England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
CHANCERY DIVISION
ON APPEAL FROM TRURO COUNTY COURT
(HIS HONOUR JUDGE MCKINTOSH)

		The Royal Courts of Justice The Strand London Tuesday, 5th February 2002

Tuesday, 5^th February 2002

1. LORD JUSTICE SCHIEMANN:Lord Justice May will deliver the first judgment.
2. LORD JUSTICE MAY: This is an appeal against a decision of His Honour Judge McKintosh given in the Truro County Court on 24^th January 2001. Permission to appeal was given on reconsideration by Dyson LJ and myself on 13^th June 2001. The permission was expressly limited to one ground of appeal only and the application for permission to appeal was otherwise refused.
3. The parties to this litigation are all solicitors. The claimant is the principal of a firm of solicitors with a main office in Redruth in Cornwall. At least until May 1997, his firm was called Thurstan Hoskin and Partners. The first defendants Jewill, Hill & Bennett are a firm of solicitors in Penzance. They did not feature as effective parties before the judge and do not feature as parties to this appeal. The second defendant, Mr Burton, was until May 1997 employed by Mr Hoskin as a salaried partner. The third defendant, Mr Kidd, was employed by Mr Hoskin as an assistant solicitor until he left at the end of August 1997. Within Mr Hoskin's firm, Mr Burton was in charge of litigation and Mr Kidd was his assistant.
4. In 1994, Mr Hoskin entered into what is referred to as a Deed of Partnership with two salaried partners, one of whom was Mr Burton. Clause 28 of that otherwise unremarkable agreement was headed "Restraint of Trade". Clause 28.1 was essentially a covenant that, in the event of the termination of the partnership, the salaried partners would not act in competition with Mr Hoskin as solicitors at stated places or within a 3 mile distance of any partnership office for a period of 6 months from the termination. Clause 28.2 provided:

"In the event of the termination of the Partnership as aforesaid the Salaried Partner shall not within such period aforesaid canvass solicit or endeavour to take away from Mr Hoskin the business of any Clients of the Partnership who shall have been clients of the partnership within one year of the termination of the partnership nor shall he hold himself up as having had any connection with the Partnership".

5. By 1997, Mr Burton and Mr Hoskin had fallen out in a fairly big way, as indicated by evidence which the judge referred to in his judgment in the present case. At the end of April 1997, Mr Hoskin dismissed Mr Burton. Mr Burton contended that he had been wrongfully dismissed and brought proceedings in the Truro County Court claiming, among other things, an injunction to restrain Mr Hoskin from preventing him continuing to work for the firm as a solicitor. He applied for an interim injunction and there were hearings before His Honour Judge Anthony Thompson QC in Truro. These proceedings were quickly compromised and came to an end by a consent order made on 2^nd May 1997. The terms of the order by consent were that Mr Burton's application for an interlocutory injunction and his claim in the action were dismissed with no order as to costs. The order recites that the parties had reached agreement set out in Heads of Agreement which were attached to the order. The Heads of Agreement state that Mr Burton and Mr Hoskin had agreed the following terms in full and final settlement of all claims which either party might have against the other in connection with or arising from their Deed of Partnership made in November 1994 and/or Mr Burton's employment by Mr Hoskin. The terms included that Mr Hoskin was to pay Mr Burton the sum of £11,250 as compensation for termination of his employment; that Mr Hoskin should pay Mr Burton's salary for April 1997 and make a contribution to a pension scheme; that any partnership or contract of employment between Mr Hoskin and Mr Burton should be dissolved or terminated with effect from 1^st May 1997; and that Mr Burton should be released from the covenants in Clause 28.1 of the Deed of Partnership but not those contained in 28.2, except that Mr Burton should be entitled to canvas solicit and represent four named clients of Mr Hoskin's firm.
6. On these agreed terms, Mr Burton departed from Mr Hoskin's firm and soon joined the first defendants. Mr Kidd meanwhile remained for a short time with Mr Hoskin. But at the beginning of August 1997, he gave one month's notice of termination of his employment. His contract of employment apparently required three month's notice, but that is not material in the context of the present appeal. His contract of employment also contained a covenant equivalent to that of Clause 28.2 in Mr Burton's Deed of Partnership. Mr Kidd went on holiday for two weeks in the middle of August 1997. He left Mr Hoskin's firm at the end of August. On 29^th August 1997, he had a meeting with Mr Burton, with whom he had been in contact and who had earlier shown him around the first defendant's firm. The judge heard a great deal of evidence about what Mr Burton and Mr Kidd were up to at the end of August and beginning of September 1997. Mr Hoskin's case in these proceedings was that they together solicited a number of clients of his firm to take their business to the first defendants. They defended that allegation, but the judge found that there had been solicitation in breach of Clause 28.2 and this court has refused Mr Burton permission to appeal against that finding. The bare bones of the judge's findings were that Mr Kidd acquired and brought to his meeting with Mr Burton a list of Mr Hoskin's clients. They selected some 22 of these clients and induced 20 or so of them to sign prepared letters of authorisation transferring their business from Mr Hoskin's firm to the first defendants. The first defendants in the person of Mr Burton then wrote a letter to Mr Hoskin dated 1^st September 1997 enclosing the signed authorisations and asking for the files of these clients to be transferred to the first defendants.
7. It was and is Mr Burton's contention that Clause 28.2 of the Deed of Partnership is unenforceable as being in unreasonable restraint of trade. The judge found against this submission. It is contended that he was wrong to do so, and it is this ground of appeal alone upon which Dyson LJ and I granted permission to appeal. We understand that Mr Kidd also and separately made an application for permission to appeal which was refused by Aldous LJ after an oral hearing. His application did not address the ground of appeal on which Mr Burton was given permission. Mr Spens is here today, on behalf of Mr Kidd, in the contingent hope that he may be able to persuade this court, if Mr Burton's appeal succeeds, to reopen the question of Mr Kidd's application for permission.
8. The judge, in the course of his judgement, set out substantial parts of Mr Burton's evidence mainly in relation to whether there had been solicitation. He was cross-examined by reference to the Heads of Agreement attached to the court order of 2^nd May 1997. He agreed that he had been released by the terms of that Agreement from Clause 28.1 but not from Clause 28.2. Nevertheless he said that after 2^nd May he did not consider himself to be bound by any restrictive covenant not to solicit. He did not contemplate that he would wish to do so. His view was that there was more than enough work in Penzance and he would not need to go off and solicit other people's clients. He also said that there was nothing unusual to have clauses such as this and "we do have them".
9. The judge's decision as to the enforceability of the covenant was in these terms (page 52 of the judgment):

"In this case I think that the time scale is important. What I am going to do first is to say that I think that the covenant was binding on both defendants. It is quite clear that that was not just a simple agreement on the 2^nd May 1997 but was a schedule to an order of the court if one party felt that the other had not fulfilled a term of a court order, then the course of action is to enforce it through the court. It is not a question of saying: "Well, because you have not done A that means I do not have to do B". It respectfully is a nonsense to say that it never was a binding clause. It was accepted by Mr Burton, although he said that they do not have them, that is a perfectly normal covenant. One has to look at it in the light of authorities over the years in the courts in the light of changes in the law, both here and internationally over the last few years. One always to have in mind human rights to look at the balance of things, the proportion of things, and also what vice it is aimed at.

What we have here is a very intimate, small specialised part of the country with a limited client base. It is not a rich and wealthy part of the country in Cornwall. It is rather on a county scale a big village. The fact that Penzance is 20 miles from Redruth I do not think makes this an excessive radius over which such a covenant should operate. They are small communities by and large in Cornwall spread where the population over that area will tend to drift one way and drift the other, and partly in evidence that was touched on.

The terms of the covenant are no means excessive, a matter of relatively few months in the case of both defendants. It is quite clear, even looking at the sort of practice, shall we say, of Jewill, Hill and Bennett as it was immediately before its acquisition by the defendant, Mr Burton, it was a practice which clearly, if someone had left there taking a reasonable proportion of one part of its client base (whether probate, conveyancing or what litigation it had) was bound to have a serious effect. One is looking, particularly these days when one has seen the problems economically in these areas, that financial effect in particular over the short term because it is indeed all about cash flow, something like that where a firm is just about going along can have a devastating effect.

So, in the first place, in the view of this court the terms of this covenant were not unreasonable or unduly draconian and were not such as to be really a restraint of trade. They were a reasonable protection. They were also clearly still held in front of Judge Thompson to continue. Other things the second defendant was released from. 28.2, the relevant condition that we are considering, was specifically stated to continue to bind and so the defendant knew. One suspects that had the boot been on the other foot, the second defendant would have been the first to yell "foul"."

10. The relevant elements of Clause 28.2, as it was originally entered into are that it was to operate on the termination of what is referred to as a partnership between the principal and a salaried partner; that the operative period was six months from termination; that the restriction was on canvassing, soliciting or endeavouring to take the business of clients away from Mr Hoskin; and that it extended to any clients of the partnership who had been clients within one year of the termination. Mr Burton was also not to hold himself out as having had any connection with the partnership.
11. It is not suggested that the clause was excessive in time. But Mr Bloch QC submits, on behalf of Mr Burton, that the essential flaw in this covenant is that it is not confined to clients with whom Mr Burton dealt. He has referred us to passages in Marley Tile v. Johnson [1982] IRLR 75, Office Angels v. Rainer Thomas [1991] IRLR 214; Austin Knights v. Hinds [1994] FSR 52; and sought to distinguish Plowman v. Ash [1964] 1 WLR 568 and Business Seating v. Broad [1989] ICR 731, in which, he submits Millett J. followed Plowman v. Ash without the benefit of a wider view of relevant authority; and also Spafax v. Harrison [1980] IRLR 442 and Stewart Jeffries Parker Ginsberg v. Parker [1988] IRLR 483; and International Consulting Services v. unnamed defendant [2000] IRLR 227. These latter cases, relied on by the respondent, were, submits Mr Bloch, cases where either the main point in the present appeal did not arise, or they were older cases, or, in the case of Business Seating, a case where the main range of applicable authority was not cited to the court.
12. Mr Bloch submits that the underlying protectable interest did not include the goodwill of the business as a whole; only the potential interest that the employee may gain over clients. He referred us to the well-known passage in the speech of Lord Parker of Waddington in Herbert Morris v. Saxelby at [1916] AC 688 at 708-9. He also referred us, and drew our attention to the short quotation by Millett J (as he then was) in Allied Dunbar v. Weisinger [1988] IRLR 1 at 48:

"... the real questions in every case are, first, what are the interests (for there may be more than one) which it is legitimate for the covenantee to protect and secondly, is the protection no more than is reasonably necessary to protect those interests respectively?"

13. Mr Bloch submits that this is not a case to which the considerations to be seen in Bridge v. Deacons [1984] 1 AC 705 at 716 to 717 are apt for the present case since this was not an agreement between partners who are the owners of the firm's whole assets including its goodwill and where mutuality was a most important consideration; on the contrary, it was he submits, an agreement between a principal and employee.
14. He submits that the judge's judgment in the present case did not address, or did not sufficiently address his main points. There were some 40 or 50 litigation clients – certainly less than 100 – against a much larger number of other clients of the firm. Mr Hoskin gave notice of Mr Burton's departure to a relatively small number of clients. Mr Bloch referred us to Mr Burton's submissions at trial to show that this point, and his main point was taken before the judge.
15. He submits by reference to the authorities to which he has referred, that it is generally fatal to a covenant of this kind if it extends beyond those clients with whom the covenantor had contact, unless there is clear evidence that he dealt with or had the opportunity to gain influence over the substantial body of the client base. He submits that it is necessary to ask whether the covenant extends no further than is reasonably necessary to protect the client connection and that it is plainly not so limited because it extended to a significant number of clients that Mr Burton might well not know at all. He submits that the evidence was that the theoretical number of the firm's clients was of the order 600 to 900. There was no evidence that Mr Burton, as a litigation solicitor, had to do with more than a small proportion of these. The clause should have been limited to those clients for whom Mr Burton had acted or, at its widest, to those for whom the litigation department had acted. Mr Bloch submits that the fact that Clause 28.2 was reaffirmed in the Heads of Agreement of the 2^nd May 1997 does not detract from its nature nor change the legal analysis to which it should be subjected. It is void unless the claimant shows that it extends no further than is reasonably necessary to protect his legitimate interests.
16. As to the agreement of 2^nd May, Mr Bloch's submission is that the incorporation of a modified version of clause 28.2 in this agreement would have been unenforceable had it appeared for the first time in that agreement. He refers us to a first instance decision of Blackburne J in Gerrard v. Michael Read where there was a restraint. There was a restraint included in a consent order which became an order of the court. Blackburne J decided that the court had power to set aside such an order if the relevant part of it was unreasonably in restraint of trade. The court however held that in that case since the restraint period was an agreed period which the court had been prepared to sanction, there was a considerable burden on the covenantor to show why the court should revisit the matter. In the event, the attack on the order failed. Mr Bloch submits that in the present case, clause 4 of the 2^nd May 1997 Agreement was not made an order of the court and that clause did not lend anything to clause 28.2 itself by confirming its enforcability.
17. By respondent's notice, the respondent seeks, if necessary, to uphold the judge's decision on additional grounds, but, other than factual points available from the judgment itself, we have not gone into that.
18. Mr Marsden, on behalf of the respondent, submitted in writing that the reaffirmation of Clause 28.2 in the Heads of Agreement of 2^nd May 1997 should alter significantly the court's approach to its enforceability. Mr Burton was legally represented at the time when he entered into the compromise agreement and was, in any case, himself an experienced litigator. He received substantial consideration for that agreement and was himself released from Clause 28.1 of the 1994 Agreement. He was not then in the position of an employee making an employment agreement, but of a litigant compromising a claim. The court should be slow to declare unenforceable any term of the settlement attached to the order of 2^nd May 1997. The policy considerations that the court should be slow to interfere with the terms of settlement of disputes between litigants are not the same as those which apply to the enforceability of a covenant entered into by an employee at the outset of his employment. Mr Marsden accordingly submits that, by reason of the Heads of Agreement of 2^nd May 1997, the question of enforceability should be determined rather as if it had been a business sale agreement than an employment agreement. He suggests that the cases relied on by the appellant are of limited relevance. He submits further that the enforceability of clause 28.2 should be determined by criteria applicable to covenants between partners. If, contrary to these submissions, this covenant is enforceable only if it extends no further than was reasonably necessary to protect Mr Hoskin's legitimate interests, then this covenant is, as the judge found, enforceable, since it goes not further than that. Mr Marsden accepts that the covenant restricted Mr Burton from soliciting all clients of the respondent's practice and is not limited to those for whom Mr Burton had previously acted. The covenant was intended to protect the client connection and, he submits, the goodwill of the firm. The firm was a small firm of provincial solicitors serving a small and rural community around Redruth in Cornwall. The clients of the firm who had used one department of the firm might reasonably be expected to use other departments of the firm if appropriate matters arose. Mr Burton, as salaried partner, had full unrestricted access to the lists of all the clients of the firm. The covenant only sought to restrict the canvassing, and that of persons who had been clients within one year of his departure of the firm and not persons who had been clients at any time. The duration of the covenant was only for six months. It was a non-solicitation covenant, which did not, absent canvassing or solicitation, prevent Mr Burton from acting for people who had been clients of the firm.
19. In my judgment, the fact that Clause 28.2 was explicitly included in modified form in the Heads of Agreement of 2^nd May 1997 is significant. The agreement was clearly expressed to be in settlement of all claims which either party may have against the other in connection with or arising from the 1994 Deed of Partnership. There is an argument, advanced by Mr Marsden, that this agreement compromised all potential disputes and precluded the submissions which are now made on behalf of Mr Burton. Jonathan Parker LJ has also mentioned a case which he decided in which he held that a litigant could not go behind an agreement including a restraining covenant which was itself made in settlement of a dispute about a restraining covenant. But I proceed, without deciding, on the basis that the 2^nd May Agreement in this case does not go this far. The making of the Agreement may not have changed the broad nature of the original clause, but it did, in my judgment, alter radically the circumstances in which it was made. It brought to an end the Deed in which clause 28.2 appeared and reasserted part of clause 28 in substantially modified form and in quite different circumstances. It was made in compromise of a dispute in court and it effected the consensual termination of the Deed of Partnership between Mr Hoskin and Mr Burton. Mr Burton was legally represented and was himself a solicitor. The agreement may not have been made an order of the court, but it was attached to an order of the court and was an overt part of an agreement compromising litigation. It is, I think, more than a jury point that Mr Burton is seeking to avoid part of this compromise for which he received valuable consideration. He is not, for instance, offering to pay back to Mr Hoskin any of the compensation which Mr Hoskin no doubt agreed to pay in part because he was retaining the benefit to himself of such protection of his client base as clause 28.2 as modified gave him. It is also, I think, relevant that clause 28.2 was in this agreement modified in Mr Burton's favour by exempting four clients from its operation. Mr Burton's evidence that he did not regard himself as bound by it clause 28.2 strikes me as disingenuous. His evidence that there was more than enough work in Penzance and that he would not need to go off and solicit other people's clients seems to me to have some significance.
20. Nevertheless, although these matters seem to me to be relevant – and Mr Bloch accepts that they are relevant - the question, I think, remains whether in all the circumstances, including those surrounding the agreement of 2^nd May 1997, the judge was wrong in his determination that the covenant extended no further than was reasonably necessary to protect Mr Hoskin's legitimate interests. I am not persuaded that he was wrong. He did not, it seems to me, apply wrong principles. He did not spell them out with Mr Bloch's dialectic, but I consider that, underlying his reasoning, there is no error of principle. The facts of each case necessarily vary. I do not think that this was a routine employer/employee agreement. It was an agreement between a principal and a salaried partner bringing to an end their business relationship for which Mr Burton received and accepted valuable consideration. Clause 4 also modified in Mr Burton's favour the ambit of clause 28.2 by excluding four clients, who were no doubt those with which Mr Burton was intimately concerned. The judge's finding was, or is akin to, a finding of fact. It was, I think, entirely legitimate on the special facts of this case for him to conclude that, in the context of a small firm of solicitors in essentially rural Cornwall, the protection which this covenant in the circumstances afforded, going as it did beyond clients with whom Mr Burton had personally dealt, was legitimate; that it went to a protectible interest; and that its enforcement went no further than was reasonably necessary to protect Mr Hoskin's legitimate interests. The circumstances of this case were, I think, capable of being more akin to those in Plowman v. Ash (as to which see, for example, the passage in the judgment of Russell LJ at page 574). That would have been my view of the covenant in the first place. It is certainly my view of the modified clause in the 2^nd May agreement.
21. I would dismiss this appeal.
22. LORD JUSTICE JONATHAN PARKER: I agree that this appeal should be dismissed for the reasons Lord Justice May has given. Had it been necessary to do so, I would have held that the appeal should fail in any event by reason of the terms of the compromise of earlier proceedings entered into by Mr Hoskins and Mr Burton and incorporated in the court's order dated 2 May 1997 which brought those proceedings to an end. That compromise was expressed to be (and I quote from the Heads of Agreement which were annexed to the order):

"... in full and final settlement of all claims which either party may have against the other in connection with or arising from the Deed of Partnership made in November 1994 and/or Mr Burton's employment by Mr Hoskin..."

23. Paragraph 4 of the Heads of Agreement, to which my Lord has has referred, provides in terms that Mr Burton should be released from the covenant contained in Clause 28.1 of the Deed of Partnership, but not those contained in Clause 28.2 made in relation to four named clients.
24. In my judgment Mr Burton, having agreed by way of compromise on earlier proceedings that he would not be released from the obligations contained in Clause 28.2 save in relation to the four named clients, cannot now be heard to assert that the very obligation which he thereby accepted is unenforceable as an unreasonable restraint of trade. In my judgment that would clearly be contrary to public policy. However, as I have said, it is unnecessary to develop this point any further; since on the conclusions reached by Lord Justice May (with which I entirely agree) the point does not arise for decision.
25. LORD JUSTICE SCHEIMANN: I agree with both judgments that have been delivered and have nothing further to add.
(Appeal dismissed; costs awarded to the respondents; stay of interim order for costs lifted; application for permission to appeal to the House of Lords refused).