United Kingdom Employment Appeal Tribunal

THE HONOURABLE MR JUSTICE RIMER

1. The appeals before us are against decisions of an Employment Tribunal sitting at Liverpool over two days in May 2004 and chaired by Mr E Lloyd Parry. The tribunal's extended reasons were sent to the parties on 15 July when the decisions were entered in the Register. The three applicants were Mr Christopher Chorley, Mr James Chorley (who are brothers) and Mr David Forshaw. The respondent was their former employer, Archcraft Ltd ("ACL"). The claims were for compensation for unfair dismissal. Each claim was dismissed, the tribunal holding the dismissals to have been fair. The dismissals were made in the wake of the refusal by each applicant at ACL's request to sign a new contract of employment incorporating a restrictive covenant limiting the scope in which they could, amongst other things, compete with ACL after they should cease to be employed by it. Each applicant now appeals to this tribunal against the dismissal of their claims. Mr Christopher Chorley and Mr James Chorley were represented before us by Mr Naylor. Mr Forshaw was represented by Mrs Bramley Marsh. ACL was represented by Mr Richard Bradley.

The facts found by, and the decision of, the employment tribunal

2. ACL manufactures arched and angled plastic products for windows and conservatories. Mr Christopher Chorley ("CC") and Mr James Chorley ("JC") commenced employment with ACL on 6 April 2001. They were both fabricators. Mr Forshaw commenced employment with ACL on 17 September 2002. He was a profile bender. All three were dismissed on 18 September 2003.
3. ACL operates at a factory near St Helens. It employs, or formerly employed, about 13 highly skilled people whose training lasts from four to 24 months depending on their particular job. The industry in which it is engaged is labour intensive. Its annual turnover is about £630,000. Its parent company is Radius Plastics UK Limited. On 15 October 2002, Radius appointed Mr Crewdson as a consultant to ACL.
4. CC and JC are the sons of Mr James Chorley senior ("JCS"). Mr Forshaw is JCS's son-in-law. JCS was formerly ACL's production director. Mr Charles Richards ("CR") was a former sales director.
5. In 2003, when they were still employed by ACL, JCS and CR became directors of Arco Properties UK Limited ("Arco"). Arco had been incorporated on 16 May 2003. Its secretary was Mr Anthony Richards, who is CR's father.
6. On 12 September 2003, Mr Crewdson had a meeting with JCS and CR. He told them he had discovered about Arco and asked them what was going on. They admitted they intended to set up a new company (we observe that the inference from the way the tribunal put it may perhaps be that they were referring to a company other than Arco) in direct competition with ACL. They claimed that they "owned" ACL's customers and staff and would easily attract them to the new company. JCS said that his two sons (CC and JC) knew all about their plans and would join them when the new company was set up. Mr Crewdson reported back to "the directors" what he had been told. We do not know whether these were the directors of ACL or Radius, since the tribunal do not say.
7. A few days later Mr Crewdson spoke again to JCS and CR. JCS said he would be resigning from ACL the following day and that his two sons would be leaving with him. CR said he was undecided as to what he would do but said he was being pushed by his father to leave. He said that if the new business was set up he intended to recruit ACL's staff and take their customers. His father was said to be the driving force behind the new business, was providing its finance and was looking for premises for it.
8. CR resigned from ACL on 16 September 2003. He told Mr Haslam, ACL's production director, when he did so that he, JCS, CR and JC would set up their competing business and would "attack" ACL's customers and staff. Mr Crewdson then spoke to JCS and tried to persuade him to abandon his intention of setting up the new company. JCS's response was that he had made a commitment to CR and the latter's father which he had to go through with. Mr Crewdson's conclusion was that ACL could not continue to employ JCS, and ACL dismissed him on 17 September.
9. Mr Crewdson then turned his attention to the three appellants, CC, JC and Mr Forshaw. The tribunal found that Mr Crewdson regarded CC and JC as being in breach of their obligations as to trust and confidence. He nevertheless decided to invite them to commit themselves to ACL. They agreed they knew of JCS's plans and said it was likely they would join him in the new company. Mr Crewdson told them that he would prefer to keep them with ACL but in the circumstances he wanted a commitment from them. His position was that they could not stay on with ACL if they were likely at any moment to leave. He gave each a new contract of employment to sign. It included a restraint of trade clause directed to limiting their activities after the termination of their employment with ACL. The tribunal did not spell out the terms of the restraint clause but we have been provided with a copy. The clause was a quite extensive one, which the tribunal found was "doubtless wider than necessary". We agree with that. The first restriction it purported to impose on CC and JC was a 12-month prohibition purported to prevent them from competing with ACL. A restriction of that sort is not one that an employer can validly impose on his employee: see, for example, Atford v Lamont [1920] 3 KB 571, in which Younger LJ makes clear that an employer is not entitled by a covenant taken from his employee to protect himself against his former employee's competition.
10. Mr Crewdson also spoke to Mr Forshaw. He was guarded in his answers. He said he would find it difficult to work for ACL if it was suing JCS, his father-in-law, which Mr Crewdson made clear to him ACL intended to do. Mr Crewdson invited Mr Forshaw to consider his position overnight and gave him a copy of the contract he had given CC and JC. That is the one containing the restraint clause.
11. The following day Mrs Fairhurst, ACL's administrator, resigned from ACL. She even refused to work a week's notice. Her husband telephoned ACL and told them that she was working for the new firm. This meant that ACL was left with just 12 employees, all on the manufacturing side, including CC, JC and Mr Forshaw. ACL was in crisis. Mr Crewdson wanted to keep all the staff he could since otherwise ACL would be faced with a long and costly recruitment and training exercise for new staff.
12. Mr Crewdson then had another meeting with CC, JC and Mr Forshaw. He told them he needed the commitment from them embodied in the contract of employment. He put to them that they were probably going to leave ACL and join the new company. They asked him what their notice pay would be, to which he replied that for CC and JC it would be three weeks' pay and, for Mr Forshaw, one week's pay. Mr Forshaw's response to that was that CC and JC would be all right, but that he would have to go on the dole for two weeks. The tribunal found that this remark made Mr Crewdson think that the plans to start the new business were more advanced than he had realized, and he believed all three intended joining it within three weeks. None of them would give him the commitment he was asking for, nor did they offer a less stringent one of their own.
13. In that state of affairs, ACL dismissed each of CC, JC and Mr Forshaw on 18 September. Mr Crewdson told them they were all good workers and that if their move to the new firm did not work out, ACL would welcome them back. They were given no opportunity to appeal. The tribunal found that, realistically, they could not have been. The dismissing director was Mrs Barton, who had signed the dismissal letter on Mr Crewdson's recommendation. The tribunal said that in such a small team it was difficult to see who might convincingly hear and determine an appeal.
14. The tribunal found that each appellant was dismissed "for refusing to commit himself to working for [ACL]". The tribunal said that was "some other substantial reason" for the dismissals: see Section 98(1)(b) of the Employment Rights Act 1996 ("the ERA"). The tribunal then directed themselves as follows:

"5.2 The question in each [case] was whether [ACL] were reasonable or unreasonable in treating that reason as sufficient to justify the applicant's dismissal. In considering fairness we had regard to equity and the substantial merits of the case. We had regard to the applicant's [sic the tribunal meant ACL's] size and administrative resources: they are a small firm with no scope for absorbing or redeploying those they mistrust. We strove not to substitute our judgment for that of [ACL] the question was not what we should have done in their place but whether their action lay within the range of options reasonably open to them."

The tribunal concluded that in each case ACL proceeded reasonably in deciding to dismiss the appellants. They referred to the particular facts of each case as follows.

15. As regards JC, they said Mr Crewdson had enough evidence of his intention to join his father's new firm. Both JCS and CR said he would be recruited. He agreed he knew of his father's plans and he agreed it was likely he would join him. The tribunal's finding was that it was inherently more likely than not that his father would want him in his new venture. They said the same considerations applied to CC. They said that Mr Crewdson was entitled to believe he knew about his father's plans and intended to join him.
16. As regards Mr Forshaw, he had told Mr Crewdson he would find it difficult to work for a firm in legal dispute with his father-in-law. He spoke to Mr Crewdson in a way which justified the view that he would be leaving ACL shortly in order to join the new firm but that there would be a short gap in which he would need to be paid. The tribunal found that Mr Crewdson was entitled to form the view that he did, namely that Mr Forshaw was also likely to leave ACL to join the new firm.
17. The tribunal summarised Mr Crewdson's view of all three appellants as follows:

"5.7 Mr Crewdson's view of all three

In effect, the 3 applicants were using [ACL] to finance them until they moved to work for a competitor. More, the avowed intention of the new business was to harm [ACL]. Mr Crewdson was entitled to decide that he did not want them to learn any more about the firm's customers than they knew already, for instance by looking out for customers' names and addresses, the details of suppliers, or to a certain extent [ACL's] pricing. It was reasonable of him to feel that he had to make a decision on the evidence available to him. He was reasonably entitled to the decision that their continued employment in the firm was not in its best interests.

5.8 The restraint on the applicants' practising their trade which Mr Crewdson put into their proposed new contract was doubtless wider than necessary. But Mr Crewdson is not to be blamed for requiring a commitment in some form from them. The attempt was probably unrealistic in that there was no prospect of any giving a truthful commitment. And they did not try to. They did not say that a 12-month nationwide restraint was far too much, but protest their loyalty to [ACL] they asked about their notice payments and speculated how they would serve their interests in an unspecified interim."

The appeal to this appeal tribunal

18. It is important to identify the reason for the dismissal of each appellant. The tribunal's finding was that it was his "refusal to commit himself to working for ACL". There is, however, nothing in the tribunal's findings to suggest that Mr Crewdson was asking for a commitment from the appellants to work for ACL for any particular period. The most that ACL might have done to that end was to invite the appellants to sign new contracts which would tie them to ACL for a fixed term. Even that would not stop them from leaving their employment early in breach of contract albeit that to do so would expose them to a claim for that breach.
19. Mr Bradley submitted to us that the tribunal had in fact found that ACL had sought, and failed to obtain, some form of commitment from the appellants that they would continue to work loyally for them for some uncertain period. We do not accept that submission, which we do not find to be supported by the tribunal's reasons. All we understand the tribunal to have found was that the "commitment" that ACL had asked for was the appellants' agreement to the signing of the new employment contracts containing the restrictive covenant. We derive this from paragraph 4.12 of the tribunal's reasons, where they said that, at the final meeting with Mr Crewdson, "[Mr Crewdson] told them he needed the commitment from them embodied in the contract of employment". The reason for the dismissal, as found by the tribunal, was the appellants' refusal to sign new contracts containing a 12-month nationwide restraint clause, that clause being the one which the tribunal appear to have regarded as imposing the element of commitment.
20. We comment that it was perhaps slightly inaccurate to describe these new contracts as imposing any commitment on the part of the appellants to ACL. They did not, for example, purport in terms to commit the appellants to stay with ACL for any length of time. The point underlying the new contracts was rather that ACL hoped that the existence of the restraint clause would operate as a disincentive to the appellants to leave ACL's employment since that if they did so they faced the risk that ACL would seek to enforce the restraint against them, if necessary by seeking an injunction. The purpose of the restraint clause was, therefore, that it was hoped that it would in practice tie the appellants to ACL, since were they to leave ACL they would face a year's unemployment in their chosen trade.
21. ACL's theory was in principle fine but its implementation was not. That is because its attempt to impose a 12-month nationwide restraint on the three appellants from competing with ACL was an attempt to subject them to a restraint that was obviously too wide - certainly far wider than was reasonably necessary to protect ACL's legitimate interests. It followed that the restraint, had it been imposed, would probably have been void and unenforceable. The tribunal held, however, that the appellants' refusal to sign the new contracts was "some other substantial reason" for their dismissal and was therefore a potentially fair reason for the purposes of Section 98(1)(b) of the ERA. They further held that it was reasonable for ACL to dismiss them for not so signing up.
22. We readily accept that, in the circumstances faced by ACL, it was reasonable for it to invite the three appellants to sign up to contracts containing a reasonable restraint clause. The appellants could not of course have been compelled to sign such contracts and, had they declined to do so, their consequential dismissal would arguably have been for a potentially fair reason. A similar point was considered in RS Components Ltd v Irwin [1973] ICR 535, in which it was held that the employee's refusal to sign up to a new contract containing a reasonable restraint was a potentially fair reason for his dismissal.
23. The problem in the present case, however, is that the tribunal's finding was that the proposed restraint was wider than was necessary for ACL's protection. ACL was, therefore, attempting to impose on the appellants a width of restraint on their post-employment activities which was unreasonably wide and therefore unreasonable between the parties. Any such restraint, had it been imposed, would probably have been void and unenforceable as an illegal restraint of trade. There is however, no evidence that either Mr Crewdson or the appellants knew this and we understand that the evidence given to the tribunal was that the appellants regarded the proposed restraint as a potentially valid one, but were not prepared to sign up to it because they regard it as imposing too wide a restriction on them: it would effectively stop them from practising the trade they knew. That is the point each of them had made in their Originating Applications.
24. The finding of the tribunal is that it was the appellants'refusal to sign up to the new agreements which was the reason for their dismissal: and that it was this refusal which was claimed by ACL to be a potentially a fair reason for their dismissal for the purposes of Section 98(1)(b). In the closing paragraph of the judgment of the Irwin case, Sir John Brightman left open the question of whether it is open to an employer to assert his employee's refusal to sign up to an unreasonable restraint as being a potentially fair reason for his dismissal. In our view, the question answers itself. We consider it was unreasonable of ACL to ask the appellant to sign up to a restraint which was unreasonably wide and which purported to impose an unreasonable fetter on their future trading activities. We do not accept that such a refusal can amount to a potentially fair reason for dismissal since we do not understand how an employer can assert as such a reason the fact that the employee refused to sign up to unreasonable terms of employment. It is true that the employees in the present case made no counter proposals as to restraint terms which might be reasonable, but we do not see why they should have done. It was ACL that wanted to impose a restraint and it was for ACL to come up with a reasonable one. We are disposed to accept that, had ACL not attempted to impose the restraint, but had simply taken the view that they should get rid of the appellants there and then, for fear that their continued employment might impair all the confidential information which ACL wanted to protect, that might by itself have been a potentially fair reason for their dismissal in the circumstances of this unfortunate case. However, this was not the reason for the dismissals found by the tribunal. We conclude that the reason they did find was not a potentially fair reason and that it anyway cannot have been reasonable, to dismiss the appellants for refusing to sign up to an unfairly wide, and unreasonable restraint clause. In finding, as they did, that the refusal to sign up to the new contracts was a potentially fair reason for dismissal, we hold that the tribunal were in error.
25. We will therefore allow the appeal, set aside the dismissal of the appellants' claims for unfair dismissal, substitute a decision that each appellant was unfairly dismissed and remit the matter to an employment tribunal for a remedy hearing. Mr Bradley asked us to make clear that it would be open to that tribunal to make findings, if justified by the evidence, as to the appellants' contributory fault and we do make that clear. In saying that, however, we are not thereby to be taken to be expressing any view one way or the other on whether there was any such fault on the part of the appellants. That will be a matter for the employment tribunal. We also take the view that better justice will be seen to be done in this case if the remedy hearing is remitted to a freshly constituted tribunal, and we will so order.