Without Rhyme or Reason: Recent Covenant Cases

Covenant cases demonstrate that judges are more human than robot.

It is trite that covenants require evidence to support the existence of a legitimate interest and the reasonableness of the covenant. In contrast, disgraceful conduct by one of the parties to a contract is not even admissible on the issue of enforceability a covenant in the contract.

So much for legal theory. Ronald Dworkin elucidated certain aspects of jurisprudence by considering the thought processes of Judge Hercules. Ronald Dworkin has never appeared in the QB Interim Applications Court. “Merits” matter as much as legal merits in every case. But even taking this into account, the length of the judicial foot remains an important factor.

Non-employment covenants – e.g. for 6 months after termination of employment, though shalt not employ any senior employee with whom you worked to a material extent in the year before termination departure – raise difficult issues.

Robert Walker J in Dawnay Day v de Braconier D’Alphen [1998] ICR 1068, 1096 described non–employment covenants as “indefensible”. The clause was in the following form:

 He plainly considered such a clause to be unenforceable in an employment contract as a matter of principle because “the law is wary of any restriction on a worker’s capacity to earn their living as they choose, even if the restriction is imposed indirectly (that is on a potential employer”.

In contrast, in TFS Derivatives v Morgan [2005] IRLR 246 a non-employment clause was held to be enforceable in principle - §§87-88. The clause read:

However, it seems at least possible that Dawnay Day was not cited to Cox J in TFS – she does not refer to it. In any event, she held that no breach was threatened or intended and so there was no basis for the grant of an injunction.

It is perhaps also relevant to note that in TFS, workforce stability was conceded to be a legitimate interest. This perhaps is a good example of the law developing – in Dawnay Day, workforce stability was still a controversial type of legitimate interest with recent inconsistent Court of Appeal authority on the topic.

It may also have been relevant that TFS is an inter-dealer broker case – many in that world view brokers as a tradeable commodity and thus it is only natural for employers to assert a proprietary interest in brokers which is deserving of protection.

Of course, Dawnay Day operated in a similar sphere to TFS albeit that employment in the City may have been less Hobbseian back then.

The old approach was to some extent restored in White Digital Media v Weaver [2013] EWHC 1681 – §§32-42.

The judgment is startlingly one-sided for a judgment on interim relief – each of the claimant’s clauses were found to be unenforceable in every respect.

The principal ground for refusing relief was that the covenants contained a generic description of the capacities in which the employee was not entitled to act which read “whether as a principal, shareholder, director, employee, agent, consultant, partner or otherwise”.

The reference to the capacity of shareholder was held to doom the entire clause, even at the interim relief stage – a surprising conclusion given the terms of the sub-clauses of the covenant and the fact that it was an interim relief hearing;

However the judge went on to consider, obiter, the covenant against employment and held that it was unenforceable because it amounted to an indirect restraint on the two employees who were within the scope of the covenant i.e. they had been employed by the Defendant in apparent breach of it.

The fact that they were affected by the covenant but not parties to the claim seemed to carry significant weight – their interests seem to have been viewed as more significant than the interests of either party to the proceedings.

The pendulum has swung again, in a hairdresser case, Rush Hair Limited v Gibson Forbes [2016] EWHC 2589, though not because of judicial creativity but rather a seeming failure by counsel to take the right points. The clause read as follows:

The contract was for the sale of a hairdressing franchise to Rush, a noted hairdressing chain by the owner of the two franchisee companies for the grand total of £50,000 and the covenants were given in the context of the sale of goodwill;

The contract seems to have been unusually one-sided – it would seem that the franchisee had two options – dissolve the companies and walk away or sell for whatever price and on whatever terms Rush Hair imposed;

Surprisingly, the defendant conceded that engagement of one of the listed former employees as a self-employed consultant should be considered to be employment of that listed person and so within the scope of the clause;

Further the judge held that, despite the complete absence of the usual expansive capacity clauses, if the Seller, acting as agent of a non-sham company, caused the company to “employ” a listed employee, she would be in breach of a covenant which on its face prohibited her from employing someone but did not prohibit her from causing a third party to employ the listed individual;

Neither of these points should have been of any relevance because on the stark facts of this case, Dawnay Day and White Media might have been expected to render the covenant unenforceable;

However, neither of these cases were cited (and one might have thought that Kores v Kolok would have been considered significant as well) and so TFS seems to have carried the day.

Indeed, Martin Chamberlain QC considered the key point to be this:

 If one contrasts the underlying facts and the covenants in White Media and Rush, one can only conclude that advocates and judges are far more important than legal or factual merits.

One still waits in vain for a case exploring in detail whether a narrowly drawn non-employment clause is enforceable as the only realistic way to police a non-solicitation of employees clause. From the cases set out above, it may seem questionable that a judge faced with such a case will have the deep cynicism about human nature that is necessary to move on from Dawnay Day – but see ICAP below.

Predicting the approach of a judge to a non-compete clause is never easy. Thomas v Farr [2007] EWCA Civ 118 was viewed by many as a new high water mark for extravagant covenants that would rarely be applied in practice.

However, this might underestimate the desire of some judges to avoid making bold decisions on an interim relief hearing.

In Advanced Business Software v Fowler [2016] EWHC 3709, the Commercial Court was tested with a non-compete clause.

The Claimant was a private equity backed software and software development provider in the UK with different divisions including  commercial, social and public enterprise.

The second defendant, the new employer of the first defendant is a UK subsidiary of Australia’s largest enterprise business management software company. Its focus in the UK is on the education and local government sectors;

Mr Fowler’s contract of employment was entered in relation to a role as Managing Director of the Commercial Division albeit it was said that he attended occasional meetings with managers of the other divisions and received general  business plans and strategic plans and such like relating to the whole business;

The contract included a 12 month prohibition on being engaged, concerned or involved with any business with which the claimant was in competition;

Mr Fowler was later promoted to Chief Sales Officer, at which point he had a real role in relation to all of the claimant’s divisions;

Notably, after this promotion, he entered a shareholders’ agreement which contained individually negotiated covenants prohibiting him from being employed only by 5 named competitors, those not including the second defendant;

The claimant applied to enforce the wide employment covenant until a speedy trial. Mr Fowler gave evidence that his new role with the second defendant would not put him in competition with any aspect of his previous work or involve him using any of the very generically described confidential information;

The sole legitimate interest relied upon was protection of confidential information;

The judgment refers to only three cases, American Cyanamid, TFS and Littlewoods v Harris [1977] 1 WLR 1472;

HHJ Bird’s starting point was that a speedy trial could be heard 10 weeks after the interim application. He then undertook cursory consideration of the facts and minimal law and decided that the covenant wasn’t so obviously bad that he could refuse to grant relief and so followed the adequacy of damage route to the grant of an interim injunction;

One might ask rhetorically that if a shareholders agreement covenant which had been individually negotiated after a significant promotion was a lot narrower than the employment covenant, why would you treat the employment covenant as no wider than reasonably necessary?

The end result was that a covenant entered when manager of a division that was not in any way competitive with the new employment, and where the confidential information seems to have been only banal internal reports which had been inadequately particularised in the evidence, was not viewed as hopelessly unenforceable.

To similar effect was the decision in the recent garden leave case of ICAP v BGC [2017] EWHC 638. Mr Berry was the CEO of Global E-commerce for ICAP. He resigned to join BGC giving 12 months’ notice and was put on garden leave. After 7 months, he started work for BGC. ICAP sought to hold him to his garden leave.

Given the short period of notice period outstanding, the court had to pay some attention to the prospects at trial, applying the Lansing Linde test;

On the evidence, the Court was persuaded that claimant had legitimate interests in confidential information and client connection which justified further restraint but held that workforce stability was sufficiently protected by a non-sol covenant and, moreover, BGC’s earlier announcement of his move would have caused any employee who wished to seek employment with ICAP to have done so already;

As is increasingly common, the court imposed a brutal timetable to an abbreviated trial to minimise any harm caused in the event that ICAP was to lose.

The threshold on appeal from a judgment on an interim relief application is a particularly high one – the appellate court should only interfere where they consider that the judge has exceeded the generous ambit within which reasonable disagreement is possible – Hadmore v Hamilton [1983] AC 191.

A rare example of a successful appeal is Willis v JLT [2015] IRLR 844 where the claimant had sought a springboard injunction to a return date to prevent further poaching after the first phase of an unlawful  team move. HHJ Seymour had refused to grant relief because he had considered that the heart had already been ripped out of the business and there was little risk of the remaining employees being of further interest.

The Court of Appeal overturned this refusal and granted relief;

The interesting part of the judgment is that springboard relief was treated as very much a practical temporary remedy to permit stabilisation of the claimant’s business. Instead of a springboard injunction being viewed as draconian and exceptional, the Court of Appeal treated it as a practical way of holding the ring;

Material to the Court of Appeal’s consideration was that if the respondents did not intend to carry on poaching then the injunction would not be in any way burdensome;

In contrast to the non-employment cases set out above, the Court of Appeal were unwilling to elevate the significance of the indirect effect of an injunction on the remaining JLT employees who might have been hoping to be included in the team move;

At §19 of the judgment, Elias LJ made explicit the need for a non-employment injunction by way of springboard because of the difficulty of policing a non-solicitation springboard. It might be thought that if a non-solicitation injunction backed by the threat of committal for contempt is insufficient protection for an employer, the courts should be sympathetic to the arguments in favour of enforcing non-employment covenants in other situations.

Key issues include the following:

The outcome of an application for interim relief is no more predictable than the outcome of a trial despite limited consideration of the law and the evidence being taken as read;

The urgency of the application can result in good arguments being missed. Refusal on  grounds of delay seems less common than a failure by one side to identify the right arguments;

The good guys don’t always win, but bad facts can taint a good case;

The law remains in a state of flux which, when combined with willingness to make time for speedy trials, gives the applicant a distinct advantage;

Some judges are better than others, though perspectives of applicant and respondent may differ as to the essence of a good judge on an interim application.

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