| RESTRAINT OF TRADE — Employment — Financial services — Covenant restraining employees from providing advice to any client of the company — Employer company providing services to clients only through subsidiaries — Whether restrictions more than reasonably necessary for protection of employer — Whether restrictions enforceable — Whether unreasonable restrictions severable
Beckett Investment Management Group Ltd and others v Hall and others [2007] EWCA Civ 613
CA– Sir Anthony Clarke MR, Carnwath and Maurice Kay LJJ: 28 June 2007
In construing a covenant in restraint of trade between a holding company and its employees who provided services through subsidiary companies within a corporate group, the Court of Appeal rejected a “purist” approach to corporate personality in favour of one which had regard to the realities of big business.
The Court of Appeal in a reserved judgment allowed an appeal by the claimant, Beckett Investment Management Group Ltd, from the order of Judge Seymour QC, sitting as a judge of the Queen’s Bench Division on 16 February 2007, who dismissed the claimant’s claim against the defendants, Glynn Hall, Yogesh Yadev and Harifa Ltd, for breach of contract.
The claimant company was the holding company of a group of companies which provided financial services. The claimant did not itself provide financial services, but did so through its various subsidiaries. The first and second defendants, both independent financial advisers, were employed by the claimant and entered into covenants with it which restrained them, for 12 months after the termination of their contracts of employment, from supplying advice to clients of “the company” of a type provided by “the company” in the ordinary course of business. Following the termination of the contracts the claimant brought claims for breach of the restrictive covenants against the individual defendants and the third defendant company, which they had formed. The judge dismissed the claim, holding that “the company” was to be narrowly construed as the claimant, rather than the claimant’s group of companies; that since the claimant did not provide advice about anything to anybody, but acted simply as a holding company, the restriction was of no practical utility; and that the defendants had not breached the covenants since they had not supplied advice of a type provided by the claimant. The claimant appealed.
MAURICE KAY LJ said that unlike the judge he did not feel inhibited by a purist approach to corporate personality. The judge declined to take a lead from the obiter dicta of Lord Denning MR in Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472, 1428f: “the law today has regard to the realities of big business. It takes the group as being one concern under one supreme control.” However, that approach had other support. Thus, in Stenhouse Ltd v Phillips [1974] AC 391, 404, Lord Wilberforce rejected the purist approach and considered that “the subsidiary companies were merely agencies or instrumentalities through which the appellant company directed its integrated business.” Those words resonated in the present case. His Lordship therefore rejected the judge’s narrow construction. The fact that the clients dealt with a subsidiary rather than with the claimant was not fatal to the reliance placed by the claimants on the clause in question, subject to its enforceability. Similarly when considering whether the claimant had a legitimate interest to protect, the judge’s approach was too inhibited by considerations of corporate personality. The reality was as described in the Stenhouse Ltd case. His Lordship had no doubt that the claimant had a legitimate interest to protect by a restrictive covenant. The next question was as to the reasonableness of the clause. His Lordship was prepared to hold that a 12 months non-dealing clause was reasonable between the parties and reasonable in the interests of the public. However, the covenants were unreasonable to the extent that they deemed individuals to be the claimant’s clients when they had only dealt with the defendants on behalf of firms, companies or organisations which they represented. Applying the threefold test formulated by Mr P J Crawford QC in Sadler v Imperial Assurance Co of Canada Ltd [1988] IRLR 388, at para 19, that unreasonable aspect of the covenants was susceptible to severance.
SIR ANTHONY CLARKE MR and CARNWATH LJ agreed.
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