Post-termination restraint cannot be “bought” by employer

In Bartholomews Agri Food Ltd v Thornton [2016] EWHC 648 (QB), the English High Court recently held a post-termination restriction in an employee’s contract of employment to be unenforceable. The case is notable for a clause, which the Court struck down, enabling the employee to receive full salary from the employer provided he abided by the (unenforceable) restriction.

The link to the full judgment can be found here: http://www.bailii.org/ew/cases/EWHC/QB/2016/648.html

Background

The employee (T) joined Bartholomews in 1997 as a trainee agronomist. Clause 10.2 of his contract of employment read:

10.2 PROTECTION OF KNOWLEDGE ACQUIRED DUE TO THE COMPANY’S SPECIALISED BUSINESS

Employees shall not, for a period of six months immediately following the termination of their employment be engaged on work, supplying goods or services of a similar nature which compete with the Company to the Company’s customers, with a trade competitor within the Company’s trading area, (which is West and East Sussex, Kent, Hampshire, Wiltshire and Dorset) or on their own account without prior approval from the Company. In this unlikely event, the employee’s full benefits will be paid during this period.”

In other words, the employer purported to prevent T engaging in work supplying goods and services “of a similar nature” to its customers for a period of six months immediately following the termination of his employment. The employer also agreed to give him full pay during the period of the post-termination restriction.

T resigned and intended to start working for a competitor. Bartholomews sought an interim injunction to prevent him from dealing with its customers.

Decision

The High Court refused the injunction, ruling that the restriction was in restraint of trade and unenforceable. It decided on three grounds:

First, the restriction was imposed in 1997 when T was a trainee with no experience and no customer contacts. The term was adjudged to be “manifestly inappropriate” for a junior employee and would remain unenforceable even if the employee had subsequently been promoted to a role in which the restriction would have been reasonable – Patsystems Holdings Limited v Neilly: http://www.bailii.org/ew/cases/EWHC/QB/2012/2609.html.

Second, the scope of the restriction was plainly far wider than was reasonably necessary for the protection of the applicant’s business interests. It applied to all Bartholomews’ customers, regardless of whether T had knowledge of them and regardless of whether he had ever carried out any work for those customers – he only dealt with 2% of the customer base and this restriction prevented him from working with the 98% that he never came across.

Third, the fact that T would continue to be paid in full during the period of the restriction did not save the clause. The Court held that it is contrary to public policy to permit an employer to purchase a restraint of trade.

Commentary

It is commonly known that restrictions on post-termination activities have to be drafted cautiously and should be with the benefit of legal advice. Clauses will only be enforced if they go no further than is necessary to protect the company’s legitimate business interests such as its customers, trade secrets and confidential information.

The Court suggested that the covenant might have been reasonable if it had referred only to those customers with whom T himself had dealings (i.e the 2%). Clause 10.2 however was wider than reasonably necessary.

Restrictions are not usually appropriate for junior members of staff and should always be reviewed on promotion. As the Court reiterated, having decided a similar point before, “if a restriction was unenforceable when entered into, it does not become enforceable over time” if the employee rises through the ranks to a role where the restriction might be considered reasonable. Even if the restriction was enforceable when entered into, it might not provide adequate protection for the company when the employee is more senior.

Hong Kong

Whilst not Hong Kong jurisprudence, it is advisable for employers to take heed of this recent English decision. The relatively high turnover of employees in various local industries might tempt employers to try and hold down their staff (usually secured after much effort) for as long as they can, including even paying to stop going to the competition – where garden leave is not possible – but employers should now bear in mind that such a clause will unlikely hold up to court scrutiny.

When updating restraints during employment, employers need to ensure that they provide a real benefit to the employee in return for him agreeing to the new restraint – e.g. a pay rise/promotion/more responsibility. If this is not done, then it might mean that the restriction is unenforceable: see Re-Use Collections Ltd v Sendall (2014) (http://www.bailii.org/ew/cases/EWHC/QB/2014/3852.html).

Ultimately, tighter drafting and reviewing terms when an employee comes through the ranks will invariably support long term strategies of employers.

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Footballer successfully dribbles around club’s hold

Eastern Athletic Association Football Team Ltd v Alessandro Ferreira Leonardo, HCA 2383/2015

Civil procedure – injunctions – interlocutory injunction restraining respondent (football player) from playing for other football teams without prior written consent of applicant – court not to grant injunction to enforce negative stipulations under contract for performance of skilled personal services – effect of delay by applicant in applying for injunction

This was a decision of Lok J on an application for an interlocutory injunction. The full judgment can be seen here: http://legalref.judiciary.gov.hk/lrs/common/ju/ju_frame.jsp?DIS=101092&currpage=T

Background

This is a straightforward case where a footballer who was provisionally contracted to play with EAA signed terms with another local football club during the original term of his provisional contract (due to expire in 2018). EAA applied to restrain him from so doing and, effectively, to compel him to stick to his agreement and play for EAA.

There were three main points against EAA and in favour of the player:

(1) The contract for services was provisional – it was not a contract that would be recognised by the HK Football Association and as such could not be registered. It had also not, to date, been submitted for registration by EAA such that it could not be accepted by the HKFA;

(2) The Court generally will not grant an injunction to enforce a negative stipulation (i.e. here being an inability to play for another team) under a contract for the performance of personal services involving the continuing exercise of some special skill or talent and a high degree of trust and confidence; and

(3) There was considerable delay on the part of EAA in making the application to the Court.

Analysis

The main thrust of the court’s judgment to refuse an injunction in this case was in relation to point 2. Lok J reiterated that “it is quite settled law that the court will not grant specific performance of a contract of personal services on both sides involving mutual trust and confidence, and will not grant an injunction which effectively compels performance of the positive obligations in a contract of personal services“: Worth Achieve Associates Ltd v Huang Sheng Yi [2007] 3 HKLRD 797.

This was premised on the dicta of Oliver J that:

“there is something morally repugnant in the notion of shackling together in a relationship of mutual trust, dependence and daily personal contact, individuals who are at loggerheads or who have lost confidence in one another.“

The Court also distinguished this case from one where an employee purported to “jump ship” to work for a competitor (Evening Standard Ltd v Henderson) – Lok J agreed that in such a case an injunction could be maintained where the employee could not work for any other party and the employer undertook to continue to pay that employee for the remaining period of his notice period. However, that case did not have the “relationship of mutual trust and confidence” quality that features here.

Commentary

It was paramount that the role of the employee was put to the fore. The Court, rightly in my view, distinguished normal employment situations from “special” ones where sitting idly by for a notice period to run out has different consequences:

There is no real loss to the employee in Evening Standard if he just sat idle and did not work for his employers.  He would still receive his salary without worrying for any complaint by his employers.  The Defendant here is a professional football player.  Even without any evidence from the Defendant himself, one would appreciate that he needs to play in football matches to keep and improve his skills and physiques, not to mention that he needs to play in professional football matches to increase his chance for being selected to play for his national team.  In such circumstances, one cannot realistically expect that, in the case of the grant of the injunction, the Defendant would just sit idle and receive his salary.  In effect, he has little choice but to play for the Plaintiff, otherwise it would possibly mean the end of his football career.

Indeed the court likened the present case (player and club agreement) to an actress agency agreement in the entertainment industry.

Does this mean that all football players and actors can freely release themselves from their contracts? I would suggest not. However, it was easier for the Court to come to such a finding in this case as the provisional contract was just that – a provisional one which was effectively unenforceable.

Takeaway points:

(1) Clearly, the failure to register the contract was crucial – if it was enforceable it would have been unlikely that the Court would so easily have granted the injunction.

(2) At the same time, in spite of the role of footballer, it is clear that if a contract were iron-clad (with the necessary terms being entered into the agreement specifically referring to issues that arose in this judgment), it is more than likely that the footballer might have been required to stick by his agreement, alternatively would have had to pay compensation in order to be released from his obligations.

(3) Employers, particularly when faced with such roles, should follow the required procedures of registering contracts with associations (where necessary) such that little room opens up for a party to walk out without facing financial penalty – this  seems to be the only remedy available.

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Ex-broker held to post-termination restraint

GFI (HK) Securities LLC v Gyong Hee Kang

Civil procedure – interlocutory injunction – inter-dealer broker – restraint against ex-employee – whether damages adequate remedy – balance of convenience

This was a judgment of Deputy High Court Judge Saunders. The full Reasons for Decision can be found here: http://legalref.judiciary.gov.hk/lrs/common/search/search_result_detail_frame.jsp?DIS=99092&QS=%2B&TP=JU

Background

A senior financial broker working on GFI’s Korea desk was bought out of her contract by ICAP (the 2nd Defendant). She had earlier signed an employment contract with GFI which contained the following post termination restrictions (in broad terms):

(i) Non-compete: for 6 months immediately after termination of the contract not to be involved in any relevant business, defined as any business carried on by GFI at the termination date (clause 15.4);

(ii) Non-deal: for 6 months immediately after the termination of the contract not to accept will facilitate the acceptance of orders or instructions from any person who in the previous 12 months had been a client (clause 15.5.1.2);

(iii) Non-solicit: for 6 months immediately after termination of the contact not to directly or indirectly canvas or solicit business from any person who was a client of GFI in the previous 12 months, nor to accept or facilitate the acceptance of orders or instructions from any such client (clause 15.5.1.1).

The ex-employee raised three arguments in resisting the injunction application: (1) Non-compete: if this were pursued, this would entirely prevent her from working. (2) Delay: GFI did not act within a reasonable period of time, as required. (3) Restraint: a 6 month restraint was not reasonable and would be unenforceable.

Analysis

(1) Non-compete – GFI agreed to abandon this claim.

(2) Delay – the Court agreed that an interlocutory injunction must be sought without delay: King Fung Vacuum Ltd v Toto Toys Ltd [2006] 2 HKLRD 785 at 792, §20:

“There has traditionally been a strong requirement when interlocutory injunctions have been sought, that the plaintiff must show that it has acted promptly and without delay. Promptly in the circumstances of interlocutory injunctions has been commonly understood to be a period of 6 weeks or so of unexplained delay and 3 months with an explanation for the delay in making application for an injunction. …. It stands to reason that if (a plaintiff) is prepared to allow matters to proceed and takes no action with respect to matters which have been extant for lengthy periods, it lies ill in (the plaintiff’s) mouth to say that there is likely to be in repairable damage.”

However, it accepted that the time it took for GFI to properly gather evidence to mount an application was reasonable. Hence there was no delay found here.

(c) Duration of restraint – Saunders DCHJ accepted that, at an interlocutory stage, the question to be asked is whether it is plain and obvious that the restraints will fail after an examination at a trial.  If it is not plain and obvious, the clauses must at this stage be regarded as having a reasonable prospect of being upheld: see Arbuthnot Fund Managers Ltd v Rawlings [2003] EWCA Civ 518, at §30, per Chadwick J.

The judge held that it was satisfied that GFI had a reasonable prospect of success at trial in establishing that the restraints are reasonable and no more than necessary.

Commentary

Sauders DCHJ considered the matter from an inter partes perspective such that he did not analyse with any depth the reasonableness of the restraints in this case. Having applied the “plain and obvious” test (see above) to meet the low threshold needed at the interlocutory stage, it is arguable whether GFI would succeed at trial where the thresholds would be much higher.

Clearly the timing of the ex-employee’s employment with ICAP cannot be disregarded. She left GFI’s employ on 17 February 2015 and her employment with ICAP commenced on 18 May 2015 – a 3 month period. IPAC’s advisers likely advised that a 3 month restraint was reasonable and any longer period of restraint was not enforceable – hence the fact that this matter went to hearing.

Whilst this may in fact turn out that 3 months is the reasonable period after trial, IPAC took the wrong approach, knowing the lower threshold requirements in injunction applications as to ‘reasonable prospects of success at trial’.

In my view, I would suggest that a 3 month restraint is a short one. That said, it was certainily not worth taking the risk to defend it without ample authority being cited to the Court (which seems to have been lacking from the judgment itself).

ICAP would have been properly advised to be cautious in resisting the temporary injunction (and should have done so in correspondence before any proceedings were instituted). It is never clear cut where a short period of restraint is being defended. Indeed the Court here considered a number of cases where the 6 month restraint had been upheld and was easily able to be satisfied on the lower test.

What could the ex-employee have done? There is no doubt that the ex-employee could have been engaged in a non-conflicting advisory role, in the background, before her legitimate period of restraint of 6 months had expired. Indeed, this is what she might have to do in light of this decision.