Scottish Court of Session Decisions

You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Axiom Business Computers Ltd v. Frederick [2003] ScotCS 288 (20 November 2003)
URL: http://www.bailii.org/scot/cases/ScotCS/2003/288.html
Cite as: [2003] ScotCS 288

[New search] [Help]

Axiom Business Computers Ltd v. Frederick [2003] ScotCS 288 (20 November 2003)

OUTER HOUSE, COURT OF SESSION

OPINION OF LORD BRACADALE

in Petition

AXIOM BUSINESS COMPUTERS LIMITED

Petitioners;

against

JEANNIE FREDERICK or KENNY

Respondent:

________________

Petitioners: Manley; Tods Murray

Respondent; Peoples, Q.C.; Russel & Aitken

20 November 2003

[1] In this petition for interdict the Lord Ordinary, on 5 September 2003, granted interim interdict against the respondent. The case came before me on the motion roll on a motion for recall of interim interdict. Mr Peoples QC, who appeared on behalf of the respondent, indicated that the motion for recall was restricted to branches (2) and (3) of the interim interdict. The interim interdict was in the following terms:

From

"(1) (a) conveying or disclosing to any third party and (b) from using or attempting to use in any manner which may injure or cause loss to the petitioners, by any means, the confidential information comprising customer lists; the names and addresses of customers; the petitioners' pricing and discount policies; present and future business strategy; the petitioners' intended development and promotion of new products; targets as to performance and acquisition of new customers and repeat business; the extent of progress of negotiations with new customers and the specific points that were being negotiated; customers' particular requirements and business needs; confidential material regarding customers' accounting information and IT strategy;

(2) Seeking or accepting employment, whether as an employee, agent, director or otherwise, with any of the petitioners' competitors in the field of computer systems for a period restricted to six months from 13 August 2003;

(3) For a period of 18 months from 13 August 2003 from seeking to transact business with any of the petitioners' customers with respect to the provision of any goods, services or facilities including computer hardware, software and related systems in which the petitioners deal and with whose provision during her employment with the petitioners, the said Jean Frederick or Kenny has been involved."

Factual background
[2] It is common ground that the petitioners are a company engaged in the development and sale of computer software programmes to commercial customers. The company operates in the legal and commercial markets. They supply and install computer software and hardware. They enter into commercial arrangements with their customers in respect of computer training and in respect of ongoing maintenance and support. They also provide a consultancy service. The company has been operating since about 1980. The approach is to consult with a client, examine the needs of the client and design systems to suit these particular needs. Training and education in the use of the systems is supplied and there is continuing support in the use of the systems. This includes reviewing, amending and upgrading systems. The respondent Jeannie Frederick or Kenny was first employed with the company in 1993 and was appointed the Technical Services Director in 1998. In the earlier stages of her employment the respondent was involved in considerable direct relations with customers and in building up relations with them. As Technical Support Director she was one of only two directors and the most senior member of staff. It was accepted that she had a good knowledge of the business of the company.

[3] On 13 August 2003 the respondent was dismissed for gross misconduct. The respondent denies that there was any ground for her dismissal and avers that the petitioners are in breach of contract by dismissing her. Separately, she is pursuing a claim from unfair dismissal. Clearly, the question of the dismissal of the respondent is one about which there is considerable conflict.

[4] Production 6/1 comprises the job description and terms and conditions of employment entered into between the petitioners and the respondent in 1994 ("the 1994 contract"). Included in the terms and condition of employment of the respondent is Clause 6 headed "CONFIDENTIALITY AND COMPETITION". This clause provides:

"the business of the employer involves handling information which is of a highly confidential nature. Such confidential information or trade secrets may be disclosed to you in the course of your employment.

(a) without the employer's written permission you will not disclose to any person any such confidential information, trade, commercial or business secrets or personal or private details to which you may have access. You will take all necessary steps to ensure the confidentiality of the information, secrets or details to which you may have had access in the course of your employment.

(b) you will not seek or accept employment (whether as employee, agent, director or otherwise) with any of the employer's competitors in the field of computer systems for a period of 1 year after termination of your employment with the employer.

(c) you will not for a period of 18 months after termination of your employment seek to transact business with any of the employer's customers with respect to the provisions of any goods services or facilities including computer hardware, software and related systems in which the employer deals and with those (sic) provision, during your employment with the employer you have been involved. For the purpose of this term "customers" includes those with whom the employer has concluded business transactions as well as those with whom you, on behalf of the employer, have already had dealings whether or not such dealings have resulted in the conclusion of a business transaction".

[5] In 1999 new terms and conditions were prepared and incorporated into standard term contracts, which were signed by most members of the workforce ("the 1999 contract"). In the event, for reasons which were not explored to any extent before me, the respondent did not sign the new terms and conditions. The 1999 contract was produced as Production 7/2. Clause 9 of the 1999 contract is the successor to Clause 6 of the 1994 contract. Clause 9(a) deals with business and trades secrets. Clause 9(c) and (d) deal with the question of entering into employment with a competitor and Clause 9(e) deals with the question of solicitation of customers.

[6] The three branches of the interim interdict reflect the terms of clause 6(a), (b) and (c) of the 1994 contract. It should be noted, however, that in branch (2) the period restricting employment with a competitor was restricted to a period of 6 months.

The applicable law
[7] Both Mr Peoples and Mr Marley, who appeared on behalf of the petitioners, referred me to a number of authorities. I did not understand there to be any significant dispute between them as to what were the principles of the law applicable to the restrictive covenants between an employer and an employee. The issue lay in the application of these principles to this case.

[8] It is convenient to identify the general principles from the leading cases. In Nordenfelt v Maxim Nordenfelt Guns and Ammunition Company [1894] AC 535 at page 565 Lord Macnaghten said

"The true view at the present time I think is this: the public have an interest in every person's carrying on his trade freely: so has the individual. All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty or action maybe justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable - reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public."

[9] I was also referred to the case of Scully UK v Lee [1998] IRLR 259 in which the basic principles are set out at paragraphs 8 and 9 of the judgement of Aldous LJ. In addition to quoting the above passage from Nordenfelt his Lordship referred to a passage in the speech of Lord Parker in Herbert Morris Ltd v Saxelby [1916] AC 688. At p. 707, Lord Parker drew a distinction between restraint required to protect the goodwill of a business transferred by a covenantor to a covenantee on the one hand, and a restrictive covenant between an employer and employee on the other. Lord Parker said:

"It is quite different in the case of an employer taking such a covenant from his employee or apprentice. The goodwill of his business is, under the conditions in which we live, necessarily subject to the competition of all persons (including the servant or apprentice) who choose to engage in a similar trade. The employer in such a case is not endeavouring to protect what he has, but to gain a special advantage which he could not otherwise secure. I cannot find any case in which a covenant against competition by a servant or apprentice has, as such, ever been upheld by the court. Whenever such covenants have been upheld it has been on the ground, not that the servant or apprentice would, by reason of his employment or training, obtain the skill and knowledge necessary to equip him as a possible competitor in the trade, but that he might obtain such personal knowledge of and influence over the customers of his employer, or such acquaintance with his employer's trade secrets as would enable him, if competition were allowed, to take advantage of his employer's trade connection or utilise information confidentially obtained."

[10] In Malden Timber Limited v McLeish 1992 SLT 727 at page 730 Lord Caplan quoted with approval a number of propositions advanced by counsel for the defender and not seriously disputed by counsel for the pursuers. Each of the propositions was vouched by reference to authority. The propositions were as follows:

(1) a covenant in restraint of trade is void unless it is reasonable in the interest of the parties and in the public interest.

(2) covenants between an employer and employee will be viewed more strictly by the Court than other forms of covenant where some consideration had past.

(3) for a restraint to be reasonable it must afford no more than adequate protection.

(4) an employer is not entitled to seek protection against mere competition from a former employee. Trade secrets and old established customers may be legitimate objects of concern.

(5) an employee may have acquired additional skills and knowledge through his employment but, however, that belongs to him and cannot be protected by the employer.

(6) an employee has a duty of confidence but that once employment terminates the duty is restricted to not disclosing trade secrets and trade information.

the proper approach is to ascertain what legitimate interest the employers are entitled to protect and then to see if restraint is required.

In my opinion these propositions provide a useful summary and I gratefully adopt them. Some of them are of application in the present case. I was referred to a number of further cases some of which I shall mention in the context of the analysis and discussion of the submissions.

The respondent's submissions
[11] Mr Peoples indicated that he took no issue with Clause 6(a) of the 1994 contract, recognising that in any event it would be an obligation at common law. His attack was mounted on each of sub-clauses 6(b) and (c). Under reference to the authorities Mr Peoples submitted that prima facie the terms of sub-clauses 6(b) and 6(c) were too wide to be enforceable.

[12] In relation to Clause 6(b) he submitted that it amounted to nothing more than a blanket ban on working for a competitor for twelve months. He recognised, of course, that in the interim interdict the period had been restricted to one of six months. Mr Peoples pointed out that there was no territorial restriction. Accordingly, this was potentially a world-wide restraint. There was no attempt to define a particular market or area in which the petitioners operated. The employee had no way of knowing what the territorial extent of the restriction amounted to. The petitioners were not prepared to say in which area they operated and others competed. This was fatal to the enforceability of the restraint because it was unreasonably wide. There was no averment suggesting a justification for a worldwide restriction.

[13] Mr Peoples submitted that it was instructive to compare the terms of Clause 6(b) with the terms of Clause 9(c) and (d) of the 1999 contract. The significant difference was that in Clause 9(c) and (d) the employment which the petitioners sought to be restrain was employment in the field of the sale and supply of computer systems and software to the legal profession and the commercial market, whereas in Clause 6(b) of the 1994 contract reference was made to "the field of computer systems". That was a much wider definition. It was clear that the restraints had been restricted from 1999 onwards. Clause 6(b) was a blanket ban for working in any capacity for a competitor in the field of computer systems. Clause 9(c) and (d) represented a ban on working for competitors in particular fields within the area of computer systems. It was a narrower restraint. The restraint must afford no more than adequate protection to the legitimate interests of the petitioners. If these interests can be protected by the terms of clause 9(c) and (d) then it follows, Mr Peoples submitted, that clause 6(b) goes further than is necessary.

[14] Mr Peoples submitted that clause 6(b) did not appear to prevent the respondent from working on her own account in the field of computer systems. If that was correct, then it was difficult to see why she could not work for a competitor. If the risk is that she might make use of confidential material then the risk is a real one whether she is working for herself or for a third party. Mr Peoples submitted that the ban was simply an attempt to exclude competition without a proper basis.

[15] Mr Peoples went on to submit that prima facie Clause 6(c) was also too wide to be enforceable. He submitted that with respect to Clause 6(c) the petitioners had sought to give an extended meaning to the word "customers". It included actual customers and prospective customers. There was no backward time limit as to what transaction would be included. This meant that the time period went back to the point where the business started around 1980. It therefore included customers of the petitioners who had concluded transactions prior to the commencement of the respondent's employment. It was not sought to restrict to those who had recent connections with the company or dealings with the respondent. Mr Peoples submitted that prima facie this indicated that a restraint in terms as wide as that goes manifestly beyond what is necessary to protect the business interests of the petitioners and creates a significant restriction on the activities of the respondent on leaving the employment of the petitioners. He pointed out that Clause 9(e) of the 1999 contract was more restricted and was in the following terms:

"for the purpose of this term, "customers" includes those with whom the employer has concluded business transactions as well as those with whom you, on behalf of the employer, have had dealings during the 18 months prior to termination of your employment whether or not such dealings have resulted in the conclusion of a business transaction".

Once again, if the legitimate interests of the petitioners are adequately protected by the terms of clause 9(e) then it follows that clause 6(c) goes further than is necessary.

[16] Mr Peoples recognised that, if I was satisfied that there was a prima facie case for enforcing either clause, I would require to consider the question of the balance of convenience. One factor to be placed in the balance was the relative strength or weakness of each party's case. He submitted that the covenant was of very doubtful validity and that the petitioner had advanced no more than a weak prima facie case. If the prospects of success were very weak, it would be an injustice to subject the respondent to the restrictions, which could be quite draconian. She would face considerable hardship if the interim interdict was not recalled. These hardships were set out in answer 9. She was the higher income earner in the household and will suffer substantial financial hardship if she is not able to earn.

[17] Mr Peoples submitted that by dismissing the respondent without justification and not observing the provisions of the contract with respect to appeal, the petitioners cannot seek to enforce any restraint clause in the contract. He submitted that if the respondent demonstrated a prima facie case that the petitioners had breached contract, then this was a matter which I could take into account in addressing the question of where the balance of convenience lay.

The petitioners' submissions
[18] Mr Marley on behalf of the petitioners accepted that the restraint required to be justified as reasonable under reference to the interests of the parties and the public. He accepted that this meant that the restraint should be no more than was adequate to provide legitimate protection for the petitioners. In assessing whether a restraint was no more than adequate to protect the interest of the petitioners the Court had to examine the facts and circumstances of the particular case.

[19] Under reference to passages in Scully at pages 261-262, Mr Marley submitted that in a case where an employee obtains knowledge and influence over customers he obtains acquaintance of trade secrets which would allow him to take advantage of the employer. In these circumstances the law is more ready to accept the restraint of liberty. Mr Marley submitted that it was difficult to conceive of an employee who had more intimate knowledge of the employer's trade secrets and business connections than the respondent.

[20] The Scottish Courts have recognised that the employer has a legitimate interest to preserve his business connections and goodwill and to prevent a customer being lost by enticement at the hands of a former employee. He referred to AGMA Chemicals v Hart 1984 SLT 246 at page 248.

[21] Mr Marley submitted that it was legitimate for an employer to protect his business connection and goodwill. He referred to PR Consultants Scotland Limited v Mann 1997 SLT 437 at page 440 where Lord Caplan said that it was clear from the authorities that an employer is entitled to take reasonable measures to protect his business connection and goodwill from abuse by an employee.

[22] Mr Marley submitted that the terms of Clause 6(b) and (c) were not unreasonable and afforded no more than reasonable protection to the petitioners. As to the comparison between 6(b) and the terms of Clause 9 of the 1999 contract Mr Marley submitted that it was simply a different way of saying the same thing. The answer to the question as to why this clause was necessary was that blessed with the intimate knowledge that the respondent had it was a practical protection for the petitioners. The reference to competitors in the field of computer systems created an internal restriction in the clause. The identity of the competitors would be something of which the respondent would be well aware. Mr Marley said that the company traded in Scotland and the North of England. Contracts with customers were maintained from year to year and if lost the company would lose a substantial element of their core business.

[23] Mr Marley submitted that Clause 6(b) was deliberately drafted to allow the respondent to go into competition with the petitioners on her own account. The clause was designed to inhibit the mischief which could ensue and about which the petitioners would know very little, if the respondent disappeared into the large company. It was in the contemplation of the Clause that the respondent could work on her own account subject to the restrictions in Clause 6(a) and (c).

[24] Turning to Clause 6(c) Mr Marley submitted that it was not necessary for a backstop to be expressed for this Clause to be reasonable. The duration of the employment of the respondent was relevant and was part of the contract. The intention was to protect the present customers and those who had been customers over the period of the employment of the respondent. A further aspect of goodwill included the negotiations undertaken by the respondent on behalf of the petitioners. This was not a volume business but a small company selling a personal service. Having purchased goods and services from the petitioners over a relatively short period the systems would require review, upgrade and replacement and the expectation was the customer would come back to the petitioners. That could legitimately be regarded as part of the goodwill of the business. He made reference to the case of Plowman v Ash 1964 1WLR 568 at page 572 where it was said that in the context of a non-solicitation covenant, as opposed to a carrying on business covenant, area was as a rule not mentioned. Negotiations are significant because time and resources are invested in negotiations with a view to forming a relationship and information is exchanged. In that context the respondent would become aware of the clients' existing systems etc. She would have intimate knowledge of the customers business. That then becomes part of the goodwill. Reference was made to International Consultant Services UK v Hart 2000 IRLR 227 at paragraph 39.

[25] Mr Marley submitted that the public interest was served by a certain level of stability and level of investment in business. The public would not wish to see the value of investment undermined illegitimately.

[26] Mr Marley submitted that the grounds of dismissal were well founded and that the steps taken by the petitioners were procedurally fair. He also submitted that it was not clear cut to say that the consequences of wrongful dismissal would be that the restrictive covenant flew off. He referred to Rock Refrigeration Limited v Jones 1996 IRLR 675 at paragraph 64-66.

[27] With respect to the balance of convenience Mr Marley submitted that the respondent was in a position to do serious damage to the petitioners' business. The respondent's department had contributed a million pounds to the turnover of the petitioners company in the last financial year. Mr Marley drew attention to two affidavits (productions 6/3 and 6/4) which he submitted tended to indicate an intention on the part of the respondent to seek to transact business with customers of the petitioners. If the respondent were to take customers the damage would be difficult to quantify. Twenty-six people were employed in the company and a significant loss of revenue would have an effect on them. The respondent was perfectly at liberty to work in the computer industry. There would be opportunities for her without working for competitors of the petitioners. If the respondent is able to demonstrate that she was wrongfully dismissed she will be entitled to compensation.