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Dunedin Independent Plc v. Welsh, [2004] ScotCS 97 (16 April 2004)

OUTER HOUSE, COURT OF SESSION

OPINION OF LORD MENZIES

in the cause

DUNEDIN INDEPENDENT PLC

Pursuers;

against

KENNETH ANDERSON WELSH

Defender:

________________

Pursuers: Logan, Macbeth Currie, Solicitors

Defender: A Jones, Solicitor Advocate, Brechin Tindal Oatts, Solicitors

16 April 2004

[1] This is an action at the instance of a company engaged in the provision of financial services against one of their former directors. It is averred that the defender commenced employment with the pursuers on 27 March 2001 as a director and that his employment was regulated by a Service Agreement subsequently executed on 6 October 2001. That Service Agreement contains clauses designed to prevent the defender from using or divulging any confidential information relating to the pursuers' business and affairs or trade secrets. It also contains clauses seeking to prohibit the defender from enticing or soliciting away business from customers of the pursuers, and from having business dealings with customers of the pursuers. It was on these last clauses that the dispute before me was focused.

[2] The pursuers seek a variety of remedies. They seek interdict against the use of confidential information, and separately interdict against the defender from enticing or soliciting away business from customers or accepting business from customers of the pursuers. They also seek count reckoning and payment by the defender for the profits made by him over a specified period from the use of the pursuers' confidential information and from the solicitation or enticement away of any business, which failing payment of a specified sum. In their fourth conclusion the pursuers seek repetition of the sum of £7,250 which they aver was paid on 12 September 2002 in implementation of a Compromise Agreement of the same date. By their fifth conclusion the pursuers seek payment of the sum of £51,895 which they aver to be future loss of profits from turnover on business enticed, solicited away or accepted by the defender.

[3] The action came before me by way of procedure roll debate on the defender's first two pleas-in-law, being general pleas to the relevancy and specification of the pursuers' averments. A significant part of the defender's attack on the pursuers' pleadings was concerned with the averments in support of the pursuers' third conclusion, for count reckoning and payment; the defender argued that the pursuers had not relevantly averred a situation in which a liability to account arises. This was initially disputed on behalf of the pursuers, but at the outset of the second day of the debate counsel for the pursuers conceded the force of the defender's submissions in this regard and indicated that he intended to amend the pursuers' pleadings with the aim of converting the claim for count reckoning and payment to a claim for damages. In these circumstances it is not necessary for me to set out the submissions with regard to the appropriateness or otherwise of a claim for count reckoning and payment in these circumstances, nor do I need to make any decision on them. The defender also made an attack on the specification of the pursuers' pleadings in Article 4 of Condescendence; however, standing the declared intention of the pursuers to amend, both parties were agreed that it was not appropriate for me to consider the specification of pleadings which may well be the subject of amendment.

[4] However, there were two areas in which the parties remained in dispute, and on which it was agreed that I should give my opinion in principle, before putting the case out By Order to enable the pursuers to consider further amendment. These two areas were (i) the pursuers' claim for repetition and (ii) the effectiveness of Clause 13.2.2 of the Service Agreement. I shall therefore confine this opinion to those matters.

The relevant contractual provisions
[5] The terms of the Service Agreement executed on 6 October 2001 and relevant to the dispute before me are as follows:-

"13.2 Since the Executive has obtained and is likely to obtain in the course of his employment with the Company and any Associated Company knowledge of Confidential Information, he hereby agrees that, in addition to the restrictions contained in Clause 11 and irrespective of the cause or manner of termination (except as referred to below) he will be bound by the following restriction, namely:

13.2.1 he will not during the Employment and for the period of twelve months from the Termination Date entice or solicit or endeavour to entice or solicit away from the Company or any Associated Company the custom or business of any person, firm, company, or organisation who or which is or has been a customer or client of the Company or such Associated Company (as the case may be) and with whom or which the Executive has dealt at any time during the twelve months immediately prior to the Termination Date;

13.2.2 he will not during the Employment and for the period of twelve months from the Termination Date have business dealings with or accept business from any person, firm, company or organisation who or which is or has been a customer or client of the Company or any Associated Company (as the case may be) and with whom or which the Executive has dealt at any time during the twelve months immediately prior to the Termination Date by the Company or such Associated Company;"

[6] The terms of the Compromise Agreement dated 12 September 2002 relevant to the dispute before me, after a preamble which explains inter alia "following negotiations the parties have agreed to settle the Employee's claims against the Company in the terms of this Agreement", are as follows:-

"1. This Agreement sets out the terms which have been agreed between the parties concerning the termination of the Employee's employment with the Company which commenced on 27^th March 2001 and is regulated by the terms of a contract between the Company and the Employee dated 6^th October 2001 ("the Contract") without any admission of liability on the part of the Company.

1.1 The Employee and the Company agree that the employment of the Employee with the Company will terminate with effect from 9^th September 2002 (the "Termination Date".) The Employee acknowledges that the payment by the Company to the Employee of:

(i) the sum of £7250 (Seven Thousand Two Hundred and Fifty Pounds Sterling) as compensation for loss of office (the "Termination Payment") is in full and final settlement of all claims of the Employee in respect of salary and other benefits in connection with his employment.

2. Subject to compliance with the terms of this Agreement, the Company will within seven days of receipt of this Agreement duly executed by the Employee make payment to the Employee of the Termination Payment."

The claim for repetition
[7] The pursuers' averments in support of this claim are contained in Article 6 of Condescendence, and the relevant plea-in-law is their seventh plea, which is in the following terms:-

"The defender having induced the pursuer to enter into the Compromise Agreement and make payment of the sum of £7250 in mala fide the pursuer is entitled to repetition thereof."

[8] The defender's attack on this aspect of the pursuers' case fell into several parts. First, Mr Jones submitted that the plea-in-law is not supported by the averments. As noted above, the plea proceeds on the basis that the defender induced the pursuers to enter into the Compromise Agreement and make payment in bad faith, whereas the averments make no mention of the defender inducing the pursuers to enter into the Compromise Agreement by bad faith. The averment is that "payment was induced by the bad faith of the defender". That part of the seventh plea-in-law which states that the defender induced the pursuers to enter into the Compromise Agreement is wholly unsupported by averment.

[9] Second, Mr Jones submitted that the pursuers' averments in Article 6 of Condescendence were not sufficiently relevant or specific to support a case of bad faith. This is a case based on fraud, and it is well settled that such a case requires clear and specific averments of precisely what the defender did which was in bad faith and which induced payment - McBryde on Contract at paragraph 14-55 and the authorities cited therein. Moreover, the fraud must induce the contract (McBryde at 14-51). The pursuers make no averments of what inducement or representations were made. There is no factual averment to support the allegation that "the consideration provided by the pursuers in terms of the Compromise Agreement was provided not only in settlement of any notice entitlement or claim against the Pursuers but also compliance with the terms of the Service Agreement." What inducement or representation was made by the defender? What was the "trickery" or "machination or contrivance to deceive"? In the absence of properly specific pleadings, it was submitted that the claim for repetition was irrelevant.

[10] More fundamentally, Mr Jones submitted that repetition is not the correct remedy where a contract is induced by fraud. Repetition is a form of restitution and is not available if the payment was made by way of compromise (Walker's Civil Remedies at pages 288/289). Although repetition is available in some circumstances where payment has been made under the mistaken belief that it was due, there can be no dispute that at the time that this money was paid to the defender, there was a contractual obligation on the pursuers to make payment. In any event, the pursuers are attempting to have their cake and eat it. They are seeking repetition of the money paid under the Compromise Agreement, but they are not offering the defender his job back, and they wish him to remain bound by the rest of the terms of the Compromise Agreement. They are not offering restitutio in integrum.

[11] Counsel for the pursuers submitted that any discrepancy between the seventh plea-in-law and the averments for the pursuers was merely a distinction without a difference. The Compromise Agreement provided for payment - the contract and the payment are effectively one thing, and if one was induced by the defender's bad faith, the other was also induced by the defender's bad faith. If the pursuers had been aware that the defender had no intention on 12 September 2002 of adhering to the Service Agreement they would not have paid the money to him. The defender misled the pursuers as to his intentions, but he did not say anything to them in this regard - his silence could be categorised as passive misrepresentation. Counsel accepted that this was not sufficient to give a remedy in contract, but he maintained that the pursuers are not seeking a remedy in contract. They are seeking repetition on the basis of the condictio causa data, causa non secuta. He referred me to Dollar Land (Cumbernauld) Limited v CIN Properties Limited 1998 SC (HL) 90 and Shilliday v Smith 1998 SC 725. He submitted that the benefit which the pursuers had expected to obtain from the Compromise Agreement is one which they did not receive, and therefore it is equitable that repetition should be ordered. However, he accepted that if the sum of £7250 was only paid for the reason stated in Clause 1.1 of the Compromise Agreement, and if the Court took a narrow interpretation of the scope of the Compromise Agreement, the pursuers would have failed to show that the money had been paid without lawful reason, and his argument would fail.

[12] I do not consider that the pursuers have made out a relevant claim for repetition on their present averments. I regard each of the criticisms made on behalf of the defender as having substance. The discrepancy between the averments in Article 6 of Condescendence, which indicate that payment was induced by the bad faith of the defender, and the seventh plea-in-law for the pursuers, which suggests that both payment and the Compromise Agreement itself were induced in bad faith, is a material discrepancy, and cannot be brushed aside with the explanation that the contract and the payment made in terms of it should be regarded as the same thing. Moreover, the pursuers' averments as to how the defender induced payment (and/or induced the pursuers to enter the Compromise Agreement) are wholly lacking in specification, and fall far below the standard required for averments of bad faith. This may be because the pursuers allege that the inducement or misrepresentation was passive, and that the defender took no positive actions to induce the pursuers to enter the contract or pay the money. If so, I am of the opinion that this will not do. Counsel accepted that passive misrepresentation was not sufficient to give a remedy in contract, but maintained that it was sufficient to enable him to rely on the condictio causa data, causa non secuta. I see no reason why the requirement for clear and specific averments of fraud should be relaxed in a claim based on the condictio.

[13] There are more fundamental reasons why I consider that the claim for repetition cannot succeed. First, it appears to me that a remedy under the condictio causa data, causa non secuta is properly available where money has been paid in the expectation of a future event which fails to materialise - that is, a situation in which a contract had been frustrated by a supervening event such as the outbreak of war. It is not normally a remedy available to a party to a contract just because the other party to the contract has failed to fulfil his contractual obligations, nor where the other party has induced the contract by fraud. In such situations the proper remedy is an action for damages. I do not consider that the pursuers can avoid the necessary elements for a claim for damages by resorting to the condictio.

[14] In any event, on a proper construction of the Compromise Agreement it is clear that the sum of £7250 was paid by the pursuers to the defender as compensation for loss of office. Payment was not made in order to secure the defender's compliance with Clauses 13.2, 13.2.1 or 13.2.2 of the Service Agreement. On a natural and fair reading of the Compromise Agreement it is clear that the sum was paid as compensation for loss of office, and the benefit which the pursuers sought to obtain was the defender's acceptance of this sum in full and final settlement of all claims by him in respect of salary and other benefits in connection with his employment. The purpose of the Compromise Agreement was stated to be "to settle the Employee's claims against the Company"; it was not to preserve or enhance the Company's protection provided by the Service Agreement.

[15] It may be that the pursuers have a remedy against the defender in respect of the sum of £7250 paid to him on 12 September 2002 - I express no view on this. However, for the reasons that I have given, I do not consider that the remedy which they are presently seeking is open to them. Separately, even if the remedy which they seek were open to them, the averments which they make in support of their claim fall far short of what is required for a claim based on bad faith.

Clause 13.2.2 of the Service Agreement
[16] Mr Jones submitted that Clause 13.2.2 constituted an unreasonable restraint of trade which went far beyond attempting to protect any legitimate interest of the pursuers, and which restricted legitimate competition and consumer choice. He submitted that the legal principles applicable in this area were accurately summarised in a recent decision of Lord Bracadale in Axiom Business Computers Limited v Kenny (unreported, 20 November 2003). This was a motion for recall of interim interdict but the Court considered the principles relating to the enforceability of restrictive covenants in contracts of employment. Mr Jones also referred me to several of the leading authorities in this area, including Nordenfelt v Maxim Nordenfelt Guns & Ammunition Company [1894] AC 535, Herbert Morris Limited v Saxelby [1916] AC 688 and Malden Timber Limited v McLeish 1992 SLT 727. He drew my attention in particular to the speech of Lord Parker of Waddington in Morris v Saxelby (at pages 706/707) where, in commenting on Nordenfelt he stated:-

"As I read Lord Macnaughten's judgment, he was of the opinion that all restraints on trade of themselves, if there is nothing more, are contrary to public policy and therefore void. It is not that such restraints must of themselves necessarily operate to the public injury, but that it is against the policy of the common law to enforce them except in cases where there are special circumstances to justify them. The onus of proving such special circumstances must, of course, rest on the party alleging them."

[17] Mr Jones also referred me to the principles listed by Lord Caplan in Malden Timber and repeated by Lord Bracadale in Axiom Business Computers Limited as follows:-

(i) A covenant in restraint of trade is void unless it is reasonable in the interests of the parties and in the public interest.

(ii) Covenants between an employer and employee will be viewed more strictly by the Court than other forms of covenant where some consideration has passed.

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

(iv) 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.

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

(vi) An employee has a duty of confidence, but once employment terminates the duty is restricted to not disclosing trade secrets and trade information.

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

[18] Mr Jones made no attack on the pursuers' averments insofar as relying on Clause 13.2.1, which prohibits the defender from enticing or soliciting the custom or business of customers of the pursuers. However, Clause 13.2.2, which seeks to prohibit the defender from having business dealings with or accepting business from customers or former customers of the pursuers with whom he dealt in the twelve months prior to termination of his employment, is wider than necessary and constitutes an illegitimate restraint on trade. There were four respects in which he attacked the clause:-

(a) There was no geographical limitation to it, nor any averments offering to prove that the lack of a geographical limitation was reasonable. The prohibition was therefore global, and wider than necessary. He referred me to Mulvein v Murray 1907 15 SLT 807; Nordenfelt; and Axiom Business Computers at paragraph 33.

(b) There was no limitation on the type of business which the defender was prohibited from accepting. On the face of it, if the defender decided to set up business as a bricklayer or a hairdresser he would be prohibited from accepting business in such a capacity from persons who have been customers of the pursuers during the relevant period. The Courts have refused to enforce covenants that prohibited former employees from being involved in a business which was not in competition with the employers - Scully UK Limited v Lee [1998] IRLR 259; Wincanton Limited v Cranny & another [2000] IRLR 716.

(c) The clause applies to persons who had ceased to be customers of the pursuers before the termination of the defender's employment, and also persons who ceased to be customers of the pursuers after the defender's termination but before they approached the defender with business. There are no averments offering to prove why a restriction which could encompass former customers is reasonable.

(d) In any event the pursuers have adequate protection from the other terms of the Service Agreement. There is a confidentially clause in Clause 11, and a non-solicitation clause in Clause 13.2.1. The averments on which the pursuers rely to justify this clause are in the following terms:-

"The pursuers encourage a close personal relationship between their sales executives and their clients. It is for this reason the pursuers require to protect their business by the restrictions in the contract of employment. It is both predictable and understandable that some clients that the defender had dealt with whilst at the pursuers would seek him out. Clause 13.2.2 is therefore an essential requirement to protect the business of the pursuers when an executive leaves."

[19] Mr Jones submitted that these averments do not justify the restriction in Clause 13.2.2. By reason of Clause 13.2.1 the defender cannot solicit clients for twelve months; the pursuers therefore have this period in which to establish a "close personal relationship", and there is no need for Clause 13.2.2.

[20] Counsel for the pursuers submitted that Clause 13.2.2 went no further than was necessary and reasonable to protect the pursuers' interests. The averments at page 31E to 32D of the Closed Record (as amended) were sufficient to enable the pursuers to prove the necessary special circumstances to justify the clause. With regard to lack of geographical limitation, the pursuers were engaged in the provision of financial services, and the market for financial services is a global market. There was no requirement or justification for any geographical limitation to the clause. With regard to the absence of any limitation on the type of business which the defender could legitimately accept, the clause must be construed in the context of the contract as a whole, and in light of all the surrounding circumstances. The contract related to the employment of the defender as a director of a company providing financial services and having its Registered Office at Charlotte Square, Edinburgh. The defender's employment with the pursuers was entirely within the financial services industry, and the customers or clients of the pursuers with whom he dealt during the relevant twelve month period were all customers or clients of the pursuers' financial services business. Applying the normal rules of construction of such contracts counsel submitted that it was clear that the clause was concerned only with business in the financial services sector. Should the defender choose to set up business as a bricklayer or hairdresser, this clause would not prevent him from accepting bricklaying or hairdressing business from persons who were, or had been, customers of the pursuers. In support of this submission he referred me to P R Consultants (Scotland) Limited v Mann 1997 SLT 437. The present clause is not as restrictive as a clause prohibiting the defender from working in the financial services industry for a year after termination - it is not as onerous as a "you shall not work" clause, yet such clauses have often been upheld by the Courts. It is necessary to look at the provision in the context of the contract as a whole. In that context it is not objectionable.

[21] With regard to the defender's point about the clause potentially applying to customers who had ceased to be customers before the termination of the defender's employment, or ceased to be customers after that termination but before approaching the defender, counsel submitted that the pursuers have a legitimate interest to protect their contact with customers, as set out at page 32 of the Closed Record (as amended). Unlikely and hypothetical examples were, he submitted, not helpful. With regard to the defender's fourth point, counsel submitted that the pursuers do not have adequate protection by reason of other clauses in the contract, and submitted that it was well recognised that a restrictive covenant providing protection for one aspect of an employer's interests may well be worthless unless it is accompanied by a restriction covering other aspects of those interests. In support of this he referred me to C R Smith Glaziers (Dunfermline) Limited v Greenan 1993 SC 161 (particularly at 163G) and the decision of the Privy Council in Stenhouse Australia Limited v Phillips [1974] AC 391 (particularly at 400D-H).

[22] I have no difficulty in accepting the seven principles of law identified in Malden Timber and quoted with approval in Axiom Business Computers Limited. However, I am not persuaded that the application of those principles to the pleadings in the present case entitles me to hold the pursuers' claim based on Clause 13.2.2 irrelevant at procedure roll. With regard to the first of the defender's lines of attack, I consider that it is within judicial knowledge that companies providing financial services, such as the pursuers, are likely to have a global clientele. In any event, it seems to me to be obvious in the world in which we now live that there is such mobility and flexibility of employment that in a business such as the financial service industry even those customers of the pursuers who were based in Edinburgh or London last year may be based in Hong Kong, Sidney or New York this year. I do not consider that it is necessary for the pursuers to make averments in this regard to justify the lack of a geographical limitation.

[23] With regard to the lack of a limitation as to the type of business which the defender is prohibited from accepting, I consider that it is necessary to apply common sense to the task of construing the terms of the contract. It is well established that in construing a term of a commercial contract one must look to the whole contract and to the surrounding business circumstances. The pursuers are engaged in the provision of financial services. The defender was employed as their director, and had dealings with their customers in the financial services industry. It would in my view be stretching the meaning of Clause 13.2.2 too far to suggest that it prohibited the defender from accepting business which was quite unrelated to the financial services industry from people who happened to have been customers of the pursuers. In this regard I adopt the reasoning of Lord Caplan in P R Consultants (Scotland) Limited v Mann. That case involved a public relations company which sought interdict against a former employee in terms of a restrictive covenant clause. The clause prohibited both soliciting and enticing away clients of the company, and also working on the account or business of or otherwise contracting or dealing with such clients. The arguments advanced in that case were similar to the arguments advanced for the defender in the present case. In particular, it was argued that the defender was prevented from (even as an employee) being employed or engaged with a customer with whom he had personal dealings. It was argued that this was too wide because the defender might seek to take employment with such a former customer in a capacity that had nothing to do with public relations. In rejecting this argument Lord Caplan observed (at page 441A):

"The provision against involving himself in 'seeking employment or engagement with' one of the pursuers' customers of the specified class cannot be looked at in a vacuum but must pay regard to the fact that the defender is an experienced public relations executive and the customers of the pursuers would essentially be interested in public relations services from him. Given the context within which the covenant was devised it seems to me unlikely that the parties had any contemplation that the defender should be prevented from seeking a relationship with a former customer in the capacity of an office boy or doorman for example."

[24] I agree with these observations, which are in my view sufficient to dispose of the defender's second point relating to the lack of limitation as to the business which the defender may accept.

[25] The third point for the defender is rather more finely balanced, but I do not consider that I would be justified in refusing to admit the pursuers' pleadings in this regard to probation. It seems to me that it is at least possible that the pursuers have a legitimate interest to protect their trade connection with customers for a period of twelve months after the termination of the defender's employment with them, even in circumstances in which the customer had ceased to be a customer of the pursuers before the termination of the defender's employment. For example, a customer might have discovered the defender's intention to leave the employment of the pursuers, and might have withdrawn his business from the pursuers before the termination of the defender's contract of employment. Without any improper solicitation or enticement from the defender, that customer might then approach the defender and invite him to resume the conduct of the customer's business. Such a situation would not be protected by Clause 13.2.1; in my view it is a situation which is covered by Clause 13.2.2 and is a reasonable and necessary protection of the pursuers' business. For broadly the same reasons I do not consider that the pursuers have adequate protection as a result of the other provisions of the Service Agreement. There are situations in which no solicitation or enticement may be involved, but the pursuers are still entitled to protect their reasonable business interest. The pursuers' averments at page 32 A-C of the Closed Record (as amended) are in my view sufficient to enable such a case to be admitted to probation.

[26] I am accordingly not persuaded by the various attacks made by the defender on the pursuers' case based on Clause 13.2.2 of the Service Agreement and I shall allow a proof before answer in respect of these averments.

Conclusion
[27] For these reasons I propose to repel the seventh plea-in-law for the pursuer, and refuse to admit the averments in Article 6 of Condescendence to probation. I propose to allow a proof before answer on the pursuers' case based on Clause 13.2.2 of the Service Agreement. However, counsel for the pursuer has indicated that the form in which that case will be presented is to be the subject of a Minute of Amendment which is intended to substitute a claim for damages for the present claim for count reckoning and payment. Accordingly I do not propose to pronounce an interlocutor immediately giving effect to my decision, but rather the case will be put out By Order to enable parties to consider further procedure.