LUSONA CONSULTANCY (ACCOUNTANCY & FINANCE) LTD AGAINST (FIRST) DAVID McEWAN (SECOND) ANDERSON KNIGHT LIMITED
OUTER HOUSE, COURT OF SESSION
[2017] CSOH 52
CA139/16
OPINION OF LORD BANNATYNE
In the cause
LUSONA CONSULTANCY (ACCOUNTANCY & FINANCE) LTD
Pursuers
against
(FIRST) DAVID McEWAN
(SECOND) ANDERSON KNIGHT LIMITED
Defenders
Pursuers: O’Brien; Burness Paull LLP
First Defender: Donnelly; TC Young LLP
Second Defender: Jansch, Solicitor Advocate; Gilson Gray LLP
24 March 2017
Introduction
[1] In this action the pursuers sought inter alia interdict against the first defender in order to enforce certain contractual obligations in restraint of trade contained in his contract of employment with the pursuers. The case came before me at the instance of the first defender who sought to argue that the restrictive covenant founded upon was not enforceable and that accordingly the pursuers’ case in respect of the first defender was irrelevant.
The Law on Enforceability
[2] The principles with respect to enforceability of contractual obligations in restraint of trade, were not a contentious issue. In Sundolitt v Addison 2017 CSIH 15 (“Sundolitt”) at paragraph 21 Lord Brodie in giving the opinion of the court summarised the law on this matter in a number of propositions as follows:
“Contractual provisions imposing obligations (covenants, in English terminology) in restraint of trade are prima facie unlawful as contrary to public policy and, accordingly, as it was put by Laddie J in Countrywide Assured Financial Services Ltd v Smart [2004] EWHC 1214 (CH) at para] 7, ‘to be treated with suspicion’. Accordingly, it is for the party relying on the restraint to establish why it should be upheld. To do that it will have to show (1) that it has a legitimate business interest to protect and (2) that the contractual provision relied upon, properly construed, extends the restraint no further than is reasonably necessary to protect that interest.”
Background
[3] The pursuers are a limited company. They trade as providers of professional recruitment services. The first defender was formerly employed by the pursuers as a consultant. His role involved responsibility for introducing candidates to prospective client employers.
[4] The first defender at the outset of his employment, signed a contract of employment dated 24 April 2015 (“the contract”) and the terms of his employment are set out therein.
[5] Following his leaving the pursuers’ employment the first defender took up employment in a similar capacity with the second defenders, a company trading in the same field as the pursuers.
[6] The contract contained restrictive covenant provisions. The pursuers were of the view that as a result of certain actions while in the employment of the second defenders the first defender was in breach of certain of those provisions. As a result, the present action for interdict and interim interdict was raised.
The Material Provisions of the Contract
[7] The restrictive covenant provisions in respect of which the argument before the court turned were contained in clause 29 of the contract. The clause was headed “Post Employment Activities”. In that clause “the Employer” is defined to include the pursuers’ parent company. The “Relevant Period” is defined as the final year of employment. “Services” were defined as services identical or similar to those being supplied by the Employer at the termination date, and with which the first defender was materially involved during the Relevant Period. “Candidate” was defined, in short, as an applicant for employment who has been registered with the Employer within the Relevant Period, and with whom the first defender was materially involved or had personal dealings during that time. “Client” is defined, in short, as any entity which had been a client of the Employer within the Relevant Period, and with whom he was materially involved or had personal dealings during that period. The terms “Prospective Candidate” and “Prospective Client” are defined, in short, as persons who had been in negotiations with the Employer to become Candidates or Clients within the six months prior to the termination of employment, and with whom the first defender had been materially involved or had personal dealings. The terms “Excluded Candidate”, “Excluded Client”, “Excluded Prospective Candidate” and “Excluded Prospective Client” were defined, in short, so as to exclude from the scope of the covenant persons who had only become actual or Prospective Clients or Candidates after the commencement of the first defender’s employment and with whom he had material dealings before taking up that employment.
[8] The substantive covenant provisions are as follows:
“The Employee covenants with the Employer that he/she will not, save with the prior written consent of the Employer, directly or indirectly, either alone or with or on behalf of any person, firm, company or entity and whether on his/her own account or as principal, partner, shareholder, director, employee, consultant to in any other capacity whatsoever:-
- For six months following the Termination Date be engaged or concerned in any business supplying Services in the Relevant Area;
- For six months following the Termination Date and in competition with the Employer canvass or solicit business or custom from any Client (which is not an Excluded Client) or Prospective Client (which is not an Excluded Prospective Client) in relation to Services;
- For six months following the Termination Date and in competition with the Employer be concerned with the supply to any Client (which is not an Excluded Client or Prospective Client of Services or otherwise deal with any Client or Prospective Client (which is not an Excluded Prospective Client) in relation to Services;
- For six months following the Termination Date solicit or endeavour to solicit the employment or engagement of any Key Employee in a business supplying Services (whether or not such person would breach their contract of employment or engagement);
- For six months following the Termination Date employ any Key Employee in a business supplying Services (whether or not such person would breach their contract of employment or engagement);
- For six months following the Termination Date canvass or solicit business or custom from any Candidate (which is not an Excluded Candidate) or Prospective Candidate (which is not an Excluded Prospective Client) in relation to Services;
- For six months following the Termination Date be concerned with the supply to any Candidate (which is not an Excluded Candidate) or Prospective Candidate (which is not an Excluded Prospective Client) of Services or otherwise deal with any Candidate (which is not an Excluded Candidate) or Prospective Candidate (which is not an Excluded prospective Client) in relation to Services;
- At any time after the Termination Date represent himself/herself as being in any way connected with (other than as a former Employee) or interested in the business of the Employer or use any registered names or trading names associated with the Employer;
The Employee gives the covenants above to the Employer as trustee for the Employer.
Each of the restrictions contained in this Clause 29 is an entirely separate and independent restriction, despite the fact that they may be contained in the same phrase, and if any part is found to be unenforceable the remainder will remain valid and enforceable.
While the restrictions in this Clause 29 (on which the Employee has had the opportunity to take independent legal advice) are considered by the parties to be fair and reasonable in the circumstances, it is agreed that if any such restriction should be held to be void or ineffective for any reason but would be treated as valid and effective if some part or parts of the restriction were deleted, the restriction in question will apply with such modification as may be necessary to make it valid and effective.
If, during the Employment or any period during which these restrictions apply, any person, firm, company or entity offers the Employee any arrangement or contract which might or would cause the Employee to breach any of the restrictions , the employee will notify that person, firm, company or entity of the terms of these restrictions.”
The Interdict
[9] The interdict sought by the pursuers against the first defender was this:
“2. For interdict against the first defender until 28 April 2017 from:-
(i) in competition with the pursuer or Lusona Consultancy (Group) Ltd (together ‘the Employer”), canvassing or soliciting business or custom from:-
(a) any person, firm, company or entity which at any time between 28 October 2015 and 28 October 2016 (“the Relevant Period”) was a client of the employer and with whom the first defender was materially involved or had personal dealings during the Relevant Period (“a Client”), other than one that was not a client of the Employer prior to 5 May 2015 and with whom the first defender was materially involved or had personal dealings as a client prior to 5 May (an “Excluded Client”), or
(b) any person, firm, company or entity which was at any time between 28 April and 28 October 2016 in negotiations with the Employer for the supply of services and with whom during such period the first defender was materially involved or had personal dealings (a “Prospective Client”), other than one that was not a prospective client of the Employer prior to 5 May 2015 and with whom the first defender was materially involved or had personal dealings with as a prospective client prior to that date (an “Excluded Prospective Client”),
In relation to professional recruitment services (“Services”);
(ii) in competition with the Employer, being concerned with the supply of Services to, or otherwise dealing in relation to Services with, any Client or Prospective Client (other than Excluded Clients and Excluded Prospective Clients);
(iii) soliciting or endeavouring to solicit the employment or engagement of any person who on 28 October 2016 was a recruitment consultant, manager, associate director, director or support function worker of the Employer, and with whom the first defender had personal dealings during the Relevant Period;
(iv) canvassing or soliciting business or custom in relation to Services from:-
(a) any applicant for permanent, temporary or contract employment who at any time during the Relevant Period was registered with the Employer, and with whom the first defender was materially involved or had personal dealings during the Relevant Period (a “Candidate”), other than one who was not a candidate of the Employer prior to 5 May 2015 and with whom the first defender was materially involved or had personal dealings as a candidate prior to 5 May 2015 (an “Excluded Candidate”), or
(b) any person, firm, company or entity who was at any time between 28 April and 28 October 2016 in negotiations with the Employer about their availability for placement in permanent, temporary or contract employment and with whom during that period the first defender was materially involved or had personal dealings (a “Prospective Candidate”), other than one who was not a prospective client of the Employer prior to 5 May 2015 and with whom the first defender was materially involved or had personal dealings as a prospective candidate prior to 5 May 2015 (an “Excluded Prospective Candidate”); or
(v) being concerned with the supply of Services to, or otherwise dealing in relation to Services with, any Candidate or Prospective Candidate (other than Excluded Candidates or Excluded Prospective Candidates);”
[10] Given the terms of the interdict sought the pursuers did not seek to enforce the entire covenant provisions. In particular they did not seek to enforce that part of the provisions relating to “being engaged or concerned in any business supplying Services in the Relevant Area” (“the area covenant”).
[11] It was the position advanced on behalf of the first defender that the area covenant was unreasonably broad and accordingly could not be enforced. At the outset of the debate Mr O’Brien advised that he would not put forward a positive case that the area covenant was reasonable and therefore enforceable. It being for the pursuers to establish the area covenant was reasonable, it follows that in the absence of the pursuers advancing any case to that effect, that for the purpose of the hearing before the court, the area covenant was not reasonable and was not enforceable.
The Issue
[12] The issue before the court, in light of Mr O’Brien’s position on the area covenant, was this: could the part of clause 29 relied upon by the pursuers be severed from the area covenant which was unreasonable and could not be enforced?
Submissions on Behalf of the First Defender
[13] Mr Donnelly’s position was that the starting point in considering the boundaries of the court’s power to sever part of a restrictive covenant was the remarks of Lord Coulsfield in Living Design (Home Improvements) Ltd v Davidson 1994 SLT 753 (“Living Design”) at 755J‑L. The background to the observations was that the contract in question set out various purported restrictions in clause 1.1 to 1.2, and therefor at clause 1.3 I provided “each of the foregoing sub-clauses of this clause constitutes an entirely separate and independent restriction.” Clause 1.3.3 provided, paraphrasing, that if any part of clause 1 were void but would be valid if some part were deleted such restriction would apply to make it valid. Lord Coalfield then observed:
“It seems to me, however, to be doubtful whether a clause such as cl 1.3.3 really enables the court to do anything which it could not do in any case. It is recognised that even in the absence of such a clause the court can sever the unreasonable part of a restriction, where that can be done simply by deletion of the offending part, without in consequence rewriting the contract or altering its scope: and I do not think that cl 1.3.3 contains anything which can be construed as entitling the court to re write the contract. Accordingly, the limits within which severance has been held to be acceptable in previous cases seem to me to be equally applicable to the exercise of any power under cl1.3.3. If so, the court should not strike out words where to do so would alter the scope and intention of the agreement (Attwood v Lamont). It also follows that the cautionary observations of Lord Moulton in Mason v Provident Clothing Co should be kept in mind. Lord Moulton said, inter alia, that, in the case of a covenant by an employee, there should be severance only if the enforceable part is clearly severable and even so only where it is of trivial importance or technical and not part of the main import and substance of the clause. In the present case, I think it very doubtful whether the offending part of the clause could be said not to be part of its main import and substance, and it is certainly not trivial. In these circumstances, it seems to me that the petitioners have only a weak prima facie case in respect of the disputed part of the interdict which they seek.”
[14] The test set out by Lord Coulsfield was approved by the Inner House in Sundolitt at paragraph 32.
[15] Mr Donnelly’s submission was that applying the above test to clause 29 showed that the pursuers could not sever the area covenant from that part on which they wished to rely.
[16] The part which they wished to excise was not capable of being severed for the reasons set out by Lord Coulsfield in Living Design: it is neither “of trivial importance” nor is it merely “technical and not part of the main import and substance of the clause”. Rather to the contrary: it is a significant provision forming part of the main import and substance of clause 29.
[17] Indeed, the first part of clause 29 is even more clearly incapable of being severed than the words sought to be deleted in Living Design itself. In that case, the words in question were in parenthesis at the end of sub-clause 1.1 which are referred to at 753L of the report:
“1.1 The employer shall not within Scotland and the North of England for a period of 6 months after the termination of her employment hereunder ( however that comes about and whether lawful or not).”
[18] At 755G Lord Coalfield described the effects of the words in parenthesis as “manifestly wholly unreasonable”. Despite their being words which defined merely the scope of the substantive prohibitions, Lord Coulsfield went on to hold at 755K, “I think it very doubtful whether the offending part of the clause could be said not to be part of its main import and substance, and it is certainly not trivial.”
[19] In this case, a fortiori, the offending part of the clause (the area covenant) is not merely prefatory rather it is concerned with the application of the clause’s main import and substance: it is in fact the clause’s headline substantive prohibition.
[20] It was his position that to sever the area covenant would alter the scope and intention of the agreement. Accordingly, clause 29 goes “further than is reasonably necessary to protect” the interests identified within Article 4 of Condescendence and is therefore unenforceable.
[21] Mr Donnelly then turned to comment on various English authorities he understood were to be relied upon by Mr O’Brien in his reply.
[22] His position, in summary, was that the decisions in the various English authorities were all consistent with his analysis of Sundolitt and Living Design, with the exception of the decision in T Lucas & Co Ltd v Mitchell 1974 1 Ch. 129 (“Lucas”), which he described as an aberrant decision, based on a misunderstanding of the applicable law.
[23] He directed my attention to the following statement of the law by Lord Stern dale MR in Attwood v Lamont [1920] 3 KB 571 (“Attwood”) at 578:
“I think it clear that if the severance of a part of the agreement gives it a meaning and object different in kind and not only in extent, the different parts of it cannot be said to be independent.”
[24] He described this as paraphrasing what Lord Moulton had said in Mason v Provident Clothing & Supply Co Ltd 1913 AC 724 (“Mason") cited by Lord Coulsfield. The law was thereafter stated to the same effect in the judgment of Morris Kay, LJ in Beckett Investment Management Group Ltd v Hall (2007) ICR 1539 (CA) (“Beckett”) at 1551 where he adopted as part of a threefold test in relation to severability the observations of P J Crawford QC sitting as a deputy judge of the High Court in Sadler v Imperial Life Assurance Co of Canada Ltd [1988] IRLR 388:
“The removal of the unenforceable provision does not so change the character of the contract that it becomes ‘not the sort of contract that the parties entered into at all’.”
These expressions of the law fitted entirely with the observations made by Lord Moulton in Mason, they were also consistent with the approach taken by Lord Coulsfield in Living Design, which was confirmed in Sundolitt. It was his position that this line of authority supported his contention as to the proper test to be applied when considering the issue of severability.
Reply on Behalf of the Pursuers
[25] Mr O’Brien’s position in summary was this: the test of Lord Coulsfield applied to the following situation: where there was a single restrictive covenant and it was sought to delete words in that single covenant. However, what it did not apply to was the situation in the present case where there were two or more separate covenants and what was being sought was to sever one covenant from another.
[26] Mr O’Brien submitted that it was important to recognise that the comments of Lord Coulsfield in Living Design related to the deletion of wording within a single covenant, and not to whether two covenants are severable from one another.
[27] Confirmation that the above was correct could be gained from consideration of the two cases which Lord Coulsfield cited in the passage relied upon by the first defender.
[28] First, Mason, concerned a covenant not to carry on a specified business within a 25 mile radius of the plaintiff’s premises. The House of Lords held that this was too broad, and that the covenant could not be saved by reading it down to a reasonable area. Thus severance was not an issue. At page 745 Lord Moulton made the remarks cited by Lord Coulsfield. In context, Lord Moulton was plainly considering severance of individual words or phrases as a means of reading down a single covenant which would otherwise be unenforceable.
[29] In Attwood, the plaintiff was a draper, tailor and general outfitter. The covenant required the defendant not to “carry on or be in any way directly or indirectly concerned in any of the following trades or businesses: that is to say, the trade or business of a tailor, dressmaker, general draper, milliner, hatter, haberdasher, gentleman’s, ladies or children’s outfitter” within a specified area. The covenant was found to be reasonable only in relation to tailoring. The Court of Appeal held that the remaining words were not severable, because this was properly understood as a case of removing words from within a single covenant, rather than a case of separating out multiple distinct covenants.
[30] Mr O’Brien went on to direct the court’s attention to Lucas. In that case the court held that: the defendant was employed by the plaintiff company as a salesman under a service agreement, clause 16 of which provided that the defendant should not for one year after the determination of his employment
“within the allocated districts as existing at the termination of his employment deal in any goods similar to or capable of being used in place of any of the allocated articles or solicit orders for or supply any such goods to any person firm or company carrying on business within the allocated districts as existing at the termination of his employment ... to whom the company has supplied any of the allocated articles during the twelve months preceding such determination.”
[31] The court held at page 130:
“That, as, on the evidence, a restraint against soliciting and supplying would have sufficed to protect the trade connection of the plaintiff, the restraint against dealing in the area was unreasonable and, accordingly, unenforceable ...
(2) That, as a matter of construction, clause 16 was to be regarded as not merely a single obligation not to deal solicit or supply but as two separate obligations, one against dealing and the other against soliciting and supplying; and that having found the two restraints in collocation to be severable, no further step, namely, that the court should in a master and servant case decide whether or not to treat two such restraints as separate by enforcing the valid and ignoring the invalid, was required.”
[32] Mr O’Brien submitted that the instant case was on all fours with the case of Lucas.
[33] Lastly Mr O’Brien relied on Beckett. It was his position that in the leading judgment of Maurice Kay LJ at page 1551 the same point was made as in the three cases to which he had referred.
[34] The approach of the English courts in the above authorities he submitted was entirely consistent with what had been said by the court in Sundolitt where at paragraph 33 the court said that nothing in Living Design:
“prevents a party relying upon one of a number of discrete (and therefore severable) restrictions without entering into the question of the enforceability or otherwise of other restrictions upon which he is not relying.”
[35] Having regard to the approach which he had identified the area covenant was clearly severable from the other covenants relied upon.
[36] Thus in summary he said this: nothing in Sundolitt or Living Design supports the first defender’s approach to the severability of two distinct covenants. This trivial or technical test is used only where the issue is whether a single defective covenant can be saved by the severance of offending words or phrases within it.
Discussion
[37] I am persuaded that on a sound reading of the various authorities to which I was referred that the position advanced on behalf of the pursuers is to be preferred to that argued for by the first defender.
[38] On a proper analysis of all of the cases, it can be seen that the test formulated by Lord Coulsfield in Living Design is confined to the question of when a word or phrase can be removed from a single covenant and does not apply to the question of whether two covenants are severable one from another.
[39] It is in my view important in considering the ambit of the test articulated by Lord Coulsfield to consider the context in which the observations were made. I agree with Mr O’Brien’s contention that the comments relate to the deletion of words within a single covenant. What Lord Coulsfield was considering was whether the words “and whether lawful or not” which appeared within a single covenant (see: 753L) and which he held made the covenant unreasonable could be severed from the rest of that single covenant. He refused to sever the offending words. It was in that context that he made his observations.
[40] Secondly, it is instructive as argued by Mr O’Brien to note the circumstances of the two cases which Lord Coulsfield cites within the founded upon passage.
[41] In Mason the material facts were as set out in Mr O’Brien’s submissions. On a fair reading of the contact provision it was a single covenant and it was against that background that Lord Moulton made his observations at page 745:
“It was suggested in the argument that even if the covenant was, as a whole, too wide, the Court might enforce restrictions which it might consider reasonable ..., provided they were within its ambit. My Lords, I do not doubt that the court may, and in some cases will, enforce a part of a covenant in restraint of trade, even though taken as a whole the covenant exceeds what is reasonable. But, in my opinion, that ought only to be done in cases where the part so enforceable, is clearly severable, and even so only in cases where the excess is of trivial importance, or merely technical, and not a part of the main purport and substance of the clause. It would in my opinion be pessimi exempli if, when an employer had exacted a covenant deliberately framed in unreasonably wide terms, the courts were to come to his assistance and, by applying their ingenuity and knowledge of the law, carve out of this void covenant the maximum of what he might validly have required.” (Emphasis added)
[42] It is clear from an examination of the observations made that what he is considering is the deletion of words within a single covenant and not whether two or more covenants are severable one from another.
[43] In Attwood the provision under consideration by the court was as set out by Mr O’Brien in his submissions. The Court of Appeal held:
“that the covenant being a single covenant for the protection of the plaintiff’s entire business and not several covenants for the protection of his several businesses could not be severed.” (Emphasis added).
It is plain that once more the court is considering the issue of deletion of words within a single covenant.
[44] It is helpful to consider the judgment of Lord Sterndale MR in Attwood at 578 where he approves the statement of principle of Sargant J in S Nevanas & Co v Walker [1914] 1 Ch 413 where that judge comments on Lord Moulton’s observations in Mason:
“I do not think that those remarks were intended to be applicable to cases where the two parts of a covenant are expressed in such a way as to amount to a clear severance by the parties themselves, and as to be substantially equivalent to two separate covenants.”
[45] I regard the above observations as supporting the view that the decisions cited by Lord Coulsfield are dealing with deletion of parts of a single covenant.
[46] Further support for this being the correct analysis of Lord Coulsfield’s observations can be obtained from a consideration of Lucas. In the judgment of the court delivered by Russell LJ at 135E-G this is said:
“In our judgement clause 16 is properly to be regarded as not merely a single obligation not to deal solicit or supply but as two separate obligations or restraints, one against dealing and the other against soliciting and supplying. This is, it seems to us, a matter of construction, including the question whether one obligation can be removed or severed without altering the nature of the contract and without having to add or to modify the wording otherwise than by excision. ... The restraint which was held not severable in Attwood v Lamont ... was wholly different in character and gives no guidance here.”
[47] The reasoning in Lucas strongly supports the line of argument which was developed by Mr O’Brien.
[48] Lastly, Beckett, for the reasons advanced by Mr O’Brien, clearly supports his approach to the issue of severance.
[49] Moreover, I can find nothing in these authorities which is inconsistent with what has been said in Scotland either in Living Design or in Sundolitt.
[50] It is helpful to note that in Sundolitt the following is said:
“Nothing said by Lord Coulsfield in the passage from Living Design ... quoted above prevents a party relying upon one of a number of discrete (and therefore severable) restrictions without entering into the question of the enforceability or otherwise of other restrictions upon which he is not relying.”
[51] What is said above by the court in Sundolitt clearly aligns the law in Scotland with the law in England as developed in the series of cases to which I was referred by Mr O’Brien. I am satisfied that the line of authority both in Scotland and in England from Mason to Sundolitt is a consistent one. The trivial or technical test as set out in Lord Coulsfield’s observations is applicable only, where the issue is whether a single defective covenant can be saved by the deletion of offending words or phrases within it.
[52] Having regard to the above, the appropriate first question for the court is this, when considering the issue of severance: as a matter of proper construction is clause 29 to be regarded as one single covenant or two or more separate covenants. If it is one single covenant then the approach as set out by Lord Coulsfield requires to be applied.
[53] I am persuaded what is contained in clause 29 is not a single covenant.
[54] The issue is one of substance and not of form. Thus merely because clause 29 is a single clause it does not follow that it contains a single covenant.
[55] On a sound construction, it appears to me that it contains more than one covenant. In reaching that conclusion I have been assisted by the analysis of the Court of Appeal in Lucas. I believe that applying that analysis to clause 29, clearly leads to the conclusion that there is more than one covenant contained in clause 29. I believe that the area covenant is a separate covenant in that it can be separated from that part of clause 29 relied upon by the pursuers without altering the nature and scope of the contract and without having to add or to modify the wording. The area covenant and the covenant relied upon by the pursuers are clearly two discrete covenants. Accordingly the trivial or technical test is not applicable.
Conclusion
[56] For the foregoing reasons, I hold that the covenant relied upon by the pursuers is severable from the area covenant and is therefore not rendered unenforceable by the area covenant being unreasonably broad.
Decision
[57] I accordingly repel the first defender’s first and fourth pleas-in-law to the above extent. This matter will be put out By Order in order to consider further procedure in this case.