. The provision under which Mr McLory had been suspended by the Post Office stated, ‘In the event of misconduct or where there is a need for inquiries to be made into alleged misconduct you may be suspended from your employment with or without pay’. Mr McLory’s initial argument that he had a right to work and to earn overtime payments failed on the grounds that such a term would directly contradict the express right of the Post Office to suspend without pay and therefore could not be implied. Mr McLory next sought to argue that nonetheless he was entitled to overtime payments since the power to suspend had been exercised in breach of implied terms in his contract that (as it was put in the amended statement of claim): ‘(b) any suspension of an employee should be only following full information to the employee by the employer of the reason for the suspension; (c) following a suspension, the employee should within a reasonable time be given an opportunity by the employer to answer any matters put forward by the employer as reasons for suspension; (d) any suspension of the employee by the employer should be for such period as was reasonable in all the circumstances; (e) in exercising any contractual right to suspend the [claimants] or any of them the defendant would observe the rules of natural justice and act fairly in the circumstances.’

18.53  The court held that the rules of natural justice are not imported into a contract of employment and therefore Mr McLory’s suggested terms (b), (c) and (e) (in part) failed. However, the court did imply a limited obligation of reasonableness on the Post Office. The court held that the Post Office could only suspend if they had reasonable grounds to do so and could only continue the suspension for so long as those reasonable grounds continued. In the event, however, these implied terms did not assist Mr McLory, since the court found that the Post Office had complied with them. The case is, however, a useful indication of the extent to which a general requirement of reasonableness will be implied into an express right to suspend.

4(b)  An implied right to suspend 18.54  If there is no express power to suspend in the contract, the employer’s rights are not entirely clear. Such authorities as there are on suspension tend to consider only the question of suspension as a disciplinary sanction. However, in our opinion even where an employee has a right to work (see further at 9.98–9.108) it would be reasonably safe for an employer to suspend for a reasonable period to investigate suspected misconduct, subject to certain conditions. First, and most important, the suspension must be on full pay and benefits (see 18.55). Secondly, the employer must have genuine grounds to warrant an investigation: suspension during an investigation where there is no basis for the allegations made can amount to a breach of mutual trust and confidence: Gogay v Hertfordshire County Council [2000] IRLR 703 (CA); Chhabra v West London Mental Health NHS Trust [2014] ICR 194 (SC). Further, whilst ‘the court will 1162

Preliminary issue 3: should the employee be suspended? 18.56

not “micro-manage” an employment disciplinary procedure’, it will intervene ‘if it is demonstrated that the proceedings are being conducted on a basis which makes their conduct a breach of contract such that the pursuit would also be a breach’: Hendy v Ministry of Justice [2014] IRLR 856 Mann J at paragraph 49, following Lord Hodge in Chhabra at paragraph 39. Thirdly, the employer should conduct his investigations expeditiously and keep periods of suspension brief and under constant review: ACAS  Code of Practice 1: Disciplinary and Grievance Procedures (2015), paragraph 8; Camden and Islington Mental Health and Social Care Trust v Atkinson UKEAT/0058/07 (where the employer’s failure to review and lift the suspension after one of the allegations against the employee had been disposed of was held to be a breach of trust and confidence).

4(c)  Pay during suspension 18.55  It is well established that to suspend without pay is a breach of contract, unless the employer has an express right to do so: Hanley v Pease & Partners Ltd [1915] 1 KB 698. One difficult question that arises is, what amounts to full pay for an employee paid partly by results? For example, the employee may receive a base salary plus a commission for each contract concluded with a customer. Unless the parties have addressed this problem in the contract or there is an agreement covering roughly comparable circumstances (eg a fixed commission during holiday or sickness absences), the best advice to the employer is to make a reasonable and sensible suggestion to compensate the employee at the same time as telling him he is suspended. The employer does, however, face a risk of the employee arguing that the employer’s conduct amounts to a repudiatory breach of the contract. In Milne v The Link Asset and Security Company Limited UKEAT/0867/04 (26 September 2005, unreported) loss of income resulting from suspension was one of the factors which the EAT indicated (at paragraph 28, arguably obiter) should be taken into account in determining whether a suspension constituted a breach of the implied duty of trust and confidence. Other factors specifically identified by the EAT were: what was said to the employee as justifying the suspension; the length of the suspension; whether the employee had been replaced; and whether he had a contractual right to work (see further at 9.98–9.108). The EAT did, however state that all of the surrounding circumstances of the suspension fall to be considered, so that the list identified is by no means exhaustive.

4(d)  Restraining suspension 18.56  In principle, the courts have the power to restrain an employer from suspending an employee by way of an interim injunction. The cases on this point have largely involved those working in the medical profession, where disciplinary policies are generally contractual and complex. In Mezey v South West London and St Georges Mental Health NHS Trust [2007] IRLR 244 (CA), an unusual case on its facts, Dr Mezey was a consultant psychiatrist suspended pending an internal disciplinary hearing. She had given voluntary undertakings to refrain from clinical care of patients pending the hearing so that the practical effect of 1163

18.57  Discovering competitive activity: the immediate practical issues

her suspension applied to only part of her duties. The Court of Appeal rejected the Trust’s appeal against the injunction and, in particular, its submission that suspension was a neutral act preserving the employment relationship ‘at least in relation to the employment of a qualified professional in a function which is as much a vocation as a job’. In the Court of Appeal’s view: ‘Suspension changes the status quo from work to no work, and it inevitably casts a shadow over the employee’s competence. Of course this does not mean that it cannot be done, but it is not a neutral act’ (Sedley LJ, paragraph 12).

18.57  The potential ‘damage’ that suspension can cause an employee personally was also recognised by Elias LJ in Crawford and another v Suffolk Mental Health Partnership NHS Trust [2012] IRLR 402 (CA) in a footnote in his Judgment: ‘Suspension is often said to be in the employee’s best interests, but many employees would question that, and in my view they would often be right to do so. They will frequently feel belittled and demoralised by the total exclusion from work … Even if they are subsequently cleared of the charges, the suspicions are likely to linger, not least I suspect because the suspension appears to add credence to them’ (paragraph 71).

18.58  The Supreme Court also granted an interim injunction in West London Mental Health NHS Trust v Chhabra [2014] IRLR 227 (SC). In his leading judgment, Lord Hodge noted that Dr Chhabra ‘had an implied contractual right to a fair… disciplinary process’. The overall unfairness of a number of ‘irregularities’ in the Trust’s conduct of the disciplinary process (including the fact that the allegations were not capable – even when taken at their highest – of constituting gross misconduct) amounted to a breach of Dr Chhabra’s employment contract. In the circumstances, an interim injunction was justified to restrain the Trust from pursuing their allegations of gross misconduct on the facts. 18.59  Arguably these cases open the door to injunctions being granted to restrain the suspension of professionals where suspension cannot truly be said to be a neutral act (because it casts doubt over their competence or guilt), and where damages would not be an adequate remedy. However, an injunction to restrain suspension will rarely be sought in the field of employee competition. In such cases, the very last thing that an employee will want to do is put a public spotlight on their unlawful activities. The employee is far more likely to seek to rely on an argument that the suspension constitutes a repudiatory breach of his contract thereby releasing him from all future obligations. The question of what amounts to repudiatory breach is considered at 9.63–9.122.

4(e) The suspension meeting and letter 18.60  Generally, because of the urgency of the situation, the employee will simply be summoned to a meeting and told that he is being suspended. Because it is not unusual for employees to dispute what is said at the suspension meeting, two representatives of the employer should be present and a careful note should be taken of the meeting. Despite the inevitable time pressures, employers are 1164

Preliminary issue 3: should the employee be suspended? 18.61

encouraged to invest time in preparing for the suspension meeting, including seeking legal advice. The suspension meeting may be the best (or only) opportunity that the employer has to speak directly to the employee about his unlawful activities before he engages lawyers. More senior or experienced would-be competitors are unlikely to be responsive to probing questions; however, first time offenders may be more candid and make useful admissions (or denials) that can later be relied on (and which their legal team may well have advised them not to make had they been instructed sooner). 18.61  In terms of formalities, in the context of an employee suspended in connection with potential competitive activity, the following key points should be covered at the suspension meeting: (a) Telling the employee, at least in general terms, why he is being suspended, although to do so is not strictly obligatory: McLory v Post Office [1992] ICR 758. At this early stage, the employer may only be able to (or, for tactical reasons, elect to) give a brief description of the alleged unlawful activity and/or refer to any hard evidence that has already been uncovered (eg a business plan for a competing business left on a desk or photocopier). (b) Confirming that the employee should not attend the employer’s premises and setting out what he is and is not permitted to do while suspended. In particular, the employee should always be: (i) told not to communicate directly or indirectly with customers, suppliers or other employees/independent contractors or business contacts without the employer’s express prior approval. The employer should be clear whether this is a total ban on any contact, or whether any form of social contact is permitted. If disciplinary allegations are eventually made, the employee may need to have contact with other employees/ independent contractors for the purpose of arranging a companion to accompany them at any disciplinary hearing, the employer should nominate a person who will be the employee’s point of contact for issues of this sort which will often be someone from the HR department; (ii) reminded of his continuing obligations to the employer while suspended, in particular the relevant express terms of his contract (including any terms prohibiting him from working for anyone else), the implied duty of good faith and fidelity and, in appropriate cases, any fiduciary duties; and (iii) advised that he is required: (a) to remain contactable by the employer and to notify the employer immediately of any change in contact details; (b) to cooperate fully with the employer’s investigation; (c) to respond to any work-related queries on reasonable notice; and (d) to be available to attend the employer’s offices on 24 hours’ notice. By including these requirements the employer reduces the risk of being unable to advance matters (by, for example, pursuing the disciplinary process or lifting the suspension) simply because he cannot contact the employee. It also reduces the risk of counter-arguments from the employee that his exclusion from the business has narrowed the scope 1165

18.61  Discovering competitive activity: the immediate practical issues

of his duties of fidelity (see Chapter 3 for a full consideration of the duty of fidelity). For an illustration of how an employee’s ‘disappearance’ can create difficulties see Hassan v Odeon Cinemas Ltd [1998] ICR 127 (EAT). Odeon’s inability to contact Mr Hassan while he was suspended resulted in his employment continuing for several months after Odeon’s final attempt to bring it to an end. The facts of Hassan are somewhat unusual in that his ‘disappearance’ was a result of compliance with a bail condition requiring him to reside outside London. However, it is an example of the degree of importance employment tribunals place on actual communication with employees, hence the importance of requiring the employee to stay in touch whilst suspended. (c) Confirming the arrangements for pay and benefits during suspension. (d) Addressing the employer’s requirements regarding the return of property and whether the employee’s access to the employer’s internal IT and other network/systems will continue or be terminated during the suspension. Generally the contract should provide that, with the exception of property provided wholly or partly as a benefit, company property is to be returned for the duration of any period of suspension. Potentially difficult issues arise in relation to devices (mobile telephones, laptops, tablets etc) provided and paid for by the employer, or where the employee uses a personal device for work purposes (see Chapter 8). Depending on the circumstances, some continued access to the employer’s internal IT network/systems may be necessary if, for example, the employee needs to respond to work-related queries during any period of suspension. However, allowing the employee to retain any device, or their IT access, facilitates the possibility of ongoing contact with customers and colleagues in furtherance of the unlawful activity. It also affords the employee the opportunity to tamper with any evidence of wrongdoing. The employer will naturally want to avoid this and, invariably, will want the IT access suspended and devices returned as soon as possible: (a) to preserve evidence of any wrongdoing; and (b) to prevent any further wrongdoing. Experience shows, however, that employees often cannot resist using or continuing to use their devices/IT access for their illicit activities. The employer needs to balance whether the commercial risk of allowing the employee to retain a device and/or have continued access to his internal IT network/systems outweighs the prospect of catching the employee engaging in further illicit activities. Where the employer has been unable to uncover much evidence, the balance may tip in favour of letting the employee keep the device/IT access, as this may produce the very evidence the employer needs. If IT access is to be cut and/or devices retrieved from the employee, the employer should take the following precautionary steps: (i) require the employee to confirm at the suspension meeting, or very shortly afterwards, all usernames, passwords, pin codes, login or other access details for any devices and/or the employer’s internal IT network/systems, and then immediately change them all; (ii) require the employee to hand over any devices at the suspension meeting, or very shortly afterwards. Once in possession of the device, 1166

Preliminary issue 3: should the employee be suspended? 18.61

the employer should immediately disable any Wi-Fi or mobile data connections, for example, by putting the device into ‘airplane mode’, so that data cannot be wiped from the device remotely. Immediately following the suspension meeting the employer should also have the internal IT team or external IT advisers take a forensic ‘image’ of the device (ie a ‘snapshot’ of everything that is on that device at the point the image is taken). If there is a risk of data being removed remotely from the device, or if the device is to be returned to the employee (or reallocated to another employee – something we would not recommend in the short term), having that ‘image’ will enable the employer to still have a complete record of what was on the device and, where it is returned to the employee, to show that data has been removed from the device or otherwise altered or tampered with after the image was taken; (iii) ask the employee to confirm the details of any personal email or online data-storage platforms or accounts (eg, Gmail, Hotmail, iCloud). The employer should also consider writing to the account provider asking them to make sure that the accounts are not emptied or closed. Even if no response or assistance is forthcoming, at least the employer will be able to demonstrate to a court that reasonable steps were taken to preserve evidence; (iv) ensure that out-of-office and voicemail messages provide an alternative contact number rather than the employee’s work or personal mobile telephone number; and (v) give a clear instruction to the employee not to delete or tamper with evidence and to preserve the integrity of (and not delete, destroy or close, as appropriate) any accounts, systems or devices (whether personal or otherwise), such as iPhones or email, online data-storage or social networking accounts, which may have been used in connection with the activities under investigation. (e) Agreeing, if possible, what internal and external parties will be told about the employee’s absence on suspension. In the absence of any express term in the contract of employment the employer is not legally obliged to agree anything in this respect. However, the absence of an employee who has been suspended will inevitably cause gossip and the employer should have a plan in place to deal with that issue to avoid allegations that trust and confidence, reputation or future career prospects have been irreparably damaged. For example, it is common to agree with the employee that internal and external parties will be informed that the employee is taking some additional holiday, or family leave. (f) The anticipated timeframes in the employer’s disciplinary procedure or, where there are none, when it is anticipated that the employee will be given an update on the investigation. The employer should avoid committing himself to a very rigid timetable and should retain the ability to extend the suspension if necessary. It may be sensible simply to state that the suspension 1167

18.62  Discovering competitive activity: the immediate practical issues

period shall be no longer than is reasonably necessary. Employers should keep in mind the requirement of the ACAS Code of Practice 1: Disciplinary and Grievance Procedures (2015) (and supporting guidance) that periods of suspension be kept brief and under constant review. In Camden v Islington Mental Health & Social Care Trust v Atkinson UKEAT/0058/07, the employer’s failure to consider whether the suspension should be continued when one of the disciplinary allegations was dropped was a breach of trust and confidence. (g) Making it clear that the suspension is not a disciplinary action and does not imply any assumption or finding of guilt regarding the employee at this early stage. (h) Dealing with any other matters specifically required by any express term(s) enabling the employer to suspend and (also) handing over a copy of the employer’s disciplinary process. 18.62  The suspension of an employee should always be confirmed in writing as soon as possible after the suspension meeting. The suspension letter should reconfirm the key points discussed at the meeting, any points that were not specifically addressed and chase up any outstanding action points (such as the return of company property or the provision of passwords etc). 18.63 In addition, the employer will need to deal quickly with the practical issues such as diary appointments, what is to happen to emails that arrive for the employee, and how the work he was undertaking is to be dealt with. There will also be the question of changing passwords, cutting off remote access to the employer’s computer systems and suspending the employee’s entry pass. All these tasks should be handled by Group 2.

4(f)  Disadvantages to the employer of suspension 18.64  The prime disadvantage is that suspension puts the employee further outside the employer’s physical control. The employer can say that the employee must not contact customers, but in practical terms it is virtually impossible to police that requirement. Even if the employer has one or more very loyal customers or employees who are willing to report back to the employer if the employee contacts them, the employer is very unlikely to learn the full extent of the employee’s unlawful activities. Most competing employees are also likely to avoid potential ‘moles’. Moreover, the employee who is already intending to leave to set up in competition or to join a competitor often takes the view that he has little to lose by advancing his plans to compete while suspended (and more time on his hands to do just that). Legally he is undoubtedly wrong but the employer has the problem of proving the wrongdoing. In extreme cases suspension can also present a problem where the only realistic commercial solution to the competitive threat is for the employer to retain the services of the employee. It will be very difficult, if not impossible, for the employer to convince an employee he has suspended to stay in employment, 1168

Applying the three basic steps: discovery of competitive activity during employment 18.67

even if a significant enhancement of salary, benefits and status is offered to him. Suspension is also likely to be the precursor to the instigation of the internal disciplinary process and if that is inappropriately applied, or indeed even if it is not, that in itself may be enough to dissuade the employee from remaining. This is another important reason for making sure that there are real grounds for suspension, and not deploying it as a punishment or emotional reaction to an actual or proposed competitive threat.

5. APPLYING THE THREE BASIC STEPS: DISCOVERY OF COMPETITIVE ACTIVITY DURING EMPLOYMENT 18.65  With the legal and advisory teams in place, tasks allocated amongst the management team, and a decision made as to whether the employee will be suspended, the employer is ready to begin the three-step process of: gathering information; taking key decisions; and settling a strategy to reflect key decisions.

5(a)  Gathering information 18.66  This exercise is essentially the first stage of a disciplinary investigation. There are four questions to which the employer needs answers: (i) What is the nature and scope of the competitive activity (see 18.67–18.68)? (ii) Has the competitive activity involved any breaches of the express, implied or (where appropriate) fiduciary obligations owed by the employee to the employer, or is it likely to do so (see 18.69–18.78)? (iii) What are the terms of employment, role and importance of the employee (see 18.79–18.82)? (iv) What sort of threat does the competitive activity pose to the employer’s business (see 18.83)? 5(a)(i) What is the nature and scope of the competitive activity? 18.67 Frequently, allegations of competitive activities are based on gossip, which may have become exaggerated as it passes from one person to the next. The rumours may have been started by a rival colleague, looking to obtain a personal advantage from the potential downfall of their colleague. What the employer therefore needs is accurate, unbiased information from reliable sources, supported, wherever available, by documentary evidence, including information on computers, portable devices (such as mobile telephones), email, social media sites and messaging systems (such as Facebook, LinkedIn, WhatsApp and Twitter) and online data-storage platforms (such as the ‘Cloud’ and ‘Dropbox’). Moreover, he needs as much of it as possible in the minimum amount of time and without alerting the offending employee that they are under investigation. 1169

18.68  Discovering competitive activity: the immediate practical issues

18.68  The key questions the employer will need answers to are: (a) What is the employee doing or intending to do, in particular, are they joining a competitor (if so, who), setting up a new business enterprise or entering into a joint venture? (b) Who else is or will be involved? Are other employees/independent contractors of the employer participating in the illicit activities or likely to do so? What is the likelihood that one or more of those other colleagues can be persuaded to stay with the employer and give evidence against his cohorts? (c) Are customers, suppliers, or other business contacts or third parties involved in the illicit activities or will they be involved? (d) From where is or will the employee be operating? (e) Are the employer’s other employees/independent contractors, customers, suppliers, or other business contacts being targeted, or is that intended? (f) What confidential or commercially sensitive information is at risk? 5(a)(ii) Has the competitive activity involved any breaches of the obligations owed by the employee to the employer or is it likely to do so? 18.69  In many cases the answer to this question is probably yes, but the employer has difficulty in obtaining proof. Some employees, particularly those who have taken legal advice at an early stage or who are being poached by a sophisticated competitor, will be well-aware where the employer will look for evidence of their activity and will have covered their tracks carefully. In one of the most high profile team move cases, Tullett Prebon Plc & Ors v BGC Brokers LP & Ors [2010] IRLR 648 (QB), one of the lead protagonists ‘lost’ or discarded eight blackberries in total, and could not explain how his last remaining blackberry had become locked by a password. The courts are likely to take a dim view of employees who go to such considerable lengths to conceal their wrongdoing. In Tullett, Jack J found it ‘inconceivable that all these items went missing or became unavailable as they did, when they did, without an improper intention …’, and was satisfied ‘it was [the protagonist’s] gambit to “lose” blackberries whenever he thought they might contain inconvenient material … [and] the inaccessibility of the contents of his last blackberry due to a missing password was a deliberate ploy’ (paragraph 65). 18.70  Even though employees may go to great lengths to conceal their wrongdoing, it is a rare case where the employee leaves no evidence of his illicit activities whatsoever. An employer who searches thoroughly enough will usually find some evidence of breach, for example, skilled in-house or external forensic IT advisers can usually recover and interrogate print/photocopy/scan logs from multifunctional devices, document management system access histories, deleted emails, online ‘chat rooms’ and WhatsApp and text messages etc (see Chapter 8 for details of the extent to which an employer can monitor his employees’ use of such devices and systems). 1170

Applying the three basic steps: discovery of competitive activity during employment 18.72

18.71  Answering the question whether there have been or are likely to be breaches of the employee’s obligations to the employer is made easier by dividing it into five sub-questions covering the areas in which breaches most commonly occur. The sub-questions are: (a) Have competitive activities been carried out in the employer’s time? (b) Have confidential information or other property or resources of the employer been misused and/or removed? (c) Have other employees/independent contractors been enticed to participate/ participated in the competitive activities? (d) Have customers or suppliers been contacted by the employee (directly or indirectly) or has the employee (directly or indirectly) sought to interfere with the dealings between them and the employer? (e) Has there been a failure by the employee or other employees/independent contractors to disclose to the employer information about actual or suspected wrongdoing? If the answer to any of these questions is no, the employer needs to know whether there is any likelihood of any of these activities happening in the future. Sources of information 18.72  Obtaining answers to the questions posed at 18.68 and 18.71 can undoubtedly be difficult, but an employer should take a positive attitude and think carefully where he might find the information. In whatever choices he makes, the employer should always be alive to the risk that details of the investigation may be fed back to the offending employee. Apart from direct questioning of the employee himself, sources of information the employer should consider are: (a) Colleagues of the employee who work closely with him, in particular the employee’s secretary/personal assistant, who can be a mine of information. The employer must keep in mind that those colleagues may also be involved in the unlawful activities, eg a secretary who is asked to type-up a business plan for the employee’s new venture, or colleagues looking to leave with the employee (see further at Chapter 19 regarding team moves). (b) Customer/supplier files. (c) The employer’s computer systems, including: electronic diaries; document management system histories (which show when items stored in the system were created, modified, viewed, downloaded, copied, printed etc); internet and email records; and customer management relationship systems used to store contact details and other information about customers and other business contacts. (d) Instant messaging and ‘chat room’ histories (eg Bloomberg). (e) Logs of telephone calls and, for those employers who record telephone conversations, those recordings. 1171

18.73  Discovering competitive activity: the immediate practical issues

(f) Mobile telephone memories and SIM cards. (g) Itemised home or mobile telephone bills (particularly where the employer receives the invoices and then pays the bills directly). (h) Records from multi-functional devices that have printing, scanning and photocopying functionality. (i) CCTV records and any records kept of attendance at the employer’s premises, whether they are manual (by signing-in) or electronic (eg security systems which allow access by the use of swipe cards/passes). (j) Unusual requests for, or downloads, printing etc of, information, eg repeat runs of customer or other business contact lists/databases or a copy of the employee’s contract of employment. (k) Unusual or unexplained behaviour such as: working late or at weekends for no apparent reason; suddenly taking a full briefcase home every evening; sudden holiday requests or increased sickness absence or medical appointments; irregular customer contact; business trips, or sudden lavish entertaining, unusual/repeat expenses claims or duplicate expense claims being submitted by more than one employee for the same/similar event. The employer should also look out for employees making furtive mobile telephone calls or spending excessive time looking at emails, texts, Facebook, LinkedIn, WhatsApp and Twitter etc on mobile devices. (l) Social networking sites used by the employee or poaching employer such as Facebook, LinkedIn, WhatsApp and Twitter. The amount of information that (ex-)employees include online about their activities or any new business venture in which they are involved can be astonishing. As information on these sites can be updated or removed in an instant, employers need to be particularly vigilant. We advise employers to take screenshots, and print and save hard copies, of any information found on such sites. Those screenshots/copies should be clearly marked with the relevant date and time, so that (if necessary) they can be produced as evidence against the employee even if they later try to cover their (electronic) tracks. (m) Information held at Companies House either in the name of the individual or frequently a spouse, partner, child or other close family member. See Chapter 8 for consideration of the extent to which the employer can monitor the employee’s behaviour in relation to certain of the above sources of information (in particular, (c)–(i) and (l)), and then use information gathered as a result of that monitoring. Rights to data protection/privacy 18.73  In considering the search and use of the sources of potential information identified in 18.72, the employer will need to take into account the employee’s rights under the Data Protection Act 1998 (as supported by the Employment Practices Code (particularly Part 3: Monitoring at Work) and 1172

Applying the three basic steps: discovery of competitive activity during employment 18.74

the Employment Practices Code Supplementary Guidance issued by the Information Commissioner’s Office), the Regulation of Investigatory Powers Act 2000, the Telecommunications (Lawful Business Practice) (Interception of Communications) Regulations 2000 (SI  2000/2699) and the Human Rights Act 1998. In addition, from 25  May 2018 the Data Protection Act 1998 will be replaced by the EU  General Data Protection Regulation (EU) 2016/679, which will have direct effect in all EU Member States (see further at 8.54 and 18.191 on the effect, and implementation of, the Regulation). We discuss these ‘privacy’ rights (and some of the relevant case law in this area) at 8.52–8.65 and Appendix 2 to Chapter 8 in the context of the practical steps the employer can take to maximise his chances of detecting competitive activities at an early stage. 18.74  Once the employer is on notice of actual or proposed competitive activities, arguably the position becomes a little easier. First, covert monitoring is expressly permitted by the Employment Practices Code (Part 3: Monitoring at Work) published by the Information Commissioner’s Office where: (i) there are grounds for suspecting criminal activity or equivalent malpractice, and (ii) notifying the individuals about the monitoring would prejudice its prevention or detection, or the apprehension or prosecution of the offenders. ‘Equivalent malpractice’ is not defined but, based on language in the Employment Practices Code Supplementary Guidance to Part 3, it is arguable that it includes gross misconduct, thereby bringing many cases of employee competition within the exception. Secondly, Part 3 of the Employment Practices Code expressly excludes from its ambit the examples of: (i) checking emails sent by a particular worker that are stored as a record of transactions to investigate allegations of malpractice; and (ii) looking through telephone logs kept for billing purposes to establish whether a worker suspected of disclosing trade secrets has been contacting a competitor. However, the Employment Practices Code chooses not to address whether occasional access to records in the course of a specific investigation is within the scope of monitoring activities. Subject to the stated exceptions, the position is not entirely settled and in conducting his investigations the employer should exercise some caution. Although the Employment Practices Code does not have legal effect, as it has been issued under section 51 Data Protection Act 1998, any enforcement action for failing to follow its guidance on good practice would be based on a failure to meet the requirements of the Act itself. Inevitably, the employer needs to undertake a balancing act, weighing the threat that the actual/ proposed competitive activity poses to the business against the extent/impact of any potential breach of the employee’s data protection/privacy rights. In practice the courts and employment tribunals carry out a similar balancing exercise when weighing the probative value of evidence against the nature and extent of the evidence-gathering activity which has allegedly infringed any ‘privacy’ right. In our experience, they have been reluctant to exclude evidence which the employee alleges has been unlawfully gathered where it is clearly relevant to the issues in dispute, and it would be unwise for an employee to rely on their doing so. Where the employer has appointed a forensic IT adviser, the analysis of electronic records will be undertaken by that adviser and the employer will also need to ensure that, in doing so, the adviser does not overstep the mark. 1173

18.75  Discovering competitive activity: the immediate practical issues

Contacting customers, suppliers and business contacts 18.75 A  particularly difficult issue is whether the employer should approach customers, suppliers or other business contacts. In most cases, these groups of people will not want to become involved in the domestic wrangles between employers and employees and, by contacting them, the employer may risk marring his relationship with them. In each case it will be a matter for the employer to judge whether the risk is worth taking. To minimise the risk, but maximise the chances of obtaining accurate information, the employer should contact only those customers with whom there is a good relationship and who are likely to remain with the employer, and preferably not ones for whom the competing employee is the principal point of contact. Sometimes, it will be a customer who first draws the competitive activity to the employer’s attention. For example, the customer may forward a copy of an email from the competing employee in which he is pitching for the customer’s future business, or a LinkedIn message/ status update ‘innocently’ putting the customer on notice that he is leaving the employer. In such cases, as much information as possible should be obtained from the customer immediately. The employer should make a full note of what the customer tells him and, where appropriate, obtain copies of any documents relevant to the competitive activity sent by the employee to the customer. Where there is a likelihood that court proceedings may be issued, it is also sensible, if commercially possible, for the customer to be asked whether he is willing to provide an affidavit or witness statement. Under the Civil Procedure Rules evidence in interim applications for a search order or a freezing injunction should be by way of an affidavit; but for other interim injunction proceedings evidence will normally be by witness statement. Obtaining an affidavit or witness statement from a customer at an early stage can serve as a critical piece of evidence, even if its primary purpose is for use at the initial investigatory or planning stage to establish if there are grounds for more formal action. It is also a form of insurance policy for the employer in case it subsequently becomes commercially unacceptable to enlist assistance from the customer, or the customer no longer wishes to be involved in the matter. Public sources of information 18.76  Where the employee’s competitive activity entails setting up a new business, additional useful sources of possible evidence include relevant trade journals (in hard copy or online), internet searches and Companies House records. Since June 2015, over 170 million digital records held on the UK register of companies have been accessible free of charge on the Companies House public beta search service. The available records include financial accounts, company filings and details on directors and secretaries throughout the life of the company. In relation to Companies House records, it is useful to look out in particular for the use of spouses’/partners’ or children’s names, which are linked to the employee’s home address. This device is commonly used as a ‘smoke screen’ to conceal the employee’s activities. Surprisingly, some departing employees have been known to set up a website for their new organisation complete with their contact name and address and have simply assumed their current employer will not find out. 1174

Applying the three basic steps: discovery of competitive activity during employment 18.80

Email and other electronic sources of information 18.77  One very common result of the employer’s enquiries is the discovery that confidential information has been sent either to the employee’s personal email account, or that of a spouse or close family member, or to third parties, including the poaching employer and/or customers. As a preliminary step the employer should consider how that information is to be retrieved and/or preserved and whether urgent action is required to ensure the return or preservation of the evidence. Immediate first steps might include issuing clear instructions to the employee and/ or any third party: to preserve all potentially relevant evidence, in particular, suspending any standard document deletion or destruction processes; not to delete/ erase, destroy or tamper with evidence; and to preserve the integrity of (and not delete/erase, destroy, tamper with or close, as appropriate) any accounts, systems or devices (personal or otherwise), such as mobile telephones, iPhones, laptops, tablets or email, online data storage platforms or social networking accounts, which have been used in connection with the activities under investigation. See also our proposed ‘rules of engagement’ as regards the creation and dissemination of potentially discloseable documents, which are set out at 18.12. See also 18.11–18.45 regarding the instruction of the legal, advisory and management teams appointed to deal with an employee competition situation. 18.78  Interim relief in the form of, for example, search orders, orders for delivery up and preservation orders are discussed at 15.153–15.260. The employer’s advisers might need to consider whether any of these special remedies should be sought, in particular search orders, at the early stages of the process. 5(a)(iii) What are the terms of employment, role and importance of the employee? 18.79  It may seem rather odd to suggest that these are factors that the employer must establish. One might expect that an employer automatically knows them. In the case of key employees of small organisations the information may well be available. However, in a surprising number of instances the employer’s knowledge may be hazy and the facts will need to be clarified. Official records, such as personnel files, are also often incomplete or out-of-date, particularly where long-serving employees have been promoted and/or received multiple contract updates over the years. 18.80 Contract terms of particular importance that the employer should identify are: (a) the employee’s general obligations to the employer and any express terms incorporating the implied duty of good faith and fidelity and/or fiduciary duties, in particular, obligations to report wrongdoing, conflicts of interest, plans to compete or other competitive threats to the business; (b) disciplinary rules and procedures and the right to suspend; (c) the employee’s hours of work and any rules regarding outside activities during employment; 1175

18.81  Discovering competitive activity: the immediate practical issues

(d) how the contract may be terminated and whether the employer has the right to make a payment in lieu of notice; (e) whether the employee can be sent on garden leave and, if so, for how long and subject to what conditions; (f) any variation of duties provisions; (g) confidentiality and intellectual property obligations, including terms dealing with the ownership/handling of business contact details (in particular those held on social media sites like LinkedIn); and (h) any restrictive covenants applying after termination of employment. In Chapter 5 we consider and provide precedents for these various types of contract terms. The drafting of restrictive covenants, including two case studies, are considered in Chapter 12. 18.81 In looking at the role and importance of the employee, while the job title will be relevant, not too much reliance should be placed on it. Frequently employees are given rather grander titles than their roles merit, a common example being the title ‘Director’, which is regularly used even for mid-level positions and ones where the holder is not a director within the meaning of the companies legislation. Similarly, in US companies the title Vice-President is commonly used even for comparatively junior employees. The key points for employers to be mindful of are: (a) whether the employee is a director, de facto director or shadow director within the meaning of the companies legislation or is otherwise a fiduciary, by virtue of the terms of their employment contract and/or the nature of their duties (see 4.5–4.86 as to who is a fiduciary); (b) the amount of revenue the employee produces directly and indirectly; (c) the employee’s key contacts amongst customers, suppliers and other business contacts; (d) the business (including prospective business) the employee could take with him if he left, or which might otherwise be lost because of his departure (eg because the customers feel that the employer will no longer have sufficient resources or expertise to service their needs following the employee’s departure); (e) the confidential information, trade secrets or other commercially sensitive information to which the employee has had access; and (f) the other employees or relevant independent contractors that might leave with the employee or as a result of his departure. 18.82 In establishing the current terms of employment, the following basic points need to be covered: 1176

Applying the three basic steps: discovery of competitive activity during employment 18.83

(a) Where are the terms recorded? There are a number of potential sources of contract terms, and restrictive covenants in particular, including employment contracts, employee handbooks, bonus plans and severance agreements. (b) Have the contract terms been signed? Convenient though it is for the legal team to receive electronic versions of documents from the employer, normally these will not be signed versions. It will be key to establish whether a signed version exists. Often the position is that the employer has sent the employee an employment contract containing notice periods and restrictive covenants and simply assumes that the employee has signed it, whereas in fact the employee has either actively objected to it or, more commonly, simply failed to return it (either innocently or intentionally in an attempt to avoid eg onerous restrictive covenants). For an example of where the employee’s failure to sign the contract was not fatal to the enforcement of the restrictive covenants see FW Farnsworth Ltd and another v Lacy and others [2013] IRLR 198 (Ch) (which is considered at 13.59). (c) Have the original contract terms been varied? There are a number of legal issues regarding the effective variation of contract terms, including: whether the employee has consented to the variation; whether consideration for the change has been given; and the impact of the Transfer of Undertakings (Protection of Employment) Regulations 2006. Often there are also practical difficulties ascertaining what changes have been made and when. For example, employee handbooks are commonly held in soft copy only on the employer’s intranet. They are updated on a regular basis and they can include important terms that are incorporated into the contract (eg new and enforceable covenants, as the employees found to their cost in Credit Suisse Asset Management Ltd v Armstrong [1996]  IRLR  450 (CA), considered at 13.47), but which can be overlooked. Equally, however, examination of an electronic employee handbook can prove a depressing task where the only restrictive covenants are in that document. In the absence of a good audit trail, the employer may be in a weak position in terms of demonstrating precisely what, if any, covenants are binding on the employee. For a fuller discussion on the above questions regarding sources of contract terms, (un)signed contracts and variation of contracts see Chapter 13. 5(a)(iv) What sort of threat does the competitive activity pose to the employer’s business? 18.83 With the answers to the first three questions referred to at 18.66 the employer will be able to judge whether the competitive activity poses any real commercial threat to his business and consequently the seriousness with which it should be treated. Often what appears at first sight to be a threat of real gravity is revealed on closer examination to be of lesser, or only minor, significance. Furthermore, occasionally there is the possibility of diverting the employee from a competitive activity to a complementary activity. For example, the employee 1177

18.84  Discovering competitive activity: the immediate practical issues

might have identified a particular type of business activity that is partially competitive with the employer’s business, but which could be developed in such a way that it could be provided by the employer as an additional product or service for customers. In such circumstances, the employee may be given the opportunity to pursue that business activity for example, as a joint venture with the employer. Giving the employee a personal equity stake in, and some control over, the new business venture will align his interests more closely with those of the employer and should make it less likely that he will compete with that activity, or allow or enable others to do so. This option has the added advantage that more stringent restrictive covenants with greater prospects of enforceability can usually be attached to an employee’s shareholding; see 10.17, 10.45–10.54, 11.78–11.90). As a result, the employer has the option of capitalising on the positive opportunity presented by the employee rather than wasting time and resources on defensive action to protect his business.

5(b) Taking key decisions 18.84  There are five key decisions the employer needs to take: (i) Is the employee to be retained or dismissed (see 18.85–18.101)? (ii) Should legal proceedings be threatened/issued against the employee (see 18.102–18.119)? (iii) Should legal proceedings be threatened/issued against any third party (see 18.120–18.123)? (iv) Are there steps that should be taken to protect/consolidate the employer’s position with customers (see 18.124–18.132)? (v) Are there steps that should be taken to reassure and motivate other employees/independent contractors (see 18.133–18.139)? 5(b)(i)  Retention or dismissal? 18.85  The following section focusses primarily on the steps that the employer can take either to retain the employee or bring the employment relationship to an end by dismissing the employee. However, it is just as likely that the individual will have already resigned, either with or without notice. 18.86  There are a number of ways in which the employee may resign, with a corresponding range of options in terms of the employer’s response. We have highlighted below the two most common scenarios in employee competition disputes: (a) where the employee serves due notice; and (b) where the employee resigns with immediate effect claiming constructive dismissal. 18.87  In either scenario identified in 18.85, as a preliminary step, the employer should establish the employee’s entitlement to receive, and obligation to give, notice. Ideally the employer will have in place a signed written employment 1178

Applying the three basic steps: discovery of competitive activity during employment 18.91

contract, which contains express provisions regarding the period of notice to be given by the employee and the employer’s rights to pay the employee in lieu of notice, place him on garden leave and/or suspend him pending any investigation into his wrongdoing. Without these express rights, the employer’s options may be severely limited. For example, absent an express notice provision, an employee who has been continuously employed for one month or more is only required as a matter of statute to give one week’s notice pursuant to section 86(2) Employment Rights Act 1996, which means that the employee may be able to leave almost immediately. That said, where there is no agreed notice period the contract will be terminable on reasonable notice and whilst that period cannot be less than the statutory period it will frequently be more, particularly in the case of senior employees. The difficulty for the employer is that he will not have the certainty of an agreement with the employee and instead will have to negotiate with the employee in the hope of reaching agreement or, failing that, resort to the courts for assistance involving the associated investment of time and money, coupled with uncertainty as to the employee’s status in the meantime. Employee serves due notice 18.88  If the employee has served due notice, the employer needs to make a prompt decision as to whether to permit the employee to work out that period of notice, place him on garden leave or release him from all or some of the notice period (eg by making a payment in lieu of notice). Whatever the preferred option, care must be taken not to breach the employee’s contract of employment, particularly if it contains restrictive covenants that the employer wants to enforce. For the potential risks associated with suspending an employee or placing him on garden leave absent express contractual rights to do so, see 9.102–9.108 and 18.54. Employee resigns in breach of his notice requirements 18.89 Where the employee resigns in breach of his notice obligations, the employer can simply accept the breach and end the employment relationship. Alternatively, he may reject the breach and seek to enforce the employment contract (either by requiring the employee to work his notice or, in appropriate cases, by sending the employee on garden leave and seeking a garden leave injunction if the employee fails to comply – for garden leave injunctions see 15.3–15.73). 18.90  The circumstances in which the employee resigns will inevitably impact on the likelihood of retaining the employee, and the employer’s options for dealing with him. For example, an employee who has resigned and left employment immediately claiming to have been constructively dismissed (either genuinely or as a ruse to avoid any otherwise enforceable restrictive covenants) will often be very difficult to retain. Retention 18.91  Retaining the services of the employee is something every employer in this situation should consider. It is an option frequently rejected out of hand by 1179

18.92  Discovering competitive activity: the immediate practical issues

employers but can be one of the most effective ways of eliminating competitive activities. Whether or not it is a practical proposition will depend on two factors: (a) the likelihood of the employee remaining; and (b) the commercial desirability to the employer of his doing so. Balanced against retention is an argument that, once tempted to leave, an employee may well be tempted again. The employer should therefore bear in mind that retention may only be a temporary solution. In the context of team moves, employers should always consider the possibility of convincing at least one member of the team to stay. In return for staying (usually for an improved salary/benefits package, a promotion and a waiver of any claims against the employee arising out of the unlawful competition or unlawful preparatory acts), the employee may turn ‘Queen’s evidence’ and be willing to provide valuable information about the unlawful actions of their cohorts (see Chapter 19 on team moves). The likelihood of the employee remaining 18.92  Generally speaking, employees engage in competitive activities because of dissatisfaction with their salary and remuneration packages, frustration at their lack of career progress within the employer’s organisation, or sheer boredom. If the root cause of the employee’s actions can be remedied, and the employer is prepared to remedy it either immediately or in the foreseeable future, there is often a good chance of retaining the employee. See further at Chapter 8 for some of the most common reasons why employees may be tempted to compete and the practical steps that employers can implement to guard against this. Commercial desirability to the employer 18.93  This will depend on matters such as: (a) the threat the competitive activity poses to the employer’s business; (b) the likely cost of retaining the employee; (c) whether there is a critical time factor involved, such as the imminent launch of a new product or the renewal of important customer or supplier contracts for which the employee is vital; and (d) how retention would affect other key employees/independent contractors. Steps to retain the employee 18.94  Precisely how the employer goes about retaining the employee will depend on the type of competitive activity in which the employee has engaged or is proposing to engage. Where the employee has already resigned to join a competitor or is preparing to set up in competition, it will be a matter of persuading the employee that his interests are better served by remaining with the employer. In appropriate cases, the employer will also need to anticipate the poaching employer’s strategy and why his offer may be more attractive to the employee. The employer must act quickly, his arguments must be well prepared and he must address the employee’s 1180

Applying the three basic steps: discovery of competitive activity during employment 18.97

current dissatisfactions. In practice, the necessary ‘carrots’ are usually an improved salary and benefits package, enhanced status and/or more important/high profile responsibilities and sometimes greater security in terms of the notice that must be given to him to terminate his employment. The employer must also be willing to waive his rights as against the employee in respect of any existing breaches of duty arising out of the competitive activity. 18.95 One danger area to look out for, particularly where the employee has already resigned, is that retaining the employee might put him personally in breach of an agreement he has entered into with the poaching employer. For example, the employee may have entered into a ‘forward contract’ under which he has agreed to join the poaching employer as soon as he is ‘free’ of his contractual obligations to the employer (see Tullett Prebon & ors v BGC Brokers LP & ors [2011]  IRLR 420). Alternatively, the contract entered into with the poaching employer may contain a ‘no show’ clause, which imposes a financial penalty on the employee for failure to take up employment with the poaching employer (see Tullett Prebon Group Limited v Ghaleb El-Hajjali [2008] IRLR 760 (QB)). The employer’s retention efforts may also amount to inducing the employee to breach any such arrangements with the poaching employer. It is relatively unusual (but becoming more common at least in some sectors) for the poaching employer to resort to legal proceedings for this sort of breach of contract, particularly if the consequences of the recruitment not proceeding are serious. The key point for the employer is that he should be aware of the risks. Additionally, a well-represented employee may look for an indemnity from his current employer against any legal fees and damages he might incur as a result of any litigation brought by the poaching employer if the employee reneges on any agreement with them. Such indemnities commonly form part of the ‘price’ of the employee remaining and, potentially, providing evidence against his cohorts in a team move scenario. 18.96  Where the employee has merely been ‘moonlighting’ for a competitor to earn extra wages, as in Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] 2 All ER 350 (CA), retention should be a good deal easier, even if the employer decides to impose a disciplinary sanction. The employee will usually be grateful to have kept his job. The employer need not remedy the reason for the employee’s moonlighting at this stage, but he should certainly keep it in mind if he needs to retain the employee for any length of time. If, for example, the employee simply needs the extra money to live on, or has become disillusioned for one or more of the reasons explored in Chapter 8, there could be a fairly quick and easy ‘fix’. If the employer just ignores any underlying issues, then the employee may well be forced to leave or to ‘moonlight’ again. 18.97  Where retention is an acceptable solution for the employer but his initial attempts to persuade the employee to remain are not successful, it may nonetheless be possible to achieve that outcome as part of a mediated settlement. Mediation is considered at 18.222–18.266 and see in particular 18.244–18.254 on the advantages mediation offers compared to the more limited remedies available from the courts. 1181

18.98  Discovering competitive activity: the immediate practical issues

Dismissal 18.98 An employer who is considering dismissing an employee for actual or proposed competitive activity needs to think carefully about the reason for the dismissal and how the dismissal will be implemented. In choosing his method of dismissal, the employer must avoid, wherever possible, acting in repudiatory breach of the contract. What amounts to a repudiatory breach of the contract is considered in detail at 9.63–9.122. The employer must also be careful to dismiss fairly an employee with the requisite continuous service (currently two years) and must pay heed to both his own disciplinary procedures (particularly contractual ones) and the ACAS Code of Practice 1: Disciplinary and Grievance Procedures (2015), and the accompanying (non-statutory) Discipline and Grievances at work: The ACAS  guide – see 18.101. Employees with the requisite service may allege that the dismissal was unfair if: (a) it was not for one of the potentially fair statutory reasons for dismissal (set out in sections 98(1) and (2) Employment Rights Act 1996); and (b) if the reason falls within section 98(1) or (2) but the employer did not act reasonably in treating that as a sufficient reason for dismissal (section 98(4) Employment Rights Act 1996). The potentially fair statutory reasons for dismissal are the four specific grounds identified in section 98(2) Employment Rights Act 1996, plus the general ground referred to in section 98(1)(b) ie ‘some other substantial reason of a kind such as to justify the dismissal of an employee holding the position which the employee held’ (sometimes referred to as the ‘safety net’ category). Special rules apply to dismissals where there has been a transfer to which the Transfer of Undertaking (Protection of Employment) Regulations 2006 applies and these are considered at 13.173–13.174. Reason for dismissal 18.99  Where the employee is competing, he will invariably have breached an express or implied duty owed to the employer. ‘Conduct’ is therefore most likely to be the reason (under sections 98(1) and (2) Employment Rights Act 1996) for dismissal. However, where there is no obvious breach of duty, eg the employee has taken only limited preparatory steps to compete, the only option for the employer wishing to dismiss at that stage (a course we would not normally recommend) is to rely on the ‘safety net’ category of ‘some other substantial reason of a kind such as to justify the dismissal of an employee holding the position which the employee held’: section 98(1)(b) Employment Rights Act 1996. There is no statutory definition of what amounts to ‘some other substantial reason’. Merely stating an intention to leave and join a competitor or taking certain preparatory steps to compete during employment (eg  buying a shelf-company) would not, without more, amount to ‘some other substantial reason’ justifying dismissal. However, in an extreme case if the employer can demonstrate a reasonable concern that continuing to employ the employee poses a real commercial risk to his business – eg the employee is likely to misuse or leak valuable confidential information – that may suffice. See, for example, Skyrail Oceanic Ltd t/a Goodmos Tours v Coleman [1980] IRLR 226 (EAT) and Chandlers (Farm Equipment) Ltd v Rainthorpe UKEAT/0753/04 considered at 13.74, albeit that those cases are 1182

Applying the three basic steps: discovery of competitive activity during employment 18.101

very specific on their facts, involving situations where the employee’s spouse, or intended spouse, was or was planning to work for a competitor, and are some way removed from the typical scenarios with which this book is concerned. Methods of implementing dismissal 18.100  The main options available to the employer will include: (a) Summary dismissal without notice or payment in lieu of notice. (b) Immediate dismissal with a lump sum payment in lieu of notice, using a payment in lieu of notice provision. (c) Dismissal with notice, using a garden leave provision for all or part of the notice period. (d) Dismissal with notice, using a variation of duties clause. The option of dismissing with notice, or with part notice and part payment in lieu, may also be available to the employer (depending on the terms of the payment in lieu provision). However, in an employee competition situation, the employer is unlikely to want the employee to remain in post unless, for example, the employer has no right to place the employee on garden leave and/or has concerns about the enforceability of any restrictive covenants (in which case, keeping the employee under contract and delaying his competitive plans for as long as possible may be attractive). The relevance of disciplinary procedures – why follow one? 18.101  The reasons for ensuring that the correct disciplinary procedure is followed are threefold: (a) So that the employer is certain of his facts before dismissing the employee and, as a result, is making an informed commercial decision. Initial evidence may appear very damning against the employee, but a proper investigation may reveal a comparatively innocuous breach or none at all. The employer who acts hastily may lose the services of the employee unnecessarily. (b) For employees with the required continuity of service (currently two years), to avoid successful claims of unfair dismissal under section 98 Employment Rights Act 1996 and the risk of an uplift in the compensation award for failing to follow the ACAS Code of Practice 1: Disciplinary and Grievance Procedures (2015). Section 3 Employment Act 2008 granted employment tribunals the power, where they consider it just and equitable to do so in the circumstances, to increase or decrease (as appropriate) any unfair dismissal award made ‘by no more than 25%’ for a failure of either party to follow the ACAS  Code in this situation (section 124A Employment Rights Act 1996; section 207A Trade Union and Labour Relations (Consolidation) Act 1992). Any increase awarded cannot, however, take the amount of the 1183

18.102  Discovering competitive activity: the immediate practical issues

compensatory award above the statutory cap (currently the lesser of one year’s gross salary or £80,541, increasing to £83,682 for dismissals taking effect on or after 6 April 2018). The ACAS Code applies to ‘disciplinary situations’ (which expressly includes conduct dismissals) but is silent as to whether it applies to dismissals for ‘some other substantial reason’. There has been conflicting judicial debate on the application of the ACAS Code to some other substantial reason dismissals – for a detailed discussion of the relevant cases see 13.80. Until there is a definitive ruling from an appellate court, employers seeking to rely on the category of ‘some other substantial reason’ should be mindful of, and adhere where possible, to the ACAS Code. In any event, in almost all cases the employer’s procedure should include: (1) setting out the alleged misconduct in writing and inviting the employee to attend a disciplinary hearing; (2) a disciplinary hearing; (3) confirmation of the disciplinary decision in writing; (4) offering the employee the right of appeal and conducting an appeal hearing if that right is exercised. The employee should also be afforded his rights to be accompanied at any disciplinary or appeal hearings pursuant to section 10 Employment Relations Act 1999. (c) Where the disciplinary procedure is part of the contract, in order to avoid being in repudiatory breach (as well as a procedural unfair dismissal) with the attendant consequences and uncertainty about the date of termination. In Gunton v Richmond-upon-Thames London Borough Council [1980] IRLR 321, Dietmann v Brent London Borough Council [1987] IRLR 146 (CA) and Boyo v Lambeth LBC  [1995]  IRLR 50 (CA), the failure to follow contractual disciplinary procedures was found to amount to a repudiation of the contract, which the employee was entitled to accept as determining the contract. Largely because of such cases, it is now common practice for employers to provide expressly that disciplinary procedures do not form part of the contract of employment. Where the disciplinary procedure is expressly stated to be non-contractual, the employer is still well advised to follow it as closely as practicable. What amounts to a repudiatory breach, and when a contract terminates as a result of acceptance of a repudiatory breach, are considered in Chapter 9. 5(b)(ii)  Should legal proceedings be threatened/issued against the employee? 18.102 This is not the same question as whether there are good grounds for threatening/issuing proceedings or whether any such proceedings have any likelihood of success, although it does encompass them. This is a tactical decision for the employer to make. Usually, where the competitive activity is a single employee ‘moonlighting’ in his spare time (see 18.96), the threat or issue of proceedings will not be necessary or appropriate. However, even where the prospects of success are very low, there may still be value in threatening or instigating proceedings if it may result in the (ex-)employee’s/poaching employer’s competitive plans being significantly delayed. The employer may see this as a way of gaining time to mitigate the damage to his business. It is something of a moot point as to whether this was a driving factor behind the litigation brought 1184

Applying the three basic steps: discovery of competitive activity during employment 18.104

in the highly publicised case of Marathon Asset Management LLP v Seddon & Ors [2017] IRLR 503. Despite only being awarded damages of £1 against each of the defendants (when sums in excess of £15 million had been claimed by way of Wrotham Park damages), Marathon succeeded in delaying the launch of the competitive business for many months. The case is further referred to at 16.15. In any event, the employer should still address this question rather than ignore it. 18.103  In many cases the employer will have far greater financial resources than the employee. In those cases, often the mere threat of legal proceedings, coupled with the cost and uncertainty which that will involve for the employee, may be enough to eliminate the competitive activity completely, or to reduce it to an extent acceptable to the employer. Such an outcome, however, will be far less likely for those more sophisticated employees who have secured indemnities from their future employer against legal costs and/or damages flowing from any litigation instituted by their former employer. Similarly, the impact will be reduced where the employee/poaching employer knows that the employer has a history of making ‘empty’ threats of litigation which have not been followed through. Those advising the competing employees/poaching employers will invariably ask what the employer’s past approach to competitive activity has been, and whether they truly have the appetite (and funds) to litigate. See also 18.244–18.254 and Appendices 6 and 7 to this chapter for consideration of the circumstances in which mediation or arbitration may be preferred to litigation, for example, where the employer may not want to risk a public final determination that his restrictive covenants are unenforceable. Of course, any ruling on the covenants may be fact-specific and does not necessarily mean that the covenants will be automatically unenforceable as against the remaining workforce. However, employers will be concerned that any unfavourable court rulings may be perceived by other would-be competitors as a ‘green light’ for their own illicit activities. 18.104  This chapter focusses on the steps the (ex-)employer should take when he discovers competitive activity by a single (ex-)employee. Where the (ex-) employer is facing a competitive threat involving multiple (ex-)employees, for example, a team move, consideration will also need to be given to whether only some, or all, of the potential defendants are threatened (or served) with legal proceedings. Sometimes the (ex-)employer considers the costs of pursuing all of the potential defendants prohibitive and that having multiple defendants would result in proceedings that are unmanageable. However, it is a question that needs to be addressed carefully by the (ex-)employer and his legal team. See, for example, Utilitywise Plc v Northern Gas & Power Ltd & ors [2017] EWHC 2520 (QB). In summary, Utilitywise sought an interim injunction restraining Northern Gas & Power from recruiting its employees in alleged breach of non-competition restrictions in their employment contracts. Despite there being a strong prima facie case that Northern Gas & Power had used unacceptable recruitment strategies, there was uncertainty over precisely which employees had non-competition restrictions and differences in the form of the restrictions of those who did. Whipple J held that the uncertainty as to each contract’s terms and conditions made the order that Utilitywise sought unworkable, as it would not simply apply to a class of employees. Utilitywise should have taken enforcement action against each individual 1185

18.105  Discovering competitive activity: the immediate practical issues

employee who was looking to breach their contract of employment. A  court looking at an individual application could consider the specific non-competition clause in that contract. The court could then decide whether that employee was bound by it. Further, the contracting parties would then be before the court and could be heard. By contrast, in this case the employees had been excluded from the debate. Although Utilitywise’s application was more convenient to them, the lack of specificity in the form of order sought would be unfair to the employees. The interests of third parties, namely the employees, were relevant in considering the balance of convenience, and that tipped the balance against granting relief. 18.105 The questions the employer needs to answer to reach a decision on whether to threaten/issue proceedings are: (a) Will the competitive activity have a significant impact on the employer’s business and, where relevant, the business of the employer’s group of companies (see 18.106)? (b) Are there grounds for threatening/issuing particular proceedings (eg garden leave or springboard injunctions (considered in Chapter 15), damages or account of profit claims (considered in Chapter 16) (see 18.107)? (c) Have those grounds any real prospect of succeeding at an interim hearing and/or full trial (see 18.108)? (d) What is the potential cost involved (including not only the costs of the litigation, but the ancillary financial and administrative costs associated with any dismissal process and the recruitment of a replacement) (see 18.109–18.110)? (e) What is the likely reaction of the employee and the poaching employer/ backers of a new business venture or joint venture (see 18.111–18.112)? (f) What is the likely reaction of other employees/independent contractors (see 18.113)? (g) What is the likely reaction of customers, competitors and the market in which the employer operates (see 18.114)? (h) What sort of solution would be acceptable to the employer (see 18.115– 18.119)? The weight that an employer should give to any particular question/answer in reaching his decision will depend on the facts of each case. However, the following comments are of general application. Impact of the competitive activity 18.106  If this is minimal, on its own it will not normally justify the cost of threatening or instituting proceedings. There may, however, be other reasons why the employer should take action, eg  to dissuade other employees/independent contractors (and would-be poachers) from engaging in similar activities that may be much more harmful to the employer’s business, or to delay the launch of the 1186

Applying the three basic steps: discovery of competitive activity during employment 18.110

competitive enterprise, as in Marathon Asset Management LLP v Seddon & Ors [2017] IRLR 503 (see 18.102). Grounds for proceedings 18.107  In many cases there will be some grounds on which to base proceedings. Provided that it does not lead to any significant delay that would prejudice an application for an interim injunction, the employer should endeavour to complete his enquiries before he threatens or institutes proceedings. The stronger the case the employer can present at the outset the greater the chance of a successful outcome. Merits of proceedings 18.108 Assessing the merits of any proceedings is a difficult process. Whilst speedy trials are common as a method of dealing with cases concerning employee competition, in practice such cases are still normally disposed of at or before the interim stage. As a result, it is usually the merits for the purposes of interim proceedings on which particular attention must be focussed at the early stages. In addition, the employer should not overestimate the strength of the employee’s case. Where the employee has breached his duties, for every breach the employer discovers, there are often many more of which he is unaware but for which, in time, evidence will come to light. This will have to be taken into account by both the employer’s and the employee’s respective advisers. In extreme and cleverly orchestrated cases of unlawful competition, the employer could be facing the complete decimation of a particular business line. This also needs to be factored into the assessment of the merits of litigation because it can lead to some very difficult questions, such as whether the employer still has a legitimate business interest to protect by way of a restrictive covenant injunction (see 10.32–10.33 on the issue of disappearing legitimate interests). It may also prompt the employer to consider more commercial alternatives to litigation, such as entering into a joint venture with the employee to continue the business line, or even a potential sale of that business line to the employee or poaching employer. Expense 18.109 The expense involved depends on whether proceedings are simply threatened or actually issued. Where they are merely threatened, the employer will usually only have his own legal fees and the cost of management time spent on the matter. Other pre-action costs incurred may include: the fees of other advisers or experts retained to assist in the preliminary stages (eg forensic IT, accountancy or public relations advisers – see further at 18.28–18.39); the ‘price paid’ to retain the employee or any of his colleagues or, conversely, the costs of recruiting a replacement. 18.110  Once proceedings have been issued, the employer’s potential expenses increase significantly. They will certainly include court fees, which can be significant depending on the remedy sought. It may also include the employee’s legal 1187

18.111  Discovering competitive activity: the immediate practical issues

fees (costs orders in the context of interim remedies are dealt with at 14.152– 14.166) and, in some cases, an award of damages under the cross-undertaking in damages. The question of expense should be addressed carefully at the outset and reviewed regularly. In addition, it is vital that the employer appreciates that once proceedings are issued, it may not be possible to put a stop to them without incurring significant expense. This is particularly important where the grounds of claim are weak. Ordinarily, the party discontinuing the claim will be liable for both their costs of the proceedings and those of their opponent incurred on or before the date of discontinuance (Part 38, Civil Procedure Rules). Depending on the value of the claim, the parties may also be subject to the costs management regime (see the Civil Procedure Rules, Parts 3.12–3.18, and Practice Direction 3E). Under that regime detailed costs budgets must be prepared carefully and usually require the assistance of skilled costs draftsmen. When assessing the successful party’s costs at the end of the proceedings, the court will not depart from the pre-agreed/approved budget unless there is good reason to do so (see further on costs at 14.152–14.166 and 16.107). Employee’s and poaching employer’s reaction 18.111  How an employee reacts will normally depend on the following factors: (a) the financial resources he has to fight the employer. Third parties such as the new employer/joint venture partner may be providing financial backing through indemnities for legal fees and sometimes also damages; (b) the actual extent of the employee’s breaches of duty and the likelihood of the employer being able to uncover evidence of those breaches; (c) how confident he is that the employer will give up or be unable to succeed in any proceedings. This may include an assessment of whether the employee has a credible claim that the employer has committed a repudiatory breach of his employment contract; and (d) the overarching question of the employer’s financial resources, in particular whether the employer can satisfy a cross-undertaking in damages. 18.112  Most of these considerations will apply equally to the likely reaction of the poaching employer. The employee’s reaction may be heavily influenced by the attitude of the poaching employer to the threat or institution of proceedings. In turn, the poaching employer’s reaction will inevitably be influenced by any prior encounters between the two employers, for example, if the employer has previously made ‘empty’ threats of litigation, or has recruited from the poaching employer in similar circumstances. Other employees’/independent contractors’ reactions 18.113 Other employees/relevant independent contractors working alongside the employee are likely to watch carefully to see how the employer responds to the competitive activity. They have two interests in doing so, first to ascertain 1188

Applying the three basic steps: discovery of competitive activity during employment 18.115

the likely reaction of the employer if they were to do something similar and, second, to gauge their future prospects with the employer. Other employees/ independent contractors may see the departure of the employee as an opportunity for promotion, or alternatively a sign that they too should leave to preserve or advance their own careers. The employer needs to pay particular attention to the employee’s colleagues who work closely with him, and this is a key function of Group 2 of the employer’s management team: see 18.40–18.45. The employer should take the opportunity to assess whether any reasons or concerns that led the employee to compete reveal an underlying problem within the broader workforce that needs to be addressed (see further in Chapter 8), and take such steps as are necessary to reassure and motivate other members of staff (see 18.133–18.139). Likely reaction of customers, competitors and the marketplace 18.114  Just as the employee’s colleagues will watch the employer’s reaction to the competitive activity with interest, so too may customers, competitors and the marketplace generally in which the employer operates. In more high profile cases, that interest may well be fuelled by media speculation, which may often be ‘prompted’ by the poaching employer. This is exactly the sort of public relations issue for which the employer must be prepared and the reason why he should have a nominated person/agency primed and ready to respond where appropriate: see 18.32–18.36. The employer will need to make an assessment of the likely level of media interest, for how long it may last and its potential long-term impact on the business. Often the interest is very transient and little more than gossip. However, in some cases, eg where the departure is high profile or the latest in a series of employee departures, the interest can be more durable and acute. In those cases customers’ interest may stem from concerns about the ongoing viability of the business to service their needs, particularly if the employer is about to engage in time-consuming and acrimonious litigation with the employee/poaching employer. Competitors generally may also be considering what customers and employees/independent contractors they may be able to ‘pick up’ with minimal opposition from the employer. The employer faced with this situation will need to consider very carefully whether proceedings should be threatened/issued, as well as addressing what other steps he can take to restore customer confidence, reassure the remaining workforce, ‘warn off’ other competitors, and protect the public image of the business. Acceptable solutions 18.115  As early as possible the employer must decide on what solutions would be acceptable to him. Obviously, if there are none that can be achieved by the threat or issue of proceedings, that is an extremely powerful argument against such a course of action. For example, if the employer’s only acceptable solution is to enforce a covenant prohibiting the employee from joining a competitor, but he has repudiated the contract and that has been accepted by the employee, there is unlikely to be any prospect of success: General Billposting Co Ltd v Atkinson [1909] AC 118 (HL). Whilst General Billposting, in our view, currently remains 1189

18.116  Discovering competitive activity: the immediate practical issues

good law, the correctness of the principle that accepted repudiatory breaches render every restrictive covenant unenforceable has been questioned. See for example, Societe Generale, London Branch v Geys [2013] IRLR 122 (UKSC) where Lord Wilson at paragraph 68 noted that the principle ‘is now the subject of some debate’. See also Praxis Capital Limited v Jack Burgess [2015]  EWHC  2631 (Ch), Judge Hodge QC (paragraph  72); Croesus Financial Services Limited v Bradshaw & anor [2013]  EWHC  3685 (QB) where Simler J  at paragraph  88 thought that ‘The time may have come to revisit the rule’ but having found that there was no repudiatory breach, Croesus was not the case to do so. See further at 9.49–9.58. 18.116  In each case it will be a matter for the employer to weigh up all the various factors for and against the threatening or issue of proceedings, and reach an informed decision. Where the employer concludes that proceedings should be threatened or instituted against the employee, the first step will normally be a letter before claim to the employee. That will not apply in the comparatively rare case where a without notice application (previously known as ‘ex-parte’) is the appropriate course (see 14.38–14.50 for the circumstances in which that option is open to the employer) and the limited exceptions set out in the Pre-Action PD (see further at 18.156). (A copy of the Pre-Action PD, and the detailed guidance on pre-action conduct for the types of dispute covered by this book that was contained in Annex A to its predecessor, the general PDPAC, appear at Appendix 8 to this chapter.) Letters before claim are of key importance in the context of employee competition disputes and are considered in detail at 18.152–18.221. 18.117  Where proceedings are to be either threatened or instituted, an additional consideration is whether mediation of the dispute might secure an acceptable solution for the employer. Mediation is considered at 18.222–18.266. Although still relatively rare, there may be a provision in the employment contract requiring the parties to mediate or arbitrate any dispute, or the parties may simply prefer to mediate or arbitrate rather than litigate. Arbitration is considered in the overview in Appendix 6 to this chapter. 18.118 The Data Protection Act 1998 also presents employers with an interesting additional, or sometimes alternative, weapon in the armoury against unlawful employee competition. Under section 55 Data Protection Act 1998, it is a criminal offence to knowingly or recklessly, and without the consent of the data controller, obtain or disclose personal data (or the information contained within it), or procure disclosure to another person. There are a number of examples of convictions on the Information Commissioner’s Office website. For example: (a) On leaving his employer to join a rival, Mark Lloyd emailed himself a list of over 950 of the employer’s customers, which included their contact details, order history and other sensitive information. Rather than seeking an injunction, the company reported Mr Lloyd to the Information Commissioner, who then prosecuted him for breach of section 55. Mr Lloyd was convicted, fined £300 and ordered to pay a victim surcharge 1190

Applying the three basic steps: discovery of competitive activity during employment 18.120

of £30 and £405.98 costs (see the enforcement notice on the Information Commissioner’s Office website dated 26 May 2016). (b) Former recruitment agency employee Rebecca Gray emailed the personal data of around 100 clients and potential clients to her personal email address as she was leaving to start a role at a rival recruitment company. She then used the information to contact those clients in her new job. She was prosecuted under section 55 Data Protection Act 1998. She pleaded guilty and was fined £200, ordered to pay £214 in prosecution costs and a £30 victim surcharge (see the enforcement notice dated 18  January 2017). (c) Another former recruitment agency worker Gregory Oram emailed the personal data of around 500 candidates to his personal email address as he was leaving to start a rival recruitment company. He took the data to use as potential clients for his new business. Mr Oram was prosecuted under section 55 Data Protection Act 1998, pleaded guilty and was fined £170, ordered to pay £360 in prosecution costs and a £30 victim surcharge (see the enforcement notice dated 16 March 2017). 18.119  Currently prosecutions can only be brought by the Information Com­ missioner, or with the consent of the Director of Public Prosecutions; private prosecutions are therefore rare. Whilst the financial penalties imposed in the enforcement actions referred to in 18.118 were small, the threat of a potential criminal conviction could be a powerful deterrent to most employees thinking of misusing an employer’s confidential or commercially sensitive information. In addition to any other threatened proceedings, eg for an injunction or damages, the employer should therefore consider threatening to take appropriate steps to instigate a prosecution. In our view, we are likely to see an increase in these type of prosecutions, given the number of high profile data breaches in recent years, and the increased regulation and sanctions imposed by EU General Data Protection Regulation (EU) 2016/679, which will become directly effective in all Member States of the European Union on 25 May 2018 (see further at 8.54, 18.73 and 18.191). Employers would be well-advised to keep this option in mind and monitor developments in this area closely. 5(b)(iii)  Should legal proceedings be threatened/issued against any third party? 18.120  Potential targets for this course of action fall into two broad categories: (a) third parties who have sought to induce, or conspired with, the employee to breach his contract; and (b) third parties who are the recipients of the employer’s confidential information against whom an application for disclosure (see 18.177– 18.183) or an application for a Norwich Pharmacal order may be appropriate (see further at 14.130). Examples include: (a) a poaching employer who requires or allows the employee: (i) to start working for them before the expiry of the employee’s notice period; 1191

18.121  Discovering competitive activity: the immediate practical issues

(ii) to breach his duty of fidelity by soliciting business from the employer’s customers and/or involving other colleagues in the competitive activities whilst still employed by the employer; and/or (iii) to breach his duty of confidence by disclosing the employer’s confidential information as part of the recruitment process; (b) individual or corporate third parties who have requested details of the employer’s confidential information in order to assess whether they will provide financial backing to the employee’s new business enterprise or joint venture; and/or (c) head-hunters or recruiters who have assisted the employee(s) with the preparation of business plans and received the employer’s confidential information in the process. 18.121  There are two primary reasons for pursuing third parties: first, to stop or limit the effect of the competitive activity (normally the employer will be pursuing the employee simultaneously); and/or secondly, as a means of ensuring that there is a defendant who has the means to meet a monetary claim. It can also be a means of eliciting valuable evidence from someone other than the employee, and send a strong message to the market that the employer will not tolerate unlawful competitive threats to his business. 18.122  To decide if a third party should be pursued, the employer must address the same basic questions that he posed in reaching his decision as to whether or not to pursue the employee. He must consider the likely reaction of the third party and the likely consequences of suing the third party. Often this is a stumbling block for the employer. While he will be relatively relaxed about pursuing an employee, which he regards as essentially ‘domestic’ litigation, he will often be reluctant to proceed against third parties who are not his employees. There are four basic reasons for this: (a) the third parties’ financial resources are likely to be greater than those of the employee (although this point will be less significant where the third party is known to provide indemnities to its recruits); (b) it increases the chances of the third party providing financial backing for the employee; (c) the potential liability under the cross-undertaking in damages provided to a third party, such as a competitor, will usually be far greater; and (d) the inevitable damage that will be done to any existing commercial relationships and/or ‘gentlemen’s agreements’ not to sue in these situations, along with the enhanced risk of litigation in the future, eg where the third party is a competitor and the employer subsequently poaches one of their employees. 18.123 Where the employer concludes that proceedings should be threatened or instituted against a third party, just as in the case of proceedings against the 1192

Applying the three basic steps: discovery of competitive activity during employment 18.125

employee the first step will normally be a letter before claim to the third party. Again that will not apply in the rare case where a without notice application (previously known as an ‘ex-parte’ application) is the appropriate course (see 14.38– 14.50 for the circumstances in which that is an option open to the employer). Nor will it apply in the circumstances set out in the Pre-Action PD – see further at 18.156 and Appendix 8 to this chapter). Letters before claim are dealt with in detail at 18.152–18.221. Where proceedings are either to be threatened or instituted, an additional consideration is whether alternative dispute resolution (in particular mediation or arbitration) might secure an acceptable solution for the employer (see 18.222–18.266 and Appendices 6 and 7 to this chapter). If the employer decides to arbitrate or mediate his main dispute with the employee, it will usually make sense to include any dispute with a third party in that process.

5(b)(iv)  Are there steps that should be taken to protect or consolidate the employer’s position with customers? When should steps be taken? 18.124  It is not always necessary for any such steps to be taken. For example, where the employee resigns, but is then persuaded to withdraw that resignation and customers are unaware of these events, no useful purpose would be served by informing them. Similarly, if the employer knows that the key customers are very loyal and/or has taken the step (suggested in Chapter 8) of having customer ‘teams’ rather than individual employees responsible for customers, it may be possible for another team member to be substituted for the employee with minimal disruption to the customer. However, employers should not assume that the rest of the team is loyal and should keep in mind that other team members may be involved in the competitive activities. Some action will, however, almost always be advisable if the employer: (a) knows or suspects that the employee has approached customers directly; (b) knows or suspects that customers are generally aware of the competitive activities; or (c) has decided to dismiss the employee. Ultimately, it is a balancing act for employers as to whether to say anything and cause (potentially unnecessary) alarm amongst their customer base. In our view, some managed communication (even if only low key) is usually preferable to doing nothing and risking customers finding out about a change in personnel via, for example, an out-of-office message or a LinkedIn update from the employee. Preliminary risk analysis 18.125 As a preliminary step, Group 2 of the employer’s management team should undertake an immediate exercise to identify those customers (actual or prospective): (a) for whom the employee has had direct/indirect responsibility; about whom he possessed, or had access to, significant confidential information; or with whom he otherwise had contact or dealings; 1193

18.126  Discovering competitive activity: the immediate practical issues

(b) the potential financial risks associated with losing that customer; and (c) other key information such as any ongoing pitches or when key customer contracts are scheduled for renewal. Against each customer name should be noted, in order of seniority, other employees/independent contractors who have had dealings with that customer. 18.126  Using the information gleaned in the information gathering exercise, the list should then be split into three sections, namely: (a) those customers whom the employer knows have/are likely to have been contacted by the employee; (b) those who are/are likely to be aware of the competitive activity even though they may not have been directly approached by the employee; and (c) those who are probably unaware of the situation. Each section should then be prioritised by reference to the importance of the customer to the business and the likelihood that they may transfer or consolidate all or some of their business either to/ with the employee or a third party (it is less common nowadays for customers to have all of their business in one place). Generally the easiest way to format the final version list is by way of an excel spreadsheet, which should include additional columns to identify which member of Group 2 will take responsibility for the customer, the action to be taken and columns for notes to record when the specified action was taken and the outcome. An example table is included at Appendix 1 to this chapter. 18.127 Once the information aspects of the spreadsheet are complete, the employer will have an extremely useful risk analysis of his position vis-à-vis customers and informed decisions can be taken as to how best to attempt to consolidate each relationship. Three notes of caution for the employer: (a) Whilst the analysis is important, the employer should never delay taking action in relation to key customers simply because the analysis is not complete. Unless there are compelling reasons not to do so, action should be taken with all key customers immediately, particularly if the employer is aware that a key customer has been approached by the employee, or if a key contract renewal date, pitch meeting or product launch is fastapproaching. (b) Even where the employer’s assessment is that a customer is very likely to transfer their business with the employee, he should not give up too easily on the customer. Frequently the assessment will be based largely on the perception created by the offending employee, who may well have exaggerated the strength of his connection with the particular customer. The employer may be pleasantly surprised that the outlook is not as bleak as his initial assessment suggested or the customer may take a dim view of the employee’s behaviour and what it says about their loyalty and integrity. (c) It is imperative to keep the assessment and actions taken as confidential as possible. Consequently, those with access to the spreadsheet should be 1194

Applying the three basic steps: discovery of competitive activity during employment 18.130

kept to a minimum and the document should be password protected – in the wrong hands such a document would give an invaluable insight into some of the employer’s core and most valuable customers. Employers should also keep in mind that the spreadsheet will be potentially disclosable unless it is protected by some form of legal privilege. Avoiding an inadvertent waiver of any privilege is another reason for keeping the circulation list as small as possible, and limited to only those persons who fall within the definition of ‘client’ in any retainer with the legal team (see further at 18.27). 18.128 A similar exercise should be undertaken in relation to any key suppliers who or for whom the employee had direct/indirect responsibility, or about whom he possessed (or had access to) significant confidential information, or with whom he had contact or dealings. What steps should be taken? 18.129  This depends very much on the particular facts, and needs to be tailored to the individual customer. For some customers the best strategy may be to give the competitive activity as low a profile as possible. For others, the only course may be to tackle the issue ‘head on’. Whichever approach is adopted, under no circumstances, except of course where the employer does not want to keep the customer’s business, should the employer leave the customer feeling that they are unimportant. Where the employee is going to leave, the employer must reallocate responsibility for each customer to another employee. Usually, the best person to consolidate the relationship with the customer will be a senior employee who is known to the customer. For an interim period it may be necessary for that senior employee to look after the customer more or less exclusively, but the employer can gradually introduce more junior employees to take on day-to-day responsibility, particularly for the more mundane tasks needed by the customer. If the employer does not already operate a system based on customer ‘teams’ (as suggested at Chapter 8) then, rather than customers having a single point of contact, wherever feasible customer teams should be implemented as soon as possible to avoid history repeating itself in the future. 18.130  Generally, communication with key customers in this type of situation should be on a one-to-one basis and ideally face-to-face or by telephone, particularly where a key contract renewal date, pitch meeting or product launch is fast-approaching. However, in some cases, particularly where there are a lot of customers, an urgent communication to those customers whom the employee has sought to solicit, or who are aware of the competitive activity, may be required. In such circumstances, we recommend a group email which is carefully drafted to look like a bespoke, personal communication. The content and tone of the communication needs to be appropriate and, however annoyed the employer may be by the employee’s conduct, it must not contain any defamatory statements. Defamation proceedings are becoming more common in this field and an ill-worded communication could amount to both defamation 1195

18.131  Discovering competitive activity: the immediate practical issues

and (if the employment relationship is still live at the time) a repudiatory breach by the employer. See, for example, RDF Media Group Ltd v Clements [2008]  IRLR  207, discussed at 9.156. The communication should normally inform the customer in broad terms only what is happening and, most importantly, set out how and by whom the customer will be looked after in the future. In very rare cases it may be appropriate to put the customer on notice of the nature of a dispute with the employee but those cases will be very much the exception and normally limited to situations where the customer is suspected of involvement with the (ex-)employee’s planned or actual competitive activities. Wherever possible, the employer should avoid any sort of statement that seeks to tell the customer what he can and cannot do. Such statements are universally disliked by customers and, as a result, are either ignored, or worse, actually encourage the customer to take or consolidate his business elsewhere, usually (but not always) to/with the departing employee. The employer should never underestimate the strength of the relationships between an employee and the customers with whom he works regularly. Often the customer identifies only with the employee, not the business that employee represents, and consequently feels that his loyalty is owed to that employee. This is less likely to be the case in more product-focussed industries. However, it will be particularly relevant in service sectors like law, recruitment, inter-dealer broking, insurance, stockbroking and hairdressing. Given the focus on close/personal customer relationships in those service sectors, they tend to generate the most employee competition cases. 18.131 In some high profile cases of employee competition it may also be necessary for the employer to consider making a press announcement, or at least having a prepared statement should enquiries be made by the press. Such announcements/statements are often best prepared by the employer’s external public relations adviser or internal communications team. Statements should, however, always be cleared with the employer’s solicitors, as should any proposed oral comments to the press, not least because of the risk of making a defamatory statement or committing a repudiatory breach.

18.132 Where the employee is to remain with the employer, generally no specific action is needed, although it is sensible for the employer and employee to agree a statement to be used as the basis for responses to questions from customers. The initial draft can be prepared by the employer’s public relations advisers or internal communications team and approved by the solicitors before being presented to the employee. Again, where possible, the employer should ensure that in future the customer is not totally dependent on the employee, but deals with other employees who can take over if needs be (see further on customer teams at 8.129–8.130). An employee who has reached the stage of nearly departing once may well repeat his behaviour, and the next time he may actually depart. Worse still, the employee may have learned valuable ‘lessons’ from the first attempt to compete which he may put to good use second time around. 1196

Applying the three basic steps: discovery of competitive activity during employment 18.135

5(b)(v)  Are there steps that should be taken to reassure and motivate other employees/independent contractors? 18.133  The discovery that an employee is already, or is proposing to be, involved in a competitive activity will often engender a good deal of gossip amongst his colleagues. It can also be extremely unsettling, particularly for those employees/ independent contractors who work closely with the offending employee and who may have legitimate concerns about the future viability of their area of the business. Where, however, the employee is leaving, this can also create exciting opportunities in terms of promotions and role changes (see further at 8.6 where we consider the potential upsides of employee turnover). 18.134  The immediate tasks for Group 2 of the employee’s management team are two-fold: (a) to conduct an analysis of the opportunities for relevant employees and identify the future shape of the workforce in the relevant area; and (b) to devise an internal communication strategy that provides appropriate reassurance to relevant employees that matters are under control and the future is assured (in all but the most extreme cases this will be both possible and plausible). In undertaking these initial activities the employer should avoid any action that might prejudice any disciplinary proceedings instituted against the offending employee or which could be construed as a repudiatory breach of the offending employee’s contract or amount to defamation (see 18.130–18.131). The employer also needs to be mindful that the other employees/independent contractors he is seeking to reassure may be in league with the employee and could tip him off that the employer is investigating. Some of those colleagues may also see the employee’s departure as an opportunity to engineer their own advancement by, for example: threatening to leave at a time when they know the employer is vulnerable in the hope that they can negotiate better terms for themselves; or offering the employer false information about a colleague’s activities to discredit them or, worse, divert attention away from themselves, leaving them free to undertake unlawful competitive activities of their own. Workforce analysis and opportunities 18.135  Group 2’s task here is to identify the risks and opportunities created by the competitive activity for the workforce and how best to structure the future workforce to meet the challenges. Naturally, much will depend on whether the offending employee (and any colleagues) will be leaving, but even where they are not, there may well be opportunities created and restructuring required. Typically, the questions the employer will need to consider are: (a) Whether any gap should be filled by an internal promotion or an external hire. (b) Whether additional staff should be recruited to enlarge the particular area of operations. (c) Whether existing roles can be revised or expanded to make them more rewarding or interesting. 1197

18.136  Discovering competitive activity: the immediate practical issues

(d) Whether customer relationships can be re-allocated amongst existing employees. (e) Whether the damage done by the employee will be such that the employer may end up withdrawing significantly (or completely) from a particular line of business so that redundancies may become necessary. 18.136 As with the communication strategy (for which see 18.137–18.139), there is no single answer that will fit every case. Much will depend on the calibre of the employer’s existing employees/independent contractors and, for example, whether they include a candidate with the requisite skills to fill the shoes of the departing employee. Where there is no such candidate, an external hire would be a better commercial option than over-promoting a second-rate candidate and usually far more motivating for the other employees/independent contractors engaged in the particular area of business. Similarly, revision of roles and reallocation of customers may be exactly what is needed to re-energise a team which might secretly have regarded themselves as ‘held back’ by the employee who has now decided to compete with them. By the same token, a decision to expand the particular area of business by bringing in lateral hires may have a re-vitalising effect on other employees/independent contractors and secure the future prosperity of the relevant area of the employer’s business (see further at 8.6). See also 18.83 where we consider the fact that the (ex-)employee may have identified a competitive business activity that the employer can actually exploit and develop in conjunction with the (ex-)employee and/or the remaining staff. Employees may, for example, be given the opportunity to pursue that business activity as a joint venture with the employer. In certain cases, the employer may consider buying-out the would-be poacher, or accepting an offer from that entity for the particular business unit in which the employee works. If structured as a business sale under the Transfer of Undertakings (Protection of Employment) Regulations 2006, all employees assigned to the transferring business/part of a business will be automatically transferred to the poaching employer along with the employee (see 13.131–13.189 for further details of the operation and effect of the Regulations). This may be an attractive option to the employer if, as a result of the employee’s departure, redundancies in the business unit he has left would be likely. Instead of paying out redundancy costs, the employer may actually be able to realise some value through the sale of the business unit to the poaching employer, or the employee himself. Internal communication strategy 18.137  Group 2 should plan this communication strategy in conjunction with the employer’s internal communications team and/or external public relations advisers. As a general rule it is inadvisable for the employer to make any substantive statements until the key decisions have been taken. The exceptions to this rule are: (a) ‘holding statements’ designed to stem the rising tide of gossip – these are often a preferable course to pretending that nothing is amiss; 1198

Applying the three basic steps: discovery of competitive activity during employment 18.139

(b) statements made in confidence to senior employees who are drafted in to assist with consolidating relationships with key customers (always mindful that they could be in league with the competing employee); and (c) statements made where the competitive activity is being aired in the media or is widely known amongst customers or the broader market, so that there is a real risk of employees receiving inaccurate and often grossly exaggerated information second hand. 18.138  Once the key decisions have been taken, devising the communications strategy will break down into the following issues: (a) To whom information will be provided. (b) By whom information will be provided. (c) How, physically, the information will be provided. (d) The content of each statement. (e) When information is given. There is no single formula which fits all circumstances and each strategy must be devised to fit the particular facts. However, the following points should be of general assistance. The strategy should be geared to the real risk created by the competitive activity. The strategy must control, not exaggerate, the risk presented by the competitive attempts. Employees nowadays tend to expect a reasonably high level of transparency, and therefore providing no, or very limited, information will often be counter-productive. 18.139  Generally there will be two distinct categories of staff to whom information will need to be provided. The first is the key employees/independent contractors most directly affected by the competitive activity, and the second, those indirectly affected by the competitive activity. Occasionally, there may be a third group, namely those employees/independent contractors suspected of being in league with the employee but whom the employer wants to retain. In smaller employers these categories may comprise the entire workforce. Normally, more frequent communications will be made to the first group with the second (and potentially third) group only receiving information at key stages. To retain a reasonable level of control over what information is provided, it is generally better to limit those providing information to a very small number, often no more than two or three individuals. The method of communication may vary and will depend on whether it is a more formal internal announcement or simply a response to an employee’s/independent contractor’s question. Where practical, it is often better for information to be given orally (provided the employer is confident the provider of the information will not depart from the agreed script) and usually it should be expressly stated to be provided in confidence. Employers must assume that everything said or written may well find its way back to the offending employee, the poaching employer, customers or the market generally (for example, on social media sites, in blogs etc) and they should bear that in mind when considering what 1199

18.140  Discovering competitive activity: the immediate practical issues

is said. The content of information to be provided should be carefully thought through. Scripts or drafts should be prepared in conjunction with the internal communications team and/or public relations advisers, as appropriate and approved by the legal team. As with the document analysing the risk to customers – see 18.125–18.128, employers should keep in mind that, once finalised, these documents will be disclosable unless they are protected by some form of legal privilege (see 18.27). Avoiding an inadvertent waiver of any privilege is another reason for keeping the circulation list as small as possible, and limited to only those persons who fall within the definition of ‘client’ in any retainer with the legal team. Deciding precisely when information is given is a matter of judgement in each case. Too much communication can be just as unsettling for the workforce as too little. Since the primary function is to reassure key employees/independent contractors, the only practical advice that can be given is that communications should be given when reassurance is genuinely needed, eg to avoid the risk of another key employee/independent contractor being so unsettled he simply leaves. The risk of departures is, of course, in part driven by the economic climate, so that the risks can be lower when the economy is depressed or in recession.

5(c)  Settling a strategy to reflect the key decisions 18.140  The employer’s strategy must be flexible. Like all strategies it will be based on a combination of known facts, assumptions as to what the competing employee has been doing, or intends to do, and the anticipated reactions of those directly and indirectly affected, namely fellow employees, customers and wouldbe poachers. Particularly in the very early stages of an employee competition dispute, daily, if not hourly, additional information will be emerging which has an impact on the strategy. At very regular intervals the employer and the legal and advisory teams must re-assess the key decisions and strategy in light of the additional material and make any necessary revisions. Employers who adopt too rigid an approach do so at their peril. They run a real risk of being out-manoeuvred by the competing employee. 18.141  In Appendix 2 to this chapter, using the facts and covenants in Case Study 1: Excel Copiers Limited and Brian Thomas in Chapter 12, and adding additional facts concerning the competitive activities discovered, we have shown how Excel Copiers Ltd might make their key decisions and settle their strategy.

6. APPLYING THE THREE BASIC STEPS: DISCOVERY OF COMPETITIVE ACTIVITY AFTER EMPLOYMENT HAS ENDED 6(a)  Gathering information 18.142  When competitive activities are not discovered until after employment has ended, the four questions identified at 18.66 are still appropriate, namely: (a) What is the nature and scope of the competitive activity? 1200

Applying the three basic steps: discovery of competitive activity after employment has ended 18.145

(b) Has the competitive activity involved any breaches of the express, implied or (where appropriate) fiduciary obligations owed by the employee to the employer, or is it likely to do so? (c) What are the terms of employment, role and importance of the employee? (d) What sort of threat does the competitive activity pose to the employer’s business? 18.143  In obtaining the information to the first two questions, the ex-employer should always be mindful of the data protection/privacy rights of the ex-employee: see 8.52–8.65 and Appendix 2 to Chapter 8 and 18.73–18.74). The ex-employer should still go to the same sources, including his own records and other publicly available (and often free) sources of information like Companies House. Checking online sources (such as Facebook, LinkedIn, WhatsApp and Twitter) is also particularly important as today’s employees tend to promote their career moves and successes online. The ex-employer should also speak to other employees/ independent contractors who worked with the ex-employee. The mere fact that the employment has ended does not mean that those sources will not reveal any useful information. They may provide useful evidence of breaches during employment. In addition, they may even disclose helpful facts about the ex-employee’s post-termination activities. For example, often the ex-employee remains in touch with his former colleagues and it is not at all unusual for an ex-employee to boast to them how much business he has been able to transfer or anticipates being able to transfer to his new employer. One note of caution: ex-employers should be wary about taking the ex-employee’s boasting at face value. Ex-employees have a tendency to exaggerate their success, particularly if they are trying to recruit former colleagues and often by the time the information reaches the ex-employer that exaggeration has been embellished further by the internal ‘grapevine’. 18.144  Finally, because electronic records in particular can provide very valuable evidence of the ex-employee’s activities, when an employee leaves (even one not suspected of being involved in competitive activities), his computer and any other device (mobile telephones, laptops or tablets etc) returned to the employer should not automatically be ‘wiped clean’ and re-allocated to another employee. To do so may destroy valuable evidence, or at least make it significantly harder to trace. If devices must be reallocated, they should be forensically imaged by IT advisers before they are wiped. A complete electronic ‘snap-shot’ of what was on the device, along with any underlying metadata, can be crucial evidence of when materials were created, used, deleted etc in employee competition disputes. 18.145 Different considerations may apply on the question of approaching customers. Sometimes the customer may have made it clear that he intends to transfer his business to the ex-employee’s new employer, in which case the exemployer needs to consider the wisdom of approaching that customer. Such a customer may in some cases be in the class of third parties whom the ex-employer will consider threatening with proceedings or possibly suing. Alternatively, the customer’s loyalty may be unknown, in which case the ex-employer again needs to tread carefully. 1201

18.146  Discovering competitive activity: the immediate practical issues

18.146  With regard to ascertaining the terms of employment, the ex-employer will need to concentrate on the key express and implied obligations relating to competitive activities during and after employment, in particular confidentiality covenants, the duty of good faith and fidelity, fiduciary duties and post-termination restrictive covenants, if any. That is not to say that the termination provisions are irrelevant. The ex-employer should consider whether the employment was terminated in accordance with its terms. If there is any suggestion that the termination followed a repudiatory breach of contract by the ex-employer, which was accepted by the ex-employee, that would have a significant impact on the key decisions the ex-employer has to take. See 9.49–9.58 for a more detailed consideration of the effect of a repudiatory breach on restrictive covenants.

6(b) Taking key decisions 18.147  With the exception of the first decision (retention or dismissal) the key decisions are the same as referred to in 18.84. However, because the possibility of eliminating the competitive activities by retaining the ex-employee is a less likely option, the other possibilities assume a greater importance. In rare cases, it is possible for the ex-employer to persuade the ex-employee to return but often the only reason the ex-employee will want to do this is because his new venture/employment is going badly. Consequently, the ex-employer should think very carefully before taking this step and about the impression this gives the remaining workforce. If the ex-employee is incentivised to return, the more unscrupulous potential employee-competitors may see threatening competition as an effective way of forcing the ex-employer to renegotiate their terms and conditions. Even if there are sound business reasons for doing so, the broader workforce may interpret any retention package given to the returning employee as a reward for unlawful behaviour. The ex-employer should also bear in mind the possibility of a recurrence of the ex-employee’s behaviour, perhaps when the ex-employee regards the economic climate as more favourable and/or his chances of being able to poach customers or colleagues are better. 18.148  The threat/issue of proceedings against the ex-employee and third parties may be a more important option to the ex-employer than in the case of breaches by an existing employee. Depending on how long it takes to discover the breach it may also be a more difficult option to pursue. For example, where the exemployee is settled in to his new position and has made contact with the new employer’s customers, as well as those of his ex-employer the new employer may be more willing to ‘protect’ the ex-employee (and at the same time therefore the new employer’s own position) than he would have done had the competition been discovered earlier. That said, particularly in cases where there have been significant breaches of obligations owed to the ex-employer, it may well be possible to secure an acceptable outcome such as a profit sharing arrangement, perhaps through a mediated settlement or a confidential arbitration. Mediation is considered at 18.222–18.266; an overview of arbitration is given in Appendix 6 to this chapter. 1202

Applying the three basic steps: discovery of competitive activity after employment has ended 18.151

18.149  Again, depending on the timing, steps to consolidate the ex-employer’s position with his customers can and should be taken, primarily through the allocation of other employees to those customers (see further at 18.124–18.132). If those steps have not already been taken, then obviously this should be done immediately. The same basic considerations apply regarding communications with customers as when the competitive activities are discovered during employment (see 18.130). 18.150  Unless the ex-employer has been incredibly lax, steps to reassure and motivate the ex-employee’s colleagues who remain will have been taken and the ex-employer will be monitoring their effectiveness. However, the ex-employer needs to be alive to the fact that, whilst the departure of the ex-employee may not initially have had a significant effect on his colleagues, knowledge that he is now competing for the same customer business, particularly where that may adversely affect their remuneration, eg through a commission scheme/performance bonus, can create a very different climate. The ex-employer needs to be extremely vigilant. Group 2 of the ex-employer’s management team (see 18.40–18.45) must ensure that they keep close to the relevant employees/independent contractors and are alive to the impact the competitive activity is having. For example, the following can all be indicators that an employee is testing the job market: a sudden incidence of medical/dental appointments or sickness absence; requests for the odd day’s holiday; requests for a copy of their contract of employment; furtive mobile telephone calls for which the employee leaves the office; and/or spending lots of time looking at emails, texts, WhatsApp messages, LinkedIn etc on mobile devices – this can be done more discretely than regular calls and in many offices, there is nothing unusual about seeing an employee on a personal device. The ex-employer should also be very alive to the possibility that joining the ex-employee at his new employer may be an attractive option for some of his former colleagues. It is not uncommon for employees/independent contractors in this situation to approach their former colleague and his new employer and take up employment with potentially devastating effects for the ex-employer. The ex-employer must assess the risk of this happening as soon as the competitive activity becomes known, and keep matters under constant review. See Chapter 19 for further information about team moves, and how they are often orchestrated by a ‘recruiting sergeant’ employee.

6(c)  Settling a strategy to reflect the key decisions 18.151  In Appendix 3 to this chapter, using the facts and covenants in Case Study 2: Smith & Jones HR Services Limited and Ian Simpson in Chapter 12, and adding additional facts concerning the competitive activities discovered, we have shown how Smith & Jones HR  Services Limited might make their key decisions and settle their strategy. We have also included at Appendix 4 to this chapter a sample letter before claim and at Appendix 5 to this chapter sample documentation for proceedings by Smith & Jones HR Services Limited against Ian Simpson. Obviously, these documents are intended to apply only to the particular case study and should be used with great care when applied to other facts. 1203

18.152  Discovering competitive activity: the immediate practical issues

7. LETTERS BEFORE CLAIM 18.152 Except where it is necessary to make an application for interim relief without notice, or on short informal notice (see 14.38–14.50 and 14.52–14.54 for further details of such applications), generally it will be both necessary and appropriate to engage in some form of pre-action correspondence with the potential defendant(s) to an employee competition dispute. A well-crafted letter before claim can be highly instrumental in securing a speedy and satisfactory outcome for the (ex-)employer. In contrast, a poorly drafted letter is likely to produce a short, sharp rebuff from the opposition and the not uncommon riposte that the (ex-)employer is simply on a ‘fishing expedition’ and has no basis for any threatened action. 18.153 To maximise the chances of achieving a positive outcome, there are, therefore, two key goals for the draftsman. First, the content and tone of the letter before claim must be right and play to the strengths of the (ex-)employer’s case. Secondly, although this may seem rather obvious, the letter before claim should be sent by the legal team to the most appropriate person and the right method of delivery must be chosen. As discussed at 18.19(e), we advise that letters before claim (and, generally, any pre-action correspondence) are sent by solicitors rather than the (ex-)employer as this is likely to have a greater impact on the recipient(s). On receipt of a solicitor’s letter, daunted by the prospect of becoming embroiled in lengthy and expensive litigation and realising that his conduct is being taken very seriously, an (ex-)employee may capitulate at an early stage. 18.154 In employee competition cases the (ex-)employer’s solicitors may be sending letters before claim to the (ex-)employee and to third parties who may have assisted the (ex-)employee in his unlawful activities eg  by inducing the employee to breach his contractual obligations, requesting or receiving copies of the (ex-)employer’s confidential or proprietary information, or helping to prepare business plans, setting up new companies etc. Such third parties will obviously include the (ex-)employee’s new enterprise/joint venture and/or the poaching employer. Less obvious third parties, who can easily be overlooked, include: (a) companies associated with the new enterprise/joint venture or poaching employer; (b) other employees/independent contractors or directors; (c) third parties providing financial or other support (eg guarantees), such as individual or corporate funders, investors or insurers; (d) head-hunters used by the (ex-)employee or by the poaching employer to help extract an individual or team of employees; or (e) other individuals, perhaps family members. Almost invariably, however, it is the letter before claim to the (ex-)employee that is the most important and it is this one that the draftsman should tackle first and on which we will focus in this chapter. We will then look at some additional factors relevant to a letter before claim to be sent to the poaching employer. 1204

Letters before claim 18.156

7(a)  Letters before claim to the (ex-)employee 18.155 All letters before claim must be tailored to the particular facts of the case. Consequently, it is not possible to be overly prescriptive about the precise content of any particular letter. However, set out below are the key issues which should normally be covered in any letter before claim to an (ex-)employee. In preparing the letter, particularly where proceedings are a real likelihood, the draftsman must be careful to ensure that, wherever practical, he complies with: (a) any contractual pre-action procedures that may be set out eg  in a sale agreement or other contractual document; (b) the overriding objective enshrined in Part 1 of the Civil Procedure Rules; (c) the relevant Court Guides; and (d) the Pre-Action PD, which came into force on 6 April 2015 replaced the general PDPAC and the detailed guidance on pre-action conduct for the types of dispute covered by this book that was contained in Annex A  to the PDPAC. Paragraph 2 of Annex A listed the various issues that (from 6 April 2009) were required to be covered in a letter before claim. Although the detailed guidance in Annex A  was not replicated in the Pre-Action PD, much of its content remains good practice to this day and employers should endeavour to comply with it to the extent possible. (Copies of the Pre-Action PD and Annex A to the PDPAC appear at Appendix 8 to this chapter.) 18.156  For the kind of disputes covered by this book, the degree of urgency may be such that full compliance with any pre-action requirements is impossible, eg because an application for an interim injunction has to be made. This situation is specifically provided for in paragraph  13 of the Pre-Action PD. In such circumstances the court will ‘consider whether all parties have complied in substance … and is not likely to be concerned with minor or technical infringements, especially when the matter is urgent’ (paragraph  13). See also paragraph 5.1 of the Chancery Guide (February 2016, updated 10 January 2018), and paragraphs B3.1 and B3.2 of The Admiralty and Commercial Courts Guide (which is now contained within The Commercial Court Guide, Tenth Edition, updated 8 January 2018). These guides make it clear that, whilst compliance with the Pre-Action PD is expected where practicable, parties are not expected to engage in elaborate or expensive pre-action procedures, particularly where that might defeat the purpose of their application (eg  an application for a freezing order) or prompt ‘forum-shopping’ by the other party (that is, looking for another forum that may be perceived as more benign for their case or less convenient for the opposing party). For ease, these guides will be referred to respectively as the Chancery Guide and The Commercial Court Guide throughout the rest of this chapter. The Pre-Action PD is not a mandatory pre-action protocol but (ex-)employers should keep in mind that the courts retain the discretion to order sanctions against parties for failing to comply with it, which can be severe (paragraphs 15 and 16 Pre-Action PD; see also 14.37). If it does become necessary to issue proceedings without complying with the Pre-Action PD requirements, the 1205

18.157  Discovering competitive activity: the immediate practical issues

(ex-)employer should explain the reason for this to the (ex-)employee, and any other potential defendant(s), as soon as practicable and either suggest a stay of proceedings in order to allow time for compliance, or else suggest alternatives for dealing with any pre-action matters (see further regarding the ability to seek a stay, and its impact on interim injunctions, 14.142, 18.233(d), 18.235(a), 18.256 and Appendix 7, A7.7–A7.8). The Pre-Action PD also specifically recognises that, where a relevant limitation period is about to expire, the correct course of action is to issue proceedings and then apply for a stay to enable any pre-action steps to be taken (paragraph 17). 7(a)(i) Content 18.157  Pursuant to paragraph  6(a) of the Pre-Action PD, letters before claim should set out ‘concise’ details of the (ex-)employer’s claim, including: the basis on which the claim is made; a summary of the relevant facts; what the (ex-) employer wants from the (ex-)employee; and, if the (ex-)employer is seeking money from the defendant(s), how that has been calculated. 18.158  In broad terms, the key elements that are normally covered in a letter before claim are as follows (although not all will be appropriate in every case): •

relevant background to the (ex-)employee’s employment;

•

details of any directorships held, and/or fiduciary obligations owed, by the (ex-)employee;

•

whether, and if so how, the (ex-)employee’s employment terminated;

•

details of the alleged/anticipated breaches;

•

enclosing copies of any hard evidence and/or other documents relevant to the issues in dispute, and requesting disclosure of any mis-use of the (ex-) employer’s property or confidential information;

•

arrangements regarding return of the (ex-)employer’s property;

•

the requirement to preserve evidence;

•

details of any financial loss or undertakings sought;

•

the timetable for compliance with the (ex-)employer’s requirements;

•

what, if any, proceedings are being threatened;

•

any proposals regarding alternative dispute resolution;

•

a recommendation to take legal advice and reference to the effect of the PreAction PD;

•

explaining any delay on the part of the (ex-)employer; and

•

a clear reservation of the (ex-)employer’s rights.

1206

Letters before claim 18.162

7(a)(ii)  Relevant background to the employment 18.159 The letter should summarise the relevant background to the employment, including: the name and address of the (ex-)employer; the duration of the employment; the key terms of the employment contract (in particular, the detail of any express or implied obligations owed to the (ex-)employer which the (ex-) employee is known, or suspected, to have breached); and the (ex-)employee’s role. Issues such as the (ex-)employee’s access to confidential information and any strong relationships with customers and/or colleagues should also be emphasised to support the (ex-)employer’s concern that the (ex-)employee is a real competitive threat. If known, the letter should also refer to the identity of the (ex-)employee’s new/potential new employer, new business enterprise or joint venture. 7(a)(iii)  Directorships held, and/or fiduciary obligations owed, by the (ex-)employee 18.160  Where the (ex-)employee is a Companies Act 2006 director that should be referred to, together with a clear reminder of the statutory and fiduciary duties to which he remains subject. In addition, where the (ex-)employee has ceased to be a Companies Act 2006 director, relevant details regarding his ceasing to hold office should be clearly set out, including the dates of his tenure as a director. If the (ex-)employer has grounds to allege that the (ex-)employee was either a de facto director, shadow director or other fiduciary that too should be included. See further at 4.5–4.86 regarding fiduciaries and the circumstances in which nondirector employees may nevertheless owe fiduciary duties. 7(a)(iv) Termination of employment 18.161 Where the employment has either ended already or the employee has tendered his resignation, the factual background to the termination should be set out. This should include whether the employee is working out his notice or is on garden leave. The letter before claim should also include any factors surrounding the termination that are prejudicial to the (ex-)employee, for example: attempts to evade notice obligations by an unmeritorious allegation of repudiatory breach, particularly one abandoned at an early stage; giving false or deliberately misleading answers regarding his future plans; and false statements made about the reasons for leaving or an attempt to negotiate an early release based on false grounds. 18.162  For an interesting case in which the court was asked to grant an injunction based not only on misuse of confidential information but on the departing employees’ failure to answer truthfully when questioned about their plans to compete, see MPT Group Ltd v Peel & Ors [2017] IRLR 1092 (Ch). Whilst the employer was granted interim injunctive relief (albeit in a much narrower form than was sought), the Deputy Judge did not hold the employees subject to a duty (as part of their general duty of good faith) to provide candid answers to their employer’s questions. The Deputy Judge was: 1207

18.163  Discovering competitive activity: the immediate practical issues

‘… far from satisfied that these employees were under a duty to disclose their true intentions to MPT. The law will step in to prevent unfair competition or to hold employees to enforceable restrictive covenants or to protect confidential information. Equally, employees must not induce others to breach their own contracts of employment, conspire to cause their employer injury or, in most cases, solicit their colleagues for their new enterprise. Subject to these matters, employees are otherwise free to make their own way in the world. I  should therefore be reluctant to hold that an incident of the duty of fidelity is that, when asked a straight question a departing employee is under a contractual obligation to explain his own confidential and nascent plans to set up in lawful competition’ (paragraph 86).

The case is considered further at 3.141. In our opinion, the Deputy Judge may have reached a different view had the employees been fiduciaries, or otherwise sufficiently senior to owe duties to report their own wrongdoing, or if they had been subject to an express contractual duty to do so.

7(a)(v)  Alleged/anticipated breaches 18.163  The letter must set out the basis for the (ex-)employer’s belief that the (ex-)employee has been, or will be, in breach of his express, implied, fiduciary and/or statutory obligations and there should be a clear summary of the facts on which the claim is based. This can be one of the most difficult aspects of the letter, particularly where the (ex-)employer’s evidence is largely circumstantial. However, the draftsman must do the best he can with the material he has. This is a classic situation where ‘less may be more’: an allegation can sound far more compelling if it is stated in broad terms rather than in great detail. This is particularly so where, as is commonly the case, the (ex-)employer has only uncovered the ‘tip of the iceberg’ of the (ex-)employee’s transgressions and the (ex-)employee knows only too well what might emerge if the (ex-)employer investigates further or issues proceedings. Normally the letter should also indicate that the (ex-)employer’s investigations are ongoing, thereby signalling to the (ex-)employee that, even if all his transgressions are not referred to in the letter, they may well still be uncovered. Uncertainty as to the strength of the allegations against the (ex-)employee will also affect the overall tone of the letter and influence whether litigation is threatened at this early stage.

7(a)(vi) Disclosure 18.164  There are two types of disclosure in this context: (a) the relevant documents that the (ex-)employer should include with the letter before claim (for which see 18.165–18.169); and (b) the information and documents that, in appropriate cases, the (ex-)employee (or other third parties) can, and should, be asked to provide (for which see 18.170–18.185). 1208

Letters before claim 18.168

Evidence to be disclosed with the letter before claim 18.165  To comply with the overriding objective and the Pre-Action PD, parties are encouraged to disclose the ‘key documents relevant to the issues in dispute’ (paragraph 6(c) Pre-Action PD). The Pre-Action PD does not expressly state whether ‘disclosure’ means the (ex-)employer must provide copies of the key documents with the letter before claim, or whether he need only list the key documents and then either provide copies of any of those documents requested by the (ex-)employee or a written explanation as to why copies will not be provided (which was the position under the Pre-Action PD’s predecessor, the PDPAC, Annex A – paragraphs 2.2 and 5.1, a copy of which is at Appendix 8 to this chapter). In our view, it will generally be appropriate to send copies of the relevant documents with the letter before claim subject to any concerns regarding confidential information being disclosed – see 18.168. 18.166 At the very least, the copy documents to be included with the letter before claim will include a signed version of the contract of employment and any relevant contractual provisions contained within the employee handbook. If the (ex-)employer cannot produce a signed version, there are two options, provided that there is an arguable case that the relevant document governs the employment relationship: the employer should include either an extract of the relevant terms, or the full document with or without an explanation as to the absence of the signatures. 18.167  The employer should also include any evidence of the (ex-)employee’s unlawful activities, such as: telephone records, recordings or transcripts of calls, emails, text or WhatsApp messages with customers, other employees/independent contractors or other third parties; communications or posts on social media sites (such as the (ex-)employee’s updated LinkedIn profile announcing his new role); and records taken from document management systems or multi-functional devices showing when confidential information has been created, modified, viewed, downloaded, copied or printed etc. 18.168  The position is more complex where the (ex-)employer’s evidence contains confidential or commercially sensitive information, or the personal data of third parties who have not consented to the disclosure. Understandably, unless the material can be redacted (or the data subject consents to the disclosure of their personal data), the (ex-)employer will be reluctant to disclose it at this early stage, or at all. In particular, the (ex-)employer will not want to risk losing any confidentiality in the relevant materials by disclosing them. He will also want to avoid refreshing the (ex-)employee’s knowledge of the materials – or indeed (where there is uncertainty as to precisely what confidential information the (ex-) employee has mis-used) not to disclose the full range of secrets to him, his new business enterprise/joint venture, the poaching employer or any other third party. In our view, rather than providing copies of such documents, it will generally be acceptable to describe them in the letter before claim by classes of documents (eg customer lists, supplier contact details or terms of business) without revealing their contents, provided that the (ex-)employee has sufficient information to 1209

18.169  Discovering competitive activity: the immediate practical issues

understand the allegations being made against him and the relief being sought. So, for example, where the allegation is that the (ex-)employee has emailed to himself a customer list on an excel spreadsheet the documents enclosed with the letter before claim might be the covering email sent by the employee showing an attachment had been sent and its description and a copy of a page of the customer list showing only the headings of the columns so it can be demonstrated to the court the categories of information which the employee has sent to himself. 18.169 It is more difficult to resist disclosure, or full particularisation, when it comes to applying to the court, particularly for injunctive relief. The courts have made it clear that the terms of any injunction must be framed in sufficient detail to enable the defendant to know, for example, exactly what information he cannot use. To do that, claimants are expected to identify the confidential information being relied on with sufficient particularity. For example, the need to provide particulars of the information said to be confidential was robustly emphasised by the Court of Appeal in Caterpillar Logistics Services (UK) Ltd v de Crean [2012] IRLR 410 (CA): ‘... the form of interim relief sought ... is hopelessly wide and vague. It does not specify the confidential information to be the subject of restriction with any certainty, but simply describes it as “all or any confidential information acquired by the respondent during her employment with [CLS] in whatever form.”’ (Stanley Burnton LJ, paragraph 68). For a more detailed discussion of the (ex-)employer’s obligations (eg to give full and frank disclosure on a without notice application), and the steps that can be taken to maintain confidentiality when applying to the court for interim relief (such as confidentiality clubs and the court sitting in private and/or giving redacted judgments), see 14.45–14.50 and 14.93–14.101. Requests for information and/or documents 18.170 The (ex-)employer can, and in appropriate cases should, request the immediate return of any confidential or otherwise commercially sensitive information that has been misappropriated, used and/or disclosed by the (ex-)employee. Typically, the documents that the (ex-)employer will be most keen to recover will be those that either belong to him, contain confidential information belonging to him, or infringe his copyright or database rights. The employer will be no less keen to recover/see documents that evidence the (ex-)employee’s unlawful activities, for example, letters and invoices showing solicitation of, or dealing with, customers in breach of a non-solicitation/dealing covenant. Because such documents are (a) ‘evidentiary’, rather than belonging to the (ex-)employer, and (b) will ordinarily be disclosed as part of mutual disclosure of documents at the appropriate stage in the case, they can be more difficult to recover at an early stage. 18.171  Most employment contracts will contain provisions entitling the (ex-) employer to require the immediate return (or ‘delivery up’) of their confidential or proprietary information either during employment or on termination of employment (see 5.138–5.141 for template clauses to this effect). Where there is such an express provision, and even where there is not, the (ex-)employer can, 1210

Letters before claim 18.173

and should, request that the (ex-)employee delivers up relevant materials immediately, and/or confirm that this has already been done and that no copies have been retained. If it becomes necessary to seek an order to enforce compliance with such an express term, the (ex-)employer may need to adduce evidence that the particular (ex-)employee has breached that term. In Capita plc and another v Darch and others [2017] IRLR 718 (Ch) the claimants sought an interim order to enforce an express contractual term requiring delivery up of confidential information on termination of employment. One of the (many) reasons the Deputy Judge refused to grant that order was that, in the absence of evidence that the relevant defendants had breached that particular term, the claimants could not rely on the fact that other defendants involved in the alleged team move had done so. (In relation to this case see further 18.175.) 18.172  Absent an express delivery up clause, the courts may not readily imply one. In Eurasian Natural Resources Corporation Ltd v Judge [2014] EWHC 3556 (QB), a very fact-specific case relating to papers received by Sir Paul Judge in his capacity as a non-executive director, the letter of appointment contained express provisions (which applied both during the appointment and following its termination) preventing: (a) the disclosure of confidential information acquired during the appointment to third parties, and (b) its use for any reason other than in the interests of the company. The letter did not, however, contain an express term requiring the delivery up of confidential information at any point, including following termination of the appointment. Sir Paul Judge was granted summary judgment/strike out in respect of Eurasian’s claim for delivery up based on an implied term in his contract or Sir Paul Judge’s fiduciary duties: ‘Had it been the “obvious but unexpressed intention of the parties”, one would have expected it to be incorporated into the defendant’s contract, as was done in Brandeaux. Moreover, I have been shown no legal authority, Code of Practice, Guidance or other evidence that would suggest that such a requirement is the norm for directorships’ (Swift J, paragraph 73).

Swift J did accept, however (at paragraph 77) that it remained open to the court trying the case to make an order for delivery up at its discretion in addition to or as part of a permanent injunction to protect Eurasian’s confidential information. See further on the case at 18.192; and see 15.153–15.260 regarding the types of interim orders that are available in relation to documents, including delivery up and search orders. 18.173  Where there is at least some evidence of breaches of existing obligations, the (ex-)employer may still be entitled to: (a) request more detailed information regarding the extent of the (ex-)employee’s breaches from the (ex-)employee himself, the poaching employer or other involved third parties; and/or (b) identify and request copies of any relevant documents which are not in the (ex-) employer’s possession but which the (ex-)employer wishes to see. For example, the (ex-)employer may reasonably believe that his data has been removed by the (ex-)employee and disclosed to the poaching employer (or other third party) but is finding it difficult to uncover hard evidence of this because the (ex-)employee has covered his tracks. The extent to which (ex-)employees are required to 1211

18.174  Discovering competitive activity: the immediate practical issues

answer these questions will depend, at least in part, on whether they are subject to a duty (express or implied) to disclose details about their or their colleague(s)’ wrongdoing, including intentions to compete. If the employee is relatively junior, the court will probably be reluctant to imply an obligation to answer questions of this nature as part of the employee’s general duty of fidelity (see MPT Group Ltd v Peel & Ors [2017] IRLR 1092 (Ch) (16 May 2017), which is considered at 18.162 and 3.141). However, if the (ex-)employee is sufficiently senior, that implied duty may arise as part of the (ex-)employee’s general duty of good faith or because he is a fiduciary (as to which see Chapters 3 and 4 respectively). The duty can also be imposed contractually (see Chapter 5, 5.37–5.42). 18.174 The main reasons for requesting the information and/or documents identified at 18.170 are twofold: first, to establish the full extent of the unlawful activity, and mitigate any further damage to the (ex-)employer’s business; and, secondly, to lay the groundwork for one of a range of evidence-related orders that the (ex-)employer can seek from the court. 18.175 Wide-ranging, excessive requests for documents or information are likely to be ignored or dismissed by the recipient (and are very unlikely to be ordered by the court). See, for example, Capita plc and another v Darch and others [2017] IRLR 718 (Ch) where the Deputy Judge refused a request from Capita that the defendants forward to Capita’s solicitors copies of ‘all emails that they have received into any non-Capita email account from any email account at Capita (including their own)’ (paragraph 53). The request was refused on a number of grounds, including the following: (a) it would require the defendants to forward emails regardless of the information they contained and, in particular, including if they contained the defendants’ private or confidential information (paragraph 55); and (b) the relief claimed went ‘considerably wider than the obligations that they will have when they are required to provide standard disclosure’ (paragraph 56). The width of the order sought was, therefore, not only ‘excessive’ (paragraph 61), but granting it would have infringed the defendants’ rights to respect for their private and family life, home and correspondence pursuant to Article 8 European Convention on Human Rights. Arguments that the content of the emails of the type in question were Capita’s property also failed (see paragraphs 67–73 of the judgment). See further on these aspects of the case at 8.93 and Appendix 2 to Chapter 8, A2.14–A2.15. 18.176  At best wide-ranging/excessive requests may elicit only vague, high-level responses which are of little use to the (ex-)employer. However, a well-crafted letter before claim from solicitors setting out targeted requests for documents which the (ex-)employer believes have been misappropriated and/or disclosed by the (ex-)employee, and requiring an explanation of the use which the (ex-) employee, poaching employer or other third party has made of the materials, 1212

Letters before claim 18.179

can be an effective pressure point and yield good results. Typically, the sort of questions that might be set out in the letter before claim include: (a) What confidential information has been unlawfully retained or appropriated by the (ex-)employee? (b) Where disclosure of the confidential information has been made to third parties, to whom it has been disclosed, when and in what medium the disclosure has been made, and for what purpose? (c) What other use has been made of the confidential information, when it has been misused, in what medium and for what purpose? (d) Has the confidential information been incorporated into any third parties’ electronic systems? 18.177  If the requests made in the letter before claim remain unanswered, or unsatisfactory answers are given, the (ex-)employer may have to apply to the court for assistance. Two specific orders that the (ex-)employer can seek are: (i) pre-action disclosure against the (ex-)employee, the poaching employer, any other potential defendant(s) and/or certain non-parties under CPR r 31.16 and r 31.17; and (ii) early unilateral disclosure, which is often sought together with an order requiring the (ex-)employee, and any other potential defendant, to set out his wrongdoing in a witness statement. (i)  Pre-action disclosure 18.178  The pre-action disclosure procedure enables the (ex-)employer to accelerate both parties’ disclosure obligations and will help him to ascertain whether or not he has a good cause of action. However, the courts are very wary of allowing this procedure to be used as a ‘fishing expedition’. Accordingly, the (ex-) employer needs to keep the application as narrow and specific as possible to better his chances of securing the order from the court. See for example, Hays Specialist Recruitment (Holdings) Ltd v Ion [2008] IRLR 904: a request for disclosure of an entire database so that it could be used to identify dealings with those clients which might give rise to a claim for breach of restrictive covenants was denied as being a ‘fishing expedition’; whereas a disclosure request limited to communications with those contacts whose names and addresses the first defendant had taken from his email address book while still an employee of Hays succeeded. For a more detailed examination of pre-action disclosure, see 14.125–14.132, and 14.140–14.141). (ii)  Orders for the early provision of witness statements and disclosure of evidence 18.179 Orders for the early provision of witness statements and disclosure of evidence are considered in detail at 14.133–14.141 and 15.191–15.195. Essentially, the (ex-)employer will be seeking a witness statement detailing the extent of, and disclosure of documents evidencing, the (ex-)employee’s unlawful competitive activities. The leading case is Aon v JLT Reinsurance Brokers Ltd 1213

18.180  Discovering competitive activity: the immediate practical issues

[2010] IRLR 600. There, Mackay J observed that this type of disclosure order was ‘on any view an exceptional and not a routine order …’, and that the order sought was ‘the very antithesis of the focussed and proportionate approach that might have made such an application more palatable’. Aon is considered in more detail at 14.135–14.136 and 15.192, and has been followed in numerous subsequent cases, for example Al Hajeri v Bennett [2013] EWHC 2552 (QB) where HH Judge Seymour QC said: ‘It is no part of the ordinary process of civil litigation to interrogate a Defendant, on pain of imprisonment for failing to answer or for giving false answers, to obtain evidence which is not available to the party seeking to pursue causes of action against the Defendant.’ (at paragraph 10).

18.180  Notwithstanding the vehemence of the court’s disapproval, orders for early unilateral disclosure and witness evidence setting out wrongdoing are still granted in appropriate cases and are powerful tools in the armoury of the (ex-) employer. If the (ex-)employer is able to show that, in respect of a proportionate and limited number of documents and allegations, such orders are necessary, there is no reason why such orders will not be made. Indeed, in M&E Global (Staffing) Solutions Ltd & Anr v Mr Russell Tudge & Ors [2016]  EWHC  597 (QB), the judge commented that orders ‘for the provision of information on affidavit as to the use to which the information has been put are properly ancillary to the grant of an order for delivery up of confidential information’. 18.181  However, the court is unlikely to make such orders in respect of large numbers of documents, unfocused allegations, or merely to require the (ex-) employee, or other likely defendants, to set out their own wrongdoing. This is illustrated by the cases considered above and at 14.133–14.141. See also Capita v Darch [2017] IRLR 718 (Ch), which is considered at 15.167 and 18.175. 18.182 The court will take into account the stage of the litigation, and may refuse to make such orders if, for example, simultaneous disclosure would take place shortly in any event (see Dorma UK Ltd v Bateman [2016] IRLR 616 at paragraph 72). (iii) Conclusion 18.183  The recipients of disclosure enquiries in a letter before claim will not normally want to damage their credibility in any future proceedings by giving false or inadequate replies. In addition, where the employee is still in employment, even if in his notice period, he still owes duties of loyalty (and sometimes fiduciary duties) to the employer and may find it difficult to avoid providing the requested information or documents, without looking evasive or suspicious. See 3.85–3.142 and 4.226–4.262 regarding the duties of disclosure of ordinary employees and fiduciary employees respectively. The same is true in relation to orders (or the threat of orders) for pre-action or early provision of witness statements and disclosure in the action, although it may be easier for the recipient of such requests to avoid providing information/documentation on the basis that it is too wide-ranging or premature (eg since both sides will be exchanging 1214

Letters before claim 18.187

disclosure lists/documents as part of the ordinary pre-trial procedures). However, there will be cases where the documents and information are so pertinent (and specific) that it may be difficult credibly to resist compliance. 18.184 Provisions requiring information and disclosure are also regularly included in detention, preservation and inspection orders (see 15.171–15.175), orders for delivery up, search or inspection of electronic devices (see 15.177– 15.190) and search orders (see 15.196–15.260), especially where documents that are the property of the (ex-)employer or which contain its confidential information or trade secrets are sought. 18.185 Where it is still proving difficult to evidence the (ex-)employee’s (or poaching employer’s) unlawful activities, the (ex-)employer might consider using enquiry agents, or even an agent provocateur to place ‘trap’ orders. (Ex-) employees frequently object to such evidence being adduced on grounds that it has been gathered unlawfully. In our experience, however, the courts are reluctant to exclude evidence gathered by such means where it is clearly relevant to the issues in dispute, and it would be unwise for any (ex-)employee to assume such exclusion. That said, (ex-)employers must keep in mind the (ex-)employee’s data protection/privacy rights and need to be aware that the court may look askance at such evidence and will have the final say on whether, and to what extent, it is prepared to rely on it. See further at 14.85–14.86. Subject access requests 18.186  Finally, whilst this chapter focusses on the steps that the (ex-)employer can take upon discovering competitive activity, it is worth noting one useful tool in the (ex-)employee’s armoury when it comes to requests for documents and information. That is the right, under section 7 Data Protection Act 1998 (or, with effect from 25 May 2018, under Article 15 EU General Data Protection Regulation (EU) 2016/679) to make a subject access request, or ‘SAR’. SARs enable a ‘data subject’ (eg the (ex-)employee) to check the accuracy of any ‘personal data’ held by a ‘data controller’ (eg the (ex-)employer), and make sure that it is being processed lawfully. ‘Personal data’ encompasses data which relates to the (ex-)employee and from which he is readily identifiable. Having received a SAR, the (ex-)employer must (currently) comply within the statutory time limit or else show that an exemption applies. Non-compliance is enforced by the Information Commissioner’s Office or the court. 18.187  It has become common practice for disgruntled (ex-)employees to make wide-ranging SARs with two main aims: (a) As a simple and inexpensive means of getting early disclosure of information and documents that may prove useful in any subsequent litigation with the (ex-)employer (perhaps to obtain evidence of a repudiatory breach on the part of the (ex-)employer). The (ex-)employee need only incur the time and cost involved in drafting the SAR, which does not have to follow any prescribed form and can be submitted in hard copy, by email, or even via 1215

18.188  Discovering competitive activity: the immediate practical issues

social networking sites. If the (ex-)employer requests it, currently a fee of £10 is also payable (however, there will no longer be the right to charge a fee for complying with a SAR when the EU  General Data Protection Regulation (EU) 2016/679 comes into effect in the UK on 25 May 2018 (see further at 18.191)). In contrast, responding to a wide-ranging SAR is often a hugely expensive and time-consuming exercise for the (ex-)employer. (b) As a means of putting pressure on the (ex-)employer to consider an early resolution of the dispute. Complying with the SAR may require disclosure by the (ex-)employer of potentially damaging information or documents. Coupled with the time and expense involved in responding to the SAR, the (ex-)employer may well prefer an early settlement. In our experience, few SARs are made by (ex-)employees in the context of employee competition disputes but there is nothing preventing an (ex-)employee from doing so, for either of the reasons identified above. 18.188  Previously it was common practice for (ex-)employers to resist responding to SARs where they considered them to be pre-disclosure ‘fishing expeditions’, even though there is no prohibition on SARs having any such ‘dual purpose’ in the Data Protection Act 1998. This practice stemmed from the case of Durant v Financial Services Authority [2004] FSR 573, which has been criticised in a number of cases over the years. There was also a commonly held misconception that the Data Protection Act 1998 imposed a requirement that SARs, and in particular searches for personal data, had to be reasonable and/or proportionate. This was frequently relied on in an attempt to narrow the scope of SARs and, therefore, the extent of any searches to be conducted. In fact, the only reference in the Data Protection Act 1998 to having to make ‘disproportionate effort’ is in section 8(2) (a), which has generally been held by the Information Commissioner’s Office to apply only to the provision of data in a particular form and not to the scope of the request or the searches required (this was also reflected in the Information Commissioner’s Office’s Subject Access Code of Practice, Version 1). 18.189  Three Court of Appeal decisions have potentially changed the scope of the Durant approach to SARs: Dawson-Damer v Taylor Wessing LLP [2017] 1 WLR 3255 (CA), and the combined cases of Ittihadieh v 5-11 Cheyne Gardens, and Deer v Oxford University [2017]  3 WLR 811 (CA). In summary, the key points for (ex-)employers to note are as follows: (a) In future, it will be very difficult to refuse to comply with a SAR on the basis that it is just a pre-action disclosure ‘fishing expedition’. The Court of Appeal has made it clear that (ex-)employers cannot refuse to comply purely on the basis that the (ex-)employee has this collateral purpose. SARs are ‘purpose blind’ and should not be affected by the underlying purpose behind them. (b) In Dawson-Damer Arden LJ did recognise that there may be circumstances in which a SAR might amount to an abuse of process, but did not elaborate further. In such cases, the court could still exercise its discretion not to order compliance with the SAR. Arden LJ also held that merely holding 1216

Letters before claim 18.191

a collateral purpose for making a SAR would not normally amount to an abuse of process (paragraph 109). (c) The courts can, and will, take the (ex-)employee’s motive and the breadth of the SAR into account when making costs orders. For example, Mr Deer was found to have engaged in ‘low level attritional warfare’, as a result of which the first instance judge reduced his costs award by 25% (which was upheld by the Court of Appeal). (d) The court, taking a contrary view to that expressed by the Information Commissioner’s Office in its original Subject Access Code of Practice, Version 1, held that the search for documents does only need to be reasonable and proportionate. However, it is clear that even a proportionate search may be extensive (see, for example, the finding in Holyoake & Anor v Candy & Ors [2016] 3 WLR 357 (Ch) (29 April 2016) that a review of 17,000 documents involving costs of £37,000 was reasonable and proportionate). (e) Finally, the Court of Appeal has set out a number of factors that it will take into account when deciding whether to order compliance with a SAR, including whether there is a more appropriate route to obtaining the evidence (eg standard or specific disclosure in legal proceedings). 18.190  These cases prompted the Information Commissioner’s Office to issue a revised Subject Access Code of Practice (Version 1.2) in June 2017 to reflect the fact that the ‘disproportionate effort’ test may apply, in some instances, to the search itself. However, the Information Commissioner’s Office does warn that this does not mean that an (ex-)employer can easily use arguments of disproportionality to avoid complying with a SAR, as the high burden of proof is on the (ex-)employer to show that it has taken all reasonable steps to comply and that it would be disproportionate in all the circumstances to take further steps. In addition, the Information Commissioner’s Office expects parties to engage in productive dialogue about SARs and considers it good practice for the (ex-)employer to engage with the (ex-)employee, confirming that if it receives a complaint about an organisation’s handling of a SAR, it may consider, amongst other factors, the organisation’s readiness to engage. 18.191 (Ex-)employers should also keep in mind that the EU  General Data Protection Regulation (EU) 2016/679 becomes directly effective in all Member States of the European Union on 25  May 2018. Under that Regulation some key changes will be made to the SAR regime. In particular, the time limit for complying with a SAR will reduce from the current 40 days to one month and there will be significant financial penalties (up to EUR  20 million or 4% of the organisation’s total worldwide turnover) for non-compliance with the rights of data subjects. There will also no longer be the right to charge a fee for complying with a  SAR, although reasonable administrative costs will be charged for a ‘manifestly unfounded or excessive’ request, particularly if it is repetitive. The UK Data Protection Bill has been introduced to Parliament to legislate, prior to ‘Brexit’, those areas where national law is required to supplement the Regulation. 1217

18.192  Discovering competitive activity: the immediate practical issues

7(a)(vii)  Return of property 18.192 The (ex-)employee should be required to return any property in his possession or under his control belonging to the (ex-)employer (and, where relevant, group companies of the (ex-)employer) or relating to the (ex-)employer’s business. Any particular items the (ex-)employer believes the (ex-)employee may have retained should be specifically identified, but as examples only. In Eurasian Natural Resources Corporation Ltd v Judge [2014]  EWHC  3556 (QB), the court would not, in relation to a non-executive director’s letter of appointment, imply a duty to deliver up confidential documents on termination of a non-executive directorship (the case is further considered at 18.172). In the case of employees, the contract of employment will generally, and should always, include an express provision requiring the return of property on request, and in any event on its termination; see 5.43 for a template clause to this effect. 18.193 Issues relating to the return of property are more tricky where the employment is ongoing. However, even in that situation, the employee to whom the letter before claim is being sent is likely to be either suspended or on garden leave. Most contractual suspension/garden leave clauses provide that salary and the majority of benefits will continue to be provided to the employee including, for example, the use of any company-provided equipment (such as a car). It will be legitimate to require the immediate return of property provided to the employee purely for the purposes of carrying out their work duties, but not property provided solely or partly as a benefit of employment, or for mixed business and personal use. For such items, it may be better to wait until the end of the period of suspension or garden leave to ask for their return. Insisting on the early return of such property absent a contractual right to do so risks claims from the (ex-)employee that the contract has been breached (either an express provision or the implied term of mutual trust and confidence). For the impact that such breaches can have on any otherwise enforceable restrictive covenants, see further at 9.49–9.58). Of course, there may be circumstances where the risk of breaching a contractual term is outweighed by the damage that the (ex-)employee could cause if permitted to retain an item of property (particularly electronic devices used for business purposes and/or to access the (ex-)employer’s systems and databases such as mobile telephones or laptops). 7(a)(viii)  Preservation of evidence 18.194  In addition to any information or property belonging to the (ex-)employer, the (ex-)employee may well have property, including documents, often in electronic format, which are not technically the (ex-)employer’s property but are highly relevant to the competitive activity. For example, the (ex-)employee is very likely to be in possession of one or more (perhaps even all) of the following: a business plan or a database prepared for the competitive activity and which includes the (ex-)employer’s confidential information; telephone records; emails, text or instant messages (or other forms of e-communication); electronic diary entries; materials created in word, excel, PowerPoint etc; USB memory sticks/flashdrives; and iPhones, laptops, tablets or other such devices. To reduce the risk of this 1218

Letters before claim 18.197

potentially highly valuable information or property mysteriously disappearing, the letter before claim should always require the preservation of all such evidence. Clear instructions should also be given not to delete/erase, destroy, or tamper with the evidence and to preserve the integrity of (and not delete/erase, destroy, tamper with or close, as appropriate) any such accounts, systems or devices (whether personal or otherwise) such as any personal email, online data storage or social networking accounts (eg LinkedIn), which the employer knows (or suspects) have been used in connection with the unlawful activities. 7(a)(ix)  Financial loss and undertakings 18.195 As required by paragraph  6(a) of the Pre-Action PD, the letter before claim should set out the remedy that the (ex-)employer is seeking, what the (ex-) employer wants from the (ex-)employee and, if the (ex-)employer is claiming financial loss (for example, damages or an account of profits), how that has been calculated. If it is not possible to calculate financial losses accurately at this early stage, the draftsman might consider making a statement that they are likely to be ‘significant’ or offer an estimated range of the potential financial damage (provided that the (ex-)employer is confident that such statements will not turn out to have been exaggerated). Alternatively, the letter can explain that the (ex-) employer’s investigations are ongoing and that details of the financial impact will be provided in due course. 18.196 The letter before claim should also detail any undertakings the (ex-) employer requires the (ex-)employee to give. The letter should state whether those undertakings are simply written contractual undertakings given to the (ex-) employer or are undertakings to be given to the court. Which option the employer chooses will be influenced by a number of factors, including: (a) the strength of any evidence against the (ex-)employee (if weak, contractual undertakings may be more appropriate); (b) whether the (ex-)employee can be trusted to comply with the new undertakings (if this is in doubt, then undertakings to the court will be the preferred route); and (c) in some cases, the ‘message’ that the (ex-)employer wants to send to the (ex-)employee, the poaching employer, and any other employees/ independent contractors or would-be poachers. 18.197  Where the employer requires undertakings to be given to the court, he will, of course, have to issue court proceedings and give a cross-undertaking in damages (indeed, any potential defendant who gives an undertaking to the court to avoid proceedings is likely to insist on an express cross-undertaking in damages from the (ex-)employer: see further at 14.58–14.64). The (ex-)employee could find himself in contempt of court if he breaches an undertaking given to the court, in addition to the more usual remedies for breach of a contractual undertaking, namely an order for specific performance or an injunction. (Undertakings are considered in more detail in Chapter 14, in particular 14.114–14.119.) 1219

18.198  Discovering competitive activity: the immediate practical issues

18.198  In drafting the undertakings it is inadvisable for the draftsman to try and ‘sneak in’ improvements to the restrictive covenants on which the (ex-)employer is relying. Any worthy opponent will immediately spot this approach. At best it will result in a sharp rebuff; at worst it can undermine the (ex-)employer’s position by alerting the (ex-)employee and his representative to weaknesses in the covenants. 18.199 In Lawrence David Ltd v Ashton [1989] IRLR 22 (CA), a case involving a two-year area covenant, Balcombe LJ gave guidance to the effect that an (ex-) employee who has entered into a contractual restraint should seriously consider offering an appropriate undertaking until the hearing of the action, provided that a speedy hearing of the action can then be fixed and the (ex-)employer is likely to be able to pay damages on his cross-undertaking in damages (see paragraph 54). This dictum has become a powerful tool in the armoury of (ex-)employers seeking relief. Where proceedings have been, or are shortly to be, issued (ex-) employers would be well-advised to inform (ex-)employees of this dictum in the letter before claim (and (ex-)employees ignore it at their peril). In Underwriting Exchange Ltd v Newall [2015] EWHC 948 (at paragraphs 40 to 41), indemnity costs were awarded following an interim hearing, on the basis that the respondent had ignored Balcombe LJ’s well known guidance. See further on Lawrence David at 14.174 and 14.152–14.154 regarding the costs of interim hearings. As to the extent to which the (ex)-employee can challenge undertakings once they have been given, see Capgemini India Ltd and another v Krishnan [2014] EWHC 1092 (QB), which is considered at 13.110 and 14.119. 7(a)(x) Timetable 18.200  It is vitally important that the letter before claim sets out a timetable for compliance with the (ex-)employer’s requirements. That timetable will largely depend on the likelihood of proceedings being issued, the type of relief that is being sought (eg damages and/or an interim injunction), the amount of time that is left before any enforceable restrictive covenants expire and whether the (ex-) employee or the poaching employer are already legally represented. The PreAction PD requires potential defendants to respond to a letter before claim ‘within a reasonable period – 14 days in a straightforward case and no more than 3 months in a very complex one’ (paragraph 6(b) Pre-Action PD). In reality of course, few (ex-)employers will be able (or willing) to wait 3 months for a full response. Paragraph 4.4 of Annex A of the PDPAC (the Pre-Action PD’s predecessor) anticipated this and provided that where the potential defendant has indicated that he will need a longer time period for responding than the (ex-)employer is prepared to wait before commencing proceedings, the court would consider whether the potential defendant’s deadline was reasonable in the circumstances. Whilst Annex A is not replicated in the Pre-Action PD, this principle is still regarded as good practice (a copy of Annex A appears at Appendix 8 to this chapter). 18.201  If the competitive activity is already occurring and an application for an interim injunction is very likely, then the timetable should be very short 1220

Letters before claim 18.203

– generally just sufficient for the (ex-)employee to have an opportunity to take legal advice and respond. In other cases, the timetable can be a little longer, although we would recommend that it is never more than a working week. In relation to the return of property or provision of information the requirement can, where appropriate, be for it to be returned almost immediately (subject to the points discussed at 18.164–18.193 above). In cases where it is likely that there will be a dispute about the ownership of particular items of property, or there is property containing key evidence (eg a mobile telephone and SIM card) which belongs to the (ex-)employer, then a possible interim solution is to require the (ex-)employee to lodge that property with his solicitor subject to the condition that the (ex-)employee has no access to it (which will need to be confirmed by the solicitor). We recommend that it also be agreed that a forensic ‘image’ be taken immediately of any device that is returned, or lodged with the (ex-)employee’s solicitor, so that any evidence is preserved. 7(a)(xi) Threat of proceedings 18.202 To have force, the letter must set out the consequences of noncompliance by the (ex-)employee. However, there is a balance to be struck. Tactically there is no point in threatening the immediate issue of proceedings if the case is very weak and/or the (ex-)employer has no intention of ever issuing proceedings. In that situation, there is a real risk that the (ex-)employee will call the (ex-)employer’s bluff and wait and see if the (ex-)employer carries through his threat. Where it is unlikely or unclear that the (ex-)employer will issue proceedings, the draftsman must find a middle ground between making it clear that there will be serious consequences of non-compliance, but equally not over-committing the client. Generally it will be sufficient to state that the (ex-)employer’s investigations into the (ex-)employee’s alleged misconduct are ongoing and that, absent a suitable agreement being reached between the parties, the (ex-)employer will be left with no alternative but to consider appropriate action to protect his interests, including an application to the court without further notice, the costs of which will be for the (ex-)employee’s account. In appropriate cases, particularly where the evidence against the (ex-)employee is strong, a copy of any draft court application or pleadings can also be enclosed with the letter before claim. 7(a)(xii)  Alternative dispute resolution 18.203  Unlike its predecessor (the PDPAC), the Pre-Action PD does not require the (ex-)employer to set out the form of alternative dispute resolution (‘ADR’) (if any) the (ex-)employer considers most suitable and invite the (ex-)employee to agree to this in the letter before claim itself. The parties’ obligations to consider ADR are set out in paragraphs 8–11 of the Pre-Action PD. Essentially, the parties are required to use litigation as a last resort and consider whether some form of ADR might enable them to settle their dispute without the need for litigation. In addition, if proceedings are commenced the parties may be required to produce evidence that ADR has been considered. See 18.233 and Appendix 7 to 1221

18.204  Discovering competitive activity: the immediate practical issues

this chapter for further consideration of the parties’ obligations to consider ADR pursuant to the SRA Code of Conduct, Bar Standards Board Code of Conduct, the Court Guides and the Civil Procedure Rules. 18.204  The parties may also have agreed in their contractual documentation that some form of ADR is embarked upon before either party commences litigation. Such provisions are relatively rare in the employment sphere, but are likely to become more common (especially in cases involving significant benefit packages). As part of the investigation into the (ex-)employee’s misconduct, relevant documentation should be checked for such provisions and a decision taken as to whether those provisions can, and should, be complied  with. 18.205  In the context of this book, where the remedy the (ex-)employer will be seeking is normally an interim injunction, often time will not permit any form of ADR (contractual or otherwise) over and above discussion between the parties/ their representatives prior to an application being made to the court. As discussed at 18.156, the Pre-Action PD (and relevant Court Guides) recognise this and the courts are unlikely to penalise parties for minor/technical infringements when the matter is urgent. Depending on the particular circumstances, a failure to consider or engage in ADR prior to commencement of proceedings may well be reasonable within the meaning of the Pre-Action PD (see further at 18.233(b)). However, ADR, and in particular mediation, can be used to good effect between the time an undertaking is given or an interim injunction is granted and a trial (even a speedy trial). Bearing in mind the continuing obligation of the parties and their representatives to consider ADR as a means of resolving a dispute, this is not an issue that the parties should ignore. 18.206 For all these reasons, it remains good practice (even if it is not required) to set out any proposals for ADR in the letter before claim, where appropriate, even if only to explain why there was insufficient time to consider ADR (eg because an urgent application was necessary). For a list of the types of ADR available, see Appendix 7 to this chapter (A7.1). Mediation and its advantages in the context of this book are considered in more detail at 18.222–18.266 and in particular 18.244–18.254. Appendix 6 to this chapter sets out an overview of arbitration. 7(a)(xiii)  Recommendation to take legal advice and reference to the effect of the Practice Direction on Pre-Action Conduct and Protocols (‘Pre-Action PD’) 18.207 Although never a very popular suggestion with (ex-)employers, solicitors and counsel alike must be mindful of their professional obligations when dealing with litigants in persons (see further at 14.171–14.173). For example, Outcome 11.1 and Indicative Behaviour 11.7 of the SRA  Code of Conduct provide that solicitors must not take unfair advantage of third parties generally, and particularly an opposing party’s lack of knowledge where they have not instructed a lawyer. To assist lawyers, The Bar Council, CILEx and the 1222

Letters before claim 18.210

Law Society published joint guidelines entitled Litigants in person: guidelines for lawyers (June 2015), together with accompanying guidance notes, for both clients and litigants in person. A copy of the Litigants in person: guidelines for lawyers (June 2015) is included in Appendix 8 to this chapter. The guidelines set out some general behaviours expected of lawyers in their dealings with litigants in person, such as: treating litigants in person with courtesy; being prepared (and preparing their clients) for the fact that the court may require them to assist with, eg the preparation of bundles for hearings, even if this increases the represented party’s costs; and avoiding technical language and ‘legal jargon’. It is good practice, therefore, to ensure that the letter before claim is written in clear and simple language, particularly where the (ex-)employee is not legally represented. 18.208  In addition, the guidelines encourage representatives to advise unrepresented parties (for example, (ex-)employees) to seek legal advice. In an employee competition dispute, we recommend that an (ex-)employee be advised to do so as a matter of urgency. Similarly, although no longer a formal requirement of the Pre-Action PD, the guidelines encourage lawyers (and it remains good practice) to refer the unrepresented party to the Pre-Action PD. We recommend that, unless the (ex-)employee is known to be legally represented, the letter before claim should specifically address these matters and enclose a copy of the Pre-Action PD. We also recommend that the (ex-)employee’s attention is drawn, in particular, to paragraphs 13 to 16 of the Pre-Action PD concerning the court’s power to take into account, and impose sanctions for, any non-compliance with it, in particular when making case management decisions and orders for costs. The Pre-Action PD’s predecessor, the PDPAC, also set out various requirements that applied in circumstances where the (ex-) employer did not know whether the (ex-)employee was legally represented (paragraph 2.3 Annex A, PDPAC). These provisions have not been repeated in the Pre-Action PD but they are still generally considered to contain some good practice suggestions. Copies of the Pre-Action PD and Annex A to the PDPAC appear at Appendix 8 to this chapter. 7(a)(xiv)  Explaining delay 18.209  In interim injunction proceedings time is of the essence. Because of this, where there has been any actual or apparent delay in sending the letter before claim, the draftsman should consider whether he seeks to explain this issue in the letter. To do so is generally a better tactic than waiting for it to be raised by the opposition, although this is often a matter of fine judgement. For the impact of delays on the prospects of securing an interim (or final) injunction see 14.23 and 14.43. 7(a)(xv)  Reservation of Rights 18.210 The letter should expressly reserve all of the (ex-)employer’s rights against the (ex-)employee. By doing so, assertions of express or implied waiver of any rights are avoided. 1223

18.211  Discovering competitive activity: the immediate practical issues

7(a)(xvi) Third party funding and costs insurance 18.211  It is increasingly common for parties to litigation to enter into funding arrangements in respect of their, or their opponent’s costs, for example, conditional fee arrangements, third party litigation funding and/or own party or adverse costs insurance. In the context of an employee competition claim, where such arrangements were entered into after 1 April 2013 the (ex-)employer is not required under the Pre-Action PD, or the Civil Procedure Rules more generally, to disclose the details of those arrangements in the letter before claim or (normally) subsequently. Indeed, disclosing details of these arrangements can present a tactical advantage for the (ex-)employee/poaching employer and be positively prejudicial to the (ex-)employer. For example, if the (ex-)employee/ poaching employer knows the (ex-)employer has a capped budget from a third party funder, and is committed to keeping in place adequate cover to meet all adverse costs, they may try to make the (ex-)employer exhaust the third party funds as quickly as possible and/or be more reckless about increasing their own costs, forcing the (ex-)employer to keep increasing his insurance cover and pay the corresponding (and potentially sizeable) premiums to secure that cover. Ultimately this could force the (ex-)employer into a position where the third party funder or after the event insurer may refuse to provide additional cover, leaving the (ex-)employer with the difficult decision to self-fund or discontinue the proceedings (with the associated costs consequences of discontinuance). On the other hand, in some cases voluntarily disclosing the existence of funding may help in bringing about an early settlement, particularly where the (ex-)employee/ poaching employer are having to fund their own costs. Although, on balance, we would not expect early disclosure by the (ex)-employer of funding arrangements, we would not rule it out completely at a later stage, particularly where smaller poaching employers are involved in the dispute (whose resources to meet legal and other fees will necessarily be limited). In practice funding issues have not, as yet, been a major consideration in employee competition cases although with speedy trials now becoming increasingly common, and increased interest in using third party funding, that may change. Although it will be some time ago now, there may still be some cases where the funding arrangements were entered into before 1 April 2013 and which fall within the meaning of CPR r 48. In such cases, the (ex-)employer needs to ensure that the appropriate notifications and information are given as this may affect the (ex-)employer’s ability to recover his full costs. 18.212  Having completed his draft letter before claim, it is vital that the draftsman review it as though he were the recipient. If looking at the letter from that perspective he can find obvious ways to parry particular arguments, then he must consider whether he can improve the letter. 7(a)(xvii)  Delivery to the (ex-)employee 18.213  Once the letter is complete, the final issue is what method of delivery should be used. Normally the (ex-)employee will no longer be undertaking his 1224

Letters before claim 18.215

duties by this stage but, where he is, delivery can be personal, namely by handing him the letter. In all other instances, bearing in mind that time will be of the essence, it is important to ensure that the letter reaches the (ex-)employee quickly and that the (ex-)employer has the means of being reasonably sure that has happened. For these reasons, simply entrusting the letter to the ordinary post is not advisable. In most cases, the best methods of delivery will be by courier to the (ex-)employee’s home address with a back-up copy being sent by email (as a PDF attachment) to the (ex-)employee’s personal email address (where the employer has that address). Ideally the courier should obtain a signature for the letter but if that is not possible, the letter should in any event be left at the (ex-)employee’s home address. In addition, in some instances, it may also be appropriate to send a short text, WhatsApp, Facebook or LinkedIn etc message to the (ex-)employee just stating that a letter requiring his urgent attention has been sent to him by courier with a copy sent by email. If the employer has concerns that a letter sent to a home address may not reach the (ex-)employee, for example because he is working at his new employer’s offices, or where the (ex-)employee’s current home address is difficult to ascertain (eg because the (ex-)employee may have moved) then it may be appropriate to use the address of that office. Similarly, if the (ex-) employee has set up a new business, the address of that business could also be used. In very urgent cases, and particularly where there are grounds for believing that the (ex-)employee may seek to avoid the letter, a process server might be used. Whatever means of delivery is selected, the key is to ensure that the letter before claim has been received promptly by the (ex-)employee and that the (ex-) employer has credible and contemporaneous evidence of this. 18.214  As the letter may well contain serious allegations, it is also important to ensure confidentiality. All communications should therefore be marked, both on the envelope (‘window’ envelopes should not be used) and letter, ‘Strictly Private & Confidential, Addressee Only’, and that should be included in the subject line of any email, with the message simply saying something along the lines of ‘please see attached letter which requires your urgent attention’. This will be particularly important if the letter before claim is being sent to the (ex-)employee somewhere other than his private home address, such as his new place of work.

7(b)  Letters before claim to the poaching employer 18.215  When writing to the poaching employer, in broad terms, there are generally two alternative tacks the (ex-)employer can take. The first is to write on the assumption that the poaching employer is unaware of the (ex-)employee’s ongoing express/implied obligations to the (ex-)employer or any unlawful activities, that he surely would not countenance any inappropriate behaviour and seeking appropriate assurances/undertakings that this is the case. The alternative is to proceed on the basis that the poaching employer does have some knowledge of the (ex-)employee’s obligations and/or activities and seek appropriate disclosure and undertakings from him. Which of the two approaches is the more appropriate will depend largely on the facts of the particular case. The first approach may be an appropriate course where the (ex-)employer judges that the poaching 1225

18.216  Discovering competitive activity: the immediate practical issues

employer will not want to become embroiled in litigation and may be looking for a way of resolving the situation without appearing to lose face. In sectors where employees move frequently, it is also possible that the two employers may have encountered each other in a similar situation before or will do in the future, in which case how matters proceeded previously will inform the choice of approach. Alternatively, the (ex-)employer may decide to take a less aggressive approach on this occasion in the hope that the poaching employer will do likewise should their roles be reversed in the future. 18.216  As with any letter sent to the (ex-)employee, the letter before claim to the poaching employer should reflect the requirements of the Pre-Action PD to the extent possible. As to the content of the letter to the poaching employer, depending on the circumstances of the particular case, generally it will simply refer to (and usually enclose a copy of) the letter to the (ex-)employee for details of the underlying background of the matter. Specific mention should be made of the ongoing express/implied (and, where relevant, fiduciary or statutory) obligations that the (ex-)employee remains subject to and is suspected of having breached. Copies of the relevant contract terms – redacted as appropriate – should also be provided and reference made to any contractual obligation on the (ex-)employee to disclose those terms (covenants in particular) to the poaching employer. The letter can, and often does, also state that the (ex-)employer assumes that the relevant terms were disclosed by the (ex-)employee and that the poaching employer has not done anything that may lead to the (ex-)employee breaching those terms. If the (ex-)employer is more ‘bullish’, he may seek express confirmation of the same. 18.217  Normally, and always where there is evidence that the poaching employer is likely to have received the (ex-)employer's property and/or confidential information (remembering that the important issue is the tone of the letter) the poaching employer should be required to: (a) return any property of the (ex-)employer that he has received; (b) provide an electronic copy (eg  on a portable hard drive, computer disk or memory stick) of any of the (ex-)employer’s information (or materials which have been derived from that information) that has been transferred to the poaching employer’s electronic systems, and/or a hard copy print-out of the same, with care being taken to preserve the underlying metadata of the materials (which can be valuable evidence of misuse), and then delete the information from his electronic systems; and (c) confirm that he has done so. 18.218 In appropriate cases, disclosure should be required of any key documents and information that the (ex-)employer wishes to see, for example: any written instructions to the (ex-)employee not to breach his obligations to the (ex-)employer; and any activities involving misuse of confidential information or contacts with customers, employees, suppliers or other restricted business contacts. There should also be a requirement to preserve any evidence, including items such as: electronic diary entries; emails, texts or Facebook, LinkedIn, 1226

Alternative dispute resolution (‘ADR’) 18.222

WhatsApp and Twitter etc; materials created in word, excel, PowerPoint etc; and the integrity of any systems or devices, online data storage, email or social networking accounts which have been used in connection with the unlawful activities. 18.219  The letter should set out what the (ex-)employer wants from the poaching employer in terms of next steps. For example, undertakings may be required, either to the court or to the (ex-)employer. In addition, the (ex-)employer may request that the (ex-)employee is moved into a different, non-competitive area of the poaching employer’s business or effectively placed on garden leave until matters are resolved. In more extreme cases where the (ex-)employer is seeking to enforce a non-competition covenant, he may even request that the (ex-) employee’s employment with the poaching employer is terminated. 18.220 Finally, the same ‘housekeeping’ points that are covered in the letter before claim to the (ex-)employee should also be included, namely, the timetable for compliance, consequences of non-compliance (eg whether the (ex-)employer is contemplating action against the poaching employer itself, such as a claim based on breach of confidence or one of the economic torts that are discussed in Chapter 19), preferred ADR option (or explanation as to why ADR is not appropriate at this stage), the recommendation to take legal advice and reference to the Pre-Action PD and a full reservation of the (ex-)employer’s rights. 18.221  In the case of a company the letter should be addressed normally to the Chief Executive or Managing Director of the poaching employer at the business address at which he/she is based. It should, however, be checked that the Chief Executive/Managing Director is at that address and is not, for example, travelling on business. If they are away, then it will be necessary either to send the letter to another Director (eg the Finance Director) or ascertain a means of delivery that will reach the Chief Executive/Managing Director. As to the method of delivery, generally a courier is the most appropriate method. It is normally inadvisable to send letters before claim as PDF attachments to an email because of the difficulties of ensuring confidentiality, although this method can be used if it has been confirmed by the person’s secretary that the email is confidential and the email is marked accordingly. Where a letter is sent by email a hard copy should also be sent by courier. Just as with delivery to the (ex-)employee, the key is to ensure that the letter before claim has been received promptly by the poaching employer and that the (ex-)employer has credible and contemporaneous evidence of this.

8. ALTERNATIVE DISPUTE RESOLUTION (‘ADR’) 18.222  In this section we will look at why the (ex-)employer should consider ADR (and mediation in particular) as a means of resolving a dispute relating to employee competition; the advantages it can offer as a mechanism for securing an acceptable outcome for the (ex-)employer and some practical issues that arise. 1227

18.223  Discovering competitive activity: the immediate practical issues

18.223  There are numerous forms of ADR currently available, a list of which appears at Appendix 7 to this chapter (A7.1). For a more detailed analysis of the various forms of mediation, see The Jackson ADR Handbook (2nd Edition, 2016) by Susan Blake, Julie Browne and Stuart Sime, which was written in response to Lord Jackson’s recommendation that there should be an authoritative handbook to explain clearly and concisely what ADR is (see his 2010 report entitled Review of Civil Litigation Costs: Final Report). The Jackson ADR Handbook has been endorsed by The Judicial College, The Civil Justice Council and The Civil Mediation Council and is specifically referred to in the Practice Direction on PreAction Conduct and Protocols, which came into effect on 6 April 2015 (the ‘PreAction PD’); see paragraph 10). Points made in the Jackson ADR Handbook have also received judicial approval: see, for example, PGF II SA v OMFS Company 1 Ltd [2014] 1 WLR 1386 (Briggs LJ) and Northrop Grumman Mission Systems Europe Ltd v BAE  Systems (Al Diriyah C41) Ltd [2015]  3 All ER 782 (TCC) (Ramsey J). 18.224  Depending on the particular method chosen, ADR can result in either a binding decision that can be enforced, or a non-binding decision. ADR can be ‘adjudicative’, where an appointed third party makes an independent decision (such as an arbitrator), or ‘non-adjudicative’, where the parties themselves agree the outcome (sometimes with the assistance of an appointed third party, such as a mediator). Parties are increasingly turning to ADR to resolve their disputes, but the general consensus is that more could be done to raise awareness and promote the potential benefits of ADR to clients and practitioners alike. There is clear judicial support for using ADR, as the cases considered in this chapter demonstrate. The broader legal community has also clearly turned its mind to the issues as well: in October 2017, the Civil Justice Council ADR Working Group published its interim report entitled ADR and Civil Justice; and, in November 2017, the Employment Lawyer's Association's Arbitration and ADR Group published two reports entitled ADR and Employment Disputes and Arbitration and Employment Disputes. 18.225 Arbitration is increasingly being used as a means of resolving commercially sensitive disputes, with parties preferring the combination of a private and confidential process, in which an independent third party (or panel) reaches a final and binding decision, to public litigation. We have therefore set out an overview of arbitration at Appendix 6 to this chapter. However, aside from direct negotiations, mediation remains the form of ADR most commonly used in employee competition matters and, therefore, is the one on which we will focus. 18.226  Mediation is a voluntary and non-binding means of resolving disputes. The resolution does not become binding until it is agreed to by the parties (usually in writing). Mediations are conducted over a set period of time and in private. The confidential, and without prejudice, discussions are facilitated by a neutral, third-party mediator. The mediator is generally selected by the parties or, where agreement cannot be reached, by a third party to whom they have given the task of appointing the mediator, for example the Centre for Effective Dispute Resolution (‘CEDR’). The advantages of mediation are considered in more detail at 18.244–18.254. 1228

Alternative dispute resolution (‘ADR’) 18.229

18.227 The questions that the (ex-)employer is likely to ask with regard to mediation are: (a) Why should we mediate? (b) What are the advantages of mediation? (c) When should we start the mediation process? (d) What are the cost implications of mediating the dispute and who will bear those costs? (e) What other factors need to be taken into account? Whilst the answers to these questions may differ depending on the facts of each particular case, the key principles are set out in the following paragraphs.

8(a) Why should the (ex-)employer mediate? 18.228  In summary there are three key reasons for doing so: (a) Mediation gives the parties an opportunity to gain a better understanding of the issues between them, with a view to working together to try and resolve their dispute. Through mediation, the parties can explore more creative options than the usual remedies available from the court. A  successful mediation can avoid the need for proceedings to be commenced at all, or bring about an early (and often more cost-effective) resolution of proceedings that have already been commenced. At the very least it often lays the groundwork for a successful settlement, or it becomes clear that the matter is going to trial – see 18.244–18.254. (b) The parties to a dispute and their advisers are required to consider mediation as a means of avoiding proceedings being commenced or resolving proceedings that have been issued – see 18.229–18.234 and Appendix 7 (A7.2–A7.8). (c) More importantly, the court has the power to impose sanctions on parties who have unreasonably declined to consider or engage in mediation or who have behaved unreasonably in the conduct of a mediation – see 18.235–18.243. 8(a)(i) The parties’ obligations to consider mediation 18.229  The courts cannot (yet) compel the parties to resolve their dispute by mediation (or any other form of ADR): Halsey v Milton Keynes General NHS Trust [2004] 4 All ER 920 (CA) and Aird v Prime Meridian Limited [2006] EWCA Civ 1866 (CA). In Halsey, Dyson LJ held that it seemed: ‘… likely that compulsion of ADR would be regarded as an unacceptable constraint on the right of access to the court and, therefore, a violation of article 6 [European Convention on Human Rights]. Even if (contrary to our view) the court does have jurisdiction to order unwilling parties to refer their disputes to mediation, we find it difficult to conceive of circumstances in which it would be appropriate to exercise it’ (paragraph 9). 1229

18.230  Discovering competitive activity: the immediate practical issues

18.230  Whether it continues to be the case that parties cannot be compelled to mediate remains to be seen. In Wright v Michael Wright Supplies Ltd & Anor [2013] EWCA Civ 234 (27 March 2013) the Court of Appeal called, in strong terms, for the court to revisit the ‘Halsey rule’ that truly unwilling parties cannot be compelled to mediate, particularly given the developments in the field of ADR in the previous decade: ‘Judge Thornton attempted valiantly and persistently, time after time, to persuade these parties to put themselves in the hands of a skilled mediator, but they refused. What, if anything, can be done about that? You may be able to drag the horse (a mule offers a better metaphor) to water, but you cannot force the wretched animal to drink if it stubbornly resists. I suppose you can make it run around the litigation course so vigorously that in a muck sweat it will find the mediation trough more friendly and desirable. But none of that provides the real answer. Perhaps, therefore, it is time to review the rule in Halsey …’ (Sir Alan Ward, paragraph 3).

18.231  Moreover, in Bradley v Heslin [2014] EWHC 3267 (Ch) (a case involving a boundary dispute), Norris J accepted that the court could not ‘oblige truly unwilling parties to submit their disputes to mediation’ but nevertheless he did ‘not see why, in the notorious case of boundary and neighbour disputes directing the parties to take (over a short defined period) all reasonable steps to resolve the dispute by mediation before preparing for trial should be regarded as an unacceptable obstruction on the right of access to justice’ (paragraph 24). Some degree of mediation is already ‘compelled’ in the employment sphere at least, in the form of the mandatory Early Conciliation process that applies to employment tribunal proceedings. In addition, one of the specific questions considered by the Civil Justice Council ADR Working Group was whether mediation in particular ought to be compulsory, a question that seems to divide opinion amongst practitioners. In its paper entitled ‘Response of the Law Society of England and Wales to the Civil Justice Council ADR Working Group Interim Report’, dated December 2017, the Law Society expressed concerns that this could frustrate the principle that parties should have unimpeded access to the courts. We await the outcome of the debate with interest. 18.232  In the meantime, two points remain clear: first, the courts can, and do, actively encourage parties to mediate, and sometimes in the strongest and most robust terms. See, for example: (a) Halsey v Milton Keynes General NHS Trust [2004] 4 All ER 920 (CA): ‘…  the court’s role is to encourage, not to compel. The form of encouragement may be robust …’ (Dyson LJ, paragraph 11); and (b) PGF II SA  v OMFS  1 Ltd [2014]  1 WLR 1386: ‘The court should not compel parties to mediate, even if it were within its power to do so. … None the less the court may need to encourage the parties to embark on ADR in appropriate cases, and that encouragement may be robust’ (Briggs LJ, paragraph 22). As Dyson LJ noted at paragraph  30 in Halsey, ‘the strongest form of encouragement’ is currently the Admiralty and Commercial Court’s ability to make an ADR Order, which is considered in Appendix 7 to this chapter (A7.6). 1230

Alternative dispute resolution (‘ADR’) 18.233

18.233  Secondly, parties to any dispute (and their legal representatives) are, as a minimum, required to give due consideration to using mediation (or other forms of ADR) as a means of avoiding claims being issued or proceeding to full trial, and as part of general case and costs management. Authority for this can be found in several important sources for practitioners, including: (a) The SRA Code of Conduct and the Bar Standards Boards Code of Conduct. For further details see Appendix 7 to this chapter (A7.2–A7.5). (b) The Pre-Action PD, which replaced the PDPAC. A  copy of the PreAction PD and the detailed guidance on pre-action conduct for the types of dispute covered by this book that was contained in Annex A  to the PDPAC appear at Appendix 8 to this chapter. Paragraphs 8–11 of the PreAction PD set out the principles governing settlement and ADR. In broad terms, litigation should be a last resort and the parties should consider some form of ADR before and during proceedings. Unreasonably refusing to use a particular form of ADR or to respond to an invitation to do so may be regarded as non-compliance with the Pre-Action PD (paragraph  14). As noted at 18.156, the Pre-Action PD expressly recognises that in urgent cases (eg  an application for an injunction) full compliance with the PreAction PD may not be practical (paragraph  13). This may relieve the (ex-)employer of the obligation to consider mediation prior to issue of proceedings in some cases, but not in every case. For example, where an ex-employee is willing to give undertakings to abide by his posttermination covenants whilst a mediation takes place, this may remove or at least reduce the urgency of the matter. In such circumstances, the court might treat the immediate issue of proceedings (where time is not of the essence) by the (ex-)employer as non-compliance with the Pre-Action PD. Again, as noted at 18.156, the Pre-Action PD is not a mandatory pre-action protocol but the court can order a stay of proceedings to allow time for the pre-action step(s) to be taken, or order sanctions for noncompliance (including costs). (c) The Court Guides, which set out the courts’ stance with regard to mediation. Employee competition cases will usually be heard in the Queen’s Bench or Chancery Divisions or the Commercial Court (which, with effect from 2 October 2017, became a specialist division of the Business and Property Courts). The key requirements of The Queen’s Bench Guide (Fifth Edition, updated February 2017), the Chancery Guide, and The Commercial Court Guide in this respect are set out in Appendix 7 to this chapter (A7.6). (d) The Civil Procedure Rules, in particular: the overriding objective of dealing with cases justly and at proportionate costs (CPR r 1.1); and the court’s general case management powers under CPR  Part 26, including CPR r 26.4, which provides a mechanism for the court to order a stay of proceedings to allow mediation (or any other form of ADR) to take place either where the stay is requested by a party or where the court considers a stay is appropriate. See further at Appendix 7 to this chapter (A7.7–A7.8). 1231

18.234  Discovering competitive activity: the immediate practical issues

18.234  Similarly the courts have held lawyers subject to a duty to discuss mediation with their clients. See, for example: (a) Halsey v Milton Keynes General NHS  Trust [2004]  4 All ER 920 (CA) in which Dyson LJ stated that ‘All members of the legal profession who conduct litigation should now routinely consider with their clients whether their disputes are suitable for ADR’ (paragraph 11). (b) Cowl & Ors v Plymouth City Council [2002] 1 WLR 803 (CA), in which Lord Woolf (the then Lord Chief Justice of England & Wales) stated that ‘This case will have served some purpose if it makes it clear that the lawyers acting on both sides of a dispute of this sort are under a heavy obligation to resort to litigation only if it is really unavoidable. If they cannot resolve the whole of the dispute by the use of the complaints procedure they should resolve the dispute so far as is practicable without involving litigation. At least in this way some of the expense and delay will be avoided …’ (paragraph 27). Although these cases were decided under the regime which preceded the PreAction PD, we are not aware of them having been overruled and so the principles appear still to hold good. 8(a)(ii)  Sanctions for failing to consider mediation 18.235  The courts can impose a wide range of sanctions on parties who fail to mediate or consider mediation (or other forms of ADR), even if they are ultimately successful in their claim. For example: (a) staying the proceedings until the steps which ought to have been taken have been taken (paragraph 15(b) Pre-Action PD; CPR r 26.4); (b) making adverse costs orders, including orders for the payment of indemnity costs (paragraphs 16(a) and (b) Pre-Action PD; CPR Part 44); (c) reducing or increasing the rate of interest payable on money ordered to be paid to, or by, the offending party (paragraphs 16(c) and (d) Pre-Action PD); (d) directing the parties to consider mediation or making an ADR Order (see Appendix 7 to this chapter (A7.6)); (e) ordering a party (who has, without good reason, failed to comply with a rule, practice direction or pre-action protocol) to pay a sum of money into court (CPR r 3.1(5)), which it may do so as to concentrate a party’s mind on ADR (see Lazari v London and Newcastle (Camden) Ltd [2013] EWHC 812 (TCC)); and/or (f) striking out all or part of claim under CPR r 3.4, which the court can do of its own volition, or on the application of either party, particularly where the party can resolve his dispute or secure some form of remedy through ADR but continues litigation regardless, eg  to obtain a costs advantage (see: 1232

Alternative dispute resolution (‘ADR’) 18.238

Binns v Firstplus Financial Gp Plc [2013] EWHC 2436 (QB); Andrew v Barclays Bank Plc [2012] CTLC 115). Strike out under CPR r 24 (summary judgment) is another possibility. Adverse orders for costs for failure to mediate 18.236  Of all the potential sanctions outlined above, adverse orders for costs are by far the most common sanction imposed by the courts for failure to mediate or consider mediation (or other forms of ADR). 18.237  The court has a general discretion to decide who pays the costs of the proceedings. The ‘normal rule’ is that the unsuccessful party will pay the successful party’s costs. CPR r 44.2 sets out the factors which the court should take into account when making an order for costs, including the following: ‘(4) In deciding what order (if any) to make about costs, the court will have regard to all the circumstances, including – (a) the conduct of all the parties; (b) whether a party has succeeded on part of its case, even if that party has not been wholly successful; and (c) any admissible offer to settle made by a party which is drawn to the court’s attention, and which is not an offer to which costs consequences under Part 36 apply. (5)

The conduct of the parties includes – (a) conduct before, as well as during, the proceedings and in particular the extent to which the parties followed the Practice Direction – PreAction Conduct or any relevant pre-action protocol; (b) whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue; (c) the manner in which a party has pursued or defended his case or a particular allegation or issue; and (d) whether a claimant who has succeeded in the claim, in whole or in part, exaggerated its claim.’

18.238 In Halsey v Milton Keynes General NHS Trust [2004] 4 All ER 920, the Court of Appeal held that, in order to justify departing from the normal rule that costs follow the event (see 18.237) the burden lay on the unsuccessful party to prove that his opponent acted unreasonably in refusing to mediate. The Court of Appeal then set out (non-exhaustively) some of the factors that a court would take into account when considering whether a party was reasonable, or not, in refusing to mediate and whether this should give rise to costs sanctions. The factors identified were: (a) the nature of the dispute; (b) the merits of the case; 1233

18.239  Discovering competitive activity: the immediate practical issues

(c) the extent to which other settlement methods had been attempted; (d) whether the cost of mediating would be disproportionately high; (e) whether any delay in arranging and attending a mediation would have been prejudicial; and (f) whether the mediation had a reasonable prospect of success. 18.239  These principles were expressly approved by Briggs LJ in PGF II SA v OMFS  1 Ltd [2014]  1 WLR 1386 (see paragraph  22). It is important to note that a costs penalty is by no means an automatic consequence of a failure to mediate. Rather, it is ‘simply a factor to be taken into account by the judge when exercising his costs discretion’ (Patten LJ in Gore v Naheed and Ahmed [2017] EWCA Civ 369 (CA), paragraph 49, approving the judgment of Briggs LJ in PGF II SA, paragraph 51). When will a failure to mediate or consider mediation be reasonable or unreasonable? 18.240  There is a plethora of case law on whether a party’s behaviour in the context of ADR, and mediation in particular, has been found to be reasonable or unreasonable. For a more detailed analysis, see Chapter 11 of The Jackson ADR  Handbook (2nd Edition, 2016), by Susan Blake, Julie Browne and Stuart Sime. 18.241  For examples of where a party’s behaviour in refusing to mediate was found to be unreasonable, see: (a) Dunnett v Railtrack Plc [2002]  1 WLR 2434 (CA) (refusing even to consider whether a case was suitable for mediation – and where the court had recommended it – even though a modest Part 36 offer was made); (b) McMillan Williams v Range [2004]  EWCA Civ 294 (CA) (withdrawing at the last moment from an agreed mediation because of a belief that the mediation would fail because of the other party’s unwillingness to change their position. Both parties were heavily criticised for their ‘posturing and jockeying for position’ in correspondence before the mediation and were ordered to pay their own ‘costs of their frolic in the Court of Appeal’: ‘I do not intend to review this tedious correspondence, some of the letters being pages long, in any detail. My attitude is best summed up as “a plague on both your houses”. Of course negotiating positions are bound to be taken and asserted prior to and in the course of mediation but the lesson to be learned from the process is that the true bottom line is never known until the mediation is concluded, usually successfully, and unusually when one party finally closes the door of the negotiating chamber. In my judgment this is a case where we should condemn the posturing and jockeying for position taken by each side of this dispute and thus direct that each side pay its own costs of their frolic in the Court of Appeal. I would allow the appeal with no order for costs’ (Ward LJ paragraph 30); 1234

Alternative dispute resolution (‘ADR’) 18.241

(c) Rolf v De Guerin [2011] EWCA Civ 78 (unreasonably rejecting offers to enter into settlement negotiations or mediation, even though the claimant ultimately failed in most of her claim); (d) Seeff v Ho [2011]  EWCA  Civ 186 (where a significant part of the claim failed but the defendant did not take part in proposed mediation); (e) Abbott v Long [2011]  EWCA  Civ 874 (where the defendant made no settlement offers at all); (f) Ali Ghaith v Indesit Company UK Limited [2012] EWCA Civ 642 (failing to use mediation at the appeal stage when recommended to do so by the Court of Appeal); (g) PGF II SA v OMFS 1 Ltd [2014] 1 WLR 1386 (silence in response to offers to mediate – which was treated the same as an outright refusal – and failure to raise potential obstacles to mediation at the time (rather than when costs are being considered) when steps could have been taken to overcome those obstacles. The Court of Appeal expressly endorsed the guidance in The Jackson ADR Handbook in this respect: ‘In my judgment, the time has now come for this court firmly to endorse the advice given in para 11.56 of the ADR Handbook, that silence in the face of an invitation to participate in ADR is, as a general rule, of itself unreasonable, regardless whether an outright refusal, or a refusal to engage in the type of ADR requested, or to do so at the time requested, might have been justified by the identification of reasonable grounds. I put this forward as a general rather than invariable rule because it is possible that there may be rare cases where ADR is so obviously inappropriate that to characterise silence as unreasonable would be pure formalism. There may also be cases where the failure to respond at all was a result of some mistake in the office, leading to a failure to appreciate that the invitation had been made, but in such cases the onus would lie squarely on the recipient of the invitation to make that explanation good’, Briggs LJ (paragraph 34); and

(h) Thakkar and another v Patel and another [2017] EWCA Civ 117 (where the Court of Appeal upheld a hard costs sanction levied against the defendants by the High Court judge. The claimants had proposed mediation, but the defendants delayed responding/engaging for so long that the claimants lost confidence and abandoned the idea. Against that background, and having held that the case was suitable for mediation, the High Court judge ordered the defendants to pay 75% of the claimants’ costs of the claim, notwithstanding that the overall outcome at trial was less advantageous to the claimants than the defendants’ (withdrawn) settlement offer, made under the pre-6  April 2016 version of CPR  Part 36. Jackson LJ held that this ‘was a tough order, but it was within the proper ambit of the judge’s discretion’ (paragraph 30). His Lordship further held that: ‘The message which this court sent out in PGF II was that to remain silent in the face of an offer to mediate is, absent exceptional circumstances, unreasonable conduct meriting a costs sanction, even in cases where mediation is unlikely to succeed. The message which the court sends out in 1235

18.242  Discovering competitive activity: the immediate practical issues

this case is that in a case where bilateral negotiations fail but mediation is obviously appropriate, it behoves both parties to get on with it. If one party frustrates the process by delaying and dragging its feet for no good reason, that will merit a costs sanction. In the present case, the costs sanction was severe, but not so severe that this court should intervene. …’, paragraph 31).

18.242  For examples of where the court found that the refusal to mediate was not unreasonable in the circumstances, see: (a) S  v Chapman [2008]  EWCA  Civ 800 (where it was not unreasonable to refuse mediation pending determination of a strike out application); (b) Swain Mason and Others v Mills & Reeve (A firm) [2012] EWCA Civ 498 (where a party’s reasonable belief in the strength of its case, and the fact that the parties were so far apart in terms of settlement that it was difficult to see how mediation could have succeeded, could justify a refusal to mediate), and Uwug Ltd (in liquidation) v Ball [2015] EWHC 74 (IPEC) (where it was held that a party may be able to show that it was not unreasonable to refuse mediation if it would have wasted time and money and was unlikely to succeed. However, (ex-)employees should heed Ward LJ’s warning in McMillan Williams v Range [2004]  1 WLR 1858 that ‘the true bottom line is never known until the mediation is concluded’, and also Northrop Grumman Mission Systems Europe Ltd v BAE Systems (Al Diriyah C41) Ltd [2015] 3 All ER 782 in which the court noted that this position overlooks the fact that mediation can have a positive effect, even where unmeritorious claims are made); (c) ADS Aerospace Ltd v EMS Global Tracking Ltd [2012] EWHC 2904 (TCC) and Park Promotion Ltd (t/a Pontypool Rugby Football Club) v Welsh Rugby Union Ltd [2012]  EWHC  2406 (QB) (where refusing mediation proposed late in the proceedings and only a short time before trial – 20 days and 13 days respectively was not unreasonable); (d) ADS  Aerospace (proposing an alternative to mediation – in this case without prejudice discussions – when there was no good reason why that alternative should not be tried, and it was likely that it will be cheaper and quicker); (e) Gore v Naheed and Ahmed [2017]  EWCA  Civ 369 (CA, 24  May 2017) (where the claimant’s failure to engage with the defendant’s invitation to mediate did not result in the court ordering a reduction of the claimant’s costs. Mr Gore’s solicitor had considered that mediation had no realistic prospect of success and would only add to the costs of the litigation, and the trial judge had considered that the case raised complex questions of law which made it unsuitable for mediation. Interestingly, Patten LJ expressed his personal ‘difficulty in accepting that the desire of a party to have his rights determined by a court of law in preference to mediation can be said to be unreasonable conduct particularly when, as here, those rights are ultimately vindicated’, paragraph 49). 1236

Alternative dispute resolution (‘ADR’) 18.245

18.243 As these cases show, predicting with any certainty when a refusal to mediate will ultimately be considered to be reasonable or unreasonable is difficult. It is therefore important that the (ex-)employer is made fully aware of the possible sanctions which may be imposed if he is found to have been unreasonable in refusing to mediate. The risk of sanctions being imposed should not be underestimated, although in employee competition cases they are more likely to arise in relation to conduct after issue of proceedings and typically during the period between the grant of an interim injunction and a speedy trial. See 18.255–18.259 in relation to timing of a mediation.

8(b) What are the advantages of mediation? 18.244 Aside from avoiding the potential sanctions, including adverse cost orders, which may be imposed for an unreasonable failure to engage in mediation (see 18.235–18.243), there are a number of good reasons why, where time permits, the (ex-)employer should attempt to resolve his dispute with the (ex-) employee by mediation. In summary those reasons are as follows: (i) control over the mediation process; (ii) privacy and confidentiality of mediation; (iii) the application of the ‘without prejudice’ rule and privilege in the context of mediation; (iv) the remedies available in mediation; (v) avoiding a final (public) determination regarding the restrictive covenants; (vi) cost effectiveness of mediation; (vii) flexibility of the mediation arrangements; and (viii) laying the groundwork for a later settlement. 8(b)(i)  Control over the mediation process 18.245  Unlike litigation, where the parties have very limited control over which judge will hear the case, the (ex-)employer and (ex-)employee are free to agree on the appointment of a mediator of their choice. The parties should seek a mediator with the right skills and experience, both in terms of their familiarity with the relevant legal issues and the particular industry sector in which the parties operate. A mediator may be a lawyer and/or have relevant experience in the matters giving rise to this dispute. The mediator’s role is, in effect, that of a facilitator to help the parties reach a solution. Selecting the right candidate for the dispute can significantly increase the chances of a successful outcome. With the right practical and interpersonal skills, a good mediator can help the parties break through seemingly impassable deadlocks by managing emotions and discouraging negotiation ‘posturing’ that may occur when the parties engage with each other directly. 1237

18.246  Discovering competitive activity: the immediate practical issues

8(b)(ii)  Privacy and confidentiality of mediation 18.246  Mediations are conducted in private and are confidential as between the parties and as between the parties and the mediator (Farm Assist Limited v Secretary of State for the Environment, Food and Rural Affairs [2009] EWHC 1102 (TCC), Ramsey J at paragraph 44). Consequently, as a general rule what is said and written at a mediation cannot be used in later proceedings, although there are exceptions. The legal representatives should ensure that the mediation agreement expressly provides for confidentiality (and privilege – see below), identifies the mediation attendees, and makes it clear who can waive confidentiality (or privilege). Confidentiality is often of particular importance in cases of employee competition, either because they involve issues relating to confidential information or, from a commercial standpoint, the (ex-)employer simply does not want the background to the dispute aired in open court. For example, the (ex-)employer may be keen to avoid subjecting staff or customers to giving live evidence in acrimonious proceedings, or commercially sensitive/valuable data being referred to in open court (although the court may protect the confidentiality of information referred to in proceedings before it, for example, by sitting in private and/or giving redacted judgments). The fact that mediations are conducted in private may also help both parties to walk away with their respective public reputations intact, which in turn increases the chance of a successful outcome. Information shared with the mediator cannot be disclosed to the other party to the mediation without consent, or disclosed more broadly, save in very limited circumstances. For example, the court can order the mediator to disclose, or give evidence about, confidential information obtained in the course of the mediation where: disclosure is required by law, or it is necessary in the interests of justice (Farm Assist); to establish if a settlement was entered into under economic duress; or where allegations of negligence or breach of contract are made against the mediator or the parties’ legal representatives. 8(b)(iii) The application of the ‘without prejudice’ rule and privilege in the context of mediation 18.247  The general without prejudice rules apply to oral and written communications between the parties to the mediation, provided that there is a dispute between them and the communications are for the purpose of exploring settlement of that dispute (which is likely to be the case if the parties are mediating). Without prejudice privilege should, therefore, apply to mediation statements, communications during mediation, offers and even concessions made before, during or after mediation (Reed Executive plc v Reed Business Information Limited [2004] EWCA Civ 887). However, parties to mediation should be aware that statements of pure fact at a mediation may not be protected by the without prejudice principle. In Savings Advice Limited and ors v EDF Energy Customers PLC [2017] EWHC B1 (Costs), Master Haworth held that statements of pure fact as to the defendant’s costs were not protected: ‘Documents that are brought into existence for the purpose of a mediation or settlement in order to settle the substantive claim should in my judgment be treated as inadmissible in any subsequent litigation in accordance with the judgment of Ramsey J  in Farm. It seems to me that “without prejudice 1238

Alternative dispute resolution (‘ADR’) 18.250

privilege” exists to protect the disclosure of admissions or concessions made in negotiations, not to protect statements of pure fact. … the statement relating to the Defendant’s costs referred to in the email correspondence was a statement of pure fact and not protected by “without prejudice privilege”. … The whole purpose of the mediation was to achieve a settlement. In those circumstances any costs information given in mediation is and must be admissible in order to work out the consequence of any subsequent settlement. In that sense in my judgment, costs information in the form of statements of facts can be separated out from documents or other information that comes into the domain of either party for the purposes of negotiating a settlement of the substantive claim’ (paragraphs 29 and 30).

18.248  Without prejudice privilege exists only as between the parties and not between the parties and the mediator. It is the parties’ privilege to waive, and then only jointly. The normal exceptions to without prejudice privilege, such as the unambiguous impropriety exception apply: the Court of Appeal applied this in Ferster v Ferster [2016] EWCA Civ 717 upholding the first instance decision that an email sent in the context of a mediation was, in fact, a blackmail attempt and therefore fell squarely within the unambiguous impropriety exception. Without prejudice privilege will not protect communications or other documents that are disclosable under the usual rules on disclosure. The privilege can also be overridden if the court believes it is necessary to determine whether a settlement was reached at the mediation and on what terms. 8(b)(iv) The remedies available in mediation 18.249 The remedies that a court may award are quite limited in scope (see further at Chapters 14, 15 and 16). In contrast, at a mediation the parties are free to agree the terms on which they resolve their dispute, which gives the parties far greater flexibility and increases the prospects of success. Examples of elements a mediated settlement may include, but which a court cannot order are: (a) Revising the scope of a restrictive covenant eg by reducing the period or re-defining the protected pool of customers. (b) Restructuring of an existing contract. (c) Creating entirely new contractual arrangements eg involving not only an ex-employee but also his new employer. (d) Issuing press statements, apologies and references. (e) Issuing agreed external/internal announcements and other communications to customers, suppliers and other business contacts and third parties. (f) Co-operation and/or fee-sharing or buy-out arrangements to ensure the retention/smooth transition of customers. 8(b)(v)  Avoiding a final (public) determination regarding the restrictive covenants 18.250  The (ex-)employer may not want a final (public) determination in respect of a particular clause in an employment contract or other document containing 1239

18.251  Discovering competitive activity: the immediate practical issues

restrictive covenants (such as a business or share purchase agreement). For example, if a court finds that a restrictive covenant is not enforceable, this may have an adverse impact on similar contracts the (ex-)employer has entered into. The (ex-)employer may fear ‘opening the floodgates’ for other would-be poachers and competing (ex-)employees to take their chances against the (ex-)employer’s covenants. If a private mediated settlement can be reached between the parties, this will not set any binding precedent or affect similar contracts which the (ex-) employer has with other employees/independent contractors. 8(b)(vi)  Cost effectiveness of mediation 18.251  It may be difficult or indeed impossible for an (ex-)employer to recover costs from a former employee. In such circumstances, it is preferable for the parties, particularly the (ex-)employer, to resolve the dispute sooner rather than later so as to limit costs and free up management time. Mediation need not be unduly expensive – usually the mediator can be engaged on a fixed fee basis, and preparation can be kept to a sensible minimum, with short pre-prepared mediation statements and bundles containing only the key documents exchanged in advance. Whilst it is not unusual for both solicitors and counsel to attend a mediation, this is not a formal requirement and the parties may decide to have only one member of the legal team in attendance in order to keep costs down. See further at 18.260–18.264 regarding the costs implications of mediation. In contrast, litigation, and arbitration, can be very costly exercises (see further at Appendix 6 to this chapter for an overview of arbitration). 8(b)(vii)  Flexibility of the mediation arrangements 18.252 Mediation can usually be arranged on short notice and will not necessarily delay the court proceedings. Consequently, the mediation and the court proceedings can run in parallel. See 18.255–18.259 on the timing of mediation generally, and 18.256 in particular as to the advantage of having a mediation after an interim injunction has been granted but before the trial has commenced. 18.253 The mediation process is flexible and largely controlled by the parties who can withdraw from the mediation process at any time (although see 18.241(b) regarding the potential consequences of withdrawing from the mediation process very late in the day). 8(b)(viii)  Laying the groundwork for a later settlement 18.254  Many cases settle during the course of a mediation and of those that do not, a significant proportion will settle following the mediation, often largely as a result of progress made during the mediation coupled with the prospect of rapidly escalating costs of the litigation and a healthy respect for the risk inherent in any litigation. 1240

Alternative dispute resolution (‘ADR’) 18.256

8(c) When should the mediation process be started? 18.255  In theory, the parties may enter into mediation in respect of the whole or part of the dispute at any time, or indeed on any number of occasions, during the course of the dispute. Mediation can take place: (a) Before or after proceedings have been commenced; (b) After an interim injunction has been granted but before the trial; (c) After the trial has been concluded but before any appeal; and (d) After an appeal has been lodged (there is also a specific Court of Appeal Mediation Scheme which has been in operation since 2003). It can be difficult to determine precisely when to mediate to get the best strategic and costs advantages out of the process, and each case will be different. Parties may be reluctant to mediate at a very early stage, eg  before there has been any material disclosure, or other key steps completed (eg a summary judgment or strike out decision). Conversely, if mediation is left until proceedings are well underway, the parties may have become so entrenched in their respective positions, or incurred such extensive costs, that mediation is no longer a viable option. Whether such delays, or refusals to mediate, are reasonable or not will very much depend on the particular circumstances of the case and (ex-)employers should heed the warnings given in the cases considered at 18.240–18.243. In particular, in PGF II SA v OMFS 1 Ltd [2014] 1 WLR 1386 (23 October 2013) the Court of Appeal cautioned parties to identify any obstacles to ADR early on in the process so that steps to overcome them can be considered (such as early disclosure), rather than leaving consideration of those obstacles until the court is considering the costs position. 18.256 In the case of disputes relating to employee competition, normally the optimum time for the (ex-)employer to consider mediation is following the grant of an interim injunction (or the return date of an injunction granted without notice or on short notice and upheld on the return date) and before trial of the action which nowadays will often be a speedy trial. Normally the degree of urgency means that there is insufficient time for a mediation to take place before the application for the injunction or it may prejudice the application itself. As discussed at 18.156 the Pre-Action PD (paragraph  13) and the Court Guides recognise this (see: paragraph  5.1 of the Chancery Guide and paragraphs B3.1 and B3.2 of The Commercial Court Guide). Where the (ex-) employer mediates after the grant of an interim injunction (or after the upholding of a without notice injunction), he will normally know sufficient of the detail of the (ex-)employee’s case to make mediation sensible. Also by mediating at this point, he will gain the advantages of mediation (see 18.244–18.254) whilst avoiding the risks of not doing so (see 18.228–18.243) and, at the same time, potentially make significant savings in both costs and management time through avoiding having to prepare for the (speedy) trial. Practitioners should remember that, pursuant to CPR r  25.10, any interim injunction obtained will 1241

18.257  Discovering competitive activity: the immediate practical issues

be automatically set aside when a stay is granted, unless the stay was agreed between the parties or the court orders that the interim injunction should continue (see further at 14.142). This must be considered carefully before applying for a stay for mediation, or giving the court cause to impose a stay of its own volition. Where the (ex-)employer has failed to secure an interim injunction, mediation may still be the best option as a means of salvaging something through a settlement and at the same time optimising his position in relation to the other parties’ costs. In very weak cases, however, the costs of a mediation are unlikely to be justified and the (ex-)employer in that situation is best advised to see if he can simply negotiate a conclusion to the dispute directly with the (ex-)employee and any other party. 18.257  There may, however, be a number of circumstances, beyond the parties’ control, that will determine when the mediation should take place. For example, the restrictive covenants or a statutory limitation period may be about to expire. In the latter case the Pre-Action PD (paragraph 17) suggests that the appropriate course of action is to issue protective proceedings then apply for a stay to allow time for compliance with any pre-action steps, which of course includes consideration of mediation and other forms of ADR. In addition, the employment contract or other contractual documentation entered into by the parties to the dispute (eg a settlement agreement or business/share purchase agreement) may provide that the parties must mediate within a given time before proceedings are commenced. Such contractual clauses may also provide for a series of ADR steps to be taken (eg negotiations, expert adjudication, and then mediation), with each step being triggered automatically if the previous step does not resolve the dispute. These are commonly referred to as ‘escalation clauses’. Standard ADR or escalation clauses are still comparatively rare in English employment contracts and are unlikely to preclude the (ex-)employer from seeking interim relief from the courts in the absence of appropriate undertakings from the (ex-)employee. However, they are enforceable, provided that: ‘… the provision prescribes, without the need for further agreement, (a) a sufficiently certain and unequivocal commitment to commence a process (b) from which may be discerned what steps each party is required to take to put the process in place and which is (c) sufficiently clearly defined to enable the Court to determine objectively (i) what under that process is the minimum required of the parties to the dispute in terms of their participation in it and (ii) when or how the process will be exhausted or properly terminable without breach.’

(Hildyard J  in Wah (Aka Alan Tang) & Anor v Grant Thornton International Ltd & Ors [2012]  EWHC  3198 (Ch) (at paragraph  60), in which he considered the key relevant authorities, in particular, Cable & Wireless Plc v IBM  [2002]  EWHC  2059, and the Court of Appeal’s decision in Sulamerica CIA  Nacional de Seguros SA and others v Enesa Engenharia SA and others [2012] EWCA Civ 638). 18.258  In accordance with CPR r 26.4, the court may order that there be a stay of proceedings to enable the parties to explore settlement by mediation. 1242

Alternative dispute resolution (‘ADR’) 18.263

18.259  As the cases discussed at 18.241 show, the (ex-)employer should avoid undue delay in agreeing to mediation. Where he agrees to mediation very late in the litigation process, when the majority of the costs have been incurred, the court may take the view that the (ex-)employer’s behaviour was unreasonable and impose a costs sanction accordingly. See, for example: ADS Aerospace Ltd v EMS Global Tracking Ltd [2012] EWHC 2904 (TCC); Park Promotion Ltd (t/a Pontypool Rugby Football Club) v Welsh Rugby Union Ltd [2012] EWHC 2406 (QB); Thakkar and another v Patel and another [2017] EWCA Civ 117 (CA).

8(d) What are the cost consequences of mediating the dispute? 18.260  The (ex-)employer is likely to have the following questions at the forefront of its mind: (a) Who pays for the mediation? (b) Are there any cost consequences of not mediating the dispute? 18.261  The costs of the mediation itself is a matter upon which the parties need to reach agreement. Usually, the parties share the mediator’s fees and expenses and the incidental costs such as venue hire but each party bears their own legal or other professional costs (such as IT, accountancy, public relations or other advisers) in respect of the mediation. Where the (ex-)employee is unrepresented, or of limited means, it is not uncommon for the (ex-)employer to agree to pay the mediator’s fees/expenses and provide the venue. There is no formal obligation on (ex-)employers to do this, but it is worth considering if this is the only obstacle to the mediation taking place. 18.262 Accordingly, proponents in favour of mediation will often stress that resolving a dispute by such means is a more cost effective option than proceeding through the court. Whilst that may be true in many instances, particularly for high value claims, it is not the whole story. For lower value disputes, an unsuccessful mediation may increase costs disproportionately to the value of the claim. That said, it should be remembered that even if the parties are not obliged, either contractually or by court order, to attempt to resolve their dispute by mediation, the recalcitrant party may be penalised in costs or other case management sanctions if they are unable to offer a satisfactory explanation to the court as to why they have not engaged in the mediation process. 18.263  Ordinarily, if the mediation is successful, some or all of the ‘winning’ parties’ costs will be paid as part of any financial settlement agreed. The court will not usually be asked to make an order as to costs after a successful mediation, but it does have a residual power to do so. However, if no clear ‘winner’ emerges from the mediation, it can be difficult for the court to make a fair assessment of costs without effectively conducting a mini-trial (which is precisely what the mediation was intended to avoid). In such circumstances, the court may make no order as to costs. For example, in Promar International Ltd v Clarke [2006] 1243

18.264  Discovering competitive activity: the immediate practical issues

EWCA Civ 332, the Judge was asked to make an award of costs after a restrictive covenant dispute was resolved at the opening of the speedy trial. The defendant offered an unconditional undertaking and the claimant unilaterally abandoned its claim for damages. The Judge held that there was no outright winner or loser and, particularly in the light of the timing of the resolution, each party should bear their own costs. That decision was upheld by the Court of Appeal. This could be a very unsatisfactory outcome for an (ex-)employer who, at the doors to the court, finally gets the form of undertaking he has been seeking from the (ex-)employee from the beginning of the dispute. In effect the (ex-)employer wins (albeit on the specific facts in Promar, Promar was not the outright winner) but is left with a hefty legal bill for his troubles and potentially no way of recovering any of those costs. This is another reason why early mediation of disputes is to be encouraged. 18.264  If the litigation continues after an unsuccessful mediation, or the (unreasonable) refusal of one party to mediate, some costs protection can be secured through making a Part 36 offer (see 14.158–14.161), and/or through the imposition of costs sanctions (see 18.235–18.243). For consideration of the costs of arbitration, see Appendix 6 to this chapter (A6.15).

8(e) What other factors need to be taken into account? 18.265  Whilst there are many reasons why the parties should try and resolve their disputes by mediation, there are also a number of general factors that the (ex-)employer should be advised to take into account, namely: (a) If the parties are unable to reach a settlement at mediation, this will add time (including management time) and costs to the proceedings (although (ex-) employers should note that mediation often paves the way for a settlement shortly after a failed or aborted mediation). (b) The mediator is in effect a ‘facilitator’. The mediator does not have any power to order the parties to give disclosure of documents; however, the parties can, and should, consider giving limited early disclosure voluntarily (particularly if this is the only obstacle to the mediation: see PGF II SA v OMFS Company 1 Ltd [2014] 1 WLR 1386). (c) If the dispute is not settled at mediation, there may be a concern that it will show the (ex-)employer’s hand which may give the opposing party a tactical advantage later on in the proceedings. That said, any strategic discussions should take place in private with the mediator, who in turn has a duty of confidentiality to the respective parties (see 18.246 above for the limited circumstances in which this duty may be overridden). Similarly, subject to the exceptions considered at 18.247–18.248, neither party can use information disclosed during a mediation in the proceedings as that information is generally given on a without prejudice basis. Of course, if the parties have made settlement offers on a ‘without prejudice save as to costs’ basis (eg  in a Calderbank letter), if that offer is not accepted the details of it can still be referred to in court in relation to any dispute about costs. 1244

Alternative dispute resolution (‘ADR’) 18.266

(d) As the mediation process is voluntary and non-binding, this may be exploited by an intransigent party. However, a skilled mediator should be able to break such a deadlock. It needs to be stressed that an agreement to mediate should provide that any settlement reached in the mediation will be enforceable as a contract once it is produced in writing and signed by both parties. (e) The Court of Appeal in Halsey v Milton Keynes General NHS Trust [2004] 4 All ER 920 and the subsequent case law recognises that the issues involved may mean the dispute may be unsuitable for mediation. These may include: (i) Where a party requires an injunction to be granted. Only a court can grant an order for injunctive relief. However, this difficulty can be resolved by obtaining an undertaking or injunction to protect the party’s position and then seeking to mediate. (ii) Where there are allegations of fraud. That said, the Court of Appeal in Couwenbergh v Valkova [2004] EWCA Civ 676 took the view that allegations of fraud would not make mediation inappropriate. (iii) There is a point of law that must be resolved eg a declaration of the rights of one party. However, the decision in Royal Bank of Canada v The Secretary of State for Defence [2003] EWHC 1841 suggests that a case may be suitable for mediation even where a point of law is to be resolved. In that case the point of law was the interpretation of a lease. 18.266  In summary, whilst mediation will not normally be an option at the earliest stages of a dispute relating to employee competition, it can have a very useful role to play in resolving such disputes at a later stage. In some cases mediation can also be useful at the earliest stage, for example, where the restrictive covenants are weak but also the (ex-)employee is nervous about becoming embroiled in expensive litigation. In those cases, mediation can present an opportunity for an agreement to be reached which allows both parties to save face. The flexibility afforded by mediation to craft a solution which would not be available from the court is a key advantage, as is the maintenance of confidentiality. Furthermore, potential sanctions for a party refusing to engage in mediation are not to be underestimated. For the (ex-)employer discovering competitive activity, mediation should be an option he takes into account as part of his longer term strategy and as early in the process as is appropriate, given the particular circumstances of the dispute.

1245

APPENDIX 1 TO CHAPTER 18

Customer/client risk analysis regarding the (ex-)employee’s competitive activity A1.1 Section A – Customers/clients approached/likely to have been approached by the (ex-)employee Name of customer/ client

Other employees who have had dealings by order of seniority

Importance of customer/ client to business (Rate H, M, L, U)

Likelihood of business transferring (Rate H, M, L, U)

Member Agreed of Group action 2 with responsibility

Date action taken and outcome

Section B – Customers/clients unlikely to have been approached but aware of competitive activity

Section C – Customers/clients unlikely to be aware of competitive activity

Key H = high L = low M = medium U = unknown 1246

APPENDIX 2 TO CHAPTER 18

Key decisions and strategy – Case Study 1

CASE STUDY 1: EXCEL COPIERS LIMITED AND BRIAN THOMAS A2.1  Thomas has now been with Excel for three years as Regional Director – South East Region. His employment has been performed in the way anticipated in the facts given in the Case Study in Chapter 12. He has had responsibility for liaison with Easy Copy Inc. and the negotiation of any changes in the exclusive distribution agreement. The terms of his contract, including the restrictive covenants, are as set out in the Case Study in Chapter 12.

1.  Initial discovery A2.2  On 28  July 2017, John Williams, senior sales representative (South East Region) of Excel, requests a private interview with Excel’s Managing Director. Williams says that the previous day Thomas invited him to join a new business which Thomas is setting up, to sell and service MFDs and to be based in Surrey. Williams says that Thomas showed him briefly a business plan for a company called Copy All Sales and Servicing Ltd, which Thomas described as ‘his company’. In a section headed ‘projected turnover’ a number of Excel’s most lucrative customers are named and figures given for annual turnover which correspond to the turnover they are currently producing for Excel. The plan identifies some of the named customers as having confirmed they will transfer their business to Copy All Sales and Servicing Ltd and others as prospects. Williams’ recollection was that the majority of customers were ones with service contracts for Easy Copy Inc. machinery. Williams presumes that Copy All Sales and Servicing Ltd will also be selling Easy Copy Inc. machinery but that point was not specifically referred to by Thomas. Thomas apparently told Williams that he would be inviting other employees of Excel to join his new company (he did not identify which employees) and would be discussing salaries and so on, once he had some initial reactions. Thomas asked Williams to keep their discussion confidential. He also mentioned that he had secured some, but only limited, financial backing from a bank. A2.3  The Managing Director regards Williams as an honest individual. However, he is the most likely candidate to succeed Thomas as Regional Director, if Thomas were to leave. The Managing Director asks Williams to say nothing to anyone about the matter. Having telephoned his solicitor, the Managing Director 1247

A2.4  Key decisions and strategy – Case Study 1

informs the Finance Director of what he has learnt and together they carry out the information gathering exercise.

2.  Gathering information A2.4  Excel’s investigations reveal the following: (a) A check at Companies House shows that three months ago a shelf company was acquired by Thomas and his wife and its name changed to Copy All Sales & Servicing Ltd. Mr and Mrs Thomas are the sole shareholders of Copy All Sales and Servicing Ltd and they and Mr Thomas’ uncle (the Chief Executive of Easy Copy Inc.) are the company’s directors. (b) A search of Thomas’ desk late the same day produces a copy of the business plan for Copy All Sales and Servicing Ltd which confirms Williams’ account of its contents. The business plan also refers to a staffing complement of four salesmen and four engineers, and there are initials with question marks against them which correspond to the initials of some of Excel’s sales and servicing staff, including Williams. (c) Oral enquiries made of X  Ltd, a long-standing customer of Excel who renewed its service contract for Easy Copy Inc. machinery last week, reveals that they were approached by Thomas. Approximately three weeks ago the Managing Director of X Ltd received a letter from Thomas telling him about the new company and the services it will provide. The letter invited the customer to consider placing its business with Copy All Sales and Servicing Ltd. The Managing Director of X Ltd, being satisfied with the service from Excel, put the letter in the bin. (d) A  log of documents created by Thomas’ secretary on Excel’s systems reveals that three weeks ago she typed letters to all the customers named in the business plan and several more, including X Ltd. An initial review of Excel’s systems shows that the various letters have been deleted. Retrieval from the archive system will be possible, although it will take a little time. Further investigations are to be conducted by Excel’s IT Director with the assistance of an external adviser. There are also no copies of those letters on the relevant electronic customer files nor on Excel’s customer relationship management system. Unfortunately Thomas’ secretary is on holiday and not due to return to the office for another two weeks. (e) Records kept by Excel’s weekend security contractors show that Thomas has been a regular visitor to the office on Sundays over the last three months. Thomas does not normally work at weekends and the last three months have been a quiet spell for both Excel and OSS. Excel decides not to approach Easy Copy Inc. at this stage because of the connection between Thomas and Easy Copy Inc.’s Chief Executive. They also decide not to approach any other customers or the members of staff whose initials seem to appear in the business plan. 1248

Case study 1: Excel Copiers Limited and Brian Thomas A2.8

3. Taking key decisions 3(a)  Retention v dismissal A2.5  Excel concludes that for commercial reasons it is essential that they try and retain Thomas. If he goes it is likely that they will lose the Easy Copy Inc. exclusive distribution agreement and a large majority of the servicing contracts, since in practice customers prefer the distributors to also serve their machinery. Excel realise that they have allowed themselves to become over dependent on the turnover generated by Easy Copy Inc. machinery. They need to retain Thomas while they expand the range of multi-functional devices they sell and service. A2.6  Excel believes that it will be possible to retain Thomas. They consider that Thomas has sought to compete because of the lack of career path he sees for himself at Excel. Thomas has repeatedly asked whether he is likely to be promoted and to be given a seat on the Board of Directors. Excel is willing to offer him a newly created position of National Sales Director with a seat on the Board and a salary increase of £10,000 per annum. A condition of retaining Thomas is that Copy All Sales & Servicing Ltd is wound up. A2.7  Excel appreciate that they have only a short time in which to achieve their goal of retaining Thomas. If retention proves impossible they plan to hold a disciplinary hearing and, subject to there being any changes of the facts, dismiss him but do so on notice so they can utilise the garden leave clause in his contract. Since Thomas has not yet resigned, sending him on garden leave at this stage is not an option. Excel considered suspension but feel that is not appropriate as an immediate step. 3(b) Threat/issue of legal proceedings against Thomas? A2.8  Since Excel’s preferred option is to retain Thomas, they consider that to threaten legal proceedings at the outset would destroy that possibility. The threat of proceedings may, however, be used if Thomas is wavering over whether to leave or stay. If it becomes clear that he is definitely going to persist with his plans, then Excel will threaten proceedings and if that does not bring Thomas into line they will issue proceedings seeking an interim injunction. Their reasons for doing so are: (a) Thomas’ activities pose a real threat to Excel’s business. (b) If Thomas persists with his apparent plans as explained to Williams there are good grounds to issue proceedings. (c) They believe that they have a good chance of obtaining an interim injunction. (d) The potential cost is reasonable bearing in mind what is at stake. (e) Thomas is likely to be rattled by the issue of proceedings. He is not a wealthy man and it is unlikely that he will receive any financial backing in any proceedings. His uncle at Easy Copy Inc. is known to be notoriously ‘mean’ and the bank funding he told Williams he has secured may be cancelled. 1249

A2.9  Key decisions and strategy – Case Study 1

(f) Excel’s sales and servicing staff are likely to watch Excel’s reaction closely. Following the departure of a team of employees Excel has recently secured the agreement of all sales and servicing staff to non-dealing/non-solicitation covenants. Pursuing Thomas is likely to be a deterrent to others. (g) The most acceptable solution to Excel, if retaining Thomas is not achievable, would be undertakings to the court in the terms of his restrictive covenants. 3(c) Threat/issue of proceedings against third parties? A2.9  As a matter of principle Excel does not want to sue any third party. They consider it would be commercially unacceptable to be seen to be doing so. They appreciate, however, that in due course there may be merit in notifying some of the customers named in the business plan of the legal position in an attempt to ‘warn them off’. A2.10  Excel considers it pointless to write to Easy Copy Inc. threatening proceedings. However, if Thomas stays a joint approach will be made by Excel’s Managing Director and Thomas to Easy Copy Inc. to inform them of the position and to cement the relationship. Excel also does not want to threaten/issue proceedings against any other employee. 3(d)  Steps to consolidate Excel’s position with customers A2.11  Excel’s Finance Director is to undertake the risk analysis in relation to customers. A2.12  The steps then taken will differ depending on whether Thomas stays or leaves. If he stays, a joint approach by Thomas and Excel’s Managing Director will be made to each customer who was aware of Thomas’ plans. In addition a review of the arrangements for each of those customers will be carried out. A2.13  If Thomas leaves, Excel will either appoint a replacement from their existing staff or make an interim appointment pending the recruitment of a new employee. An announcement of the appointment will be sent to all South East Region customers of Excel. Some of the customers named in the business plan may also be notified of the legal position. A2.14  A review of the arrangements for each customer in the South East region will also be carried out. 3(e)  Steps to reassure/motivate other employees? A2.15  Again these will depend on whether Thomas stays or leaves. If he stays, then action will be limited to announcing his promotion and filling his position. Excel considers it would exacerbate the position to make any reference to 1250

Case study 1: Excel Copiers Limited and Brian Thomas A2.17

the events preceding the promotion although this decision will be reviewed if it becomes clear that Thomas’ plans were widely known. A2.16  If Thomas declines the option of staying, those employees who are apparently named in the business plan will be seen immediately and it will be made clear to them that the company wants to retain their services. Excel is likely to intimate that if Thomas leaves his position will be filled from Excel staff. A2.17  By taking the Key Decisions Excel has formulated a rough strategy. The following flow chart shows how that strategy will work in practice.

1251

1252

General review by Excel’s Managing Director of contact arrangement for each customer

Joint approach by Excel’s Managing Director and Thomas to all customers named in the business plan. General announcement to all other customers of Thomas’ appointment

Joint approach by Excel’s Managing Director and Thomas to Easy Copy Inc to inform them of position and to cement relationship

General announcement of Thomas’ new position. Invitation for applicants for position of Regional Director of South East Region

Thomas declines offer

Dismissal

Suspension and notification of disciplinary hearing. Letter before claim

Interim Injunction obtained

Announcement to customers/staff (as appropriate) and confirmation of future arrangements

Resolution through undertakings to court

Issue of proceedings*

Dismissal notice and garden leave

Retention

* Note depending on the timing proceedings may be issued before the disciplinary hearing

Thomas accepts offer

Meeting between Excel’s Managing Director and Thomas. Disclosure of discovered facts and offer position of National Sales Director with salary increase of £10,000 conditional on Copy All Sales and Servicing Ltd being wound up

Implementation of interim arrangements for customers. Update communication to staff if appropriate

Appeal hearing (if any)

Disciplinary hearing

Interviews with employees named in business plan

A2.17  Key decisions and strategy – Case Study 1

APPENDIX 3 TO CHAPTER 18

Key decisions and strategy – Case Study 2

CASE STUDY 2:  SMITH & JONES HR SERVICES LIMITED AND IAN SIMPSON A3.1  Ian Simpson (‘Simpson’) worked for Smith & Jones HR Services Limited (‘Smith & Jones’) for two and a half years as a Senior HR Consultant. On 30 June 2017 Simpson resigned giving the three months’ notice required to terminate his employment. His last day in employment was 30 September 2017 and he worked until the expiry of his notice period. When he resigned Simpson was asked what he was going to do in the future but he declined to answer. The point was not pursued by the Managing Director of Smith & Jones at the time. The terms of Simpson’s Service Agreement with Smith & Jones (which is dated 15 January 2015), including the restrictive covenants, are set out in Case Study 2 in Chapter 12. On Smith & Jones’ instructions no non-competition covenant was included in the contract of employment; covenants preventing the solicitation of Restricted Clients and Key Employees (as defined in the contract) and dealings or interference with the relationships with Restricted Clients were included.

1.  Initial discovery A3.2  On 15  October 2017 Fludd Ltd (‘Fludd’), a client of Smith & Jones for whom Simpson was responsible while an employee, sent Smith & Jones’ Managing Director a copy of a letter they had received from Simpson. The letter is on the notepaper of People ‘R’ Us Ltd, a competitor of Smith & Jones. In the letter Simpson says that he is now employed as a Senior HR Consultant with People ‘R’ Us Ltd. He refers to the good working relationship he had with Fludd in the past and suggests a meeting to discuss how he could assist them with their HR work in the future. Simpson indicates that as an incentive People ‘R’ Us are offering a 10% discount on any new annual contracts. Since Simpson’s departure Fludd have been looked after by another consultant of Smith & Jones, Ellen Moores. Fludd are satisfied with Moores as a replacement for Simpson and in their covering email confirm that they have no intention of transferring their business to People ‘R’ Us.

2. Gathering information A3.3  Smith & Jones’ investigations reveal the following: 1253

A3.3  Key decisions and strategy – Case Study 2

(a) Some of the physical files of the clients for whom Simpson was responsible are missing. (b) There are important physical documents, such as strategy reports, and reorganisation reports, missing from the files of other clients for whom Simpson, or Consultants who reported to him, were responsible. (c) Simpson was known to keep all the business cards of the clients he worked for in a case which is also missing. (d) As well as his electronic diary, each year Simpson asked for a paper diary which was provided to him and in which he noted important dates for his clients such as salary review dates, performance bonus dates and, where relevant, the renewal date of their annual agreements with Smith & Jones. The paper diary for 2017 is missing and there are very few entries in his electronic diary. (e) A review of the electronic client relationship system, in which Simpson was required to summarise all contact with clients and note key dates, shows a pattern of incomplete records dating from around the beginning of May 2017. This is in sharp contrast to Simpson’s previous record keeping which had been meticulous. (f) Simpson’s former secretary, Miss Holt, is interviewed. She tells Smith & Jones that: (i) She overheard a number of conversations between Simpson and another employee, Alan Neil, a Junior HR Consultant in Simpson’s team, in which Simpson was trying, while still an employee of Smith & Jones, to persuade Neil to resign. Neil has also resigned and left the company in August 2017. By ringing the switchboard of People ‘R’ Us, Smith & Jones establish that Neil is working there as a consultant. Neil had no restrictive covenants in his contract. (ii) A few days before Simpson resigned he came into the office with a USB stick. He told her that he needed to download some information for a client meeting but that he was having trouble doing so and asked her to help him. Miss Holt remembered that the information appeared to relate to a client meeting he was shortly to attend. Whilst she thought the request was unusual, as Simpson normally took a work laptop on client visits, she showed Simpson how to download the information. Investigation by Smith & Jones’ internal IT team has established that the following weekend Smith & Jones’ entire client database was downloaded from Simpson’s computer onto a USB stick. That database has taken several years to create, it includes very detailed information of each client including key contacts, their direct lines and mobile numbers and email addresses, often including personal email addresses used for highly confidential information; fee and billing information; important dates for the client such as salary review dates, performance review dates, key future events, for example planned redundancies and reorganisations; dates of scheduled meetings; and, where relevant, the renewal date, for Smith & Jones’ contract with the client. 1254

Case study 2:  Smith & Jones HR Services Limited and Ian Simpson  A3.5

(g) A  review of Simpson’s email account, including the recovery of emails deleted from his computer in mid-September 2017, reveal that Simpson emailed to a personal email account ([email protected]) Smith & Jones’ suite of precedents which are used to create employment documentation for clients. Examples of these precedents include contracts, employee handbooks, template redundancy letters, dismissal letters and scripts for various HR processes (including redundancies and dismissals). (h) Smith & Jones has talked to the HR Consultants who worked with Simpson. Two say that within two days of Simpson leaving they had offers from Simpson to join People ‘R’ Us. The others deny having been approached. Of the two offers one was to William Hetherington and was in writing. Hetherington has declined the offer and has provided copies of the offer letter and his reply. Hetherington also confirmed that he had received a LinkedIn update from Simpson, announcing his move. Hetherington said that both he and Simpson are ‘LinkedIn’ with a number of Smith & Jones’ key clients. He has agreed to provide a copy of the pro forma email that LinkedIn sends out when someone updates their online profile asking if the recipient wants to ‘congratulate’ their contact on their news. The second offer was to Matthew Lewis and was oral. Lewis says he has not responded but does not intend to accept. (i) Smith & Jones has also contacted two other clients who Simpson looked after but who have very recently sought assistance from Smith & Jones. Both confirm that they received a similar letter to that received by Fludd but gave strong indications that they were reluctant to provide a copy or ‘go on the record’ about this, preferring to ‘stay out of’ any public dispute with Simpson and/or People ‘R’ Us. Both gave assurances that they were happy with the service they were receiving from Smith & Jones.

3. Taking key decisions 3(a)  Enticing Simpson and/or Neil back? A3.4  Smith & Jones do not want either employee back. Simpson’s behaviour demonstrates that he clearly cannot be trusted and Neil is considered to be too junior to represent any significant competitive risk. 3(b) Threat/issue of legal proceedings against Simpson? A3.5  Smith & Jones concludes that unless appropriate undertakings can be extracted from Simpson in very short order, its property and confidential information returned and it is sure that no use has already been made or can be made of its property/confidential information, proceedings must be issued without delay for the following reasons: (a) Simpson’s activities pose a real threat to Smith & Jones’ business. It has not yet lost any key clients but there is a real risk it will do so: Fludd and 1255

A3.6  Key decisions and strategy – Case Study 2

two other clients have already received written approaches from Simpson and Smith & Jones believe this may only be the ‘tip of the iceberg’. Two clients are being very slow in renewing their annual contract, including one who received a letter from Simpson but initially reassured Smith & Jones that they were happy with the service they were receiving. Another two significant clients, who had dealings with Simpson both whilst he was employed by Smith & Jones and with his previous employer, have indicated that they are considering using alternative service providers, although they have declined to explain why and are no longer answering Smith & Jones’ calls. (b) There have been clear breaches by Simpson of his obligations including the removal of confidential information and breaches of the non-dealing/nonsolicitation covenant and the non-poaching covenant. Those breaches are supported by documentary and oral evidence from witnesses. (c) Smith & Jones has acted quickly and has a good chance of obtaining an interim in