England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN'S BENCH DIVISION
HIS HONOUR JUDGE ALTMAN
(SITTING AS A DEPUTY HIGH COURT JUDGE)

		Royal Courts of Justice Strand, London, WC2A 2LL Monday 30th July 2001

LORD JUSTICE PILL:

The Background

1. This is an appeal against the judgment of His Honour Judge Altman sitting as a Deputy High Court Judge at Leeds on 30 August 2000. The judge dismissed a claim by Ward Evans Financial Services Ltd ("the employers") against Mr Iain Fox and Mr Alan Phillips ("the employees") with respect to damages for breaches of contracts of employment. Judgment was also given upon other disputes between the parties which are not the subject of appeal.
2. The employers are financial advisers and both employees were employed by them in 1997 as Independent Financial Advisers. A company known as Certis Ltd ("Certis") appointed the employers as their broker for a pension scheme provided by Standard Life. Mr Fox was appointed to implement the scheme. The judge described the procedure:

"This involved his visiting Certis, he said, about every month or so to speak to individual employees of Certis and to maintain contact with the Company. Each member had his or her own pension scheme arrangement with Standard Life through the Claimant and it is common ground that as time went by Mr. Fox acquired a good deal of knowledge of the requirements of individual members and that he maintained by his visits the goodwill and the personal link that existed between the Claimant and their client"

3. The judge also described the way in which clients such as Certis are canvassed and secured:

"The provider was Standard Life. The way in which this type of client is canvassed and secured is that The Independent Financial Adviser, in this case Mr. Fox, approaches the prospective client. If the client is sufficiently interested he will give a 'letter of authority' to the Financial Adviser, as a result of which the latter is authorised to approach the pension provider, in this case Standard Life, for information as to the arrangements and terms of the existing scheme which they have with Certis. This process then involves steps which comply with the requirements of the Personal Investment Authority, which is the regulatory authority. Those include raising a file from which it can be demonstrated that the adviser has acted independently and with sufficient research as to different policies available so as to comply with the regulations."

4. Mr Phillips resigned from his employment on 25 November 1998. Mr Fox gave notice on 8 December 1998 to terminate his employment on 9 January 1999. A company known as Fidelius Ltd ("Fidelius") commenced trading in the same business as the employers on 22 January 1999. It is alleged by the employers first that while employed by them Mr Fox and Mr Phillips both formed and obtained regulatory approval for Fidelius so as to compete with the employers and, secondly, that they secured Certis as a client at the expense of the employers.

The agreements and the allegations

5. The employers' claim is based upon the written terms of a "trust and confidence agreement" which was subsidiary to the written contract of employment. Under the heading "Obligations During Employment", that agreement provides:

"The Executive agrees that during the period of his employment by the Company, he shall; …

3. Not without the Company's prior written permission hold any Material Interest in any person or firm or company which:

3.1 Is or shall be in competition with any of the Businesses …

3.3.2 Impairs or might reasonably be thought by the Company to impair his ability to act at all times in the best interests of the Company: or

3.3.3 Requires or might reasonably be thought by the Company to require him to disclose any Confidential Business Information in order properly to discharge his duties to or to further his interest in such person, firm or Company.

Clause 4 is headed 'Obligations After Employment' and provides:

The Executive [the employee] shall not directly or indirectly: …

4.3 At any time before or after the Termination Date, induce or seek to induce by means involving the disclosure or use of Confidential Business Information any Customer to cease dealing with the Company …

This agreement also defined certain of the terms used as follows;

1.2 'Confidential Business Information' means all or any Corporate Information, Marketing Information and any other information … to which the Company … attaches an equivalent level of confidentiality …;

1.2.1 Which the Company Executive shall acquire at any time during his appointment by the Company but which does not form part of the Executive's own stock-in-trade and

1.2.2 Which is not readily ascertainable to persons not connected with the Company or any Group Company either at all or without a significant expenditure of labour skill or money …

1.6 'Marketing Information' means all and any information … relating to the marketing or sales of any … product or service of the Company … including without limitation … pricing statistics, … market research reports … price lists, discount structures, … names, addresses, telephone numbers, contact names and identities of customers and potential customers of and suppliers and potential suppliers to the Company … their requirements for any product or service sold to or purchased by the Company … and all confidential aspects of their business relationship with the company …"

6. In the statement of claim, the alleged breaches of contract are not attached to specific contractual terms but the employees are claimed to be in breach of the express terms in that:

"(1) On or about the 29^th October 1998, during the currency of their employment with the Plaintiff, the Defendants formed a company known as Fidelius Limited. The first named Defendant is a Director and the second named Defendant a Director and Secretary of the said company.

(2) Fidelius Limited was formed by the Defendants with the intention of trading in competition with the Plaintiff.

(3) In or about February 1999, the Defendants; induced Certis Limited; a customer of the Plaintiff, to transfer management of the Pension Scheme referred to above to Fidelius Limited. In doing so the first and/or second Defendants used confidential business information to acquire the said business for Fidelius Limited."

7. The written contract of employment included the following terms:

"1. The employee must devote the whole of his time, attention and ability during the hours of work for the employer to his duties for the employer. The employee may not, under any circumstances whether directly or indirectly, undertake any other duties, of whatever type, during the hours of work for the employer.

15.2 The employee may not without the prior written consent of the employer (which would not be unreasonably withheld) engage, whether directly or indirectly, in any business or employment which is similar or in any way connected to or competitive with the business of the employer in which the employee works or which could or might reasonably be considered by others to impair the employee's ability to act at all times in the best interests of the employer outside your hours of work for the employer."

8. Clause 4 of the Trust and Confidence Agreement contained provisions other than the clause (4.3) on which the employers seek to rely. Clause 4.1 provides that the Executive shall not directly or indirectly for the period of 12 months after the termination date, seek in any capacity whatsoever any business, orders or custom for any restricted services from any customer and by Clause 4.2 he must not accept requests from any customer. Under Clause 4.6 he must not at any time after the termination date disclose to any person, firm or company or make use of any confidential business information. No attempt is made in these proceedings to enforce these clauses.

The judge's findings

9. In a detailed and careful judgment, the judge found:

"On the 29^th October the Defendants purchased a Company which became Fidelius Limited. Mr. Fox was a Director and Mr. Phillips a Director and Secretary and each held half the shares. On the 3^rd November formal application was made for authorisation by The Personal Investment Authority ['PIA']. This was a detailed application and after some correspondence it appears, from a letter dated the 23^rd December 1998 from the PIA, that there were a number of what appear to be fairly fundamental discrepancies in the information provided. Whether the authorisation from the PIA took longer than was hoped for, or, as the Defendants contend, was quicker than they expected, cannot be ascertained by me on the evidence before me.

Fidelius started trading on the 22^nd January 1999, receiving approval from the PIA dated some six days later but back dated to the 22^nd January. The opening balance sheet of Fidelius Limited is dated the 31^st December 1998 with an opening balance of £10,000 being the share capital. It shows cash at the Bank £20,000 and a Director's loan account of £11,700.

In cross-examination Mr. Fox said that he did not know, initially, that Mr. Phillips had obtained information from the PIA, but that there were discussions about doing things together at about the same time. Mr. Fox said that they discussed it for two months and by late November he was keen to pursue it. He said that the final 'nail in the coffin' was seeing Mr. Phillips' unhappiness in the Claimant Company at the time he left. Mr. Fox said that before the 25^th November he had made no final decision. He agreed that it was in early October that Mr. Phillips told him that he had obtained information from the PIA and that within four weeks the Company had been formed. He said that the Company had been bought 'off a shelf in readiness that should things go awry it could be activated'. He said that the completion of the PIA application form on the 3^rd November was with a view to 'perhaps getting authorisation'. He suggested that there was a delay because Mr. Fox was not sure. He agreed that a bank account was opened and that there was a business plan. He then said, it seems to me significantly, that from his point of view there was no major hurry because he knew he had one month's notice to give. He said that he was aiming to be away from the Claimant Company by the time the authorisation came through. It appears that a Mr. Wilmot was employed by the claimants at the same time as having established his own Company which he did openly and with full knowledge of the Claimant. On the other hand, the Defendants did not disclose to the Claimant the steps they were taking and Mr Fox said it was because it was none of their business. Mr Phillips gave evidence of his reasons for forming Fidelius, including the alleged insecurity of his employment with the Claimants. He referred to redundancies. It seems to me that he attributed rather more input from Mr. Fox into the formation of Fidelius and into obtaining authorisation than Mr Fox was himself prepared to own up to. The reason that he gave for not setting up Fidelius later and for doing it during his employment was that he had to earn a living. He sought to explain his secrecy by saying that it was not a good idea to speak to Mr. Evans, due to the way he had treated other employees. Mr Evans did concede that there had been a lot of disturbance amongst employees at a particular period but he said that this was mainly due to the activities and failings of a Director whose employment was terminated. Whilst fairly wild accusations were made by the Defendants I found no persuasive evidence to support the criticism that they made of Mr. Evans.

I found that the evidence of Mr. Fox demonstrated a sliding away from the extent of his true involvement in the setting up of Fidelius. I find that both Defendants were actively involved in the formation of this Company and in obtaining authorisation, and that they did this so as to be able to continue working in the same field immediately upon leaving their employment with the Claimant. I also find that there is no evidence that Fidelius traded until some time after the end of Mr Fox's employment with the Claimants and that then there was substantial legitimate work that both Defendants could do under the umbrella of that Company without being in breach of any contractual covenants with the Claimants"

10. The judge considered the evidence as to the circumstances in which Mr Phillips resigned. There was a serious dispute of fact between Mr Phillips and Mr Evans, a director of the employers. The judge substantially accepted the evidence of Mr Evans. He stated:

"I find that the decision of Mr. Phillips to leave was in response to the meeting of the previous day combined with the receipt of a summons to a meeting in the North of England which he must have known was liable to lead to his dismissal for his dishonesty. Insofar as this finding relates to the specific issues in the case, it lends support to the view of Mr. Evans on behalf of the Claimant that Mr. Phillips was not seeking new business during the last nine months of his employment and did not obtain any. There was certainly telling evidence, which Mr. Phillips was unable to counter save by referring to some prospects on which he said he was working hard, that he was not obtaining new business for his employers at all during the latter months of his employment. In so far as the manner of Mr. Phillips leaving is related to the formation of Fidelius and the Defendants' intention to trade in competition with the Claimants after they left, it may have disrupted the timetable which the Defendants had set themselves."

11. The judge next considered the circumstances in which, as the judge put it, the defendants secured Certis as a client for Fidelius. The judge's findings were:

"I find that in the event there was a measure of contrivance in the way in which the establishment of the change-over from the Claimant to Fidelius was recorded in documentary form and a degree of defensiveness in the way in which Miss Hatton-Hughes [Human Resources Officer with Certis] gave her evidence. However I do not find that the witnesses have concealed, in their evidence, an express and direct approach by Mr. Fox. Whilst Certis and the pension fund may have subsequently co-operated in pre-empting a complaint of breach of restrictive covenant by signing certain documents I find that the conversation which led to their transferring to Fidelius was much as has been described to me. I do not find that the inconsistencies in the evidence are such as to lead me to conclude that the way in which the exchange developed as described to me has been completely manufactured. I find that the Defendant was asked when he would be coming again and explained that his employment was coming to an end and that there was conversation as to whether in those circumstances Certis would be able to transfer to him. I accept that the initiative came from Miss Hatton-Hughes and that the Defendant did confirm that he would be able to take over. I also find that although he was at that time still an employee of the Claimant he did not deny that he could carry on operating the scheme after his employment ended through Fidelius. That would, I suppose, have been a mark of considerable loyalty to the Claimant, but it would also have been untrue. I also note that Mr. Fox did not report the conversation to the Claimant."

12. The judge had also found (judgment p 4), disbelieving Mr Fox, that Mr Fox had failed to surrender files to the employers before his employment was terminated. Moreover, when returned, the files were not in the form they should have been.
13. In the circumstances, the judge found there had not been a breach of Clause 3.3 of the Trust and Confidence Agreement by the employees:

"It does not seem to me to cover the formation, during employment, of a company which is dormant until after employment ends. The remaining clauses make that clear because they restrain a material interest which interferes with the Defendants' employment with the Claimant and the betrayal of confidential information. I find that the actions of the Defendants in relation to Fidelius did not constitute a breach of Clause 3.3."

There was a further finding that the employees' activities in relation to Fidelius "did not place them in breach of the express or implied terms of their contracts of employment or of the implied term of trust or fidelity".

14. The judge considered the actions of the employees in relation to Certis. He did not distinguish between them but it does not appear that Mr Phillips played any part in the dealings. The judge found that Mr Fox had built up a considerable connection not only with Certis itself but also with the individual employees who were clients in their own right. The very reason Certis put forward for wanting to transfer to Fidelius was the continuity which would be provided by Mr Fox's knowledge and understanding which had arisen from the relationships he had formed. The judge found that information as to the pension arrangements between Standard Life and Certis was confidential information which he could not use or disclose during his employment without breaching his duty of fidelity to his employer but which, in the absence of an express restrictive covenant, he was at liberty to use thereafter. There is a finding that "in undertaking through Fidelius to act for Certis the defendants employed confidential information gathered during their employment with the claimants".
15. The judge found that Mr Fox did not "induce", within the meaning of that word in Clause 4.3, Certis to act in the way they did. He did not take the initiative or put himself forward to seek to persuade Certis to transfer. Telling them, in answer to a question, that Fidelius would be able to do Certis work was not to induce. What took place was a genuine approach by the customer.
16. The judge went on to find that even if there was an inducement, the inducement was not "by means involving the disclosure or use of confidential business information" within the meaning of Clause 4.3. The fact that the operation of the scheme once transferred may well have involved the use of such confidential information did not mean that the customers' decision was induced by means of disclosure of such information.
17. Causation was considered by the judge but only by reference to Clause 4.3. The judge held that even if Mr Fox had declined to answer the question whether Fidelius would be able to do Certis work and had reported the conversation to his employers, events would have taken the same course. The wish for continuity expressed on behalf of Certis could not have been overcome by the employers providing a replacement representative.

Conclusion: Clause 4.3

18. On behalf of the employers, Mr Cohen submits that by acknowledging that Fidelius would be able to take over the Certis work, Mr Fox induced them to cease dealing with the employers. The word "induce" does not require an element of solicitation. An inducement occurs when something is said or done which leads the customer to act. Moreover, it is submitted, the inducement was "by means involving the disclosure of confidential information" because the affirmative answer could not have been given unless Mr Fox had the confidential information about the Standard Life scheme, and how it operated with the employees of Certis, which the judge himself acknowledged Mr Fox had. The judge found that, in giving the affirmative answer, Mr Fox "employed" confidential information. As to causation, Mr Cohen submits that had Mr Fox not given an affirmative answer to Certis and had he reported the conversation to the employers as he should have done, the employers could have taken steps, by appointing a replacement adviser, to keep their customer.
19. While these submissions have force, I am not in the end able to accept them. I can accept that action may amount to an inducement which does not amount to solicitation, a word used, for example, in Clause 4.4 of the relevant agreement. In some circumstances, action which has the effect of causing a course of action may be said to induce that course of action. I am not, however, able to hold that the conduct which led Certis to act as they did can be categorised as conduct involving the "disclosure or use" of confidential business information. Mr Fox was able to hold himself out as being able to act for Certis because he held confidential information but it was not by means of the disclosure or use of such information that Certis was induced to cease dealing with the employers. The clause contemplates, in my view, the deployment of confidential business information by the employee. It does not cover a situation in which the fact that the employee possesses the confidential information causes the customer to act. This is an attempt by the employers to use Clause 4.3 for a purpose for which it was not intended. Clauses 4.1, 4.2 and 4.6 may have served that purpose if reliance could have been placed on them.

Conclusion: Clause 3

20. While I do not consider that Clause 3.3.3 bears upon the actions of the employees, I accept Mr Cohen's submission that both employees were in breach of Clause 3.3.2. The judge has not given reasons for his finding that the clause does not cover "the formation, during employment, of a company which is dormant until after employment ends". In seeking to uphold that finding of the judge, Mr Norman, for the employees, submits that the actions of the employees did not impair their ability "to act at all times in the best interests of the company". In substance, the position was no different from that of an employee who, upon termination of the contract, proposes to commence business on his own account or to obtain employment with another company. There could be no objection to making such plans for the future while the contract persists and the action of setting up a company could not in substance be distinguished.
21. Mr Cohen does not challenge the judge's findings of fact in relation to the formation of Fidelius which I have already set out. Clause 3.3.2 imposes a specific obligation not to hold a material interest in another company when to do so impairs the employee's ability to act at all times in the best interests of the employers. That clause cannot now be challenged as being in restraint of trade. There is no doubt that both employees had a material interest in Fidelius while still in the employment of the employers. Moreover detailed and formal application was made on behalf of Fidelius for authorisation by the Personal Investment Authority. The conduct of the employees was in my view such as to impair their ability so to act. The judge found that Mr Phillips was not obtaining new business for his employers at all during the later months of his employment. He was a director, secretary and shareholder of Fidelius. In his dealings with Certis, already described, Mr Fox made known the existence of Fidelius, a company of which he too was a director and shareholder. Indeed, the judge found that Mr Fox undertook "through Fidelius to act for Certis".
22. These actions were not disclosed by either employee to the employers. The conduct of both men towards the employers, while still employed, was in my view such that it should be concluded that their interest in Fidelius was a strong factor in their ability, and their failure in fact, to act in the best interests of the employers whilst still employed by them. Their conduct adverse to the interests of the employers in my judgment must be taken to have been caused by their interest in Fidelius which they hoped to exploit upon termination of their contracts of employment. It does not follow from the fact that Fidelius did not trade until the contracts were terminated that the employees' ability to serve Fidelius was unimpaired by their interest in that company while the contracts persisted.

Result

23. The judge did not address the issue of causation in relation to Clause 3.3.2. Different considerations arise from those considered in relation to Clause 4.3, as to the determination of which I make no finding. No question of an injunction restraining the employees now arises. I would remit the case to the County Court Judge to consider, on the basis of the Court's finding that the employees were in breach of Clause 3.3.2, the question of causation and to take, as claimed in the statement of claim, all such accounts and inquiries as are necessary so as to ascertain the loss occasioned by the employers by reason of the employees' breach of that clause.
24. To that extent, I would allow the appeal.

TUCKEY LJ:

25. I agree.

LATHAM LJ:

26. I also agree.
ORDER: Appeal allowed to extent indicated in Judgment; case remitted; Claimant to have 60% of costs of appeal; costs below remitted to trial judge. (Order does not form part of approved Judgment)