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Rock Refrigeration Ltd & Jones & Anor [1996] EWCA Civ 694 (10th October, 1996)
URL: http://www.bailii.org/ew/cases/EWCA/Civ/1996/694.html
Cite as:
[1996] IRLR 675,
[1997] 1 All ER 1,
[1997] ICR 938,
[1996] EWCA Civ 694
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ROCK REFRIGERATION LIMITED and MICHAEL ANTHONY JONES and SEWARD REFRIGERATION LIMITED [1996] EWCA Civ 694 (10th October, 1996)
IN
THE SUPREME COURT OF JUDICATURE
Case
no.OBENF96/1085/C
IN
THE COURT OF APPEAL (CIVIL DIVISION
)
ON
APPEAL FROM
(SIR
MICHAEL DAVIES
sitting as a High Court Judge
)
Royal
Courts of Justice
Strand
London
W2A 2LL
10th
October, 1996
B
e f o r e
LORD
JUSTICE SIMON BROWN
LORD
JUSTICE MORRITT
LORD
JUSTICE PHILLIPS
ROCK
REFRIGERATION LIMITED
and
MICHAEL
ANTHONY JONES
and
SEWARD
REFRIGERATION LIMITED
(Computer
Aided Transcription of the Stenograph Notes of
Smith
Bernal Reporting Limited, 180 Fleet Street
London
EC4A 2HD
Tel:
0171 831 3183
Official
Shorthand Writers to the Court)
MR
ELDRED TABECHNIC QC
and
MR
A SENDALL
(instructed by Messrs Ashurst Morris Crisp, London EC3) appeared for the
Appellants.
MR
A STAFFORD
(instructed by Messrs Eversheds, Manchester) appeared for the Respondents.
J
U D G M E N T
(As
Approved)
J
U D G M E N T
LORD JUSTICE SIMON BROWN: The question raised on this appeal
is
one of some importance in the law relating to covenants in restraint of trade.
Shortly stated it is this: Is a restrictive covenant which is expressly
provided to take effect upon the termination of a contract of employment
"howsoever occasioned" necessarily unreasonable and thus unenforceable?
The
Judge below, Sir Michael Davies, held that it was, founding his decision
squarely upon Laws J's judgment in
D
v M
[1996] IRLR 192. By this appeal the erstwhile employers challenge that view.
It
will readily be appreciated that this issue is one of general application whose
resolution cannot depend upon the precise circumstances of the present case.
The details here indeed, are calculated rather to obscure than to illuminate
the point arising. I shall accordingly sketch in the facts only very briefly.
The
appellants, (Rock), the plaintiffs below, carry on business in the Manchester
area in connection with the sale, installation and maintenance of refrigeration
and environmental control equipment. They have a number of associate companies
carrying on broadly similar businesses throughout England.
Amongst
their competitors in the Manchester area is the respondent company, Seward
Refrigeration Limited, the second defendants below. Seward Refrigeration's
managing director, Mr. Brian Seward, had formerly been managing director of
Rock, who left Rock in June 1993 to set up Seward Refrigeration. The other
respondent, Mr. Michael Anthony Jones, was first employed by the appellants in
1984. From 1985 to 1988 he had then worked for another company until rejoining
the appellants in October 1988, first as contracts manager, and later as
general engineering manager. In 1995 he made it clear that he was not happy
and that he had been approached by another prospective employer (not Seward
Refrigeration). To induce him to stay Rock offered him, and he accepted, the
position of industrial sales director. It was a more responsible job and
attracted a higher salary. His new contract was signed on 27th October 1995
to come into effect on lst January 1996.
In
the event he remained in employment under this new contract for less than a
month. In December 1995 he was approached by Seward Refrigeration and was
offered the position of sales director with them. He accepted the offer, gave
Rock a month's notice, and during January 1996 duly left their employment.
On
26th April 1996 Rock issued the present writ, which included claims both for
damages and for injunctive relief based upon certain restrictive covenants in
the 1995 contract.
On
10th May 1996 it was ordered that the plaintiff's "claim for final injunctive
relief in this action be dealt with by way of an early trial". That trial
took place in July 1996 before Sir Michael Davies and by agreement was confined
to the question of the lawfulness or otherwise of the restrictive covenants.
In the event they were held unlawful. Had they been held lawful, the further
issues as to whether the defendants or either of them had breached the
covenants and, if so, what if any damages Rock had suffered, would have had to
be litigated thereafter.
The
relevant covenants in the 1995 contract are these:
"10.
Termination
10.3
The expiration or determination of this Contract howsoever arising shall not
operate to affect such of the provisions hereof as are expressed to operate or
have effect thereafter and shall be without prejudice to any other accrued
rights or remedies of the parties.
11.
Prevention
of Unfair Competition
ll.2
The Employee shall not except as authorised or required by his/her duties
reveal or disclose or through any failure to exercise all due care and
diligence cause any unauthorised disclosure to any person persons or company
any of the trade secrets secret or confidential operations processes or
dealings or any confidential information concerning the organisation business
finance transactions details of its research projects (including their
organisation and staff involved) list of details of customers prices or
commercial relationships or affairs of the Company or any trade secrets or
confidential information obtained by the Employee from any third party which
may come to his knowledge. This restriction shall continue to apply after the
termination of this Contract without limit in point of time but shall cease to
apply to information or knowledge which may become public knowledge otherwise
than by the Employees default.
ll.6
The Employee shall not while this Contract remains in force or for a period of
twelve months after its termination howsoever occasioned:
a) solicit
or canvas or approach any person who to his/her knowledge was provided with
goods or services by the Company at any time during the last year of his/her
employment or was negotiating with the Company for the provision of goods or
services by the Company at the date of termination provided that this
sub-clause shall only be enforceable if and so long as the Company or its
assigns shall carry on or continue to carry on the business of the Company or
any part thereof;
b) offer
to any person with whom the Employee shall have dealt in the course of his
employment goods or services which were provided to him/her by the Company
during the year prior to the termination of his/her employment year or which
were the subject of the negotiations at the date of that termination provided
that this sub-clause shall only be enforceable if and so long as the Company or
its assigns shall carry on or continue to carry on the business of the Company
or any part thereof;
c) accept
orders from such a person for goods or services similar to or competitive with
the goods or services which were provided to him/her by the Company during the
last year of his/her employment or which were the subject of the negotiations
at the time of that termination provided that this sub-clause shall only be
enforceable if so long as the Company or its assigns shall carry on or continue
to carry on the business of the Company or any part thereof."
That
is a sufficient recitation of the facts with regard to the main issue. To set
the scene for the resolution of the bare point of law now arising, I add only
that the Judge below found, and it is not now contested, that Rock did indeed
have legitimate interests suitable for protection by way of restrictive
covenants of this general nature. The question, I repeat, is whether these
particular covenants are unlawful because they are declared to operate upon the
determination of the contract "howsoever arising" (clause 10.3 as applied to
clause 11.2), or "howsoever occasioned" (clause 11.6 - and similarly, although
no issue now arises with regard to it, clause 11.5).
In
holding these covenants unenforceable Sir Michael Davies expressly agreed with
and followed Laws J's judgment in
D
v M
from which he cited at length. It is essentially the correctness of that
decision, therefore, which lies at the heart of this appeal and it is
convenient at once to analyse the basis upon which it was reached.
Its
starting point was the decision of the House of Lords in
General
Billposting Company v Atkinson
[1909] AC 118. The employers there had dismissed their employee "in deliberate
disregard of the terms of the contract" so as "to evince an intention no longer
to be bound by the contract." In those circumstances it was held that the
employee "was thereupon justified in rescinding the contract and treating
himself as absolved from the further performance of it on his part" so as no
longer to be bound by the restrictive trade covenant which the employers were
seeking to enforce. For reasons which will appear, it is worth noting that
the case was decided "on broader lines than those ....... as to mutual and
independent covenants."
I
turn next to Scott J's decision in
Briggs
v Oates
[1990] ICR 473 where the question arose whether an assistant solicitor, whose
contract had been brought to an end by the dissolution of the partnership which
had employed him, was nevertheless bound by a restrictive provision expressed
to operate once the agreement "shall have determined for whatever reason."
Scott J held not:
"I
am unable to accept this submission. First the obligation to which the
defendant subjected himself under clause 8 cannot in my opinion be wholly
separated from the other provisions of the agreement. The bargain between the
plaintiff and Mr. Rees on the one hand and the defendant on the other hand was,
in broad terms, that in return for a five-year employment on clause 6
remuneration terms, the defendant would, during the five-year term, discharge
the duties imposed on him and after the termination of his employment observe
the clause 8 restraint. The plaintiff and Mr Rees were together responsible
for withholding from the defendant the benefit of employment for the last year
of the five-year term. One year out of five is certainly not de minimis.
The defendant was deprived, by a breach of contract for which the plaintiff and
Mr Rees were together responsible, of the full consideration in exchange for
which he accepted the clause 8 restriction. In such a case, in my opinion, he
is not bound by the restriction. Secondly, and this is another way of putting
the same point, the breach of contract for which, as I have held, the plaintiff
and Mr Rees were jointly responsible, was accepted by the defendant as putting
an end to the contract. In such a case outstanding contractual obligations of
the injured party are in law discharged together with the contract. This
result does not, in my judgment, depend on the construction of the contract.
But
the point goes further. Suppose I am wrong. Suppose Mr Johnson is right in
submitting that under the true construction of the contract clause 8 binds the
defendant regardless of whether the 1979 agreement is brought to an end by the
decision of the plaintiff and Mr Rees to discontinue their partnership, or by
some other wrongful dismissal of the defendant. The termination of the
defendant's employment under the 1979 agreement could, on that footing, have
taken place at any time after 3 September 1979, but the defendant would still
have been bound by the five-year restraint clause. It is well settled that
the reasonableness of a restraint clause is to be tested by reference to the
position as at the date of the contract of which it forms part. If Mr
Johnson's submissions are right I would regard the clause 8 restraint as
unreasonable as between the parties. A contract under which an employee could
be immediately and wrongfully dismissed but would nevertheless remain subject
to an anti-competitive restraint seems to me to be grossly unreasonable. I
would not be prepared to enforce the restraint in such a contract."
The
first of those three reasons appears to rely on the "mutuality" approach, not
the approach which founded the decision of the majority of their Lordships'
House in
General
Billposting
.
The second reason (perhaps not really on true analysis "another way of putting
the same [i.e. the mutuality] point") is, of course, the
General
Billposting
approach.
It
is the third reason, however, which is critical for present purposes since it
is this which expressly underlies Laws J's decision in
D
v M
.
Indeed, Laws J described it as a principle which, albeit obiter, was "clearly
right" and which he understood and applied as follows:
"A
restrictive covenant, having effect after the termination of a contract of
service or for services, which on its face applies to the employer's benefit
even where the termination has been induced by his own breach is necessarily
unreasonable. Such a provision, if given effect, would constitute an evasion
of the rule in
General
Billposting
[1909] AC 118. Indeed, so far as I can see, the only purpose of inserting the
material words ('for whatever reason' or 'whether lawful or unlawful' or
however otherwise it might be expressed) would be to secure coercive rights to
the employer which would survive his own contractual misconduct. I cannot
think that that would be reasonable."
To
Scott J's third reason it will be necessary to return. For the moment I
observe only that it is expressly founded on the premise that reasons one and
two are unsound. It begins "suppose I am wrong", and later continues "if Mr
Johnson's submissions are right."
I
pass now to the decision of Lord Coulsfield in the Outer House of the Court of
Session in
Living
Design (Home Improvements) Ltd v Davidson
[1994] IRLR 69, a decision from which Laws J drew support for his view. The
relevant covenants in
Living
Design
were to run for six months after the termination of the employee's employment
"however that comes about and whether lawful or not." Lord Coulsfield
regarded that as "manifestly wholly unreasonable", agreeing with Scott J's
observations in
Briggs
v Oates
.
"Those observations", he said, "may have been obiter but they seem to me to
be clearly correct."
Laws
J held there to be no distinction between the phrase in
D
v M
"terminated for any reason whatsoever" and the phrase just quoted from
Living
Design
,
noting indeed that counsel for the employers "correctly did not submit as much."
Before
turning to the arguments advanced on this appeal I must refer to one further
Scottish case,
PR
Consultants Scotland Ltd v Mann
[1996] IRLR 188, again in the Outer House of the Court of Session, a case
decided before
D
v M
but not in fact cited to Laws J. The covenant there was to operate for twelve
months "following the termination of [the employee's] employment hereunder
(howsoever caused)." Lord Caplan said this:
"With
regard to the argument that the reference to termination of employment
'howsoever caused' is too wide, because it would countenance a situation where
the employer could unlawfully dismiss his employee and then avail himself of
the covenant, I find difficulty in following this. I find no difficulty with
the views expressed by Lord Coulsfield and Lord Abernethy to the effect that a
provision which provided for the operation of a covenant on a termination of
employment however caused, be it lawfully or unlawfully on the part of the
employer would be objectionable. However, the question remains whether the
particular provision being considered is as wide as this and I need not concern
myself with the construction that it was approriate to place on the provisions
in the
Living
Design
case and the
Lux
case. In my view the relevant provision 'howsoever caused' in the present
case is not apt to cover unlawful termination. There are many ways in which
an employment contract can be lawfully terminated. The contract may be
terminated upon proper notice, the term of a contract may expire, the parties
may agree that it should be terminated precipitately, or the employer may
dismiss the employee if he has a legitimate reason for doing so. In all of
these situations the employer will have a valid interest in applying the
restrictive covenant to protect his business connection. On the other hand,
there would be no effective purpose in providing against a termination caused
by the employer's unlawful conduct. If the employer were to dismiss his
employee unlawfully then by the operation of the principle of mutuality of
contractual provisions the restrictive covenant would not be available to him.
In the situation considered by Lord Coulsfield in the
Living
Design
case the contract (for some reason) specifically provided that the covenant
should cover an unlawful termination. However, in the absence of such a
specific provision I do not think that it can be readily inferred that the
parties intended that the contract be read so as to incorporate such a
provision."
Now
to the present appeal. The main argument advanced by Mr. Tabachnik QC for the
appellants was that Lord Caplan was right to recognise a distinction - indeed
a critical distinction - between, on the one hand, a covenant merely using the
words "howsoever caused", and on the other hand a provision which expressly
then adds in the words "whether lawful or not." Whereas the latter plainly
cannot be construed to exclude unlawful termination by the employer, the former
can be. The covenants in the present case, he submits, just as in
PR
Consultants
(and indeed in
D
v M
)
should be construed as not applying in the event of termination by a wrongful
act of the employer - or at any rate as not applying following a repudiatory
breach by the employer (accepted by the employee).
In
other words, the argument runs, the covenants can and should be saved by a
process of construction, it being implicit in this argument that otherwise, as
Laws J held, they would offend the
General
Billposting
principle, and thereby fall foul of the restraint of trade doctrine.
That
argument, I should note, Mr. Stafford for the respondents, seeks to meet by
submitting that the "howsoever caused" type of clause, even when standing
alone, cannot properly be construed merely to include everything short of
repudiatory breach, but not termination by repudiatory breach itself. He
argues that the words "howsoever caused" are themselves words of delimitation
such as necessarily require the court charged with their construction to look
at the widest possible circumstances in which termination may take place. The
position is, he suggests, different from when the covenant is expressed to run
merely "from termination"; the court then
can
construe the provision to exclude termination by wrongful act of the employer.
On this approach, of course,
PR
Consultants
rather than
D
v M
was the case wrongly decided on the point.
For
my part, however, I believe that all these arguments proceed on a fundamentally
false footing. The law applicable to covenants and restraint of trade simply
has no relevance to the present situation. Of course covenants which purport
to subject ex-employees to greater restrictions than their erstwhile employers
can justify are unenforceable, and elementary it is too that the legitimacy of
such covenants falls to be determined as at the date they are entered into and
not by reference to the circumstances in which the employment eventually
terminates. But in my judgment the most basic premise upon which the whole
restraint of trade doctrine is founded is that, but for the doctrine's
application, the covenant in question would otherwise operate to restrain the
employee unduly. In other words the doctrine applies only where there exists
an otherwise enforceable covenant. It renders unenforceable what otherwise
would be enforceable.
The
whole point about the
General
Billposting
principle is that, in cases of repudiatory breach by the employer, the employee
is on that account released from his obligations under the contract and
restrictive covenants, otherwise valid against him, accordingly cannot be
enforced. Once that principle was decided, its future application necessarily
postulated that such restrictive covenants upon their true construction would
otherwise be enforceable against employees.
In
short, Scott J was clearly right, not wrong, in the initial reasons he gave for
holding the restrictive covenant unenforceable against the wronged solicitor.
Thus the essential premise for his conclusion that the covenant would
constitute an unreasonable restraint of trade collapsed: a covenant which in
certain circumstances is discharged cannot be unenforceable under the restraint
of trade doctrine merely because in the self-same circumstances it would be
unreasonable to enforce it.
It
further follows that in my judgment, assuming always that no relevant
distinction exists between Scots and English law with regard to mutuality or the
General
Billposting
principle, the Scots' cases also proceed on an erroneous basis (although not
generally to an erroneous conclusion): logically it matters not whether
covenants include or exclude phrases such as "whether lawfully or not." If
they do, then to that extent they are merely writ in water, unenforceable under
the
General
Billposting
principle.
Mr.
Stafford sought to argue that, despite the apparent sufficiency of the
General
Billposting
principle to meet the justice of the case when employers repudiate the
contract, there nevertheless remains a need for the restraint of trade doctrine
to strike down such clauses in their entirety. This, he submits, is so that
employees will not be unfairly influenced by them to their detriment, declining
perhaps to accept their employers' repudiatory breaches of contract lest the
clauses nevertheless operate to restrict their future opportunities. He seeks
here to invoke by analogy a dictum of my own in
J.A.
Mont (UK) Limited v Mills
[1993] IRLR 172, at page 176, where I was endeavouring to explain why the
courts should not too readily construe restrictive covenants, ex facie too
wide, as being subject to implicit limitations:
"Thus
would be perpetuated the long-recognised vice of ex-employees being left
subject to apparently excessive restraints and yet quite unable, short of
expensive litigation and at peril of substantial damages claims, to determine
precisely what their rights may be."
With
the best will in the world, however, no expensive litigation is necessary to
inform an employee that his employers' repudiatory breach of contract will
absolve him from restrictive trade covenants. The point if anything seems to
me rather to go the other way: on the respondent's argument it becomes
necessary to construe these clauses not only to decide whether, assuming
otherwise they are valid, they would operate unreasonably in restraint of trade
once the employment is ended, but in addition to decide whether they appear
inconsistent with the rule in
General
Billposting.
Until
this recent run of cases, erected upon the slender foundation of Scott J's
obiter dictum in
Briggs
v Oates
,
this further process of construction had never been thought necessary. In my
judgment it never was and is not now. That, rather than counsel's oversight
down the years, explains the long line of previous decisions in which covenants
in restraint of trade in just the same terms as the present have been examined
in the minutest detail without anyone ever suggesting that phrases like "for
any reason whatsoever" (the phrase used, for example, in the covenants examined
in
The
Littlewoods Organisation Ltd v Harris
[1977] 1 WLR 1472 and
Bridge
v Deacons
[1984]
1 AC 705), or "termination or cessation in any manner" (the phrase in
Dairy
Crest Ltd v Pigott
[1989] ICR 92) are themselves fatal to the enforceability of such covenants.
I
would therefore hold
D
v M
to have been wrongly decided.
All
this, I should perhaps add, assumes (a) that all restrictive covenants
necessarily become unenforceable upon the employee's acceptance of the
employers' repudiatory breach - i.e. that the
General
Billposting
principle remains wholly unaffected by the
Photo
Production v Securicor Transport
[1980] AC 827 line of authority - and (b) that any wrongful termination of the
contract by the employers will necessarily involve a repudiatory breach.
Clearly the plot thickens, although not to the respondents' advantage on the
narrow point presently at issue, if either of those assumptions are unfounded.
I
pass very briefly to two further arguments advanced by Mr. Stafford under a
respondent's notice by which he seeks to challenge the enforceability of these
restrictive covenants.
The
first argument centres on a further clause in the 1995 contract: "11.7 For
the purpose of clauses 10.1 to 10.6 any reference to the Company shall include
any associate company." (The reference to clauses 10.1 to 10.6 is clearly in
error for clauses 11.1 to 11.6.)
What
is said in this regard is that Mr Jones never had and was never expected to
have any concern with Rock's Associated Companies so that this additional
protection was unjustifiable. Let that be assumed - and certainly Rock have
never sought to enforce this aspect of the contract. Why then should this
particular restriction not simply be severed? Mr. Stafford submits that this
would impermissibly alter the scope of clauses 11.1 to 11.6 (where the word
"Company" is given an extended definition by clause 11.7). I disagree.
Indeed, it seems to me difficult to think of a clearer case for severance:
both the blue pencil test is satisfied and so too in my judgment is the
requirement that the meaning of the affected covenants are not substantially
altered.
The
second argument is to my mind no more substantial. It is that whereas clause
11.5 (which I have not thought it necessary to set out) refers to not
soliciting for employment by "any person firm or company", clause 11.6 (one of
the two clauses on which Rock
do
seek
to rely) refers only to not canvassing "any person", such person thereafter
being referred to as "his/her". This, submits Mr. Stafford, requires clause
11.6 to be construed as forbidding solely dealings with individuals. Again, I
disagree. I see no reason whatever why "person" in clause 11.6 should not be
construed according to its ordinary legal meaning, i.e. in the wider sense in
which it was plainly intended to apply.
In
reality, as Mr. Stafford came close to acknowledging, this was a one point
case. That point, for the reasons already given, I would decide in favour of
the appellants. I would accordingly allow this appeal. This result having
been indicated to the parties at the conclusion of the argument on 3rd
September 1996, the respondents gave fresh undertakings to comply with clauses
11.2 (omitting the reference to "trade secrets") and 11.6, both clauses being
treated as unaffected by clause 11.7. I would now make whatever order is
required to crystallise that result.
LORD
JUSTICE MORRITT:
The
circumstances in which this appeal arises have been described by Simon Brown LJ
and I do not need to repeat them. The central question is whether, as the
judge thought, the provision in Clause 10.3 and repeated in Clause 11.5 and
11.6 that covenants expressed to apply after the termination of the contract
should so apply howsoever such termination was occasioned or arose necessarily
caused those covenants to be void as unreasonable restraints of trade.
This
is a point of considerable importance for covenants in those or similar terms
are frequently employed in contracts of employment but have only recently been
found to be invalid on this ground. Counsel for Rock have drawn to our
attention no fewer than 12 reported cases decided between 1964 and 1991 in
which covenants in similar terms were not alleged or found to be invalid on
this ground; 9 of them were decisions of the Court of Appeal and one was an
Advice of the Privy Council.
The
origin of the point is to be found in the judgment of Scott J, as he then was,
in
Briggs
v Oates
(1990) ICR 473. This decision was followed by Lord Coulsfield in
Living
Design (Home Improvements) Ltd v Davidson
(1994) IRLR 69, Laws J in
D
v M
(1996) IRLR 192 and by Sir Michael Davies in this case.
It
is not in doubt that if one party repudiates a contract and that repudiation is
accepted by the other the latter is discharged from all further performance of
primary obligations of the contract in question in addition to acquiring a
right to damages for compensation for the breach. If however the innocent
party does not accept the repudiation then, although he has his remedy in
damages for compensation for the breach, the contract continues to bind both
parties. This, latter, situation is comparable to that of a breach which does
not go to the root of the contract and therefore does not constitute a
repudiation capable of acceptance. In such a case the innocent party has his
remedy in damages but remains bound to perform the contract.
These
basic propositions apply to contracts of employment as they apply to contracts
of all other descriptions. Thus in
General
Billposting Co v Atkinson
(1909) AC 118 an employee who had accepted the employer's repudiation of the
contract of employment was not thereafter bound to perform or observe the
restrictions on his activities after the termination of his employment
contained in the contract. As the House of Lords held (p.122) he was
"justified in rescinding the contract and treating himself as absolved from the
further performance of it on his part". In principle the breach of a contract
of employment by the employer in consequence of which the contract of
employment determined or the employment ceased must have been one which went to
the root of the contract and was accepted as a repudiation by the employee.
If the employer's breach was sufficiently serious to constitute a repudiation
but the contract of employment remains in existence this must be because the
employee decided not to accept the repudiation but to permit the contract to
continue.
It
is against this background, as to which I do not believe there was or could be
any dispute, that the judgment of Scott J in
Briggs
v Oates
(1990) ICR 473 must be read. In that case a firm of solicitors consisting of
two partners agreed to employ the Plaintiff, a solicitor, for five years. The
contract of employment contained restrictions on his activities for a period
after his employment "shall have determined for whatever reasons". Before the
term of the employment had elapsed the partnership was dissolved. Scott J held
that the dissolution of the partnership constituted a repudiation of the
contract of employment. He then considered whether, as submitted, the
restrictions contained in the contract could still be enforcible. He decided
that they could not. He gave three reasons for that conclusion. The first was
that the restriction was not separate from the employment contract. The second
and third were expressed in these terms:
"Secondly,
and this is another way of putting the same point, the breach of contract, as I
have held, the plaintiff and Mr Rees were jointly responsible, was accepted by
the defendant as putting an end to the contract. In such a case outstanding
contractual obligations of the injured party are in law discharged together
with the contract. This result does not, in my judgment, depend on the
construction of the contract.
But
the point goes further. Suppose I am wrong. Suppose Mr. Johnson is right in
submitting that under the true construction of the contract clause 8 binds the
defendant regardless of whether the 1979 agreement is brought to an end by the
decision of the plaintiff and Mr. Rees to discontinue their partnership, or by
some other wrongful dismissal of the defendant. The termination of the
defendant's employment under the 1979 agreement could, on that footing, have
taken place at any time after 3 September 1979, but the defendant would still
have been bound by the five-year restraint clause. It is well settled that the
reasonableness of a restraint clause is to be tested by reference to the
position at the date of the contract of which it forms part. If Mr. Johnson's
submissions are right I would have regard to the clause 8 restraint as
unreasonable as between the parties. A contract under which an employee could
be immediately and wrongfully dismissed but would nevertheless remain subject
to an anti-competitive restraint seems to me to be grossly unreasonable. I
would not be prepared to enforce the restraint in such a contract."
It
is clear that the second reason, and in substance the first also, was a
straightforward application of the usual principles concerning the effect of
the acceptance of a repudiation of a contract. As such Scott J was following
General
Billposting Co. v Atkinson
(1909) AC 118. It is the third reason which has led to the decision under
appeal and the other cases to which I have referred. That reason assumes that
although the employment has been terminated by the wrongful act of the employer
the contractual restraint on his post-employment activities still binds the
employee. But in my view this assumption is contrary to the decision of the
House of Lords in
General
Billposting Co. v Atkinson
.
If the employment has been terminated by the wrongful act of the employer
then, by definition, the employee must have accepted the repudiation and is no
longer bound by its other terms. It is true that a breach of contract by the
employer may not constitute a repudiation or if it does may not be accepted by
the employee. In either of these cases the contract of employment will
continue to bind both parties. But in such a case there is, in my view, no
reason why the restrictive clauses should be invalidated merely by reason of
the breach of contract by the employer which for one reason or another did not
have the effect of terminating the contract. Accordingly in my view the
statement of Scott J must be understood, as it appears to be, to be the
rejection of the submissions of counsel put forward on a hypothesis which did
not arise in that case and is, in my view, a legal impossibility.
The
first of the two subsequent cases to which I have referred is
Living
Design (Home Improvements) Ltd v Davidson
(1994) IRLR 69. In that case the contract of employment contained a
restriction on the employee's activities "after the termination of her
employment hereunder (however that comes about and whether lawful or not)".
Lord Coulsfield, at para. 4 said:
"In
my view, a restrictive covenant which is phrased so as to operate on the
termination of the employment of an employee, however that comes about, and
whether lawfully or not, is manifestly wholly unreasonable. In that respect,
I agree with the observations in Briggs v Oates. Those observations may have
been obiter but they seem to me to be clearly correct."
In
my view it is clear from that passage that Lord Coulsfield considered that the
covenant was capable of operating as expressed in the case of a repudiation by
the employer and accepted by the employee for no one appears to have argued the
contrary. If the assumption were correct then I would agree with the
conclusion. But for the reasons I have given in my view the assumption is not
correct. If the contract is terminated because the employer's repudiation has
been accepted by the employee then the covenant will no longer bind the
employee. Other cases of unlawful termination would be where the employee has
repudiated the contract; in such a case it is reasonable that the covenant, if
otherwise unobjectionable, should be enforcible.
The
third case is the decision of Laws J in
D
v M
(1996) IRLR 192. In that case the restriction on the activities of the
employee operated "if this appointment under this agreement is terminated for
any reason whatsoever" and by reference to the termination date defined as "the
date on which this agreement shall determine irrespective of the cause or
manner". In his judgment Laws J referred to the decision of the House of Lords
in
General
Billposting Co. v Atkinson
as now being settled and elementary law. He recorded the submission of the
employee that the covenants in question were "an evasion of this principle and
as such are necessarily unreasonable". His conclusion on this point is
clearly expressed in para. 23 where he said:
"In
my judgment on the true construction of clause 13.5 the plaintiffs would be
entitled to enforce the clause even though the contract's termination were
caused by their own repudiatory breach...A restrictive covenant, having effect
after the termination of a contract of service or for services which upon its
face applies to the employer's benefit even where the termination has been
induced by his own breach is necessarily unreasonable. Such a provision if
given effect, would constitute an evasion of the rule in General Billposting
(1909) AC 118. Indeed, so far as I can see, the only purpose of inserting the
material words ("for whatever reason" or "whether lawful or unlawful" or
however otherwise it might be expressed) would be to secure coercive rights to
the employer which would survive his own contractual misconduct. I cannot
think that that would be reasonable"
It
does not appear to have been argued that the provision could not have that
effect in law and could not therefore, whether it was an attempt or not, be an
evasion of the rule in
General
Billposting Co. v Atkinson
.
By contrast the judge assumed that it would have effect contrary to the rule
which he had earlier described as settled and elementary law.
In
my view these two cases are founded on a misconception of what Scott J was
holding in
Briggs
v Oates
.
His conclusion was grounded on the assumption that the restrictive covenant
would be enforcible by the employer after the termination of the employment due
to his breach without any finding to that effect. Lord Coulsfield and Laws J
appear to have decided that the covenant would be so enforcible and would
therefore be unreasonable. In my view the initial decision is wrong in law so
that the conclusion does not follow.
That
the judgment of Scott J in
Briggs
v Oates
in this respect was not of general application appears to have been the view of
the Court of Session in
Aramark
PLC v Sommerville
(1995) SLT 749 and
PR
Consultants Scotland Ltd v Mann
(1996) IRLR 188, of Sachs J in
A
v B
(30th March 1994 unreported) and of Balcombe LJ in
Coral
(UK) Ltd v Richardson
(7th April 1995 unreported). In the first two of those cases the Court of
Session construed phrases referring to the termination of employment "for any
reason whatever" or "howsoever caused" so as not to extend to unlawful
terminations. In the third case Sachs J said, in my view correctly, that
"I
am bound to say that based on authority taking account of the decision in
Living Design and Briggs v Oates I cannot say for one moment that I am
persuaded that the law now is as those two latter cases assert as opposed to a
long line of cases to the contrary."
In
Coral
(UK) Ltd v Richardson
Balcombe LJ said that he did not consider that the cases of
Briggs
v Oates
and
Living
Design (Home Improvements) Ltd v Davidson
established that "the words " for whatever reason" in a contract of this kind
necessarily make it bad".
Counsel
for the employer submitted that the judge was wrong to have construed the
covenant to apply to the case of the termination of the employment by reason of
the employer's own repudiation. I do not see the question as depending on a
point of construction. I would resolve it on the basis that the covenants,
however expressed, cannot achieve the legally impossible. If the assumption
of enforcibility in the event of termination due to the employer's repudiation
accepted by the employee is impossible then even if as a matter of language the
covenant applied in those assumed circumstances the covenant cannot be
unreasonable and therefore invalid as a whole on that account.
Counsel
for the employee accepted that, however expressed, the post-employment
restrictions were unenforcible in the event of the employment terminating
because of the employer's repudiation accepted by the employee. He accepted
that in those circumstances the employee would be discharged from any further
performance of the contract. But he contended that the covenants were wholly
invalid on the grounds of unreasonable restraint of trade because the claim,
implicit in the form of covenants, to be entitled to enforce them in such
circumstances, though an empty one, might have an effect on the mind of the
employee in deciding whether or not to accept the employer's repudiation. I
acknowledge the ingenuity of the submission but I am unable to accept it. The
objection is to an unreasonable restraint on trade. The extravagant claim is
unenforcible anyway without the need to resort to that objection. It is the
restriction which would otherwise be valid which must be considered and its
reasonableness or otherwise must be determined on its own merits.
It
has been suggested that the application of the principle of
General
Billposting Co. 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.
In
my view Sir Michael Davies was wrong on the central point of law argued before
him and on which he based his decision. In relation to the points raised by
the respondent's notice, which Sir Michael Davies did not decide, I agree with
the conclusions of Simon Brown LJ and have nothing to add. In those
circumstances I agree that this appeal should be allowed and that there should
be an order in the terms to which Simon Brown LJ has referred.
JUSTICE
PHILLIPS: I agree that this appeal should be allowed, but I do not find the
route that leads to this conclusion as clear as the other members of the Court.
The
Principal Issue
This
Action raises the issue of the validity of certain restrictive covenants,
incorporated into the contract of employment between the Appellant 'Rock' and
the Respondent 'Jones'. These covenants purported to impose restraints upon
Jones which operated:
"...while
this Contract remains in force or for a period of twelve months after its
termination howsoever occasioned"
See
Clauses 11.5 and 11.6. The effect of this provision was underlined by Clause
10.3, which provided:
"The
expiration or determination of this contract howsoever arising shall not
operate to affect such of the provisions hereof as are expressed to operate or
have effect thereafter and shall be without prejudice to any other accrued
rights or remedies of the parties."
Before
the trial Judge Mr. Stafford on behalf of Mr. Jones successfully contended:
1) That
on the true construction of these provisions the restrictive covenants
purported to remain binding even in the event of the wrongful termination of
Mr. Jones' employment by Rock; and
2) That
this feature rendered the covenants an unreasonable restraint of trade, with
the consequence that they were void.
For
myself I have no difficulty in accepting the first proposition. The second
requires a more detailed analysis.
The
Cardinal Principle
The
validity of the covenants in issue on this appeal falls to be determined
according to the following principle. A restrictive covenant in a contract of
employment will be void ab initio unless the restraints that it imposes are
reasonable having regard to the interests of the parties and of the public. In
practice this test of what is reasonable tends to be resolved by considering
whether or not the restrictive covenant is reasonably necessary to protect
legitimate interests of the employer in preserving goodwill and confidential
information - see Chitty on Contracts 27th Ed. paragraph 16-083.
It
is Mr. Stafford's contention, however, that a covenant cannot be reasonable if
it purports to bind the employee even after his employment has been terminated
consequent upon the repudiation of the contract by the employer. The starting
point in considering this contention must be the decision of the House of Lords
in
General
Billposting v Atkinson
[1909] AC 118.
The
Rule in General Billposting
In
General
Billposting
a Manager was employed on terms that he was entitled to twelve months notice
and subject to a covenant that after termination of his employment he would not
compete with his employers within an area of a specified radius. His employers
wrongfully dismissed him without notice, and then sought to enforce this
covenant. The House of Lords held that the covenant did not survive the
termination. The reasoning of the majority appears from the following passage
in the speech of Lord Collins:
"I
think the true test applicable to the facts of this case is that which was laid
down by Lord Coleridge C.J. in
Freeth
v Barr (1874) L.R. 9 C.P. at p.213
,
and approved in
Mersey
Steel Company v Naylor (1884) 9 App.Cas. 434
in the House of Lords, 'That the true question is whether the acts and conduct
of the party evince an intention no longer to be bound by the contract.' I
think the Court of Appeal had ample ground for drawing this inference from the
conduct of the appellants here in dismissing the respondent in deliberate
disregard of the terms of the contract, and that the latter was thereupon
justified in rescinding the contract and treating himself as absolved from the
further performance of it on his part.
I
think the appeal should be dismissed."
The
effect of this decision, and of a number of cases which have followed it, is
summarised in Chitty at paragraph 16-080 as follows:
"If
the party in whose favour a covenant in restraint of trade is entered into
wrongly repudiates the agreement in which the covenant is contained, the
covenantor is thereby discharged from his obligation. Wrongful dismissal,
therefore, puts an end to any restrictive covenant in a contract of employment."
It
is implicit in the decision in
General
Billposting
(1) that the restrictive covenant in that case purported to apply even after
wrongful termination of the employee's contract and (2) that the covenant
remained valid up to the moment of wrongful termination. If Mr. Stafford's
submission in the present case is correct, there is no room for the rule in
General
Billposting
.
If a restrictive covenant in a contract of employment which purports to bind
even after a repudiatory termination of that employment by the employer is
necessarily void ab initio, no question can ever arise as to whether the
employee has been discharged from complying with the covenant by the employer's
repudiation.
Until
recently, no suggestion has been made that covenants such as the ones in this
case are void ab initio because they purport to apply even after a repudiatory
termination. Mr. Tabachnik, Q.C., on behalf of Rock, referred us to a series
of some twelve cases which proceeded on the basis that a restrictive covenant
wide enough to apply even after repudiation of the contract by the employer was
not rendered invalid simply on that account. Mr. Stafford has, however,
founded his argument on three recent decisions to which I now turn.
The
Recent Decisions
In
Briggs
v Oates
[1991] 1 All ER 407 two partners in a firm of Solicitors repudiated the
contract under which they employed the Defendant. That contract contained a
covenant which imposed restraints upon the Defendant for a period after his
employment "shall have determined for whatever reasons". Proceedings were
brought by one of the partners to enforce the restrictive covenant. Scott J.
held that the restrictive covenant did not survive the termination of the
Defendant's contract of employment. His reasons appear in the following
passage of his judgment at pp.416-7:
"If
the 1979 agreement was, as I hold, brought to an end by the breach of contract
on the part of the plaintiff and Mr. Rees, is the defendant nonetheless bound
by the restraint provisions in cl.8? Counsel for the plaintiff argues that on
the wording of cl.8 the clause applies, notwithstanding the manner in which the
plaintiff's employment pursuant to the 1979 agreement might come to an end. He
relied on the words 'shall have determined for whatever reason'. Even if the
reason were the wrongful dismissal of the defendant cl.8, he submitted, would
on its true construction still apply and bind.
I
am unable to accept this submission. First, the obligation to which the
defendant subjected himself under cl.8 cannot in my opinion be wholly separated
from the other provisions of the agreement. The bargain between the plaintiff
and Mr. Rees on the one hand and the defendant on the other hand was in broad
terms that, in return for a five-year employment on cl.6 remuneration terms,
the defendant would, during the five-year term, discharge the duties imposed on
him and after the termination of his employment observe the cl.8 restraint.
The plaintiff and Mr. Rees were together responsible for withholding from the
defendant the benefit of employment for the last year of the five-year term.
One year out of five is certainly not de minimis. The defendant was deprived,
by a breach of contract for which the plaintiff and Mr. Rees were together
responsible, of the full consideration in exchange for which he accepted the
cl.8 restriction. In such a case, in my opinion, he is not bound by the
restriction.
Secondly,
and this is another way of putting the same point, the breach of contract for
which, as I have held, the plaintiff and Mr. Rees were jointly responsible was
accepted by the defendant as putting an end to the contract. In such a case
outstanding contractual obligations of the injured party are in law discharged
together with the contract. This result does not, in my judgment, depend on
the construction of the contract.
But
the point goes further. Suppose I am wrong. Suppose counsel for the plaintiff
is right in submitting that under the true construction of the contract cl.8
binds the defendant regardless of whether the 1979 agreement is brought to an
end by the decision of the plaintiff and Mr. Rees to discontinue their
partnership, or by some other wrongful dismissal of the defendant. The
termination of the defendant's employment under the 1979 agreement could, on
that footing, have taken place at any time after 3 September 1979, but the
defendant would still have been bound by the five-year restraint clause.
It
is well settled that the reasonableness of a restraint clause is to be tested
by reference to the position as at the date of the contract of which it forms
part. If the submissions of counsel for the plaintiff are right I would regard
the cl.8 restraint as unreasonable as between parties. A contract under which
an employee could be immediately and wrongfully dismissed, but would
nevertheless remain subject to an anti-competitive restraint, seems to me to be
grossly unreasonable. I would not be prepared to enforce the restraint in such
a contract."
It
is plain that the reason for Scott J's decision was that the rule in
General
Billposting and Atkinson
applied. It was only on the basis that he was wrong in this conclusion that he
indicated that he would hold void a clause which would otherwise have the
effect of imposing restraints after wrongful termination of the Defendant's
employment. This expression of view was thus both hypothetical and obiter.
Scott
J's obiter view was followed by the Court of Session in interlocutory
proceedings in
Living
Design (Home Improvements) Ltd v Davidson
[1994] 1 RLR 69. In that case the petitioners sought an interdict restraining
the respondent from breach of a restrictive covenant which purported to apply
for six months after the termination of her employment with them "however that
comes about and whether lawful or not". It was common ground that the
respondent's employment had been terminated by repudiation. The issue was
whether the petitioners had wrongfully dismissed the respondent or whether they
had been entitled to do so consequent upon her repudiation. It also seems to
have been common ground that the restrictive covenant, if reasonable, would be
effective notwithstanding the repudiatory termination - whether by employers or
employee. In refusing the interdict, Lord Coulsfield said:
"In
my view, a restrictive covenant which is phrased so as to operate on the
termination of the employment of an employee, however that comes about, and
whether lawfully or not, is manifestly wholly unreasonable. In that respect, I
agree with the observations in
Briggs
v Oates
,
supra."
It
is apparent, when Lord Coulsfield's judgment is read in its entirety, that he
was proceeding on the premise that the covenant in that case would, had it been
valid, have survived termination consequent upon the employers' repudiation.
The
final decision upon which Mr. Stafford relied was that of Laws J. in
D
v M
[1996] 1 RLR 192. This, also, was a case where employers sought an
interlocutory injunction enforcing an employer's restrictive covenant in
circumstances where the primary issue was whether the termination of employment
was consequent upon repudiation by the employers or by the employee. The
contract provided that the covenant should take effect upon termination of
employment "for any reason whatsoever". In refusing an injunction Laws J. gave
the following reason at paragraph 23:
"In
my judgment, upon the true construction of clause 13.5, the Plaintiffs would be
entitled to enforce the clause even though the contract's termination were
caused by their own repudiatory breach. There is no distinction to be made
between the phrase 'termination for any reason whatsoever', which therein
appears, and the phrase 'termination... however that comes about and whether
lawful or not' which was the expression used in
Living
Design
.
Miss McNeill, correctly, did not submit as much. She accepted that to succeed
on this part of the case she would have to persuade me that
Living
Design
was erroneous, as were the relevant remarks of Scot J in
Briggs.
Neither of these decisions is binding upon me, and the observations of
Scott J. were obiter. But in my judgment the principle enunciated in
those decisions is clearly right. A restrictive covenant, having effect after
the termination of a contract of service or for services, which on its face
applies to the employer's benefit even where the termination has been induced
by his own breach is necessarily unreasonable. Such a provision, if given
effect, would constitute an evasion of the rule in
General
Billposting
[1909] AC 118. Indeed, so far as I can see, the only purpose of inserting the
material words ('for whatever reason' or 'whether lawful or unlawful' or
however otherwise it might be expressed) would be to secure coercive rights to
the employer which would survive his own contractual misconduct. I cannot
think that that would be reasonable."
Laws
J. appears to have proceeded upon the basis that it was at least possible that
the covenant could evade the rule in
General
Billposting v Atkinson
.
Before
us Mr. Stafford did not seek to contend that a restrictive covenant, however
drafted, could survive the termination of the employment consequent upon the
employers' repudiation. He conceded that a covenant which purported to have
this effect agreed to something which was impossible in law. His argument was
that it was mischievous for an employer to incorporate within a contract of
employment a covenant which purported to bind in circumstances where this was a
legal impossibility, and that this mischief alone justified declaring such a
covenant void.
In
my judgment, once Mr. Stafford rejected the premise underlying the relevant
parts of the three recent judgments upon which he relied, he cut away any
support that they could afford to his case. If a covenant, otherwise
reasonable, purports to remain binding in circumstances where the law will
inevitably strike it down, I can see no justification for holding that it is,
on that account, in unlawful restraint of trade. Thus if Mr. Stafford is
correct to concede that the rule in
General
Billposting
is of universal application, he cannot successfully support the decision of Sir
Michael Davies. This is the short and simple route which leads to the
conclusion that this appeal should be allowed.
The
Alternative Route
In
the course of argument I expressed reservations as to whether the rule in
General
Billposting
was consistent with more recent developments of the law of contract. When
considering this case since the conclusion of argument, my reservations have
grown. I have concluded that the rule in
General
Billposting
accords neither with current legal principle nor with the requirements of
business efficacy. It must be open to question whether this Court can
legitimately distinguish
General
Billposting
.
This is not a point I need decide, for whether or not the rule in
General
Billposting
remains applicable, does not in my judgment affect the result of this appeal.
I think it right, however, to express the reservations that I have about basing
a general rule on the result in that case and to explain why it is that those
reservations do not affect the result of this appeal.
Problems
with the Rule in General Billposting
In
General
Billposting
the majority of the House of Lords held that the Manager, having been
wrongfully dismissed, was "justified in rescinding the contract and treating
himself as absolved from the further performance of it on his part". Since
1909 the law in relation to the discharge of contractual obligations by
acceptance of a repudiation has been developed and clarified. In
Heyman
v Darwins Ltd
[1942] AC 356 at 399 Lord Porter observed:
"Strictly
speaking, to say that on the acceptance of a renunciation of a contract the
contract is rescinded" is incorrect."
In
that case the House of Lords held that an arbitration clause remained binding
after the acceptance of a repudiation. Lord MacMillan explained why this was
at p.377:
"The
contract is not put out of existence, though all further 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 their settlement. The purposes
of the contract have failed, but the arbitration clause is not one of the
purposes of the contract."
The
theory that the contract was abrogated upon acceptance of a repudiation, or a
fundamental breach, was finally laid to rest by the decision of the House of
Lords in
Photo
Productions Ltd v Securicor
[1980] AC 827, where Lord Diplock summarised the effect of accepting a
repudiation as follows, at p.849:
"(a) there
is substituted by implication of law for the primary obligations of the party
in default which remain unperformed a secondary obligation to pay money
compensation to the other party for the loss sustained by him in consequence of
their non-performance in the future and (b) the unperformed obligations of the
other party are discharged."
There
is no difficulty in applying these words to the reciprocal positive obligations
that arise under a contract of employment -to provide services on the part of
the employee, and to provide the consideration for those services on the part
of the employer. But I consider that there are real difficulties in applying
those words to the negative obligations that are placed on an employee by a
restrictive covenant in relation to the period after his employment has ceased.
I can best demonstrate this difficulty by taking as an example the situation
where the employee commits serious misconduct which warrants his dismissal. If
the employer exercises his right of summary dismissal, is it to be suggested
that he thereby discharges the employee from his obligation to observe negative
restrictions imposed either expressly or impliedly under his contract of
employment, such as the duty not to disclose confidential information? This
would seem to follow if one applies the principles underlying
General
Billposting
to such obligations, yet such a result borders on the absurd. The absurdity
becomes more marked if one accepts the theory that either employer, by summary
dismissal, or employee by leaving without notice, can unilaterally terminate by
repudiation the primary mutual obligations that arise under a contract of
employment - see the discussion in
Thomas
Marshal (Exports) Ltd v Guinle
[1973] 1 ICR 905, particularly at p.921, and cf. Chitty at paragraph 37-134.
The
considerations to which I have just referred demonstrate the practical problems
that
General
Billposting
can pose for the employer faced with an employee who repudiates the contract.
But that case also poses practical problems for the employer who repudiates the
contract. I do not accept that it is unreasonable for an employer to seek to
impose restraints on his employee that will subsist, even should the employment
come to an end as a consequence of a repudiation by the employer. On the
contrary it seems to me commercially desirable that it should be possible to
achieve this end, for the following reasons.
Where
an employer discloses to an employee confidential information, or otherwise
puts the employee in a position to harm the employer's goodwill, it will
usually be reasonable to impose negative restraints sufficient to protect those
legitimate interests of the employer. Contracts of employment are now subject
to complex statutory regulation, much of it designed to protect the employee.
Cases of deliberate wrongful dismissal of employees, or repudiatory breach of
the duties owed to them, are much less common than bona fide disputes as to
whether or not there has been unfair or constructive dismissal. Employees who
have been unfairly dismissed are entitled to statutory compensation. It does
not seem to me necessarily fair or reasonable that an employer who is held
liable to pay such compensation should also be at risk of losing the protection
that is reasonably necessary to safeguard his confidential information or
goodwill.
Can
General Billposting be Distinguished?
In
my judgment negative restraints agreed to apply after the termination of
employment should not be equated with the primary obligations that are
discharged when a contract of employment is terminated consequent upon
repudiation. The consideration for such restraints is in reality not the
obligation to give the appropriate notice of termination of the employee's
services, but the granting of employment that affords access to confidential
information and goodwill. Such restraints are not "one of the purposes of the
contract" (
Heyman
v Darwins
)
- they are ancillary to those purposes. But for
General
Billposting
I can see no principle of law which precludes the parties from validly agreeing
to restraints that will subsist, even if the employment is brought to an end by
repudiation. I think it at least arguable that, having regard to the
subsequent development of this area of the law, not every restrictive covenant
will be discharged upon a repudiatory termination of the employment. However,
for the reasons which follow, it is not necessary to resolve this issue.
Are
the Present Covenants Reasonable?
If,
contrary to Mr. Stafford's concession, the restrictive covenants would, if
valid, have survived had Mr. Jones been wrongfully dismissed by Rock, does this
feature render them unreasonable and consequently void as being in unlawful
restraint of trade? I am in no doubt that the answer to this question is No.
I have already explained my general approach to this question, but it is always
necessary to look at the facts of the particular case. Mr. Jones had been
employed by Rock for some 8 years. Under the terms of his new contract he was
entitled to 3 months' notice or £7,500 salary in lieu. I do not consider
that the remote possibility that Rock might terminate his employment in
circumstances where they repudiated their obligation to comply with those terms
rendered unreasonable covenants which purported to apply even if that
contingency occurred.
For
these reasons, whichever route is adopted, it leads to the conclusion that the
decision reached by Sir Michael Davies on the principal issue should be reversed.
I
agree with Simon Brown L.J. for the reasons which he has given, that the
subsidiary arguments advanced in support of the order of the trial Judge are
without merit.
----------------------------
(Appeal
allowed: with costs to be here and below; costs to be paid forthwith.)
-----------------------
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