Scottish Court of Session Decisions

You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Assembly Solutions & Tools Ltd v Mitchell [2007] ScotCS CSOH_195 (07 December 2007)
URL: http://www.bailii.org/scot/cases/ScotCS/2007/CSOH_195.html
Cite as: [2007] ScotCS CSOH_195, [2007] CSOH 195

[New search] [Help]

OUTER HOUSE, COURT OF SESSION

[2007] CSOH 195

A739/07

OPINION OF LORD PENROSE

in the cause

ASSEMBLY SOLUTIONS & TOOLS LIMITED

Pursuers;

against

STEPHEN MITCHELL

Defender:

________________

Pursuers: Logan; Balfour+Manson, LLP

Defender: Fairley; Russel + Aitken, WS (for McGrade & Co, Glasgow)

7 December 2007

[1] Until August 2005, the defender was the majority shareholder of the pursuers ("AST"). In terms of a share purchase agreement dated 31 August 2005 between the defender and Paul Ronald on the one hand and GTC Holdings Ltd ("GTC") on the other, the defender and Paul Ronald agreed to sell and GTC agreed to purchase the whole issued shares of AST for £150,000, subject to adjustment in accordance with the agreement. GTC assumed responsibility for AST's liabilities at that time, agreeing to repay the company's debt to the Clydesdale Bank and to procure the release of the sellers' personal guarantees. In terms of the contract, the defender became managing director of AST, and a service contract was entered into as provided in the sale and purchase agreement.

[2 ] The sale and purchase agreement and the service contract each contained provisions intended to regulate parties' relationships in the event of termination of the defender's employment with AST, subject to certain exceptions. On 28 September 2007 the defender resigned from AST with immediate effect. In this action the pursuers seek interdict and interim interdict relying on certain of these provisions. The defender contends that he was constructively dismissed, and resists AST's application inter alia on the ground that his constructive dismissal was in breach of the service agreement. In respect of this and other material issues the parties are in dispute as to the factual position that developed.

[3 ] It is a matter of agreement that the defender approached Stuart Melville, a director of GTC and the pursuers, about the possibility of a management buy out. The date of the initial approach is disputed, as are the scope of the proposal, and the interest or lack of interest of GTC in pursuing it. The pursuers contend that the initial approach was in April 2007 and, in terms of Mr Logan's submissions, "came out of the blue". GTC had not had such a transaction in contemplation, and AST's business was progressing as had been anticipated at its acquisition. The proposal was rejected, and on dates between 26 and 30 April 2007 a number of senior employees intimated their resignations. These were withdrawn and discussions with a view to a possible management buy out commenced and continued until September. The discussions did not reach an advanced stage. No price was discussed. The subject of the transaction was not agreed, but the pursuers had in mind a sale of the whole business.

[4 ] The defender has produced an affidavit and a series of documents, the provenance and authenticity of which were not challenged, that paint a clearer and different picture of the negotiations between parties. The defender contends that he first approached GTC about a management buy out in May or June 2006, that he raised the matter again at the beginning of 2007, and that serious negotiations proceeded between about March 2007 and August, with an intended completion date by the end of August 2007. The subject of the negotiations was the purchase of certain assets of the pursuers only. Leaving aside the earlier periods, a number of points appear from the documents. On 13 March 2007 the defender sent an e-mail to Gordon Middleton of GTC suggesting that it was imperative that a management buy out of the company's Scottish activities be put on the agenda urgently, and referred to background issues that are not immediately relevant. On 17 May the defender sent an e-mail to Stuart Melville of GTC in which he referred to a proposed meeting on 30 May and asked for an agenda "in order that we can get a framework in place towards a heads of agreement". On 19 May, Mr Melville promised to put something in hand. On 29 May, the defender sent a further e-mail to Mr Melville, copied to others, in which he commented that no agenda had been received, but that time had been put aside for the meeting: "as a precaution as to the length of time that we may require in order that we could conclude an agreement up to the 'heads of agreement' level which ultimately is our goal".

[5 ] Meantime, on 11 May the defender sent an e-mail to Gordon Middleton commenting adversely on the pursuers' accounts. In summary he said: "As a result there is no value in AST as a going concern hence the reason that the MBO is featured primarily around the purchase of stock and assets". Mr Middleton replied on 14 May stating that it was in everyone's interests to get the accounts signed off "given the proposed MBO, with a plan therefore to sort it out by the end of this week". In July, in response to a request from GTC, the defender provided GTC with a copy of the "Management Buyout Plan" on terms of strict confidentiality. On 8 August, Stuart Melville sent an e-mail to the defender making preliminary comments on the Management Buyout document, and setting out certain contractual requirements and steps that required to be carried out to satisfy GTC. These were:

"With regards to the stock gtc should keep ownership of this and have it as consignment stock so we keep ownership you have it on your premises and only pay for it as you use it and we would have the opportunity to come down once a month to carry out a stock check.

We would also need a comfort letter from the bank to ensure funding is in place. I presume this will be quite easy for you to get.

We would also need a comfort letter from Glasgow city council or acceptance paper work.

I will contact the landlord and get consent from him that we can sublet the building to you.

IT systems what are you proposing to put in place for the new co."

[6 ] On 7 August, Stuart Melville sent an e-mail to the defender containing a request for 'the last additional information we will need'. Much of the information requested was technical and operational, and is not material at this stage. Two points are material:

"The management team are going to inject £70k in to the new business can you confirm that this is in place and how the split is?

How do you plan to pay GTC for the business, is this a one off payment or is it staged if so what guarantees would we have?"

On 8 August the defender replied that 85% of the capital injection was in place and the rest was to follow within six months. Detailed proposals were made for payment for the several classes of asset that the management buy out team proposed to acquire.

[7 ] At some point prior to 10 September, the defender had delivered or procured the delivery of a draft document prepared by the defender's solicitor to give effect to the proposed transaction. On 10 September, Gordon Middleton sent an e-mail to the defender making comments on a number of omissions from the document. The defender replied on 10 September dealing with the detailed points raised, and asking, for his part whether he could take it that the parties were in agreement on the list of assets and relative arrangements and whether the invoices required would be organised as appropriate.

[8 ] On 14 September the defender's solicitor sent to Messrs Maclay Murray & Spens a draft assets purchase agreement for review and comment. He also enclosed a previous minute of agreement in respect of the property relative to a term of the assets purchase agreement. He noted that the scheduled completion date was 30 September 2007. On 19 September, Messrs Maclay Murray & Spens sent to the defender's solicitors an e-mail in these terms:

"As you may be aware, the shareholders of GTC Holdings Ltd ("GTC") have agreed to sell the entire issued share capital of GTC to Cosalt:plc. The new owners are looking to expand the business of Assembly Solutions and Tools Ltd ("AST") and, consequently, GTC has decided to discontinue its discussions with the management of AST regarding a possible MBO."

[9 ] On 17 September there was a meeting attended by the defender at which, inter alia, a director of GTC, Gordon Middleton, intimated that a management buy out would not take place. Allegations of misconduct on the defender's part were put to him, and he was told orally that he was suspended. The allegations were:

That the defender had contacted suppliers and informed them that he was going to carry out a management buy out;

That the defender was contacting clients and securing business under the name of a company set up for the purposes of the buy out;

That the defender had set up banking arrangements for the new company;

That the defender had removed signage from the pursuers' Glasgow premises that referred to the GTC group of companies; and

That the defender has stated verbally that he had organised the resignation of the senior managers of the pursuers.

Written notice of suspension on these grounds was delivered to him the same day. That letter made it clear that the pursuers regarded the defender as remaining in their employment pending the outcome of an investigation into the allegations and that he was, in effect, on "garden leave".

[10 ] The defender contends that the pursuers were fully informed of the steps being taken by the parties interested in the buy out. These were necessary steps to prepare for the transfer of business. So far as suppliers were concerned contacts were exploratory in nature, and aimed at ascertaining whether a management buy out would be viable. Contacts with employees of the pursuers were known to the pursuers' directors. Contacts with customers were also known to the pursuers' directors and were necessary to ascertain whether their business would be available to the new company in the event of a management buy out. Banking arrangements had been required in anticipation of the transaction, inter alia to give the pursuers and GTC the comfort they had insisted on, and money had been deposited by the individuals interested in participating in the scheme to give the bank comfort. A draft shareholders' agreement had been prepared. But none of these transactions was progressed after the meeting of 17 September. The defender had transferred his financial contribution out of the new company, had resigned his directorship in that company, and, apart from some transitional arrangements, had had nothing to do with the new company. He was not responsible for any of the actions of those actively engaged in the management of the new company.

[11 ] It is not possible at this stage in these proceedings to resolve the factual issues between the parties. But certain facts seem to be clear. The parties carried the discussion of a proposed management buy out to an advanced stage prior to mid-September, and each instructed solicitors to prepared necessary documents. An off the shelf company was acquired, and the defender and three others employed by the pursuers were appointed directors on 31 August 2007. The defender resigned as director on 18 September 2007. The company's name was changed initially to AST Solutions & Tools Limited on 16 October 2007 and subsequently to Power Tool Services (Scotland) Ltd ("PTS"). The company registration details record that PTS is "active". A Shareholders' Agreement was prepared while the company was expected to be named AST Solutions & Tools Ltd. The defender was party to that agreement and it was intended that he should be the new company's largest shareholder, and, in addition to the shares of which he was to be beneficial owner, that he should have a proxy over the shares of a fifth participant in the scheme. All five intended participants applied for shares and paid the appropriate contributions which were lodged in the bank for the company's account. The subscription process has not been completed. No new shares have been issued. There is one share in issue which continues to be held by Messrs Macdonald Henderson's shelf holding company. They will continue to hold it until instructed otherwise by the continuing directors of PTS, Graham Gibson and John Crooks.

[12 ] PTS is an active company. It has two declared active directors, Mr Crooks and Mr Gibson. The single shareholder, a partner in Macdonald Henderson, acknowledges an obligation to act on the instructions of these two directors, but has no part in the business otherwise. She would act on the instructions of the defender if, and only if, so authorised by the two active directors. Those directors were intended to be minority shareholders in PTS. That company is carrying on business. It has seven employees. There is no doubt that it is carrying on business in competition with the pursuers. The shareholding structure intended for the company is currently in abeyance. I was told at the first hearing that the defender was willing to "relinquish" his shares, but it appears that he does not have any. There is currently no beneficial owner of the single share that has been issued. Whether or not the defender is involved with PTS in any capacity, a wholly artificial situation has been created which can only be regarded as temporary or transitional.

[13]. There are several indications that PTS is competing with the pursuers. It is enough at this point to note that on 1 November 2007 the company wrote to certain "valued customers" announcing that it was opening for business on 1 November and saying:

"The formation of this new exciting venture is the result of key personnel and working colleagues collectively acknowledging that an opportunity in the market place has become available due to recent events and as a result strongly believe that this development will afford us the opportunity to exploit and support key areas of tooling requirements within the industries catered for by our current expertise.

All members of the management team are experts in their own field ably supported by an administration and accounts team that have been known to clientele for many years and we trust you will find are suitable for supporting new and existing customers for years to come....

As with any new business it is our utmost priority to optimise our existing personnel and provide an undertaking to invoke the quality and service levels that our previous customers have enjoyed and to improve and take our sales and services to a higher level in order that we can meet the demands of our existing and potentially new customer base"

The customers addressed were the pursuers' customers; the current expertise was gained in the pursuers' employment; the support staff were known by customers from contact with the pursuers; and customers were "previous" and "existing" only as customers of the pursuers. The recovery of a computer from one former employee has disclosed that PTS has "cloned" the pursuers' contract documents and adopted them with new headings as their own.

[14 ] The pursuers have set out in the summons a clear prima facie case that the defender was in breach of his contract of service prior to the termination of his employment with the pursuers. The defender contends that all that he did was with the knowledge of the pursuers in developing the proposals for a management buy out. However, the critical averments of the pursuers for present purposes relate to the defender's current and anticipated conduct. The pursuers aver that he continues to be the moving force behind PTS, and that they are reasonably apprehensive that he will continue to seek to transfer clients from them to the benefit of PTS. The particular factors relied on are the circular of 1 November, and arrangements for a meeting on 7 or 8 November at the Old Mill Inn, Baginton, Coventry. Further, material found on a lap top computer recovered by the pursuers showed that the defender and Mr Crooks had been in contact with clients up to 20 November 2007. The circular does not assist the pursuers in these proceedings. It identifies Graham Gibson and John Crooks as expert members of the management team and other employees of PTS. But it does not refer to the defender, and could not of itself support a prima facie case that he was continuing to act in relation to PTS. In his affidavit the defender depones that the proposed meeting at the Old Mill Inn did not take place. But the intention to meet there could provide some support on a prima facie basis for the pursuers' apprehensions. I was not shown any print-out of material implicating the defender in contacts with the pursuers' clients. On the other hand I was shown a range of deleted documents extracted from negative images on the recovered computer that demonstrated that employees of PTS, as now named, were in contact with and were doing business with clients of the pursuers.

[15 ] In moving for interdict in terms of the conclusions, Mr Logan submitted that the defender and his colleagues had effectively taken steps to establish an enterprise in competition with the pursuers while still in the company's employment and before any concluded agreement had been reached on the essentials of a management buy out. A number of employees had resigned from the pursuers to engage in the new business, and the defender himself resigned on 28 September. The defender's contention that he was free after 17 September to act independently of the pursuers depended on his assertion that he had been constructively dismissed and was therefore in a position to repudiate his service agreement. Mr Logan relied strongly on the actings of PTS. The pursuers' supervisory employees and other members of staff had left and joined PTS. The pursuers had discovered that files had been deleted from the company's computer system. These included methodology statements, client files, contract documents and other documents. As a result of PTS's conduct, two major clients of the pursuers had already been lost. The company's clientele was small and highly specialised. The pursuers serviced a narrow market strongly influenced by the personal knowledge and experience of its employees.

[16]. This action is based on the defender's contract of service. It is likely that other proceedings will seek common law remedies against the defender and other former employees of the pursuers. In the circumstances it appears to me to be important to confine the narrative of parties' submissions and comments on them to the narrow contractual issues that arise. Mr Logan relied on clause 13 of the defender's service agreement as managing director of the pursuers. It provides, so far as material:

"13. NON-COMPETITION

13.1. In this clause the expression 'The Termination Date' means the date on which the Executive's employment with the Company terminates; provided that this clause 13 shall not have effect if such termination is by the company other than in accordance with the terms of this agreement.

13.2. Since the Executive has obtained and is likely to obtain in the course of his employment with the Company and any Group Company knowledge of trade secrets, designs, design improvements, know-how, techniques, methods, lists and other confidential information relating to the Company and any Group Company and also their respective customers he hereby agrees that in addition to the restrictions contained in clause 11 he shall not during the period of six months after the Termination Date whether alone or jointly with or as a principal, partner, director, agent, employee or consultant of any other person, firm, company or organisation:

13.2.1 engage or be concerned in any business directly or indirectly in competition with any business or activities of the Company (or any Group Company in relation to which the Executive held a position of responsibility at any time during the six months immediately prior to the Termination Date) in Scotland;

13.2.2 entice or solicit or endeavour to entice or solicit away from the Company (or any Group company in relation to which the Executive held a position of responsibility at any time during the twelve months immediately prior to the Termination Date) or have business dealings with or accept business from any person, firm, company or organisation who or which is or has been a customer of the Company or such Group Company as the case may be and with whom the Executive has dealt and which business is of the kind which is undertaken by the Company or such Group Company and has been so undertaken for or on behalf of that person, firm, company or organisation at any time during the twelve months immediately prior to the Termination Date (the "Relevant Period");

13.2.3 entice or solicit or endeavour to entice or solicit away from the Company (or any Group company in relation to which the Executive held a position of responsibility at any time during the twelve months immediately prior to the Termination Date) any person who was a director, employee, contractor or consultant of the Company or such Group Company as the case may be at any time during the Relevant Period and who is or who was engaged in an area of business the same as or substantially similar to that in which the Executive was engaged at any time during the relevant period;..."

Clause 11, which is also relied on, is in the following terms:

11. CONFIDENTIAL INFORMATION

11.1. The Executive shall not directly or indirectly divulge or communicate to any person (other than those within the employment of the Company whose province it is to know the same or with the prior written authority of the Company or as otherwise required by law) nor shall he make any use of (otherwise than for the purposes of performing his duties hereunder) any of the trade secrets, designs, techniques, design improvements, know-how, business information, methods, lists or other confidential information of the company or any Group Company ("Confidential Information"). This restriction shall continue to apply after the termination of the appointment."

[17 ] Mr Logan submitted that the draft shareholders' agreement demonstrated that it was intended that the defender should be the largest shareholder in PTS, as he had been in the pursuers prior to the sale to GTC, and that the information on which the pursuers relied showed that he had already been and could be expected to be engaged in the management of the affairs of PTS. On the documents and averments there were blatant breaches of the contractual obligations set out. He founded on the up to date analysis of the applicable law in Lord Bracadale's opinion in Axiom Business Computers Ltd v Jeannie Frederick or Kenny 20 November 2003, unreported. It was reasonable in the interests of the parties that the defender's conduct should be controlled given that he had sold the business for value. The covenants were no more extensive than reasonable, given the short period of time for which they subsisted and the limitation to the business being dealt with. The scope of the protection sought against competition was restricted to established customers of the pursuers. An employer was entitled to take reasonable measures to protect his business connection and goodwill from abuse by an employee: PR Consultants Scotland Ltd v Mann 1997 SLT 437. The duty of confidence imposed after termination of the employment was moderate. The situation was a fortiori of PR Consultants Scotland Ltd. Mr Logan further referred to C.R. Smith Glaziers (Dunfermline) Ltd v Greenan 1993 SC 161. In this case there was no basis for an assertion that there was anything unfair about the provisions of the contract. And, as in that case, the restriction on disclosing trade secrets was practically worthless unless accompanied by a prohibition against entering the employment of competitors. There would also be a similar difficulty in assessing loss. The crux of the matter was focused in the first conclusion: if the defender were not to be involved in PTS, the other issues were of secondary importance. PTS was much less of a threat to the pursuers if the defender were not involved in its management. It was reasonably anticipated that the major clients were liable to be enticed to follow him.

[18 ] Mr Logan accepted that this was not a case in which there was nothing to be said for the defender. There was an issue relating to unlawful termination of the defender's employment. But at the present stage that amounted only to an allegation following on the suspension of the defender. The contract empowered the employer to dismiss the employee in a range of circumstances. Mr Logan also sought warrant to arrest and inhibit on the dependence of the action. He emphasised that the defender had financial difficulties apart from any damages that might be awarded in this action. He had an outstanding loan due to be repaid to the pursuers. Mr Melville had issued a statutory demand for payment in relation to a mortgage scheme in which the defender had been involved because of his own inability to fund the purchase of his house. There was also a hire purchase debt due on a Mercedes car. He submitted that there were substantial grounds for believing that the defender would not be good for any damages awarded against him.

[19 ] For the defender, Mr Fairley drew attention to the provisions of the 2005 share purchase agreement that provided for the protection of GTC from competition from the defender and Paul Ronald as sellers of the equity shares of AST. Clause 5 of that contract prohibited competition in a variety of ways for a period of two years from completion of the contract, a period which expired on 30 August 2007. That limited protection was an element in the parties' reciprocal obligations and coloured the approach the court should adopt in considering the provisions of the service agreement. The defender had provided an affidavit in which the factual background to the present dispute was set out. Central to his position was the fact that all of the actings of the defender now complained of were carried out with the full knowledge and consent of the pursuers' directors in pursuit of the proposed management buy out, and were essential to testing the viability of the scheme. A new company had to be acquired. The defender became a director of that company. Clients had to be told of the possible buy out to ascertain whether it could succeed. The intention was that the transaction should take the form of an assets purchase. Some clients had highly structured procurement rules. BAE Systems was one such. If the buy out team were regarded as new suppliers the BAE contract would have to be advertised for open tender. Similarly the banking arrangements had to be set up to ensure that the new company had access to liquid financing from the outset of its trading.

[20 ] Mr Fairley said that when the defender went to Aberdeen in mid-September he understood that the management buy out was very much on track for completion. The exchange between the parties' then solicitors on 4 September showed that arrangements were well advanced. The Maclay Murray & Spens e-mail of 19 September, which the pursuers had not disclosed in their application for interdict, showed the true background to the pursuers' actions at that time. Cosalt wished to expand AST's operations, and that prevented the buy out from proceeding. It provided a complete answer to the question why, having gone so far down the road, the management of GTC wished to back out of the transaction. After 18 September the defender withdrew from the new venture. It became necessary to disentangle the new operation from any connection with the pursuers. A new name was adopted for the new company as part of that exercise. The defender did not understand that he was a stakeholder in PTS. He was not involved in the day to day operations of that company. He had been involved in the certain transitional steps that were required to pass over responsibility to the remaining directors of PTS. But he has had no further involvement.

[21 ] Mr Fairley further indicated that there was intended to be a significant difference between the two businesses. The pursuers had a narrow client base, about two hundred in all, of whom about twenty companies were core clients. The pursuers supplied complex electronic services in addition to sourcing and supplying highly specialised air tools. The intention was that PTS should operate in a wider, more consumer oriented, market for air-powered tools. It was anticipated that the defender would be asked to look at marketing initiatives in that wider field in which PTS would not be in competition with the pursuers.

[22 ] Turning to the remedies sought, Mr Fairley accepted that interim interdict in terms of the third conclusion of the summons presented no difficulty. The pleadings, as a matter of averment, set out a clear prima facie case, and the balance of convenience favoured the pursuers. There was a stark factual dispute whether solicitation had occurred. But at this stage he did not dispute the pursuers' entitlement to interim interdict. He did, however, dispute the granting of interim orders in respect of the first second and fourth conclusions.

[23 ] Mr Fairley submitted that, prima facie, clause 13.2.1. of the service contract offended the general principle that an employer was not entitled to defend himself against competition from a former employee per se. Herbert Morris Ltd v Saxelby [1916] A.C. 688. There were exceptions, but the existence of other restraints in parties' contractual relationships made it more difficult to justify a non-competition provision: Stenhouse Australia Ltd v Phillips (1974) 1 All ER 117. Further to escape the prima facie view that the non-competition provision relied on offended principle, the pursuers must show that the clause went no further than necessary, a test to be applied at the time the contract is entered into: Rex Stewart Jeffries Parker Ginsberg Ltd v Parker [1988] IRLR 483; and Office Angels Ltd v Rainer-Thomas and O'Connor [1991] IRLR 214. The question must come to be what justifies protection in relation to goodwill when the contract otherwise provides protection against solicitation of clients and enticement of employees, such as clauses 13.3.2 and 13.3.3. seek to provide? In this case, there was no independent need to protect goodwill which, was embodied in the pursuers' employees and clients. PTS did not seek to rely to any extent on the pursuers' name or established reputation.

[24] However, if the general attack on the clause failed, it was in any event too wide and it was unenforceable on that ground. The clause was not limited, as it should have been, to specific types of business carried on by the pursuers while the defender was in the employment of the company. Such a clause could only seek to protect the legitimate business interests of the employer. At face value, the clause in question would apply to the pursuers' business activities as they might exist from time to time regardless of whether the defender had had any personal involvement in those activities. Given the wider contractual provisions in the share purchase agreement, and clause 5 in particular, the service contract could properly relate only to the defender as employee. If the pursuers were to become car traders, on the face of it the defender would be prohibited from becoming a car salesman. The clause did not restrict its scope to the pursuers' existing business. If that were wrong, there was another problem facing the pursuers. The language of the contract was not reflected in the interdict sought. It was not open to the pursuers, not was it open to the court, to redefine the terms of the contract by adapting them to what might have been an enforceable provision. As he understood the pursuers' construction of the clause, it involved construing the term 'business' in the first and second lines in different ways. That was illegitimate. Further, it was illegitimate to read into the specific provision temporal limitations that were not there.

[25 ] The second conclusion was based on clause 13.3.2. Again the clause was unnecessarily wide and was unenforceable. There was nothing in its terms to restrict it to people with whom the pursuers dealt at any material time. As with the first conclusion, the pursuers' approach depended on introducing temporal limits that were not expressed. Further, the conclusion for interdict sought to re-write the terms of the contract by introducing a restriction, to people with whom the defender dealt, that could not on any fair reading of the clause be derived from its terms. Further, the conclusion did not match the contract in another respect. The clause was not confined to business that was competitive with the business of the pursuer. On its terms the interdict sought would prevent the defender from accepting any form of business from a party with whom he had dealt during his employment whether or not that was a business carried on by the pursuers. He could not set up a shoe shine business and provide a service to one of the pursuers' clients. It would not therefore be appropriate to pronounce interim interdict in terms of the second conclusion.

[26 ] The fourth conclusion should be refused for the reasons set out in Malden Timber Ltd v Leitch 1992 SLT 757. That case had not been followed in TSB Bank plc v Connell 1997 SLT 1254. However, the English authorities relied on in the later case had been expressly disapproved by the Northern Ireland Court of Appeal in Lawrence David Ltd v Ashton, [1989] IRLR 22 and the more recent approach of the Court of Appeal was illustrated in Intelsec Systems Ltd v Grech-Cini (1999) 4 All E.R. 10. The ratio of the decision in that case was the same as the ratio of Malden Timber. Mr Fairley also referred to Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1992] 2 WLR 741 as examples of the application of the same approach. The approach set out in Malden Timber should therefore be followed. The present case was a close parallel. The clause in question was too wide to be enforceable. The provision was by another name a covenant in restraint of trade. "Know how" was the kind of information an employee could carry in his head. The references to "business information", "methods" and "lists" were all far too wide and general to be enforceable.

[27 ] In reply, Mr Logan reaffirmed that the pursuers' apprehensions were based on the actions of PTS. He submitted that the explanation tendered of the company's set up and management was unsatisfactory. The suggestion that the shareholder would act only on the instructions of the current directors lacked credibility. When one looked at the draft shareholders' agreement, there was no doubt as to the identity of the principal client: it was the defender. The second problem with the explanation was that it did not deal with the subscription money. Whether or not the subscription shares had actually been issued was a mere technicality. The agreement to subscribe was the reality, and the defender had been the largest contributor. The affidavit might be strictly correct in relation to the proposed meeting at the Old Mill and the target supplier. But the implication that there was not such a meeting in contemplation stretched credulity to the limits. Another difficulty arose in relation to the defender's car. There was a lease agreement taken out by the defender that was not explained. And the car was excluded from the vehicles listed in the management buy out draft. The truth was that the defender set up a private account in the name of the pursuers to pay for the car. Only when he stopped payment did the pursuers discover what had happened and sought to recover the car.

[28 ] In relation to the complaint that the restrictive provisions of the contract were unenforceable for uncertainty, Mr Logan pointed to the terms of the draft agreement which used exactly the same terminology in the definition of what the buy out team were offering to purchase. For example, they were seeking to acquire the pursuers' "confidential" materials, and "records", a term much wider than the "lists" that the pursuers sought to protect. As buyers, the management buy out team no doubt knew precisely what it was they wanted to obtain. The expressions were not objectionable on grounds of uncertainty as between the pursuers and defender.

[29 ] Mr Logan submitted that the defender could not rely on the negotiation of the buy out to explain or colour his conduct. There had never been a concluded agreement. There was no agreement on price. The draft was far from a concluded agreement. Mr Melville was told on 14 September that a draft document had been provided to the pursuers' solicitors. But it was not for a management buy out of the business. It was for cherry picking the pursuers' assets without taking over any of the company's liabilities. At the time the company had an overdraft of about £700,000. The pursuers' directors concluded that a deal could not be done on that basis. Three things then happened at about the same time. A third party expressed interest in buying the whole of the GTC Group. That approach had been made by 19 September, but there was no done deal, and the ultimate form of any agreement would not necessarily have involved the pursuers. Had the defender made a sensible proposal for a management buy out of the business, it was open to GTC to take the pursuers out of any agreement with Cosalt. The position was aggravated by the discovery that all of the signage at the Glasgow premises that had identified GTC had been removed, and that the defender had been in direct contact with BAE Systems. The defender was acting as if there had been a concluded management buy out agreement when that was far from the case. The documents that the pursuers had recovered and produced showed that PTS was making quite blatant use of the pursuers' documents in developing its own business. Even on the defender's version of events he was involved in setting up the management of PTS.

[30 ] Mr Fairley's legal submissions had proceeded from the wrong starting point by concentrating on the relationship of employer and employee. The critical feature of the transaction was that the defender had sold his majority shareholding in the pursuers to GTC. None of the cases that Mr Fairley had relied on were relevant to the situation in this case. The basis of the share purchase agreement was that GTC was to pay and had paid a proper consideration for the acquisition of the pursuers' shares, and were entitled to protection of the asset they had acquired. In reading clause 13, it was necessary to have regard to the context. The general provisions of clause 13.2 were important in identifying the purpose and intent of the provision as a whole.

[31 ] In relation to clause 13.2.1., Mr Fairley's analysis was flawed. The clause targeted the business the defender was engaged in, not the defender's activities. If that business was in competition in any respect, the defender could not work for it without breach of the provision, whatever his capacity in that business. The court had regard to the circumstances of the real world. If the defender engaged with a competitor of the pursuers a real risk arose, and the pursuers were entitled to protection against that risk: Bluebell Apparel Ltd v Dickinson 1978 SC 16 and C R Smith Glaziers (Dunfermline) Ltd v Greenan. There was no basis in this case on which the court could take the view that the restrictive clauses were unenforceable. On the facts of the case, the defender was managing director of the pursuers. There was no aspect of the pursuers' business that he was not engaged in. The position changed when his employment terminated. Emerging lines of business after that point would be beyond his knowledge and would be irrelevant to the operation of the provisions of the contract. The general provisions of clause 13.2 avoided the problems of which Mr Fairley spoke. In terms of reasonableness, the line was drawn by clause 13.2. where the pursuers' interest was defined. But it was irrelevant that PTS might enter the mass market for air tools. If the company competed with the pursuers' business, the provision applied and the defender could not be engaged in PTS's business.

[32] Mr Logan submitted that there was no basis for requiring a temporal limitation on the defender's involvement with the pursuers' business for the purpose of these restrictions. He had been managing director. It was not unreasonable to include the whole business of the company within the scope of the restriction. In this and other respects, the proper approach to interpretation was to have regard to the whole factual matrix: Dunedin Independent Plc v Welsh 16 April 2004, unreported. This was another case in which the principles outlined in Malden Timber Ltd v McLeish 1992 SLT 727 had been applied. If there ever had been a day in which the court had been at pains to avoid giving effect to restrictive covenants, that day had passed. These provisions were now construed on the same principles as applied to commercial contracts generally. In this case one might criticise the drafting of clause 13 as a whole. But it was clear what was intended. So far as the fourth conclusion was concerned, Mr Logan accepted that it was not sufficient to use vague terms. But in contrast to Malden Timber Ltd v Leitch, with which he had no quarrel in light of the English decisions, in this case there was a definition of confidential information, not a bald statement. One could construe the general term ejusdem generis with the specified items, and have regard to the context. On the basis of the whole information before the court, the pursuers had a compelling case. Interim interdict should be pronounced as sought.

[33 ] In my opinion it is appropriate to deal at the outset with the fourth conclusion of the summons which seeks interdict against use of "trade secrets, designs, know-how, business information, methods, lists and other confidential information relating to the pursuers and their customers". Mr Fairley in this case relied on Malden Timber Ltd v Leitch in which I refused interim interdict in terms that bore some similarity to the present conclusion, and which, in particular, crucially sought interdict against the disclosure of "confidential information". In TSB Bank plc v Connell Lord Osborne refused to follow that decision, following instead views expressed in the English cases of Lansing Linde Ltd v Kerr [1991] 1 All ER 418 and Thomas Marshall (Exports) Ltd v Guinle [1979] Ch 227. However, this is an area in which opinion has shifted over time. The Northern Ireland Court of Appeal took up the issue in Lawrence David Ltd v Ashton, to which Lord Osborne does not appear to have been referred. Lord Justice Balcombe said:

"So I turn to consider the relief which the plaintiffs seek. They first claim an injunction against disclosure of confidential information or trade secrets. (That is paragraph 1(i) and (ii) of the notice of motion). On this aspect of the case I agree unhesitatingly with a view of the judge. I have always understood it to be a cardinal rule that any injunction must be capable of being framed with sufficient precision so as to enable a person injuncted to know what it is he is to be prevented from doing. After all, he is at risk of being committed for contempt if he breaks an order of the court. The inability of the plaintiffs to define, with any degree of precision, what they sought to call confidential information or trade secrets militates against an injunction of this nature. That is indeed a long-recognised practice.

In Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472, at p.1479A, Lord Denning MR said this:

'It is thus established that an employer can stipulate for protection against having his confidential information passed on to a rival in trade. But experience has shown that it is not satisfactory to have simply a covenant against disclosing confidential information. The reason is because it is so difficult to draw the line between information which is confidential and information which is not: and it is very difficult to prove a breach when the information is of such a character that a servant can carry it away in his head. The difficulties are such that the only practicable solution is to take a covenant from the servant by which he is not to go to work for a rival in trade. Such a covenant may well be held to be reasonable if limited to a short period. That appears from the judgment of Cross J in Printers & Finishers Ltd v Holloway (1965) 1 WLR 1,6:

"Although the law will not enforce a covenant directed against competition by an ex-employee it will endorse a covenant reasonably necessary to protect trade secrets.....If the managing director is right in thinking that there are features in the plaintiffs' process which can fairly be regarded as trade secrets and which their employees will inevitably carry away with them in their heads, then the proper way for the plaintiffs to protect themselves would be by exacting covenants from their employees restricting their field of activity after they have left their employment, not by asking the court to extend the general equitable doctrine to prevent breaking confidence beyond all reasonable bounds"'.

It seems to me that this passage points out the way in which the difficulty, if it be a difficulty, of identifying trade secrets or confidential information with sufficient precision to enable a proper injunction to be granted, can be overcome".

Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd contained observations of a more general nature about the approach of the court. At page 760, Staughton LJ commented on the general relaxation of the court's approach to the requirement that an injunction must state with precision what the defendant must or must not do if he is to avoid the peril of imprisonment for contempt of court. From that trend he excepted two classes of case, molestation of a wife in the former family home and "the case of an employee who leaves and proposes to make use of his employer's trade secrets". As I have noted above, in the light of these authorities, Mr Logan did not quarrel with the decision in Malden Timber Ltd v Leitch. Given the approach I adopted there, it seems to me that I must refuse interim interdict in terms of the fourth conclusion.

[34 ] The interim interdict sought in terms of the first conclusion is expressed in these terms:

"For interdict against the defender from being engaged in or concerned in Power Tool Service (Scotland) Limited, ... prior to 28^th February 2008, and for interim interdict."

I agree with the approach to construction adopted by Lord Menzies in Dunedin Independent Plc v Welsh. It is necessary to apply common sense to the task of construing the terms of the contract. One must look to the whole contract and to the surrounding business circumstances. Against this background it is appropriate in the first place to consider the submission that the clause is too wide and that it is unenforceable on that ground. In my opinion it is necessary to read clause 13.2.1. along with the general provisions in clause 13.2. The purpose of the specific provision is to provide specification to the general words of prohibition in that provision. The material elements of the provision so construed are:

the prohibition for a term of six months after the termination date;
specification of the prohibited capacities, and in particular the capacities of director employee or consultant of any company; and
specification of the prohibited activities, namely engaging or being concerned in any business directly or indirectly in competition with any business or activities of the pursuers.

The construction for which the pursuers contend, and which is reflected in the terms of the conclusion, is against engagement in or concern with PTS. That involves reading the term "business" in the first line of clause 13.2.1. as meaning "business entity", in marked contrast to the clear meaning of the term in the second line as meaning business activity. Of greater significance is the clear reference to engagement as director or employee in the list of prohibited capacities. In my opinion the natural meaning of the provision is that the defender must not, as director or agent of PTS, for example, be engaged or concerned in any business of PTS which is in competition directly or indirectly with any business of activities of the pursuers. So read the clause would not prohibit employment in PTS as such, nor would it prohibit employment in a business that was not in competition with the pursuers. It is unnecessary in the circumstances to discuss at length Mr Fairley's other submissions in relation to this conclusion. The remedy sought is not within the prohibition on a sound construction of its terms, whether or not the restriction is enforceable.

[35 ] The second conclusion is based on clause 13.2.2. As with clause 13.2.1, the duration of the prohibition and the definition of the prohibited capacities is found in the general part of clause 13.2. The definition of the prohibited activities is more complicated. Read short, on the defender's approach, what the defender must not do is: entice or solicit or endeavour to entice or solicit away from the pursuers, or have business dealings with or accept business from any person, firm, company or organisation who or which is or has been a customer of the pursuers with whom the defender has dealt and which business is of the kind which is undertaken by the pursuers and has been so undertaken for or on behalf of that person, firm company or organisation at any time during the twelve months prior to the termination date.

The conclusion is in these terms:

"For interdict against the defender from enticing, soliciting away or endeavouring to entice or solicit away or, on being approached, accepting the custom or business of any person, firm, company or organisation who or which is or has been a customer or client of the pursuers and with whom the defender has dealt in the period of 12 months prior to 28^th September 2007 and that until 28^th February 2008, and for interim interdict."

[36 ] Mr Fairley's first point was that there was nothing in the clause to restrict it to people with whom the defender dealt in any specified period. The second element was wholly unrestricted as to period. On his approach, the provision would apply to customers who had not had dealings with the defender for many years, provided that the business in contemplation was of a type that had been undertaken within the twelve month period. The clause is somewhat clumsily drafted. The final words "at any time during the twelve months immediately prior to the Termination Date" naturally qualify the expression "and has been so undertaken..." with reference to the kind of business in contemplation rather than to the defender's involvement with the customer. If that is the sound construction, and it is the construction for which the defender contends, then again the interdict sought does not fall within the terms of the contract, and interdict could not be pronounced in the terms sought.

[37 ] It would be premature to resolve finally the other issue of interpretation raised by Mr Fairley, namely that the conclusion did not match the contract in respect that the clause was not confined to business that was competitive with the business of the pursuers, and interdict in the terms sought would prevent the defender from accepting any form of business from a party with whom he had dealt during his employment whether or not that was a business carried on by the pursuers. The example suggested to test this was that the defender could not set up a shoe shine business and provide a service to one of the pursuers' clients. This approach was criticised by Lord Caplan in Malden Timber Ltd v McLeish and by Lord Menzies in Dunedin Independent Plc v Welsh. I agree with their views. The purpose of the clause as a whole is to provide a measure of protection of the trade secrets, designs, design improvements, know-how, techniques, methods, lists and other confidential information that might be obtained in the course of employment with the pursuers. Whatever criticisms one might level at this expression in terms of clarity and certainty of meaning, it clearly focuses on the operations of the pursuers. In the circumstances, the 'business' contemplated is clearly the pursuers' business, not some fanciful alternative that has no basis in reality. Further, the defender was managing director of the pursuers and had responsibility for its whole business within the defined relevant period. Since the clause could not bite unless the target customer had had business dealings with the pursuers within the relevant period, the only business contact that could be attributed to the defender would relate to that business. If the terms of the conclusion were the only problem confronting the pursuers that problem might be addressed by amendment. It is not for the court, however, to speculate on what the amended terms of the conclusion might be.

[38 ] In the circumstances, I shall grant the order sought in terms of the third conclusion, and shall refuse interim interdict in terms of the first second and fourth conclusions. Had I not reached these views on the terms of the conclusions, other issues would have arisen, and, having heard full argument on these it is appropriate that I should make some comment on them. The general approach of the court to the enforcement of restrictive covenants has been focused in a number of cases of which Axiom Business Computers Ltd v Jeannie Frederick or Kenny and Dunedin Independent Plc v Welsh are the latest to which I was referred. I agree with the approach adopted in those cases. On that approach, in my opinion, the covenant set out in clause 13.2.1. of the service contract is in principle enforceable. It would not be unreasonable having regard to the interests of the parties. The defender became managing director of the pursuers as part of a package of arrangements in terms of which he sold his majority interest in the pursuers to GTC. The purchaser was reasonably entitled to protect the value of the asset purchased by provisions restricting the activities of the defender. Even on a strict approach to the covenant, in view of the employer employee relationship created, it is not, in my view, open to criticism as affording more than adequate protection. The period of restraint is remarkably brief in the circumstances, and the focus of the clause, properly construed, is on protection of the pursuers' business.

[39 ] I am less confident that the covenant contained in clause 13.2.2. is enforceable on a sound construction of its terms. There is much to be said for the defenders' approach, on the view that, on the terms of the provision, the defender is prohibited from enticing, soliciting away from the pursuers and from having business dealings with or accepting business from any person, firm, company or organisation who or which is or has been a customer of the pursuers with whom the defender has dealt at any time. That would include customers with whom the pursuers had had no dealings during the time GTC were owners of the pursuers, but had been customers before GTC acquired the pursuers. One cannot exclude the possibility that customers have preferences as to suppliers, and that there may exist a body of potential customers for services from a company with whom the defender was associated but who would not deal with a company with which GTC was associated. It is not obvious that the pursuers would be entitled to protection against the defender having an interest in business that the pursuers could never capture. However, this is an issue that could turn on evidence as to the factual background to the transaction as a whole, and I would not have held that the clause was unenforceable on grounds of uncertainty without enquiry into the facts.

[40 ] Had the conclusions fallen within the terms of the contractual provisions, a more difficult issue would have related to the balance of convenience. Mr Fairley conceded that the balance of convenience favoured the pursuers in relation to the third conclusion of the summons. On that view there would have been some difficulty in distinguishing the relevant issues in relation to the first and second conclusions. However, there are a number of features that would have to be taken into account. Draft defences have been tendered, and the defender has provided a full affidavit dealing with the circumstances. In these circumstances, the relative strengths and weaknesses of the parties' positions become relevant considerations: Malden Timber Ltd v Leitch and the authorities cited at page 759. The pursuers did not disclose the sequence of events involving the parties' solicitors in mid-September in applying for interdict. The e-mail sent to the defender's solicitor on 19 September by Maclay Murray & Spens indicates that the negotiations were broken off because Cosalt, the prospective purchasers of GTC, were looking to expand the business of AST. The failure to disclose that fact is a cause of concern, and must have a bearing on the strength of the pursuers' case. Further the representations made by counsel on their behalf about the negotiation of the management buy out weaken on close scrutiny. There is documentary evidence to support the defender's position that, at all material times, the scope of the buy out was confined to assets of the pursuers. There is documentary evidence that the financing of the new venture was of concern to GTC, and that comfort from the new company's bankers was a material factor. That could not have been arranged without contact with a banker, and the directors of the pursuers must have known that an attempt to put the new company's finances in place was inevitable. Against that one would have had to balance the defender's admitted involvement in setting up new management structures in circumstances in which there had not been a concluded agreement for the buy out. A further difficulty would have related to the defender's contention that he had been constructively dismissed. That could not have been resolved on the information available at this stage. However, in the whole circumstances I would have held that the test of the balance of convenience had not been met by the pursuers. The lack of candour in failing to disclose and explain the approach from Cosalt would have been the determining factor. However, interim interdict is refused, except to the extent that Mr Fairley conceded that interim interdict in terms of the third conclusion could not be resisted, for the reasons I have set out above.

Axiom Business Computers Ltd v Jeannie Frederick or Kenny 20 November 2003, unreported

Bluebell Apparel Ltd v Dickinson 1978 SC 16

Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1992] 2 WLR 741

Lawrence David Ltd v Ashton [1989] IRLR 22

Dunedin Independent Plc v Welsh 16 April 2004, unreported

Malden Timber Ltd v Leitch 1992 SLT 757

Malden Timber Ltd v McLeish 1992 SLT 727