England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEENS BENCH DIVISION
MR JUSTICE SIMON
HQ05XO1639

		Royal Courts of Justice Strand, London, WC2A 2LL
		17/05/2007

Lord Justice Lawrence Collins :

1. Dunwoody Sports Marketing ("the Partnership") was a partnership which carried on business as marketing and advertising consultants for sports clients, such as the Rugby League.
2. The Partnership had its origin in a partnership between Mr Diamandis and Chris Higgins Limited under the name PIA Advertising and Marketing, which became (with the addition of Ian Tonks Ltd) the PIA Partnership under a partnership agreement dated January 20, 2001. On February 27, 2001 it became Dunwoody Sports Marketing with the addition of new partners (including Mr Prescott) by a Deed of Variation, and a consolidated partnership agreement was produced. The agreement provided that the partners would be partners in the business with effect from November 1, 2000 (clause 2.1).
3. By clause 27.4:

"The PIA Partners may at any time require the Partnership to incorporate. Upon incorporation, all the assets of the Business shall be transferred to the Company in consideration of an allotment of shares to each of the Partners proportionate to the number of Points held by each Partner at the date of incorporation."

4. Clause 30 provided that in the event of any partner ceasing to be a partner the provisions of schedule 3 should have effect, and clauses 5.1 and 5.2 of schedule 3 provided as follows:

"5.1 Restrictions

Each Partner covenants with all the other Partners that:

5.1.1 (except where he is expelled from the Partnership without first having been given an opportunity to learn of and respond to the reasons for his proposed expulsion or where the Partnership is wound up or dissolved) within a period of two years from his Succession Date he will not either on his own account or for or jointly or in conjunction with or on behalf of any other person firm or company whether directly or indirectly solicit business entice clients or interfere with the relationship between the Partnership and its customers or any of them for any goods or services supplied by the Partnership where such clients were receiving such goods or services from the Partnership at any time during the period of twelve months prior to his Succession Date Provided that this covenant shall not extend to customers who it is agreed between the Outgoing Partner and the Continuing Partners were introduced to the Partnership by the Outgoing Partner whilst he was a Partner.

5.1.2 (except where he is expelled from the Partnership without first having been given an opportunity to learn of and respond to the reasons for his proposed expulsion or where the Partnership is wound up or dissolved) within a period of two years from his Succession Date he will not either on his own account or for or jointly or in conjunction with or on behalf of any other person firm or company whether directly or indirectly solicit or endeavour to entice away offer employment or partnership to or enter into partnership with or employ any person who is at such Succession Date and who at any time during the twelve months prior to such Succession Date was a Partner in or employed by the Partnership.

5.2 Each of the clauses 5.1.1 and 5.1.2 constitutes an entirely separate and independent restriction on each Partner so that if either is held to be invalid for any reason whatever then the other shall be valid to the extent that it is not held to be so invalid."

5. "Succession Date" was the date on which the partner ceased to be such: clause 1.1.
6. The Partnership's case was that on May 6, 2005 Mr Prescott resigned from the Partnership. It was its case that following his departure it was discovered that both before and after his departure he had attempted to poach clients and staff and had successfully poached Carol Rutter, one of the staff.
7. On June 9, 2005 Goldring J granted an injunction on a without notice basis to enforce the covenants in clause 5.1.1 and 5.1.2 of schedule 3. On June 16, 2005, the return date, Mr Prescott gave undertakings substantially in terms of the injunction.
8. The particulars of claim as amended in October 2005 sought a permanent injunction for a period of two years from the succession date substantially in the form of the undertakings given by Mr Prescott on June 16, 2005. The claim for an injunction in relation to clause 5.1.2 was supported by a plea (para 13) that Mr Prescott had directly or indirectly solicited or endeavoured to solicit or endeavoured to entice away offer employment or partnership to or employ Carol Rutter, who in the 12 months prior to the Succession Date was employed by the Partnership. Damages were sought for loss caused "by reason of [Mr Prescott's] wrongful enticement of Carol Rutter" to leave the Partnership on June 6, 2005.
9. The damages claimed were the difference between the telesales achieved between June 2005 and September 2005 from those achieved in the corresponding period in 2004, namely a difference of £62,912. The difference for the months involved was about £27,000 for June 2005; about £8,000 for July 2005; about £17,000 for August 2005; and about £10,000 for September 2005.
10. On August 1, 2005 an agreement was completed for the transfer of the business and assets of the Partnership to company No 03548010 ("the Company"). That company was incorporated on April 17, 1998 as P424 Ltd, and changed its name to PIA Advertising and Marketing Ltd, on June 11, 1998, and then to Dunwoody Marketing Communications Ltd on June 29, 2005. Since April 3, 2007 it is called D460 Ltd.
11. The transfer agreement gives the name of the Company as PIA Advertising and Marketing Ltd, but at that date PIA Advertising and Marketing Ltd was the name of company 05301921, which had been incorporated on December 1, 2004 as Dunwoody Marketing Communications Ltd and changed its name to PIA Advertising and Marketing Ltd on June 29, 2005.
12. It would seem that neither Mr Prescott nor his solicitors were informed of the transfer until March 3, 2006, when the Partnership's solicitors wrote to his solicitors:

"We can confirm that all assets and liabilities of the partnership have been transferred to PIA Advertising and Marketing Limited. It is our intention to apply to substitute the company further to CPR 19.2(4)(a) although the cross undertaking from Mr Mike Diamandis will be unaffected. It will be necessary for us to apply to Court to substitute the party and we ask you to confirm that you agree to the substitution."

13. Meanwhile the trial date had been fixed for May 15, 2006.
14. From March 30, 2006 Mr Prescott was acting in person. On April 4, 2006 the Partnership's solicitors applied for an order that unless Mr Prescott exchanged lists of documents his defence should be struck out, and on April 6, 2006 Master Eyre made an order in the following terms: "1. Judgment for the Claimant as sought in the amended particulars of claim with costs. 2. Liberty to the defendant to apply in 7 days after service of this order on him." Mr Prescott apparently attempted to appeal the order but was advised by the Courts Service to apply to set aside, which he did not do.
15. On April 18, 2006 Mr Prescott replied to the letter giving him notice of the transfer of business, and said (inter alia): "… I do not agree to the substitution of company."
16. On June 8, 2006 the Partnership's solicitors applied to a High Court judge for (1) a permanent injunction in the terms of Mr Prescott's undertaking and (2) judgment for £62,912 plus interest as claimed in the particulars of claim.
17. The matter was heard by Simon J on June 29, 2006. Mr Prescott did not attend, and there is ample evidence that he had notice of the date of the hearing.
18. Simon J gave judgment for £62,912, and granted the injunction as asked. There were two separate orders, one for the £62,912 damages, and the other containing the injunctions in the following terms:

"Until the 5 May 2007 the Respondent must not:-

(1) On his own account or for or jointly or in conjunction with or on behalf of any other person firm or company whether directly or indirectly solicit business entice clients or interfere with the relationship between the Claimant and its clients or any of them for goods or services supplied by the Claimant where such clients were receiving such goods or services from the Claimant at any time from 5^th May 2004 onwards.

(2) On his own account or for or jointly or in conjunction with or on behalf of any other person, firm or company whether directly or indirectly solicit or endeavour to entice away offer employment or partnership to or enter into partnership with or employ any person who was on 6^th May 2005 and who at any time from 5^th May 2004 was a partner in or employed by the Claimant.

(3) The clients covered by his prohibition include those set out in Schedule A [various sports teams] below."

19. Although Mr Prescott's solicitors had been informed on March 3, 2006 that there would be a need for the substitution of the Company, due to an oversight the application was not in fact made until after judgment was given. The application was made on paper without notice on October 6, 2006. It was supported by a witness statement by Sue Parkinson, the company secretary of the Company, stating that all the assets, liabilities and interests of the Partnership had been transferred into the Company. She did not mention that Mr Prescott was opposed to the making of an order. The order was made by Master Eyre on October 10, 2006. Mr Prescott did not take any steps to have the order set aside.
20. Mr Prescott sought permission to appeal to this court from the order of Simon J on the following grounds: the restrictive covenants were not enforceable because the Partnership had been dissolved for the following reasons: first, Mr Prescott's purported expulsion from the partnership on or around May 5, 2005 caused the Partnership to dissolve by operation of the partnership agreement; second, the Partnership ceased to trade and was dissolved on July 31, 2005 and the subsequent transfer of the Partnership's assets to the Company did not transfer any cause of action to the transferee Company; third, the Partnership should have been dissolved at its inception because Mr Diamandis was at that time in breach of a director's disqualification between 1997 and November 2004 which later became the subject of criminal investigations. Mr Prescott argued that Mr Diamandis had also committed various repudiatory breaches prior to Mr Prescott leaving the partnership. Mr Prescott also argued that: the restrictive covenant against soliciting customers did not apply because it contained a carve-out for those customers which an outgoing partner has introduced to the firm, and any football and rugby customers solicited by Mr Prescott had previously been introduced to the firm by him; Ms Rutter had not interfered with clients of the firm; her contribution to the firm had been exaggerated by the Company; her contribution was in any event subject to an overhead of £34,800 which should have been deducted from the damages awarded.
21. On November 2, 2006 Waller LJ gave permission to appeal on the "substitution point", and made it clear that he was not giving any permission in relation to the merits of the claim. He did say (para 8) that as at July 2005 there might be "arguable points as to whether any enticing of Carol Rutter was the cause of any damage to the business of the company and, in particular, as to whether the figures which are given as being due to the enticing of Carol Rutter are sums that the company should be entitled to recover." That observation appears to have been made in the context of the question whether the losses said to be caused in the period August/September 2005 were properly claimable. Mr Cavender, for the Company, suggested that this was limited to the order in so far as it awarded damages, but it seems that it must also have included the question whether an injunction should have been granted.
22. CPR 19.2(4) provides that the court may order a new party to be substituted for an existing one if the existing party's interest has passed to the new party, and it is desirable to substitute the new party so that the court can resolve the matters in dispute in the proceedings. The permission of the court is required; the application for permission may be made by an existing party or a party who wishes to become a party; and an application for an order for substitution of a new party where the existing party's interest has passed may be made without notice but must be supported by evidence: CPR 19.4(1), (2), (3).
23. Since Mr Prescott did not apply for the order to be set aside, the question whether the order could be made after judgment did not arise. There appears to be no decision of the Court of Appeal on that question in relation to the CPR. It was held under the former RSC Ord. 15 that substitution could be effected after judgment: Ord v Belhaven Pubs Ltd [1998] BCLC 447 (CA); cf Stroud and Swindon Building Society v Stalp, March 27, 1997 (a decision of Phillips LJ on a leave application in relation to the former County Court Rules, Ord. 5, rule 11) and Mercer Alloys Corp v Rolls Royce Limited [1971] 1 WLR 1520 (a decision on the inherent jurisdiction of the court to order substitution). It has been doubted whether there is a similar power in relation to joinder under CPR 19.2 because the power is in relation to "matters in dispute in the proceedings" and there are no such matters following judgment (Kooltrade Ltd v XTS Ltd, unreported, December 10, 2001). In my judgment the power under CPR 19.2 in relation to joinder and substitution exists after judgment as well as before: see also C Inc v L [2001] 2 Lloyd's Rep 459; The Selby Paradigm [2004] EWHC 1804 (Admlty), [2004] 2 Lloyd's Rep 714.
24. That does not conclude the question whether the Company is entitled to the relief. It was, of course, not a party to the partnership agreement, and accordingly the question is whether it has the benefit of the covenants in the partnership agreement or any claims under the partnership agreement by virtue of the transfer agreement.
25. The transfer was of the Business as defined, namely the business of marketing and advertising in partnership under the name of Dunwoody Sports Marketing, comprising (inter alia) the goodwill (if any) of the Business; the benefit (subject to the burden) of the contracts and engagements of the Transferors (Mr Diamandis, Chris Higgins Limited and Ian Tonks Limited) in relation to the business and "without in any way limiting the generality of the foregoing all other assets and rights of whatever nature employed in the business" at the date hereof.
26. The first question is whether the Company is entitled to the benefit of the restrictive covenants. Even if the Company had been entitled to enforce the covenants, their effect has already expired (May 6, 2007), and the only practical effect of this question would be that, if discharged, Mr Prescott might be entitled to an enquiry on the cross-undertakings given against his own undertakings in relation to any loss suffered by his compliance with those undertakings after August 1, 2005.
27. In Jacoby v Whitmore (1883) 49 LT 335 (CA) Mr Whitmore, an employee of Mr Cheek, an oil, colour and Italian warehouseman in Kilburn agreed that he would not, either while in employment with Mr Cheek or at any time thereafter within the distance of one mile from Mr Cheek's shop be engaged in a similar business. Mr Cheek sold his business to Mr Jacoby, and assigned the goodwill of the business to him. Mr Whitmore set up a competing shop. It was held that Mr Jacoby could enforce the covenant, because (a) on its true construction the covenant was intended to apply even after Mr Cheek ceased to carry on business; (b) such covenants are assignable because they are intended to protect goodwill; and (c) the benefit of the agreement had been transferred by the agreement of transfer. In Townsend v Jarman [1900] 2 Ch 698 Farwell J applied Jacoby v Whitmore to a restrictive covenant in a partnership agreement. The covenant by the partner was not to carry on the business of a corn, seed or manure merchant or nurseryman within a distance of 40 miles from Chard. The partners sold the business to a company, of which they remained directors. It was wound up, and the goodwill sold to Mr Townsend. It was held that the benefit of the restrictive covenant passed as incident to the goodwill.
28. In each of those cases the restrictive covenant could be enforced in accordance with its express terms. There is no difficulty in giving effect to clause 5.1.2 in the same way. The Company is seeking to enforce a covenant that Mr Prescott shall not entice away or employ any person who was employed by the Partnership at May 6, 2005.
29. But clause 5.1.1 cannot be approached in the same way, because the prohibition on Mr Prescott is not to "directly or indirectly solicit business entice clients or interfere with the relationship between the Partnership and its customers or any of them for goods supplied by the Partnership for any goods or services supplied by the Partnership." There is a limitation on that provision to clients who were receiving such goods or services from the Partnership in the 12 months prior to the Succession Date. Read literally it cannot have applied since August 1, 2005 because after that date there were no customers of the Partnership, no relationship between the customers and the Partnership, and no goods or services supplied by the Partnership. It is difficult to see how clause 5.1.1 could work in favour of the Company once the Partnership had been dissolved, since the restriction is against interfering with a relationship between the Partnership and its customers, at a time when the Partnership does not exist.
30. Clause 27.4 contemplates transfer of the business to a Company in which the partners are to have shares in the equity equivalent to their shares in the Partnership, but it is not clear whether the transfer of August 1, 2005 was pursuant to clause 27.4 Even if it were, it would still be necessary to construe "the Partnership" in this context to include a company to which the partnership assets were transferred pursuant to clause 27.4. But that would not be a process of interpretation of the covenant, but of rewriting it, which the court would be loath to do in the case of a restrictive covenant.
31. It follows, therefore, that the injunction to enforce clause 5.1.1 cannot stand.
32. As regards the judgment for damages, the claim for damages was for loss caused by reason of Mr Prescott's wrongful enticement of Ms Rutter, which was alleged to have taken place took place on June 6, 2005.
33. It has not been disputed that the effect of the transfer agreement was to transfer the cause of action vested in the Partnership to the Company. That does not of course conclude the question whether the Company may sue for the damage caused to its goodwill after August 1, 2005.
34. The Partnership did not suffer loss after that date, and the duty not to entice was not owed to the Company. Does it follow that the Company was not entitled to the damages claimed for July and August 2005?
35. In GUS Property Management Ltd v Littlewoods Mail Order Stores Ltd, 1982 SC (HL) 157, a building in Glasgow was used for a company in the Great Universal Stores group. Structural damage to the building was caused by the fault of adjoining landowners, Littlewoods. The building was transferred to another company in the GUS group at book value, and the transferee also took on a subject of all claims vested in the original owner by virtue of the building operations. It was held that the transferee was entitled to claim damages from Littlewoods
36. In Offer-Hoar v Larkstore Ltd [2006] EWCA Civ 1079, [2006] 1 WLR 2926 a soil inspection report was made to the owners of a development site. The owner sold the site, and a landslip occurred causing damage to the claimants' adjoining property. The claimants sued the new owner. The original owner subsequently assigned to the new owner all rights in the soil inspection report, including the right to sue for breaches of contract against the inspection company. It was held that notwithstanding that the original owner had suffered no loss, the assignee was entitled to claim damages from the inspection company for losses it suffered following the acquisition of the property. The Court of Appeal thereby avoided what was described in GUS Property Management Ltd v Littlewoods Mail Order Stores Ltd, 1982 SC (HL) 157, 177 by Lord Keith of Kinkel as a "legal black hole". See also Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd (1992) 57 BLR 57, at 80-81, revd on other grounds [1994] 1 AC 85.
37. In the present case, at the time of the assignment there had been damage to the goodwill of the business. The amended particulars of claim quantified the damage by taking the difference between the earnings with Ms Rutter in 2004 and the earnings without her in 2005. That was plainly a questionable way of quantifying damage (particularly as it gave no credit for the fact that her salary no longer needed to be paid), but Mr Prescott lost the opportunity to question it, at least as regards the damage to the Partnership, by his failure to comply with his disclosure obligations and by Master Eyre's order of April 6, 2006.
38. But it does not follow that the Company is entitled to the benefit of a judgment on that same questionable basis for the period after August 1, 2005. Although his solicitors were aware of the transfer, the judgment taken by the then claimant was in the name of the Partnership, and neither Mr Prescott nor his solicitors would have known of the separate damages issue raised by the transfer to the Company.
39. It is true that the point should have been dealt with procedurally by applying to set aside Master Eyre's substitution order of October 10, 2006, and not by an appeal from Simon J's judgment of June 29, 2006. But there would be an injustice if Mr Prescott were not able to put before a court his arguments on the quantum of damages for the period after August 1, 2005, and on the question whether the decision in Offer-Hoar v Larkstore Ltd can be extended to a case such as this.
40. Consequently I would allow the appeal to this limited extent: first, by discharging the injunction relating to the solicitation of business under clause 5.1.1; and second, by discharging so much of the judgment as relates to damages after August 1, 2005, i.e. £27,160, and by ordering an enquiry as to whether the Company is entitled to damages for the period after August 1, 2005, and, if so, how much.
41. Subject to any further written submissions which the court may receive in writing prior to handing down of judgment, I consider that no order for costs should be made on this appeal.
42. If the Company wishes to pursue the damages enquiry, the case should be transferred to the Central London County Court.

Lord Justice Toulson:

43. I agree.