England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand London WC2A 2LL
		16 July 2009

DAVID DONALDSON Q.C.

1. The Claimant company provides services to customers using infrared technology, in particular for surveying commercial buildings. This can, for instance, reveal hotspots in a factory or a warehouse caused by an electrical fault with the consequent risk of fire, or check whether a cold store is operating at the required temperature. The surveys are generally required for insurance purposes, typically for the annual renewal of the insurance, though sometimes more frequently, but the instructions come from the insured, that is to say, the factory or warehouse directly. In the nature of things, much of the company's trade, estimated at some 70 per cent, is repeat business.
2. The Defendant, Mr Norman, joined the Claimant company as long ago as 1995 as a thermal engineer. In late 1997 he and two others, including Mr David Blain, the current managing director of the Claimant, bought the company from the then owners and all became directors. At that time the Defendant owned one of the two issued shares. In 1999 he joined in the sale of the shares to a new company owned by Mr Blain and the other director. The Defendant remained a director, designated as its technical director. He was also an employee.
3. Clause 9.1 of his Contract of Employment, which dates from 2001, provided that the Defendant was not, whether before, during or after the termination date of his employment, to use or divulge to any person any confidential information concerning the business or finances of the Claimant which had come to his knowledge in the course of his employment and was not in the public domain.
4. Clause 14.2.1 of the Contract of Employment contained a covenant that the Defendant would not, without the prior consent of the Board of the Claimant, for a period of six months after the termination of his employment canvass, solicit or approach or cause to be canvassed, solicited or approached for orders, any person with whom he had dealt to a material extent and who at any time during the 12 months preceding the termination date had been a client or a customer of the Claimant.
5. Clause 15.2 provided that on termination of his employment the Defendant would forthwith deliver up to the Claimant all records, accounts, letters and papers of every description within his possession or control relating to the affairs of the Claimant.
6. On 10 September 2008 the Defendant gave one month's notice to terminate his Contract of Employment, which was accepted by the Claimant. He also resigned his directorship on 10 October 2008. On 3 November 2008 he commenced employment with Sykes & Co, a building and property maintenance company, as a thermal engineer, and, as the Claimant alleged in the Particulars of Claim and I do not understand to be in dispute, his role was to head up a new preventative maintenance division, which would involve thermal engineering survey services.
7. Over the next few months the Claimant learned that the Defendant had been canvassing its customers as the next survey date approached in relation to each such customer, offering to conduct the new survey at a lower price than the Claimant had been quoting in the past. At least in substantial part I do not understand that this is in dispute. It would in any event be hard to understand how this could have occurred without at least some use of confidential information, at least as to the survey dates for each customer.
8. On 2 March 2009 the Claimant issued the present proceedings and at the same time an application for (1) injunctions prohibiting the Defendant from (a) soliciting or canvassing or attempting to solicit or canvass the business of any of the Claimant's clients or (b) using any confidential information of the Claimant; and (2) an order that the Defendant should deliver up all property of the Claimant in his possession or control and swear an affidavit to confirm that he had done so and done so comprehensively.
9. The application came before Morgan J in the general applications list on 11 March 2009. An order was made by consent, standing the application over to be heard on a date to be fixed upon the Defendant giving a number of undertakings. Firstly, the Defendant agreed to deliver up the property of the Claimant and to swear the affidavit. That was in fact done in the next two days and revealed that the Defendant had been in possession of the information from the so-called engineers' boards, which would have recorded customers and dates of expected service. Secondly, the Defendant also agreed not to use or to disclose any confidential information, which was defined in a schedule to the order as being (a) the customer database, a comprehensive list of the Claimant's customers with the contact names of the Claimant's customers; (b) the survey list, a list of past and forthcoming surveys including the Claimant's client's address, the date a survey was due, the type of survey required, and the price charged; (c) information obtained from engineers' boards in the Claimant's premises, display boards in the office for engineers to consult; (d) the diary, the Defendant's work diary with the appointments details and contacts and agreed prices; (e) pricing information of the Claimant including profit margins. I do not understand that the Defendant was thereby accepting that he was in possession of all these items, though included in the materials which were delivered up was information from the engineers' boards. Thirdly, the Defendant undertook until 9 April 2009 that he would not solicit or canvass or attempt to solicit or canvass the business of any of the Claimant's clients as defined in Clause 14.2.1 of his Contract of Employment.
10. The day before that order the Defendant ceased to be employed by Sykes & Co, having been made redundant. On 9 April 2009 his undertaking to solicit or canvass the business of the Claimant's clients expired, having been expressly limited to 9 April, which was six months after the termination of his employment.
11. In a recent witness statement he told the court that he is currently trying to launch his own business through a company called Hotspot-Thermography Limited to provide thermal imaging surveys. In doing so he contacts and has contacted by internet (sic) and telephone potential customers who from his knowledge and experience in the industry may require thermal imaging services. These have included companies that have used the Claimant in the past. He has, according to his witness statement, been successful in obtaining survey orders from three of these, though unsuccessful in slightly more cases.
12. A few days prior to the hearing before me on 10 July 2009, the Defendant's then solicitors confirmed in a letter to the Claimant's solicitors that it remained his position that he was prepared to continue until trial his undertaking in relation to the use or disclosure of the confidential information. That will indirectly restrain the Defendant from seeking to obtain orders from the Claimant's clients if, but only if, it involves the use of such information, that is to say confidential information as defined in schedule 1, as, for example, information obtained from the engineers' boards. The Claimant, however, seeks a blanket restriction on soliciting or canvassing any of the Claimant's clients, even if no use of confidential information is involved.
13. In seeking such an order counsel for the Claimants faces the difficulty that the contractual basis for such a restraint disappeared three months ago upon the expiry of the post-employment covenant. To deal with this apparent obstacle he submits that exactly the same prohibition can be derived from s.175 and s.170(2) of the Companies Act 2006, which deal with the fiduciary duties of a director. Section 175 sets out the duty to avoid conflicts of interest and section 175(1) provides:

"(1) A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.

(2) This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity)."

And then going back to s.170, which is headed "Scope and Nature of General Duties," sub-section 1 states:

"(1) The general duties specified in sections 171 to 177 are owed by a director of a company to the company.

(2) A person who ceases to be a director continues to be subject—

(a) to the duty in section 175 (duty to avoid conflicts of interest) as regards

the exploitation of any property, information or opportunity of which

he became aware at a time when he was a director, and…

To that extent those duties apply to a former director as to a director, subject to any necessary adaptations.

(3) The general duties are based on certain common law rules and equitable principles as they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director.

(4) The general duties shall be interpreted and applied in the same way as

common law rules or equitable principles, and regard shall be had to the

corresponding common law rules and equitable principles in interpreting and applying the general duties."

14. The parties are agreed that these provisions of the Companies Act 2006 do not alter the pre-existing law, which was analysed and re-stated by Lawrence Collins in CNS Dolphin Limited v. Simonet [2002] BCC at p.600, and discussed most recently in Foster Bryant Surveying Limited v. Bryant [2007] BCC 804, where the Court of Appeal repeated and endorsed a list of relevant principles distilled from CMS v. Simonet in Hunter Kane v. Watkins [2003] EWHC 186. Those principles are set out at page 810 of Foster Bryant and include the following:

"1. A director, while acting as such, has a fiduciary relationship with his company. That is he has an obligation to deal towards it with loyalty, good faith and avoidance of the conflict of duty and self-interest.

2. A requirement to avoid a conflict of duty and self-interest means that a director is precluded from obtaining for himself, either secretly or without the informed approval of the company, any property or business advantage either belonging to the company or for which it has been negotiating, especially where the director or officer is a participant in the negotiations.

3. A directors' power to resign from office is not a fiduciary power. He is entitled to resign even if his resignation might have a disastrous effect on the business or reputation of the company.

4. A fiduciary relationship does not continue after the determination of the relationship which gives rise to it. After the relationship is determined the director is in general not under the continuing obligations which are the feature of the fiduciary relationship.

6. Directors, no less than employees, acquire a general fund of skill, knowledge and expertise in the course of their work, which [it] is plainly in the public interest that they should be free to exploit in a new position. After ceasing the relationship by resignation or otherwise a director is in general (and subject of course to any terms of the contract of employment) not prohibited from using his general fund of skill and knowledge, the "stock in trade" of the knowledge which he has acquired while a director, even including such things as business contacts and personal connections made as a result of his directorship.

7. A director is however precluded from acting in breach of the requirement at 2 above, even after his resignation where resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself any maturing business opportunities sought by the company and where it was his position with the company rather than a fresh initiative that led him to the opportunity which he later acquired.

8. In considering whether an act of the director breaches the preceding principle the factors to take into account will include the factor of position or office held, the nature of the corporate opportunity, its rightness, its specificness and the director's relationship to it, the amount of knowledge possessed, the circumstances in which it was obtained and whether it was special or indeed private, the factor of time in the continuation of the fiduciary duty where the alleged breach occurs after termination of the relationship with the company and the circumstances under which the breach was terminated, that is whether by retirement or resignation or discharge.

9. The underlying basis of the liability of a director who exploits after his resignation a maturing business opportunity "of the company" is that the opportunity is to be treated as if it were the property of the company in relation to which the director had fiduciary duties. By seeking to exploit the opportunity after resignation he is appropriating to himself that property. He is just as accountable as a trustee who retires without properly accounting for trust property.

10. It follows that a director will not be in breach of the principle set out at point 7 above where either the company's hope of obtaining the contract was not a "maturing business opportunity" and it was not pursuing further business orders nor whether the director's resignation was not itself prompted or influenced by a wish to acquire the business for himself."

15. The typical case to which the principles are addressed is helpfully described in Canadian Aero Services v. O'Malley (1973) 40 DLR 3(d) 371, a decision of the Supreme Court of Canada from which Lawrence Collins J quoted at some length in CMS v. Simonet. Laskin J said in that case that:

"…a director… is precluded from obtaining for himself, either secretly, or without the approval of the company… any property or business advantage either belonging to the company or for which it has been negotiating." (Quote unchecked)

Laskin J was also at pains to stress that:

"In general a director is not prohibited from using the stock in trade of the knowledge he has acquired while a director, such as business contacts made as a result of his directorship." (Quote unchecked)

That point was repeated by Hutchinson J in Island Export Finance Limited v. Umunna [1986] BCLC 460 at 482 where he said:

"It would… be surprising to find that directors alone, because of the fiduciary nature of their relationship with the company, were restrained from exploiting after they had ceased to be such any opportunity of which they acquired knowledge while directors. Directors, no less than employees, acquire a general fund of knowledge and expertise in the course of their work, and it is plainly in the public interests that they should be free to exploit it in a new position." (Quote unchecked)

All these quotations, of course, are reflected in the statement of principles which I set out earlier. In the light of these statements it is surprising to find this line of authority being invoked as the basis for a blanket prohibition on canvassing or soliciting the business of any client of the Claimant.

16. It may be that it is not necessary for a Claimant to show that there were formal negotiations underway at the time of the resignation of the director, but I find it hard to see how a Claimant can demonstrate the existence of a "maturing business opportunity" if there had been no or no significant discussion of the potential business.
17. In the present case, once a survey has been completed and the invoice rendered and paid, there will in the nature of things, as counsel for the Claimant accepted, be generally no contact with the factory or warehouse until it is approached shortly before the anniversary or other time when it is anticipated that it may require another survey. Only at that stage would there be discussion as regards the possible provision of that survey if the client wishes one. More specifically, any customer needing a survey from now on and who was a customer prior to the resignation on 10 October 2008, will have had no discussions with the Claimant regarding that survey either in October 2008 at the time of the resignation or prior thereto.
18. In Island Export the managing director of the Plaintiff company secured in 1976 a contract from the Cameroons postal authorities for 6,000 postal caller boxes. Although the company hoped for further such orders it received no assurance in this regard from the Cameroon authorities. Having resigned, the managing director obtained for his own company an order for further postal caller boxes some time later. The Claimant sought an account of profits on the basis that there was a breach of fiduciary duty by the managing director, who was the Defendant to the action. One of the grounds on which Hutchinson J rejected the claim was that the Claimant's hope, as he put it, of obtaining further orders was not a maturing business opportunity at the time of the Defendant's resignation.
19. Counsel for the Claimant in the present case seeks to distinguish Island Export by stressing that historically 70 per cent of the Claimant's trade was repeat business. I am sceptical whether this statistic in itself justifies counsel's suggested conclusion that each future contract was a real possibility rather than a mere hope, as the future orders had been described by Hutchinson J in Island Export. However that may be, the submission, and the proposed semantic distinction, in my view fails to address the essential point: namely whether the state of play on 10 October 2008 in relation to possible new surveys more than eight months later can properly be described as a business opportunity in the course of maturing. In fact nothing at all was happening on 10 October 2008, nor would it do so until much later. In short, the attempt to use CMS v. Simonet and Foster Bryant v. Bryant as the basis for a prohibition of canvassing any of the Claimant's clients is, in my judgment, entirely misconceived.
20. Though that is sufficient to dispose of the Claimant's application for such a restraining order, I would not in any event have considered it appropriate to make such an order. On 10 March 2009 the Claimant agreed to an order which provided that the prohibition against canvassing would cease on 9 April 2009. The Claimant now seeks, in mid-July 2009, to reverse or to restore that expired restraint.
21. In the meantime, unfettered by such a restraint, the Defendant has actively sought orders from inter alios past clients of the Claimant and apparently obtained work from three such persons. It is, of course, true, as the Claimant points out, that in these three cases the survey will by now have been done. But I am not convinced that the matter is as simple as that. The reality is that for more than four months the Defendant has been active in the market soliciting, as best he can, orders. (I say as best he can, because he tells me that the market as a result of the credit crisis has become rather stickier.) It is one thing for the court to delay the start of a new business; it is another to require its temporary suspension when it has already been started. If the Defendant were now to be required to cease until trial the activities which he has already commenced and engaged in over the last three months, his chances of his successfully resuming if the trial goes in his favour would seem likely to be seriously jeopardized. This possibility would appear to me to be likely to be of greater significance and impact than any loss which might be caused to the Claimant by the Defendant's attempts during the interim period to solicit the Claimant's clients of last year.
22. Even if I had assessed as equal the likely prejudice to each party, I would consider the balance to be moved in favour of the Defendant by the public interest in competition.
23. Accordingly, I reject the application for an interim order insofar as it seeks a prohibition on the soliciting or canvassing of the Claimant's clients. That leaves in place the undertaking which the Defendant has offered to continue, as notified to the Claimant some days in advance of the hearing before me.