England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CENTRAL LONDON COUNTY COURT
His Honour Judge Hallgarten QC

		Royal Courts of Justice Strand, London, WC2A 2LL
		13 October 1999

LORD JUSTICE WALLER:

Introduction

This is an appeal from a judgment of His Honour Judge Hallgarten QC given on 27 July 1998. The issue before him was whether the plaintiffs were entitled to receive certain payments pursuant to severance agreements entered into between the plaintiffs (the employees) and the defendants (the company) on 23 January 1996. Under the severance agreements the employees had entered into certain covenants in relation to the way in which they would conduct themselves following termination of their employment with the company, and in particular they agreed by clause 5.6

".... not to be involved whether directly or indirectly for a period of twelve months from Termination date with any business which competes with or is likely to compete with any business or project carried on by the company or any member of the Group at the termination date in which business or project [the employee] was involved in the course of his employment by the company."

Under the severance agreement the employees forfeited any right to receive the payments if they acted in breach of the covenants. Before the judge the company alleged breaches of clauses 5.2, 5.3, 5.5 as well as 5.6. The judge found that the company had failed to establish any breach of any of the covenants. On this appeal there is no challenge to any of the judge's findings of fact. Further, there is no challenge to the judge's ruling that breaches of clauses 5.2, 5.3 and 5.5 had not been established. The challenge relates to the proper construction of clause 5.6 and in that context an issue arises as to whether the clause is in unreasonable restraint of trade and unenforceable.

The facts

As already indicated, the facts as found by the judge are not in issue. They are very fully set out in his judgment, and I shall simply summarise the important features.

The company is a mining and exploration company operating in certain Central Asian Republics which were part of the former Soviet Union. The employees joined the company, in Mr Turner's case in September 1994, and in Mr Williams' case at the end of 1994, following an association between his own enterprise and the company which assisted in the negotiation on behalf of the company of the two agreements to which I am about to turn. During the period of employment of the employees, (to quote the 1996 Annual Report of the company's holding company, Nelson Gold Corp. Ltd), "minimal effort was spent in considering other exploration and development opportunities" outside "the ZGC operations in Tajikistan". Other than Tajikistan the Central Asian Republics to which consideration needs to be given are Kazakhstan, Uzbekistan and Kyrgyzstan. The company had representative offices in Tashkent in Uzbekistan, Bishtek in Kyrgyzstan, and Dushanbe in Tajikistan, but the company's concentration was on an area of 3,000 km² at the Western end of the Zeravshan Valley in Tajikistan. This was the subject of a geological exploration agreement between the company and a state organisation of Tajikistan giving the company exclusive rights to explore in a certain area. It was also in relation to this area that the company and the government of Tajikistan had entered into a joint venture establishing ZGC in order to mine and explore particular sites namely Jilau, Taror and Chore. The capital requirements for this scheme were some $150m. The employees' activities as found by the judge were almost entirely limited to Tajikistan. Albeit by the formal service agreements initially executed in January 1995 the terms could be said to be a little wider, by those executed on 1 November 1995 the recognition seemed to be of a role limited to being "responsible for the implementation of the company's objectives pursuant to the Zeravshan Joint Venture . . ."

The judge lists the activities of the company during the period until the end of 1995 in the following terms:-

"Throughout the period until the end of 1995, the Defendants' efforts were primarily directed to bringing the Jilau CIL Project on stream for gold production, which object was achieved on 22.1.96 at a cost to that date of some US$50m. Second in importance was the completion of engineering work for a heap leach project on low grade ore, likewise at Jilau, (at an estimated cost of some US$60m) and the pursuit of metallurgical test work on ore from the Taror deposit. Third in importance was the Exploration Agreement under which the Defendants sought to explore a number of potential deposits, with geochemical and trench sampling programmes being carried out in particular in the Shang-Magiyan mineralisation belt in the SW corner of the 3,000 km² zone and in the Meridionalnoye area towards the East end of the zone. Fourth in importance was minimal activity in relation to the two exploration areas in the Kyrgyz Republic. Fifth in importance can best be described as keeping a corporate eye open for potential gold projects within the Central Asian Republics: e.g. Mr Kenneth Arne, who was in charge of the Kyrgyz project for the Defendants, engaged local consultants in the Kyrgyz Republic and Kazakhstan to review mineral resources which might represent additional exploration targets."

Thus the first three matters were all concerned with the 3000 km² zone.

It is unnecessary to rehearse the circumstances giving rise to the termination of the employment of the employees. It is sufficient to say that matters were compromised by a severance agreement. As part of the compromise the company agreed to pay certain sums in return (a) for certain covenants and (b) though it is difficult to evaluate the same, other rights including share options which the employees had under their contracts of employment. It was however theses payments (and indeed share options) which would be forfeited if any breach of the covenants was committed.

Clause 5.6 must be read in its context, and thus the whole of clause 5 needs quoting:-

5. In consideration of the additional payment to Mr Turner of the sums of £50,000 payable by the Company on 30th June 1996 and £50,000 payable by the Company on 31st December 1996 [less such tax and national insurance as the Company is obliged to deduct] Mr Turner hereby:

5.1 accepts and acknowledges that the salary and sums payable and benefits provided to him under Clause 2 are made by the Company in full and final settlement of all claims and complaints whatsoever (whether arising under UK Bermudan or Canadian common law or statute or under the treaties establishing the European Union or any legislation or judgments issued pursuant thereto or otherwise) which he may have against the Company or any member of the Group or any of their officers or employees arising out of or in connection with his positions as director of the Company or any other member of the Group or his employment with the Company and/or the termination thereof or under the terms of the Service Agreement including but without limitation any entitlement to share options as referred to in clause 6.2 of the Service Agreement.

5.2 undertakes that he will not (save as required by law or with the prior written authorisation of the Company) reveal discuss or use any information regarding the business or affairs or any of the trade secrets or confidential information or dealings of the Company or any member of the Group or any partner shareholder advisor director officer or customer thereof including but without limitation their current or future projects or plans which may have come to his knowledge during his employment or as a result of his directorships with the Company or any member of the Group or otherwise. This restriction will apply without limit in time but will cease to apply to information or knowledge which may come into the public domain other than as a result of Mr Turner's default.

5.3 without prejudice to his obligations under clause 5.2, undertakes that he will not assist co-operate or have dealings with Dr Charles Cooper or Mr Richard Wilkins on any matters pertaining to the business affairs directors or officers of the Company or any member of the Group.

5.4 without prejudice to his obligations in clause 5.2, undertakes not (in particular but without limitation in respect of the IFC and the Tajik Government or any of their officers, directors or employees) to knowingly do or say anything which may be harmful to their reputation or the reputation of the Company or any member of the Group or any partner shareholder advisor director officer or customer thereof or which may lead any person or organisation not to engage in business or to cease to do or reduce its business with the Company or any member of the Group.

5.5 for a period of twelve months from the Termination Date for the purpose of competing with the business of the Company or any member of the Group in which he was involved during his employment (whether on his own account or on behalf of or in conjunction with any person, firm or organisation) undertakes not directly or indirectly to solicit induce or procure or attempt to solicit induce or procure any person who was an employee of the Company or any member of the Group within the six month period preceding the Termination Date to leave:

5.6 undertakes not to be involved whether directly or indirectly for a period of twelve months from the Termination Date with any business which competes with or is likely to compete with any business or project carried on by the Company or any member of the Group at the Termination Date in which business or project Mr Turner was involved in the course of his employment by the Company."

The termination dates were 10 January and 23 January 1996. It was (as already indicated) the company's case that the employees committed breaches of clauses 5.2, 5.3, 5.5 as well as 5.6. So far as clause 5.6 is concerned it is the company's case that by that clause the employees were restrained for a period of 12 months from being involved with any business which involved mining and exploring for minerals in Kazakhstan, Uzbekistan, Kyrgyzstan or Tajikistan. If that is the proper construction of the clause there is no doubt that the employees were almost immediately in breach of the same.

On 10 February 1996 they, together with Dr Cooper, set up a company in the British Virgin Islands called Oxus Holdings Ltd which changed its name to Oxus Resources Corp. (Oxus) as an independent mineral exploration and development company focusing upon Central Asia. They did not hide what they were doing, and a brochure produced in May 1996 identified Dr Cooper as chairman and the employees as Managing Director and Commercial Director respectively. It was alleged that the association with Dr Cooper breached clause 5.3. The judge found it did not and there is no appeal from that decision.

It was alleged that the employees had broken clause 5.2 by offering themselves as consultants to the Tajik government in relation to certain delicate negotiations with the company bearing on ZGC once gold production had begun. The judge found against the company on the facts, and would have found, albeit reluctantly, that even if the facts had been established, because the Tajik authorities turned down the alleged offer, no breach of Clause 5.2 had been established.

So far as testing the proper construction of clause 5.6 is concerned the findings of the judge can be summarised as follows. It is I think helpful for this purpose to try and place the different matters not in chronological order but in order placing those geographically furthest from ZGC first.

Oxus entered into agreements, or letters of intent, in relation to areas in NE Kazakhstan (Zhanan gold deposit) heads of agreement 3 June 1996, Central Kazakhstan (Muzbel) agreement 19 November 1996, Kyrgyzstan (Kar-Bolton Region) letter of intent June 1996; SE Uzbekistan (Khandiza deposit) ex exploration agreement 14 December 1996.

Oxus approached the Tajik authorities seeking a grant of exploration/exploitation rights in the Matcha district of the East Zeravshan Valley i.e. outside (as the judge put it) the company's sphere of influence but nevertheless in Tajikistan. In March 1996 a Joint Venture agreement was entered into.

In July 1996 (this being the date emerging at the trial) Oxus started to take a serious interest in Chulboi; a report was produced on 21 September 1996 and an offer was made to co-operate with the Tajik Government. The employees at the trial sought to suggest, for example by Mr Turner's witness statement, that so far as Chubloi was concerned matters were in limbo until March 1997 i.e. until after the period of the restrictive covenant had expired. The judge held that that did not give an accurate impression. Why I think one is entitled to ask were the employees concerned to give that impression ? The answer is that even on the employees more limited construction of clause 5.6 they appreciated that their activity, vis a vis Chulboi, was on any view close to the line.

Chulboi had at one time been thought, as between the company and the Tajik authorities, to be within the 3,000 km² area covered by the Exploration agreement. Indeed at a meeting of ZGC held on 9 October 1994 a study carried out on behalf of the company on the basis that Chulboi was within the 3000 km² referred to the Chulboi deposit as having been studied and found "interesting". That led to the Tajik authorities making clear that Lonrho had been offered deposits in the Iskanderkul area (including Chulboi), and to the company regretfully agreeing that Iskanderkul should be excluded. At the trial the company sought to establish an agreement between themselves and the Tajik authorities under which the agreement was contingent on Lonrho taking up the offer. The agreement the company sought to establish was that Iskanderkul would automatically revert if Lonrho after all decided not to proceed. The judge held that no such agreement was reached . He held that the point was merely raised as a hope or expectation in a private meeting between Mr Miller for the company and the Minister, to which conversation (he added) the employees were not a party.

In mid-1995 Lonrho evinced that they were no longer interested in Iskanderkul. However there was no evidence that the company showed any interest in Iskanderkul generally or Chulboi in particular after that date. The judge's finding was that the company through "their engagement of Mr Dowdell" must have been aware "that Lonrho were relinquishing Chulboi". He also said:-

"it is impossible to say how [the company's] activities might have been directed had the Chulboi deposit been available to be investigated in 1995/6. For my part, I was not persuaded that the availability of Chulboi would have involved any significant change of direction or allocation of resources: at best there might have been some rudimentary grassroots exploration."

Construction of clause 5.6

There is in my view some interconnection between the question of construction and the doctrine of restraint of trade. That, as it seems to me, must be so for at least one reason. If a particular construction was to lead to the view that the clause was unenforceable, then an alternative view, which did not lead to the same result if legitimate, ought to be preferred.

It is I think important to recognise that whether the company's construction is to be preferred to that of the employees or vice versa, clause 5.6 is a covenant in restraint of trade. Accordingly it will only be enforceable if first it is reasonable in the interests of the parties and secondly it is reasonable in the interests of the public. (see the classic statement of Lord Parker in Morris v. Saxelby [1916] AC 688 at 707). So far as the interests of the parties are concerned "it must afford no more than adequate protection to the party in whose favour it is imposed" (also at 707). "The only reason for upholding such a restraint on the part of an employee is that the employer has some proprietary right whether in the nature of trade connection or in the nature of trade secrets, for the protection of which such a restraint is --having regard to the duties of the employee-- reasonably necessary." (710 in the same speech).

In Attwood v. Lamont [1920] 3 K.B. 571 the matter is summarised accurately in the head note in the following way:-

"First. It is the covenantee who has to show that the restraint sought to be imposed upon the covenantor goes no further than is reasonable for the protection of his business.

Secondly. The restraint must be not only in the interests of the covenantee but in the interests of both the contracting parties.

Thirdly. An employer is not entitled by a covenant taken from his employee to protect himself after the employment has ceased against his former servant's competition, although a purchaser of goodwill is entitled to protect himself against such competition on the part of his vendor."

Thus a covenant restraining competition alone is unenforceable as between employer and employee. The seller of a business or partnership is in a different position because unless there is a covenant to restrain competition the vendor can win back the very goodwill that he has sold.

Thus to enforce the covenant at all the company would have to establish proprietary rights in the nature of trade connection or in the nature of trade secrets. I should emphasise that because those are the matters which they are legitimately entitled to protect it does not follow that clause 5.6 must be unreasonable because covenants restraining the use of confidential information or the canvassing of trade connections could , and indeed in this case were imposed. It has been recognised in many cases that because there are serious difficulties in identifying precisely what is or what is not confidential information, and who may or may not have been a customer during the period of an employee's service, a restraint against competing which is reasonable in time and space will not only be enforceable but the most satisfactory form of restraint. That line of thought has also led the court to reject the argument that a covenant is too wide because some hypothetical case right outside the contemplation of the parties might be argued to fall within the covenant. Clark v. Electronic Applications I [1963] R.P.C. 234. It has also led the court to construe a covenant or imply a limitation with the result that a covenant which might otherwise have been unreasonable is construed as reasonable.(see e.g. Plowman v. Ash [1964] 1 WLR 568. All the above I do not understand to be in issue.

Mr Tugendhat QC for the company stressed that the clause is part of a severance agreement and further stressed that a consideration was being paid at least in large measure for a restraint over a period of twelve months. In most employer and employee situations no further or specific consideration is paid in order to gain the employees agreement to be bound by a restrictive covenant, and it does seem to me that in considering the interests of the parties it is a legitimate factor to take into account that the employees were being paid something extra for the covenant they agreed to sign but that fact does not relieve the company of the necessity of justifying the restraint. Mr Tugendhat can also legitimately pray in aid the fact that these employees' were well advised by lawyers, and that there was no inequality of bargaining position but again that does not relieve the company from its obligation to justify the restraint. He also, with some force, submits that if the restraint simply prevents the employees competing in areas of business already finally captured by the company e.g. exploration within the 3000 km² what were the company paying for?

What then were the trade connections and trade secrets that the company was entitled to protect? Mr Tugendhat sought to deal with this question by submitting that he did not really have to answer it because clause 5.6 was "self limiting". He relied on two authorities although he suggested there was a further unreported authority which assisted him. The reported authorities were Ronbar Enterprises Ld. v. Green [1954] 1 W.L.R. 815 and Kall-Kwik Printing (U.K.) Limited v. Frank Clarence Rush [1996] Fleet Street Reports 114. In Ronbar the court was concerned with a restraint of trade covenant in an agreement under which one partner bought out the other. The covenant on one view was world-wide and therefore unreasonable, however the court severed the covenant limiting the restraint to prevent the vendor partner becoming engaged in "any competing business".

In the Kall-Kwik case the court was concerned with a restrictive covenant to take effect at the termination of a franchise agreement. The court was again prepared to sever the covenant and construe the covenant as self limiting in restricting only a competitive business.

Those authorities come of course from situations outside employer and employee where a restriction against competition per se may be defensible when it is the goodwill which the covenantee is entitled to protect. I am doubtful whether even as aids to construction they can assist very much. But more importantly even if they aid construction, they cannot assist in relieving the company from having to justify the restraint imposed.

On the findings of the judge the employees were not directly involved in any part of the business of the company outside Tajikistan. The most that could be said in relation to any Republic outside Tajikistan is that because the employees were directors of the company they were involved in the business so far as the representative offices in other republics were doing something, but so far as restraint of trade is concerned what the company has a right to protect is the trade connections or confidentiality which the individuals might destroy or take. The company certainly had trade connections established with the assistance of the employees with the authorities with whom they had negotiated the joint venture, and their rights in relation to the 3,000 km². The difficult question is whether and to what extent they had a proprietary interest in those connections beyond the joint venture and the 3,000 km² but that is a matter to which I shall return below.

In that context I turn finally to the wording of clause 5.6. The first point to make is that if the business which the employees are to be restrained from entering is any mining or exploration business in any of the Central Asian Republics not limited to Tajikistan, that could only be on the basis that that was the business in which the employees were involved at the termination date. For the reasons I have already given a construction that would seek to protect the company against the competition of the employees by reference to their involvement simply as directors would seem to me to be unenforceable.

Is the clause capable of a more limited construction? The words of the clause on which it seems to me right to concentrate initially having regard first to the principles relevant to restraint of trade, and secondly to the fact that they are limiting words are the final words --- "in which business or project [the employee] was involved in the course of his employment by the company."

It seems to me that business can and should be construed as being something more limited than the entirety of the activities of the company. The judge so construes it simply by reference to the language used. I however do not agree with the judge that business is synonymous with "current project" and that "project" refers to future project. The judge in reaching that conclusion relies on the words in Clause 5.2, but I do not really get much assistance from that clause.

It seems to me that one can certainly say that the business in which an employee was involved is intended to be that aspect of the business of the company in which he is in fact involved. Business used in that sense would cover negotiations with the authorities in relation to matters not even thought of as projects at that stage, as well as matters in the process of being developed into projects. I do not see that there is any basis for limiting "business" to current projects. Thus I would not construe the word business as narrowly as the judge who, as it seems to me, really construes business as synonymous with project (albeit "current" project) whereas business seems to me more naturally to connote something wider.

It is to be noted next that the restriction is upon the employee being involved directly or indirectly for a period of twelve months with any business which competes with or is likely to compete with . . ., whereas for the restraint to bite the employee must have been actually (my word) involved in the course of his employment in the business or project. That adds force to the contention that the involvement is not an indirect one or simply that of a director overseeing the business generally. There needs to be actual involvement in the business or project.

The clause is also it should be noted limited to restraining the employee for a period of twelve months from the termination date from directly or indirectly competing with any business or project carried on at the date of termination. There is thus a further limitation. The clause is not concerned to restrain an employee from competing in relation to business or a project which is not being carried on at the date of termination.

Thus, as I see it, the clause on the above construction restricts the employees from competing for a period of twelve months in any aspect of the company's business being carried on at the date of termination in which the employees were actually involved during their employment. On that construction clause 5.6 would in my view be reasonable.

Was the judge right in his conclusion as to no breach?

The judge was clearly right not to find that any breach had been committed in relation to business which the employees had entered into through Oxus outside Tajikistan. The question which I have not found easy is whether a breach was committed in relation to Chulboi. The judge having placed a very narrow construction on the word business found that it was impossible to say that either of the employees had been in any way involved in Chulboi. He also found in addition that since the company had not taken up Chulboi again after Lonrho were no longer interested from mid-1995, Chulboi was not a relevant "business or project" as at the date of termination.

But the questions on my construction of clause 5.6 are (a) was Chulboi part of the aspect of the business with which the employees were concerned during their employment? If so, (b) was that business being carried on as at the date of termination?

The employees activities were limited almost entirely to Tajikistan, and, as I understand it, to the joint venture business relating to sites within the 3000 km². Chulboi was at one time thought to be within the 3000 km². It is thus on any view close to that area, and the company even had a hope that it would be brought back within that area over which they had been granted rights by the Tajik authorities. It seems to me that Chulboi was clearly at one stage within the aspect of the business with which the employees were involved during their employment. What is a much more difficult question is whether once Chulboi had disappeared from the aspect of the business with which the employees were concerned and had not come back into that aspect of the business, the business which is being carried out at the date of termination is sufficient to enable the covenant to bite on the employees' activities vis a vis Chulboi.

Ultimately I have concluded that it is not. The use of the words "compete or likely to compete" in the earlier part of the clause lead me to that conclusion. The judge's finding was that the company must have appreciated that Lonrho had relinquished Chulboi, and yet did nothing to bring it within the 3,000 km² area. It seems to me an unnatural construction to place on the word "compete" that it should include being unable to involve oneself in a project or a part of the business which the covenantee is not involved in at the date of termination and has no intention of taking on. I appreciate that Mr Tugendhat would submit that his clients have paid a substantial sum for a restriction that seems to be limited to business the company has already firmly captured. The answer to that submission is that in my view it is not so limited. If the company had had as part of its business in Tajikistan designs on areas outside the 3000 km² as at the Termination Date, and could have established that the employees, through Oxus, were seeking to compete for that business, then a breach of the covenant would have been established. By, I accept, a narrow margin, the company failed to establish such a breach.

I should perhaps finally add that I am conscious that Mr Tugendhat was putting his appeal on a much broader basis which I have rejected. It could be said with some force that he never quite put the case in the more limited way that I have thought to be more arguable. Since I have also rejected that argument any sense of injustice at not being able to deal with the point is I hope alleviated.

I would dismiss the appeal.

LORD JUSTICE LAWS: I agree.

LADY JUSTICE BUTLER-SLOSS: I also agree.

Order: Appeal dismissed with costs; sum of £15,000 be paid out of moneys paid into court, pending detailed assessment of costs.