England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		14 May 2007

Justice Blackburne:

Introduction

1. These proceedings are concerned with a dispute between the claimants, Wedlake Bell, who are the London-based firm of solicitors ("the Firm") and the two defendants who until 31 March 2007 were partners in the Firm and who arguably still are. The dispute is concerned with the validity of agreements ("the Severance Agreements") which each defendant entered into with the Firm setting out the basis upon which that defendant would retire from the Firm with effect from 31 March 2007, including the restrictions to which each would be subject between 31 March and 1 July 2007 and those to which they would be subject thereafter.
2. The Severance Agreements were entered into in variation of the retirement provisions contained in the Partnership Agreement ("the Partnership Agreement") of the Wedlake Bell partnership (and a related partnership called Wedlake Bell Guernsey) to which the defendants would otherwise have been subject following the giving by each of them, on 16 January 2007, of written notice of his intention to retire from the Firm. At the time that they gave their notices the defendants were two out of three partners in the Firm's corporate department. The purpose of the defendants was to join the northern-based firm of Cobbetts which is intending to establish a branch office, staffed by partners and assistants, here in London. In accordance with clause 18.1 of the Partnership Agreement the effect of their notices was that the defendants' retirement from Wedlake Bell (and from the related partnership) would take effect at the end of October 2007 and, by clause 21.1 of the Partnership Agreement, that the senior equity partners in the Firm (an expression defined by the Partnership Agreement) could require that during their notice period the defendants should not attend the Firm's offices or contact or have any communication directly or indirectly with any "Clients of the Firm" (an expression which has a defined - and wide - meaning in the Partnership Agreement).
3. The effect of the Severance Agreements, which were entered into on 29 March 2007, was to shorten the period of notice which each defendant had given so that the period expired on 31 March 2007 rather than 31 October 2007, replace the period of garden leave provided for by clause 21.1 with a period of three months running from retirement on 31 March 2007 to 1 July 2007 and set out what legal services and legal advice for financial reward the defendants should be permitted to provide during that three-month period and what activities the defendants could legitimately undertake in that period to promote Cobbetts or market its services. The broad effect was that there should be an overall prohibition on engaging in any of these activities during the period to 1 July 2007 but with a very limited exception in the case of a list of clients referred to in each Agreement as "Introduced Clients".
4. The Severance Agreement also made provision for various payments, setting out the amounts in question and when they should be made, to which the defendants as outgoing partners should be entitled, including the basis upon which they would share in the Firm's profits for the year to 31 March 2007. There was also provision for releasing the defendants from leasehold liability, both direct and indirect, in respect of the Firm's London premises and for topics such as insurance benefits and access to office systems.
5. Subject to matters expressly dealt with by them, each Severance Agreement provided, by clause 1, that the defendants would "remain subject to all post-retirement restrictions and covenants" imposed under the Partnership Agreement and, by clause 10, that "After 1 July 2007 it is agreed that you are free to approach and, if asked, to provide legal services to the...Introduced Clients...together with [certain other defined categories of client]" and that "All other Clients of the Firm other than Introduced Clients ...at the date of your retirement will be subject to the covenant contained in Clause 24.1 of the Partnership Agreement."
6. Clause 24 of the Partnership Agreement sets out a series of covenants on the part of an outgoing partner (defined in the Partnership Agreement to include a person who ceases to be a partner by reason of retirement) prohibiting him for a period of one year "after the date of his outgoing" from doing various things except with the consent of the Board (another expression defined by the Partnership Agreement). Broadly stated, the prohibited activities are canvassing or soliciting any of the Firm's clients (other than his Introduced Clients) with a view to acting as solicitor or legal adviser to any such client, acting as solicitor for or legal adviser to any such clients, soliciting or enticing away or seeking to solicit or entice away from the Firm any of the Firm's employees with a view to entering into partnership, employing, engaging, remunerating or using the services of that employee in connection with the practice of a solicitor or legal adviser, and, in connection with such a practice, entering into partnership with, employing, engaging, remunerating or using the services of any such employee. The clause defines what is meant by an employee of the Firm.
7. Clause 23 of the Partnership Agreement also subjects the outgoing partner to various obligations. They are as set out in schedule 5 to the Partnership Agreement and are concerned, principally, with matters such as the delivery to the Firm of records, letters and other documents relating directly or indirectly to the Firm, doing all such things as the Board might reasonably require to assist in the recovery of debts or other assets of the Firm, and refraining from using to the detriment or prejudice of the Firm, or divulging to any third party, any information concerning the Firm's business affairs or clients, save as are required by law or as may already have come into the public domain otherwise than by breach of the Partnership Agreement by the outgoing partner.

What has led to these proceedings and the claims that are advanced

8. On 5 April 2007, exactly a week after the Severance Agreements had been entered into and only five days after the defendants had ceased, according to the Agreements' terms, to be partners in the Firm, three of the Firm's four employees in its corporate department (and, as such, close former colleagues of the defendants) gave notice of their wish to join the defendants at Cobbetts with effect from 1 July 2007 and thus to cease their employment by the Firm. This sudden and apparently co-ordinated departure of the majority of those left in the Firm's corporate department - and so soon after the defendants had left - prompted the Firm into investigating whether, as was suspected, the departure of the three assistants had been solicited or encouraged by the defendants prior to the latters' retirement and in the few days that had elapsed between retirement and 5 April.
9. It is the contention of the Firm that this is indeed what happened and that the defendants acted in breach of various duties, both contractual (in the Partnership Agreement) and fiduciary (consequent upon being partners in the Firm) and also statutory (under the Partnership Act 1890), in (a) canvassing or soliciting the three assistant solicitors to join them in Cobbetts and (b) promoting or seeking to promote Cobbetts' business. The Firm also contends that in e-mailing from his work e-mail address to his private e-mail address during the afternoon of 31 December 2006, and therefore shortly before giving his retirement notice, electronic copies of a large number of the Firm's precedent documents, Mr Robertson infringed the Firm's copyright in each of the precedent documents. It contends that this action evinced an intention by the defendants to make unlawful use of the precedent documents in the course of their proposed work with Cobbetts after 1 July 2007 and constituted breaches of the contractual and/or fiduciary and/or statutory duties which they respectively owed to the Firm.
10. The Firm contends that as a result of the defendants' conduct, essentially their failure to disclose to the Firm their unlawful actions (as the Firm contends them to be) and their implied representation to the Firm that, contrary to what the Firm contends, there were no material matters which they were obliged to disclose prior to the Severance Agreements being entered into, the defendants intended that the Firm should enter into the Severance Agreements in ignorance of their alleged wrongful conduct. The Firm contends that it was ignorant of such conduct and entered into the Severance Agreements in the belief, induced by the defendants' alleged non-disclosure and misrepresentations, that the defendants were not in breach of their duties to the Firm. It contends that it would not have entered into the Severance Agreements and, in particular, would not have abridged the date of their retirement, if it had been aware of such unlawful activities.
11. By these proceedings, which were launched on 23 April, the Firm seeks a variety of relief against the defendants arising out of these matters. They include a declaration that the Severance Agreements have been rescinded, alternatively an order that they be rescinded and, if successful in that regard, a declaration that the defendants are not entitled to start work for Cobbetts until after October 2007. The Firm also seeks damages, or its equitable equivalent, for breach by the defendants of their partnership duties (contractual, fiduciary and otherwise), all necessary orders to restore the Firm and the defendants to what the position was prior to the making of the Severance Agreements, and injunctions designed, inter alia, to enforce the various restrictions binding on a partner who has given notice of retirement (and, but for the Service Agreements, applicable in the case of the defendants up to 31 October 2007) as set out in clause 21.1 of the Partnership Agreement, and those restrictions that bind a partner after he has ceased to be a partner (and, but for the two Agreements, applicable in the case of the defendants after 31 October 2007) as set out in clause 24 of the Partnership Agreement. In the alternative the Firm seeks damages for breach of the Severance Agreements.
12. Essentially, the Firm claims that by reason of the matters of which it complains it is entitled to disregard the Severance Agreements and enforce the terms of the Partnership Agreement against the defendants as if the Severance Agreements had not been made, alternatively, if it is not entitled to disregard the Severance Agreements, enforce their terms and recover damages for their breach.
13. To this end, the Firm has served particulars of claim setting out its case and the relief that it seeks. It has also issued an application for interim relief designed to obtain a speedy trial of the question whether the Severance Agreements have been rescinded and, in the meantime (and in any event until trial of the action), injunctions to enforce clauses 21.1 and 24 of the Partnership Agreement, restrain further infringement of the Firm's copyright in its precedent documents, and ensure preservation of evidence of various kinds, including e-mails and the precedent documents. Orders are also sought for the delivery up of the precedent documents and any other documents belonging to the Firm and for the imaging of the hard disks or other electronic storage devices on which relevant files, e-mails or other documents might be stored and which are in the defendants' possession.

The stay application

14. On the first return date of the Firm's application the defendants cross-applied to have the proceedings stayed under s.9 of the Arbitration Act 1996 on the basis that the Partnership Agreement contained an arbitration clause which covered the dispute raised by the proceedings. The clause in question, contained in clause 30.1 of the Partnership Agreement, is in the following terms:

"If any dispute, difference of question shall arise (whether during the continuance of the Firm or afterwards) between the Partners or any of them or the persons respectively deriving title under them concerning the construction of this Agreement or the rights or liabilities of any Partner or any such persons as aforesaid or any matter or thing done or to be done under this Agreement (save for any question properly falling for decision under any power or discretion vested in the Partners or vested in any group or combination of Partners) otherwise touching or concerning the Firm and its affairs then the dispute, difference or question shall be referred to an appropriately qualified single arbitrator nominated (in default of agreement between the Partners) by the President (or failing him the Vice-President) for the time being of the Law Society pursuant to the Arbitration Act 1996."

15. At the effective hearing of that cross-application on the adjourned return date three days later I determined, after argument, that the dispute was indeed covered by the arbitration clause and therefore that a stay should be ordered. I then proceeded to deal with other matters. I announced that I would set out my reasons in writing for my conclusion. This I now do.

Section 9 and its effect

16. S.9(1) of the Arbitration Act 1996 entitles a party to an arbitration agreement against whom legal proceedings are brought "in respect of a matter which under the agreement is to be referred to arbitration" to apply to the court in which the proceedings are brought (and upon notice to the other parties to those proceedings) "to stay the proceedings so far as they concern that matter." Section 9(4) provides that on an application under section 9 "...the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed."
17. There has been no suggestion that the arbitration clause is null and void, inoperative or incapable of being performed. Nor was it in dispute that if and to the extent that the matters raised by the Firm's proceedings are within the scope of the arbitration clause, there must be a stay. It was also common ground that it is immaterial to this result that there may be other matters in dispute between the same parties which are not within the scope of the arbitration clause and which, failing agreement that such other matters should also be submitted to arbitration, will have to be determined by court proceedings, however inconvenient that may be. In Wealands v CLC Contractors Ltd [1999] 2 Lloyd's Rep 739 Mance LJ observed (at 749) that:

"Any possibility of duplication or differences of evidence or inconsistent findings which may exist [because some of the matters in dispute in proceedings are covered by an arbitration agreement while others are not] is the unavoidable consequence of the parties' choice of arbitration to resolve their disputes."

In other words, the inconvenience of having some issues determined by arbitration and others by court proceedings is irrelevant to the duty of the court to stay proceedings if (and to the extent that) the dispute in question is covered by arbitration.

18. The question therefore is simply whether and to what extent the disputes raised by these proceedings fall within the arbitration clause, the answer to which depends on what the disputes are in the proceedings and what disputes the arbitration clause covers. See Heyman v Darwins Ltd [1942] AC 356 at 360 (Viscount Simon LC). Or as Bingham LJ put it in Ashville Investments Ltd v Elmer Contractors Ltd [1989] QB 488 at 406:

"When a question arises ... whether a certain dispute falls within an arbitrator's jurisdiction the court's task is in principle a simple one: it is to consider the dispute in question, to elicit from the arbitration agreement the parties' intentions concerning the jurisdiction to be conferred on the arbitrator, and to decide whether the parties did or did not intend a dispute of the kind in question to be resolved by the arbitrator."

Does the arbitration clause apply?

19. I have described in brief terms the nature of the disputes.
20. An important issue is whether, as the Firm contends, the Severance Agreements have been or are liable to be rescinded. It is this question which the Firm seeks to have determined as a matter of urgency, if necessary in advance of other issues, since its outcome will determine what regime is to apply to the defendants both in terms of when they have retired or will retire, what restrictions they were or will continue to be subject to pending retirement, and what restrictions they are or will be subject to (and from what date) following retirement.
21. The contention of the defendants, for whom Mr Robert Howe appeared, was that the arbitration clause covers this question as much as it covers all other matters in dispute raised by these proceedings. The contention of the Firm, for whom Mr Tim Penny appeared, was that the Severance Agreements are quite separate from the Partnership Agreement and are not covered by any arbitration clause but even if the arbitration clause is in principle capable of extending to aspects of the Severance Agreements (as variations to the Partnership Agreement) it does not extend to the Firm's particular claim that those Agreements have been or are liable to be rescinded by reason of the material non-disclosures and/or misrepresentations upon which the Firm relies.
22. It is worth observing that, on the assumption that, as the Firm claims, the Severance Agreements have been or are to be rescinded and, instead, the relevant provisions of the Partnership Agreement (in particular clause 21.1 and 24) are to apply to the defendants as outgoing partners, it is clear that that part of the claim, ie the application to the defendants of the retirement and related provisions of the Partnership Agreement unaffected by any collateral arrangement such as the Severance Agreements, is within the scope of the arbitration clause and therefore that to that extent there will have to be a stay of the proceedings. This is because, on any view, the arbitration clause covers the construction of the Partnership Agreement and therefore covers issues arising between the parties concerning the enforceability, which the defendants challenge, of the post-retirement restrictions set out in clause 24. In this connection, it is to be noted that the temporal scope of the clause is not restricted to disputes arising during the continuance of the Firm but extends to disputes arising subsequently ("...whether during the continuance of the Firm or afterwards..."). The clause therefore covers disputes which arise after a person has ceased to be a partner.
23. Although the wording of the clause is not altogether as clear as it might be, I am of the opinion that its scope is not confined to disputes concerned with the construction of the Partnership Agreement or with the rights and liabilities of the Partners under it or with what has been or is to be done under it. In my view the clause extends to all disputes between the partners which touch or concern the Partnership or its affairs. That is the force of the expression "otherwise touching or concerning the Firm and its affairs". On the proper construction of the clause, those words are to be understood as if prefaced by the word "or". Even if that is not right and, properly construed, those words are intended to relate to what precedes them (whether it is the expression "rights or liabilities of any Partner..." or "any matter or thing done or to be done under this Agreement..."), they serve to widen the scope of the clause to include inter-partner disputes arising out of the existence of the Partnership. The underlying purpose of the arbitration clause is, in my view, to provide an arbitral mechanism, binding on partners in Wedlake Bell, for resolving all disputes between the partners, including disputes between the Firm and an outgoing partner, arising out of the Partnership relationship. That includes, in my judgment, a consensual variation of the retirement provisions effected by a collateral agreement of the kind entered into with each of the defendants, at any rate where, as here, there is nothing in the variation agreement to indicate that the arbitration clause is not to apply.
24. It is clear therefore that if and to the extent that the Firm seeks to enforce fiduciary obligations (as distinct from contractual terms of the Partnership Agreement) and/or obligations binding on the partners by force of the Partnership Act 1890 and there is a dispute as to the extent of those obligations or as to their applicability in the events that have happened, these are covered by the arbitration clause. Even if the Severance Agreements have not been and are not liable to be rescinded, so that their terms apply, it is reasonably clear that the enforceability against the defendants of the post-retirement restrictions and other terms to which those two Agreements refer (for example the provision regulating what the defendants may or may not do between 31 March and 1 July 2007) are likewise subject to the arbitration clause. This is because, in my judgment, the terms of the arbitration clause are well capable of encompassing agreed variations to the extent and duration of restrictions otherwise applicable to one of the Firm's retiring partners. That is in substance what the two Severance Agreements are intended to achieve: a variation in the retirement regime to which, by the Partnership Agreement, the defendants as retiring partners are subject.
25. The claim to have rescinded - or to be entitled to rescind - the Severance Agreements is founded upon (1) an allegation that the defendants acted in breach of duties which they owed to the Firm to disclose their own unlawful activities and the unlawful activities of others (all of which activities are, in turn, alleged to be breaches of other duties owed to the Firm), (2) an allegation that, by failing to disclose such unlawful activities, the defendants impliedly misrepresented to the Firm that there were no material facts which they were obliged by the duty of good faith which, as Partners, they owed to the Firm, to disclose and (3) an allegation that, by assuring the Firm's managing partner that they would speak positively about the opportunities for fee earners in the corporate team at the Firm, the defendants represented falsely that they intended to act in good faith towards the Firm until their retirement from it. It will be immediately apparent that, insofar as the Firm seeks to rely on breaches of duty by the defendants to support its rescission claim, the matters raised involve disputes, differences or questions concerning "the rights or liabilities of any Partner" and, as such, are within the scope of the arbitration clause. More broadly, all of the matters relied upon by the Firm in support of the claim, including in particular the allegation that the defendants falsely represented that they intended to act in good faith towards the Firm until their retirement from it and that the Firm was induced by and relied upon the defendants' representations and non-disclosures in deciding to enter into the two Severance Agreements (and would not have done so if it had been aware of the defendants' breaches of duty), are matters "touching or concerning the Firm and its affairs". As such all are matters which fall fairly and squarely within the scope of the arbitration clause.

Conclusion

26. It follows therefore that all of the matters in dispute are within the scope of the arbitration clause and, accordingly, that, as the defendants are entitled to require, the proceedings should be stayed under section 9 to enable the Firm's claims to be referred to arbitration in accordance with the clause.