England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE Case no.OBENF96/1085/C

IN THE COURT OF APPEAL (CIVIL DIVISION )

(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.

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 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.

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.

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.

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.

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.

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.

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.

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(Appeal allowed: with costs to be here and below; costs to be paid forthwith.)

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