Sundolitt Ltd v Addison [2017] ScotCS CSIH

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

[2017] CSIH 15

A374/16

Lord President

Lord Menzies

Lord Brodie

OPINION OF THE COURT

delivered by LORD BRODIE

in the Reclaiming Motion by

SUNDOLITT LIMITED

Pursuer and Reclaimer

against

PAUL ADDISON

Defender and Respondent

Pursuer: Logan; Campbell Smith LLP

Defender: Donnelly; TC Young LLP

26 January 2017

Introduction
[1] The pursuer and reclaimer is a limited company. It is a specialist in the provision of polystyrene packaging products for the construction and food industries. It supplies, among other things, packaging for fresh fish. The defender and respondent was employed by the pursuer as an area sales manager with duties throughout Scotland and northern England from 17 February 2014 until 13 May 2016. At the commencement of his employment the defender signed a Restrictive Covenant Agreement dated 17 February 2014. After he left his employment with the pursuer he began working as a self-employed sales agent in the same industry as that in which the pursuer is engaged. The pursuer considered that by so doing he was in breach of obligations which it had sought to impose by the Restrictive Covenant Agreement and raised these proceedings, concluding for interdict, interdict ad interim and damages in the sum of £100,100. The summons was signetted on 1 November 2016. On an ex parte application on 2 November 2016, Lord Tyre granted interim interdict in terms corresponding to the first three conclusions of the summons, as follows:

“(1) ad interim interdicts the defender for twelve months from 13 May 2016 whether on his own account or in the employment of Tri-Pack Plastics Ltd, Estate Road No. 1 South Humberside Industrial Estate, Grimsby DN31 2TB or any associated company from being engaged in or be interested in supplying Polystyrene Mouldings, Fluted Plastics (PP) Products and Thermoformed Packaging Products to any Prospective Clients or Restricted Clients as defined in the Restrictive Covenant Agreement between the pursuer and the defender dated 17 February 2014;

(2) ad interim interdicts the defender for twelve months from 13 May 2016 from canvassing or soliciting the Restricted Business of the pursuer with any Prospective Client with whom the defender had material dealings in the course of his duties for the pursuer during the course of his employment by the pursuer;

(3) ad interim interdicts the defender from using, divulging, or communicating the trade secrets and confidential information as to customers names, addresses and telephone numbers, the employees of such customers and requirements of such customers for Polystyrene Mouldings, Fluted Plastics (PP) Products or Thermoformed Packaging Products.”

[2] The defender’s motion for recall of the interim interdict pronounced on 2 November 2016 came before the Lord Ordinary on 20 December 2016. After hearing argument, the Lord Ordinary granted the defender’s motion in so far as it related to paragraphs (1) and (2) of the interlocutor of 2 November 2016. Put short, she considered that the restrictive provisions in the Restrictive Covenant Agreement relied on as supporting interdict as first and second concluded for and granted in terms of paragraphs (1) and (2) of the interlocutor of 2 November 2016 (respectively, “the first interdict” and “the second interdict”) were too wide in scope and duration and accordingly probably unenforceable. They could not be said to be reasonably necessary in order to protect the pursuer’s legitimate interests. At paragraph [19] of her opinion the Lord Ordinary said this about balance of convenience in relation to the first and second interdicts:

“The weakness of the pursuers’ prima facie case had a bearing on how I approached the balance of convenience arguments. I took into account that there were five months left to run if the covenant was enforceable and that the relative circumstances of the parties insofar as known to me. That there would be a severely detrimental effect of the defender’s ability to earn a living if the interim interdicts remained in place was not in doubt. There was less clarity as to what loss, if any the pursuer might sustain. I did not consider that the prejudice to the defender could properly be balanced by his right to claim damages for wrongful interdict if on final determination the covenant was found to be unenforceable. Against a background of my own tentative conclusion that the covenant was unenforceable and balancing the circumstances outlined as best as I could I decided that the balance of convenience clearly favoured the defender.”

The Lord Ordinary, however, refused to recall that part of the interdict contained in paragraph (3) of the interlocutor (“the third interdict”). She considered that it stood in a slightly different position. It sought to protect confidential information. The Lord Ordinary considered that it did not go beyond what was required to protect that confidential information. The defender disclaimed any intention of acting in the manner apprehended by the pursuer. Therefore there would be no prejudice to him in having to submit to the third interdict. The balance of convenience accordingly favoured the pursuer.

[3] The pursuer now reclaims against the Lord Ordinary’s decision.

[4] Before this court Mr Logan appeared for the pursuer and Mr Donnelly appeared for the defender. They were the same counsel who had appeared before the Lord Ordinary.

The business context
[5] In article 2 of condescendence the pursuer makes the following averments with a view to setting out the context giving rise to legitimate interests which required the protection of a restrictive covenant:

“During the defender’s employment he was the only sales manager for all packaging products and packaging customers throughout the UK and had access to all of the confidential information that the pursuers had in respect of said customers, specifically the names, addresses and telephone numbers of the customers, the employees with whom contact should be made, their usual demands for orders and the pattern of their orders, the pricing provided to them and the type of mouldings, fluted plastic (PP) Products and Thermoformed Packaging Products that were of interest to them. The turnover for which he was responsible was approximately £6.5m a year, which in turn was approximately 65% of the whole turnover of the pursuers.”

There follow averments to the effect that the defender has been appointed as the sales agent of Tri-Pack Plastics Ltd, a rival of the pursuers, and that he has solicited business from a number of businesses with which the defender had had dealings as sales manager of pursuer. The defender admits that he has been appointed as the sales agent of Tri-Pack and that it is a rival of the pursuer. He goes on to make other averments about his history and experience in the seafood packaging industry including the averment that he had been employed by his father, a sales agent for Tri-Pack, between 2010 and 2013. He avers that the businesses referred to by the pursuer in its pleadings as customers were not exclusively customers of the pursuer. In what are not finalised pleadings, none of the defender’s averments are admitted by the pursuer.

[6] During the hearing before the Lord Ordinary counsel put forward information about the business of providing fresh fish packaging which was additional to what appeared in the pleadings. The Lord Ordinary records this at paragraph [3] of her opinion as follows:

“Mr Donnelly provided some background information about the business of providing fresh fish packaging and of the defender’s work history, none of which was later contested by Mr Logan. There are apparently only about six or so suppliers in the UK of the type of polystyrene packaging provided by the pursuer to the fresh fish industry. The business is very competitive with little disparity in price and not much customer loyalty. Orders from customers are often ad hoc and months can pass between the placing of large orders. Customers shop around and there is relatively little by way of a retained customer base. The customers are all fish merchants who are known to and use all of the packaging suppliers from time to time. Accordingly, the customers involved could not properly be described as ‘Sundolitt customers’. The customers involved have been dealing with both the pursuer and with Tri-Pack throughout the period of the defender’s employment and subsequently.”

That the Lord Ordinary took this to be uncontroversial is underlined by her statement at the beginning of paragraph [12] of her opinion that “Mr Logan did not dispute the general statements about the nature of the fish packaging industry outlined by Mr Donnelly”. When he came to address this court Mr Logan confessed to being bewildered as to how the Lord Ordinary had come to the understanding that she had. Before her, he had not accepted the accuracy of Mr Donnelly’s description of the general nature of the business and indeed what Mr Logan had said in the course of his submissions was to contrary effect. Customers did not shop around. Orders were not placed ad hoc. There could indeed be said to be “Sundolitt customers”, certainly in relation to the three items for which the defender had had responsibility and which were specified in the first interdict (polystyrene mouldings, fluted plastics (PP) products and thermoformed packaging products). Customer loyalty in the sense of repeat business was secured by stock holding agreements in terms of which quantities of items were held as available for immediate supply in response to an order. For his part, Mr Donnelly accepted that in the dynamic context of an application for the recall of interim interdict such as that made on 20 December 2016 there is room for misunderstandings, but he confirmed that he had said to the Lord Ordinary what she had recorded him as saying and that whereas it had been open to Mr Logan to challenge what had been said, he had not done so. Moreover, in relation to customer loyalty, as appears from paragraph [14] of the Lord Ordinary’s opinion, when making his submissions, Mr Logan had expressly acknowledged that “this was a ‘cut-throat’ business with little customer loyalty”.

The Restrictive Covenant Agreement
[7] The provisions of the Restrictive Covenant Agreement relied on by the pursuer at the hearings on 2 November and 20 December 2016 are as follows:

“CLAUSE 1 (A)

NON-SOLICITATION – GENERAL

AND NON-DEALING (including prospects)

“1. NON-SOLICITATION AND NON-DEALING COVENANTS

(A) Of existing clients:-

The Employee shall not during the period of 12 months after the date of termination of his/her employment with The Company directly or indirectly on his/her account or on behalf of or in conjunction with any person, firm, company or other organisation or entity either: -

(a) conduct Restricted Business; or

(b) canvass or solicit or by any other means seek to conduct Restricted Business with any Restricted Client with whom The Employee shall have had material dealings in the course of his/her duties during the Relevant Period.

(B) Of prospective clients:

The Employee shall not during the period of 12 months after the date of termination of his/her employment with The Company directly or indirectly on his/her own account or on behalf of or in conjunction with any person, firm, company or other organisation or entity either:-

(a) conduct Restricted Business and/or :-

(b) canvass or solicit or by any other means seek to conduct Restricted Business

with any Prospective Client with whom The Employee shall have had material dealings in the course of his/her duties during the Relevant Period.

DEFINITIONS
‘Restricted Business’ shall mean any business or activity carried on by the Company at any time during the Relevant Period and in which The Employee shall have been directly concerned during the Relevant Period.

‘Restricted Clients’ shall mean any person, firm or company or other organisation or entity who was at any time in the Relevant Period a client of The Company.

‘Prospective Clients’ shall mean any person, firm, company or other organisation or entity who at the date of termination of The Employee’s employment with The Company has been directly approached by and engaged in negotiation with The Company with a view to engaging The Company’s services.

‘Relevant Period’ shall mean the 12 month period preceding the date of termination of The Employee’s employment with The Company, ending on that date.

CLAUSE 1(B)

NON-SOLICITATION - SPECIFIC (including area)

1. NON-SOLICITATION

The Employee covenants as separate and independent covenants that for a period of 12 months immediately following the termination of his/her employment with the Company for any reason whatsoever he/she will not, directly or indirectly, as principal, agent, employee, director, partner or otherwise howsoever, offer or provide or solicit the sale of:-

(a) Polystyrene mouldings

(b) Fluted Plastics (PP) Products

to any person, firm or company (or any associate company of such a company as defined by Section 435(6) of the Insolvency Act 1986) who is, at the date of termination of his/her employment, a customer of The Company

either : with whom The Employee has had material dealings within the course of his/her duties

or : whose place of business is within The Employee’s area ( i.e. Counties, Cities/Towns, etc).

CLAUSE 2

CONFIDENTIALITY CLAUSE

The Employee shall not make use of, divulge or communicate to any person (save in the proper performance of his/her duties) any trade secrets or other confidential information of or relating to The Company, or that of other persons or bodies with whom The Company has dealings of any sort, which The Employee may have received or obtained, or has otherwise been acquired by them in confidence, whilst in the employment of The Company. The restriction shall continue to apply after the termination of employment without limit in point of time but shall cease to apply to information ordered to be disclosed by a Court of competent jurisdiction or otherwise required to be disclosed by law.

Confidential information shall include but shall not be limited to “customer information”, led sheets, client lists, client contracts, sales aids, consultancy documentation, details of clients’ consultancy work, advice information, tribunal proceedings etc.

‘Customer information’ includes information relating to:-

(a) The names or addresses or telephone numbers of The Company’s customers and/or the employees of such customers with whom The Company has had contacts.

(b) The requirements of such customers for:-

(i) Polystyrene mouldings.

(ii) Fluted Plastics (PP) Products.

(iii) Thermoformed Packaging Products.

The Employee is to exercise reasonable care to keep safe all documentary or other material containing confidential information, and shall at the time of termination of their employment with The Company, or at any other time upon demand, return to the Company any such material in their possession.

...

SEVERABILITY CLAUSE

Each of the restrictions contained in the Restrictive Covenant Agreement is intended to be separate and severable. In the event that any of the restrictions set out above shall be held void but would be a valid part if the wording thereof was deleted, such restrictions shall apply with such deletion as may be necessary to make it valid and effective.”

Scope of the reclaiming motion
[8] Mr Logan moved the court to allow the reclaiming motion, recall the interlocutor of the Lord Ordinary of 20 December 2016, reinstate the interim order of 2 November 2016 and remit to the Outer House to proceed as accords. He accepted the point taken in the answers to the grounds of appeal that in reclaiming the pursuer was seeking to persuade the court to interfere with what had been an exercise of discretion by the Lord Ordinary and that therefore it was incumbent upon it to show that that discretion had been exercised upon a wrong principle or that the Lord Ordinary’s decision was so plainly wrong that she must have exercised her discretion wrongly: Britton v Central Regional Council 1986 SLT 207, Lord President Emslie at 208. What the pursuer founded on here was an exercise upon a wrong principle.

[9] The grounds of appeal extend to six paragraphs, some of the contents of which have more of the flavour of argument than the “brief specific numbered propositions stating the grounds on which it is proposed to submit that the reclaiming motion should be granted”, desiderated by Rule of the Court of Session 38.18 (1). Having been invited to do so, Mr Logan explained that the pursuer’s case could be encapsulated in three propositions found in the grounds of appeal: (1) The [Lord Ordinary] erred in concluding that the pursuers and reclaimers did not have a prima facie case; (2) [While the Lord Ordinary] acknowledged that the reclaimers had [legitimate interests in protecting confidential information] by refusing to recall [the third interdict] she failed to …acknowledge the compelling force of the observations in CR Smith Glaziers (Dunfermline) Ltd v Greenan 1993 SC 161 at 163 that such an order is of no utility if the former employee is working for a competitor; and (3) In concluding that the balance of convenience favoured the [defender and] respondent [the Lord Ordinary] erred and failed to follow binding authority.

Submissions
Pursuer
[10] In presenting his submissions on behalf of the pursuer Mr Logan adhered to the terms of his written note of argument which was divided into four chapters: prima facie case; the correct construction of the Restrictive Covenant Agreement; the legitimate interests of the reclaimer; and the balance of convenience.

[11] The Lord Ordinary had erred in finding that the pursuer had a weak or non-existent prima facie case. The defender had signed the Restrictive Covenant Agreement as a condition of his being employed. In such circumstances an employer will always have a prima facie case and that is the correct starting point: CR Smith Glaziers (Dunfermline) Ltd v Greenan 1993 SC 161. The Lord Ordinary had not followed Greenan in this respect. This was a business with high volumes of items sold and low percentage margins. The Lord Ordinary had erred in understanding that it was not disputed that in relation to the relevant business, the placing of orders was ad hoc and there was an absence of a client base in the traditional sense. It had been explained on behalf of the pursuer that it was not aware as to whether clients placed orders elsewhere and that the pursuer sought to engender customer loyalty by undertaking, in terms of stockholding agreements, to keep available sufficient quantities of items that the customer would generally need so that delivery could be made within 24 hours of an order being made. The defender had copied and made use of such a stock-holding agreement, merely changing the heading to “Tri-pack”. This was an example of the defender making use of knowledge gained while working with the pursuer to undermine the loyalty of its customers. In effectively concluding that there was not much of a business to protect the Lord Ordinary appeared to have accepted what Mr Donnelly had said but ignored what Mr Logan had said. There might be a logic in her conclusion but it was based on a false premise. Had she correctly understood the material put before her, there was no proper basis for the Lord Ordinary’s tentative conclusion that Clause 1(A) of the Restrictive Covenant Agreement was too wide. On the contrary the pursuer had made at least a prima facie case. The defender may have set out a prima facie defence but that was not to the point at the stage of considering an application for interim interdict.

[12] The Lord Ordinary had further erred in her construction of the Restrictive Covenant Agreement. Generally speaking, restrictions on competition by former employees may be framed in one of two ways: restriction by reference to geographical area and restriction by reference to existing clients. The present case concerned an example of the latter (in the course of submission Mr Logan abandoned reliance on the provisions relating to prospective clients); it had no geographical limitation. It was as narrowly focused as it possibly could be in order to protect the legitimate interests of the pursuer: it related to existing clients, with whom the defender had had material contact, within the 12 months prior to his leaving his employment. This restriction was not in restraint of trade because it allowed the defender to compete fairly with any prospective customers with whom he had not had substantial dealings during the course of his employment with the pursuer. It allowed the defender to sell even to existing customers of the pursuer outwith the range of goods that he himself had sold to these customers when employed by the pursuer. When determining whether the restrictions imposed by the Restrictive Covenant Agreement were too wide and therefore in unreasonable restraint of trade the Lord Ordinary had erred in considering that she had to have regard to the whole terms of the Agreement. She had been misled on this matter by the submission of the defender and a misunderstanding of what had been said in Living Design (Home Improvements) Ltd v Davidson 1994 SLT 753. The restriction in Clause 1(A) Non-Solicitation General and Non-Dealing was separate and severable from Clause 1(B) Non-Solicitation Specific. Unlike in Wiggle Ltd v Burge [2012] EWHC 4374 (QB), a case upon which the Lord Ordinary had placed weight, the restriction on solicitation imposed on the defender by the Restrictive Covenant Agreement did not potentially extend to a whole industry. The defender had been a salesman in only one part (albeit a major part) of the pursuer’s business, namely the supply of certain classes of packaging for fresh fish. In respect of this business the pursuer had a legitimate interest to protect and the Restrictive Covenant Agreement was necessary for the purpose. Reference was made to Office Angels Ltd v Rainer-Thomas and O’Connor [1991] IRLR 214 and Brake Brothers Ltd v Ungless and Another [2004] EWHC 2799 (QB). In Brake Brothers at para 15 there are set out a series of what are the applicable principles in cases of this sort.

[13] The pursuer had a legitimate interest in protecting itself against unfair competition by a former employee taking advantage of his existing relationships with customers of the pursuer and his knowledge of the pricing strategy applied to such customers, including prices charged, whether or not a stock holding agreement was in place and on what terms, what volumes might be sought by these customers and what were the pursuer’s margins in respect of that particular business. The Lord Ordinary had acknowledged that the pursuer had a legitimate interest in protecting confidential information, and therefore to that extent a prima facie case, by refusing to recall the third interdict. Having done so she had erred in not applying the observations of the Inner House in Greenan as to the lack of utility of a covenant against using confidential information where the former employee is able to work for a competitor.

[14] The Lord Ordinary also misdirected herself in weighing the balance of convenience. In particular she had failed to apply the guidance in Greenan. It would be difficult for the pursuer to quantify its damage caused by loss of custom due to the actions of the defender and his misuse of confidential information. That damage however is potentially substantial. The defender had been responsible for all the sales of a division of the pursuer with a turnover of some £6.5 million per year or approximately 65 per cent of the pursuer’s turnover. This business was at risk if interim interdict was not granted. Any loss that the defender might suffer from being subject to interdict was not commensurate with the pursuer’s potential loss. He was free to engage in the industry anywhere in the United Kingdom as long as he did not solicit business in relation to a highly specific group of products; a business which only represented a portion of the defender’s income.

Defender
[15] The pursuer’s suggestion that it should be regarded as having a prima facie case merely because the defender had voluntarily signed the Restrictive Covenant Agreement was to get the law back to front. Prima facie a covenant in restraint of trade is unlawful and therefore unenforceable: Office Angels, Brake Brothers at para 15(1). If a covenant in restraint of trade is to be held enforceable it is for the party relying upon it, here the pursuer, first to identify the legitimate interest which it seeks to protect: Brake Brothers at para 15(2), and then to show that the restrictive covenant is no greater than is reasonably necessary for the protection of the legitimate interest: Brake Brothers at para 15(2). The Lord Ordinary followed that approach.

[16] The pursuer’s contention that the Lord Ordinary had erred in acknowledging the pursuer’s interest by refusing to recall the third interdict but nevertheless not acknowledging the compelling force of the observations in Greenan was wrong. The third interdict was based on Clause 2 of the Restrictive Covenant Agreement. No more is to be implied from the Lord Ordinary’s decision than that she considered that Clause 2 was a permissibly narrow means of protecting that interest. What was said in Greenan does not alter the proposition that recall of interim interdict will always be a fact-sensitive exercise of discretion. Ultimately a court can only interdict a former employee from working for a competitor if there is an enforceable covenant to that effect. As the Lord Ordinary considered that Clauses 1(A) and 1(B) were probably unenforceable she could not pronounce interdict.

[17] Both the first and the second interdicts were founded on Clause 1(A). There was no argument as to the severability of any part of that clause. Indeed, Mr Logan had disclaimed such an argument. Therefore a finding by the Lord Ordinary that Clause 1(A) was unenforceable was sufficient for her decision. The absence of any geographic limitation made the restriction the more extreme: cf Wiggle Ltd at para 25. As the Lord Ordinary noted at paragraph [17] of her opinion, Clause 1 (A) was, at 12 months, too long in its temporal scope. Rather than targeting the selling of a narrow and specified range of goods, the restriction in Clause 1(A) prohibiting the conduct of “Restricted Business” sought to stop the defender selling all fish-packaging. The Lord Ordinary had not erred in her construction of the Restrictive Covenant Agreement.

[18] Moreover, the first interdict would have to be recalled as an impermissible hybrid of Clauses 1(A) and 1(B). A party can only enforce the contract it concluded.

[19] The balance of convenience favoured the defender. Greenan laid down no principle that the Lord Ordinary was bound to follow. If the defender was prevented from dealing with Tri-Pack’s existing customers merely because they had also been customers of the pursuer, the pursuer would gain an unfair windfall advantage. The pursuer’s case on confidential information was weak. It relied on the pursuer’s client retention strategies. The Lord Ordinary had heard that these strategies were standard practice in the industry. The customers are all fish merchants who are known to and use all of the packaging suppliers from time to time. Accordingly, the customers involved could not properly be described as “Sundolitt customers”. The pursuer had conceded that in the industry margins were tight. It is unlikely that the defender, without the benefits of the economies of scale, could undercut the prices charged by the pursuer. In any event, the Lord Ordinary heard and accepted that prices are fixed ad hoc; prior pricing has little relevance. In attempting to justify the 12-month period of the restriction Mr Logan had explained that prices are generally reviewed on an annual basis but that some prices had stayed the same for as long as three years. That seriously undercut the proposition that knowledge of prices was sensitive and confidential. Rather, the information was stale and in at least some cases pre-dated the defender becoming employed by the pursuer. The Lord Ordinary was entitled to find that the pursuer was better able to withstand adverse financial impact than the defender. The pursuer’s information on potential loss was in any event vague. The suggestion that competition from the defender would have a catastrophic impact on the pursuer’s business was disputed. The Lord Ordinary properly took into account that, at best, the pursuer’s case was a weak one, made up as it was of a number of individually weak elements. Further, the time frame was such that the question of interim interdict was likely to determine the outcome of the action as a whole: cf Prosoft Resources Ltd v Griffiths 1999 SLT 1255 at 1257. That was an additional reason not to grant interdict on such a weak basis.

Decision
[20] Leaving aside for the moment what should be taken from the decision of the Inner House in CR Smith Glaziers (Dunfermline) Ltd v Greenan, the parties were essentially at one as to what was the law applicable to the substantive issues before the court. They were also at one as to how a court of first instance should go about its decision-making on an application for interim interdict and how this court should go about reviewing the decision of the court of first instance on such an application.

[21] As far as the substantive law was concerned, counsel agreed that it had been conveniently summarised by Gloster J (as she then was) in Brake Brothers Ltd v Ungless and Another at para 15. Among what we would see as the uncontroversial propositions set out there are the following. 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. In a question between an employer and his former employee, what is no more than an attempt to prevent competition will never be upheld: Wiggle Ltd v Burge at para 23, citing Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 709. As it was put by Lord Wilberforce in Stenhouse Australia Ltd v Phillips [1974] AC 391 at 400 in a passage quoted by Sir Christopher Slade in Office Angels at para 24:

“The employer’s claim for protection must be based upon the identification of some advantage or asset inherent in the business which can properly be regarded as, in a general sense, his property, and which it would be unjust to allow the employee to appropriate for his own purposes, even though he, the employee, may have contributed to its creation.”

Examples of such advantages or assets which constitute a legitimate interest capable of protection by a restriction in restraint of trade are trade connections, trade secrets or confidential information akin to a trade secret, and staff stability. However, even where an employer can point to such a legitimate interest which is capable of protection by way of contractual restriction, for such a restriction to be enforced it must not go beyond what is reasonably necessary to protect the interest (sometimes formulated as “reasonable in the interests of the parties”: Herbert Morris Ltd at 707). Moreover, the employer will only be allowed to enforce the contract he concluded. He will not be permitted to read it down, for example by excising text which renders a restriction unnecessarily wide.

[22] As is very familiar, when the court at first instance is considering an application for interim interdict or for recall of interim interdict granted on an ex parte application, it must first consider whether the party seeking interdict has made a prima facie case of entitlement to the remedy. If the party has made such a case the court must then consider the balance of convenience in the sense of assessing the respective advantages and disadvantages to parties consequent on, on the one hand, a grant of interdict and a prohibition of the activity complained of and, on the other hand, refusal of interdict and a potential continuation of the activity. In determining whether to grant or to refuse an application for interim interdict a court of first instance is making a discretionary decision. A prima facie case is one which is sufficiently well founded in law and asserted fact that it might succeed, subject to any future comprehensive examination of its relevancy, the exigencies of proof and the strength or otherwise of any defence. It will usually fall to be tested by reference to what is pled, it being the responsibility of counsel to plead everything which he considers can be proved and which is necessary for a relevant case. However, at the early stage in proceedings at which interim interdict is often sought, the court may be prepared to proceed on what it considers can be fairly taken from statements by counsel and documents in addition to what appears in the pleadings. As a prima facie case is one which only might succeed, it is neither necessary nor appropriate for the court to make a definitive determination on relevancy but it may make an assessment of what appears to be the strength or weakness of the case. That is a relevant factor in assessing the balance of convenience in that a strong case might be thought to be more likely to succeed at the end of the day than a weak one.

[23] The decision-making process by which a court at first instance might apply the substantive law as to the restriction of competition by a former employee in making an assessment of a prima facie case can be seen in the enumeration by Cox J of questions to be addressed in TFS Derivatives v Morgan [2005] IRLR 246, a case referred to in Wiggle Ltd, at para 37 et seq:

“36. Thus, [the restrictive covenant restricting competition by a former employee] will be unlawful unless it is justified by [the employer] as being reasonable, in the interests both of the parties and of the public. In assessing reasonableness, there is essentially a three-stage process to be undertaken.

37. Firstly, the court must decide what the covenant means when properly construed. Secondly, the court will consider whether the former employers have shown on the evidence that they have legitimate business interests requiring protection in relation to the employee's employment. …

38. Thirdly, once the existence of legitimate protectable interests has been established, the covenant must be shown to be no wider than is reasonably necessary for the protection of those interests. Reasonable necessity is to be assessed from the perspective of reasonable persons in the position of the parties as at the date of the contract, having regard to the contractual provisions as a whole and to the factual matrix to which the contract would then realistically have been expected to apply.”

It appeared to us that such a three-stage process was reflected in the way that both Mr Logan and Mr Donnelly approached the issue as to whether the Lord Ordinary had been correct in her assessment of the strength of a prima facie case for the enforceability of a Restrictive Covenant Agreement.

[24] As we have already noted, Mr Logan accepted that when it came to the review of a discretionary decision such as that made by the Lord Ordinary on 20 December 2016, he had to demonstrate, for example, that the Lord Ordinary had exercised her discretion upon a wrong principle. As we understood his submissions, the wrong principle he relied on was the Lord Ordinary’s erroneous assessment of the pursuer’s prima facie case as being weak, that erroneous assessment being based on two underlying errors, an error of law as to the effect of the decision in Greenan, and an error of fact as to the nature of the business context. His submission then was that if the matter was considered of new, with these errors corrected, the balance of convenience clearly favoured the pursuer.

[25] We have not been satisfied that the Lord Ordinary made either of the underlying errors attributed to her. That is sufficient reason to refuse the reclaiming motion. However, even were the Lord Ordinary’s understanding of the business context to be set aside and Mr Logan’s characterisation of that context and the consequent nature of the legitimate interest to be protected put in its place, as we would construe the Restrictive Covenant Agreement, it looks to be too wide to be enforceable. If anything, the Lord Ordinary’s assessment of the strength of the pursuer’s case was generous and we see no basis upon which to overturn her assessment of where the balance of convenience lies. We would expand upon our reasoning as follows.

[26] We consider that the reading of Greenan put forward on behalf of the pursuer on the significance of the defender having signed the Restrictive Covenant Agreement simply to be wrong. Greenan was an action for interdict of a former employee who, when employed by the pursuer, had entered into a restrictive covenant agreement in respect of future employment. The Lord Ordinary found that each party had a prima facie case to advance on the issue of enforceability of the covenant (supra 163C) but when considering the question of balance of convenience at the stage of an application for interim interdict and determining it in favour of the defender he had had regard to the defender’s allegation that he had entered into the agreement under duress and not willingly. The court held that the Lord Ordinary had been wrong to do so. Lord Justice-Clerk Ross, giving the opinion of the court, said this at 163I:

“The Lord Ordinary makes it clear in his opinion that on the information before him he concluded that the defender had not entered into the agreement with the pursuers willingly. We are of opinion that there was no justification for the Lord Ordinary so concluding. He had to proceed upon the basis of ex parte statements, and the situation was that the pursuers were maintaining that the agreement had been freely entered into, whereas the defender was maintaining that he had only entered the agreement after threats. The agreement was produced, and it was not disputed that the defender had signed the agreement. That being so, in our opinion, prima facie the situation must be that there was an agreement which had been entered into voluntarily.”

The fact that, on the face of it, a party has willingly signed an agreement containing a restriction on his taking up employment of a particular sort has nothing to do with the question as to whether the restriction is or is not enforceable as a matter of public policy. When considering the enforceability of a contractual term it is a given that parties have in fact contracted in the terms that they have, or should be assumed to have done. Signature of a written agreement is the common indication of assent to it. That does not exclude the possibility of duress but prima facie a signature may be taken to be an indication of willing assent. That is all that was being said in Greenan; whether there was a prima facie case for enforceability was not in issue, that matter had been decided in the pursuer’s favour by the Lord Ordinary and was not challenged in the Inner House. Mr Logan’s submission that the Lord Ordinary should have regarded the fact that it was not disputed that the Restrictive Covenant Agreement had been entered into voluntarily as pointing to the pursuer having a prima facie case, must be rejected.

[27] Mr Logan also relied on Greenan for the second respect in which he said the Lord Ordinary had erred in law. The Lord Ordinary had recognised that the pursuer had a legitimate interest in protecting confidential information and had accordingly not recalled the third interdict, but she had failed to appreciate, which she would have done had she followed Greenan, that an interdict against the use of confidential information is of no utility unless there is in place, in addition, an interdict against entering into competing employment where such confidential information will inevitably be put to use. The pursuer’s legitimate interest in protecting confidential information should therefore have led the Lord Ordinary to conclude that the pursuer had a strong prima facie case in support of the first and second interdicts as well as the third interdict.

[28] The passage in Greenan founded on by Mr Logan for this second criticism of the Lord Ordinary’s application of the law is at 163F:

“We appreciate that interim interdict still stands in terms of head (i) of the conclusion, but it is well established that a prohibition against disclosing trade secrets is practically worthless unless it is accompanied by a restriction upon the employee possessed of secrets against entering the employment of competitors (Bluebell Apparel Ltd v Dickinson 1978 SC 16 at 28, per the Lord President (Emslie)). It accordingly appears to us that if interim interdict is not pronounced in terms of head (iv) the pursuers are likely to sustain loss.”

The observation to which Mr Logan said the Lord Ordinary should have given weight has a long pedigree. As the Lord Ordinary (Ross) noted in his opinion in Bluebell (supra at 22), the remark, “The prohibition against disclosing secrets is practically worthless without the restriction against entering the employ of rivals”, was made by Lindley MR in Haynes v Doman [1899] 2 Ch 13 at 23. As a matter of generality, we do not doubt its soundness, although Mr Donnelly must be right when he said that the matter is fact-sensitive and therefore dependant upon the whole the circumstances of the particular case. Here the Lord Ordinary clearly considered that little had been put before her to indicate that the pursuer had much in the way of confidential material in his possession but given his disavowal of any intention to act in the manner complained of she saw no prejudice in leaving the third interdict in place. However, what is perhaps more critical is just how far acceptance of the truth of the observation made in Bluebell and repeated in Greenan takes the pursuer. It allows the pursuer to argue that it is reasonable that interdict be granted prohibiting a defender undertaking employment with a business rival of the pursuer notwithstanding that interdict has also been granted against the use of confidential information, as was the outcome in Greenan and Bluebell, but if the court is to grant interdict prohibiting such employment, first, there must be an apposite contractual restriction and, second, that restriction must be so framed as to be enforceable. We shall have more to say on the question of enforceability in the present case but it is convenient first to address Mr Logan’s submission that the Lord Ordinary had exercised her discretion upon a wrong principle because she had misunderstood what she had been told about the business context.

[29] Understanding the particular business context in which a party seeks to enforce a restriction in restraint of trade is clearly very important as such an understanding will usually be necessary to determine whether the party has a legitimate business interest to protect and, if so, just what that interest is. For that reason it is incumbent upon a party seeking to enforce a restriction to set out, in as much detail as is practicable, just what it is about the business in question which gives rise to what Lord Wilberforce in Stenhouse described (at 400) as an “advantage or asset inherent in the business which can probably be regarded as in a general sense [the relevant party’s] property” which “it would be unjust to allow [the other party] to appropriate”. That said, as Mr Donnelly accepted, applications for interim interdict are very often brought in circumstances of urgency. The information available at the stage of framing pleadings may be far from complete and may indeed still be being provided in the course of the hearing of an application. It would be unreasonable for the court to refuse to consider information, with or without documentary support, which is tendered at the bar by counsel, it always being understood that it is part of the professional responsibilities of counsel to ensure, as far as they can, that what they put forward as fact is indeed accurate. The court may then choose to proceed upon the basis of such information even if it is not to be found in the pleadings. In contested proceedings, where the information has been accepted as accurate by the other party or at least not seriously challenged, it might be thought to be perverse for the court not to have regard to it.

[30] Here Mr Logan said he was bewildered as to how the Lord Ordinary came to understand that the information about the business recorded by her at paragraph [3] of her opinion and reproduced at paragraph [6] of this opinion had not been challenged by him. It was contrary to what he had said about the sensitive and confidential nature of knowledge as to prices, margins, the existence and terms of stockholding agreements and the volume of business generated by individual customers. Mr Donnelly, on the other hand, confirmed that what the Lord Ordinary had recorded had been said by him and that, while no doubt there was room for misunderstandings, he at least had not understood it to have been contradicted.

[31] This court is not able and, quite frankly, is not inclined, to explore precisely what occurred at the hearing before the Lord Ordinary. It was her responsibility to form an impression of what were said to be the relevant circumstances on the basis of what was put before her, but no more than an impression. The hearing before the Lord Ordinary was an interim application, not a proof. In the absence of any clear indication that the Lord Ordinary had been misled or must have misunderstood what was before her, we must proceed on the basis of what is recorded by the Lord Ordinary in her opinion. The remedy for a party who wishes there to be no room for misunderstanding of its position is to set out its case fully in its written pleadings.

[32] We turn to the terms of the Restrictive Covenant Agreement and to the strength of the case for its enforceability. The Agreement includes a provision headed “Severability Clause”. In the course of submissions Mr Logan was asked whether any question arose as to the severance of any part of the Restrictive Covenant Agreement with a view to making enforceable a provision that would otherwise be unenforceable because it was framed too widely. Mr Logan confirmed that no such question arose. That has implications for the proper construction of the relevant restrictions, which Cox J identified in TFS Derivatives v Morgan as the first stage in determining whether a covenant is enforceable. In Living Design (Home Improvements) Ltd v Davidson Lord Coulsfield was considering a clause (cl 1.3.3) in very similar terms to that of the Severability Clause in the present case. At 755I he said this:

“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 rewrite 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 cl 1.3.3. 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 [1920] 3 KB 571). It also follows that the cautionary observations of Lord Moulton in Mason v Provident Clothing Co [1913] AC 724 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.”

We express no opinion on whether “a clause such as cl 1.3.3” or the Severability Clause here “enables the court to do anything which it could not do in any case”. It is unnecessary to do so. However, we agree with Lord Coulsfield that while in reaching the proper construction of a restrictive provision it may be possible for the court effectively to take out an unreasonable part and enforce the reasonable part that remains, for that to be done the two parts must be clearly severable in the sense of being sufficiently distinct one from the other and the act of severance must not alter the scope and intention of the agreement.

[33] Before the Lord Ordinary the pursuer relied on the full terms of both CLAUSE 1(A) NON-SOLICITATION – GENERAL AND NON-DEALING (including prospects) and CLAUSE 1(B) NON-SOLICITATION – SPECIFIC (including area). Before this court, recognising difficulty with an enforceable construction of the second of these clauses and the absence of averment as to apprehension of contravention of that part of the first of these clauses which related to prospective clients, Mr Logan relied only on that part of CLAUSE 1(A) which was headed “A) Of existing clients”. We would accept that he was entitled to seek to do so. Nothing said by Lord Coulsfield in the passage from Living Design (Home Improvements) Ltd v Davidson 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. Thus the critical restriction was:

“A) Of existing clients

(a) conduct Restricted Business; or

As that is the provision which is relied upon and no issue of severance in the sense of excision of some part of the provision is said to arise, one must look to the whole of the provision when determining whether it extends the restraint no further than is reasonable to protect the pursuer’s legitimate business interests and is therefore enforceable. That being so, we would see difficulty with that part of the clause which provides that the employee shall not “(a) conduct Restricted Business”. We would see the restriction sought to be imposed as very wide. It includes the conduct of any “Restricted Business” for a period of 12 months. “Restricted Business” means any business or activity carried on by the pursuer at any time during the period of 12 months prior to the termination the defender’s employment. It is business in which the defender shall have been directly concerned during that period but, in context, “Restricted Business” must mean the type of business as opposed to the particular business dealings, because at sub-clause 1(A) 1. A) b) there is a prohibition on “Restricted Business with any Restricted Client with whom the Employee shall have had material dealings”. Thus, “Restricted Business” must include “Business” and indeed “Business with any Restricted Clients”, in respect of which the pursuer had no material dealings. That means, as Mr Donnelly submitted, that what the only clause on which Mr Logan founds seeks to do is to keep the defender out of the fish packaging business for a year. Mr Logan had argued what would otherwise have been the effect of Clause 1(A) 1. A) a) was qualified by its heading “A) Of existing clients”. We did not accept that the heading had any impact on the correctness of the construction put forward by Mr Donnelly. The heading was no doubt intended as a signpost indicating that Clause 1(A) 1. A) has to do with existing clients of the pursuer whereas Clause 1(A) 1. B) has to do with prospective clients, but grammatically “existing clients” does not qualify “The Employee shall not ... conduct Restricted Business”. Moreover, there is the problem of integrating the expression “existing clients” with the different expression “Restricted Clients”. Again, that points to the role of the heading as being to introduce the reader to the relevant contractual provisions but not to it being part of these provisions.

[34] Thus, we have not been satisfied that the Lord Ordinary exercised her discretion on a wrong principle but had the matter been at large for this court we would have considered the restriction relied upon to be so widely drawn both in respect of its industry-wide extent and its 12-month duration as to make for a very weak case for enforceability even on the basis of the pursuer’s characterisation of the relevant business context. That being so, we would have seen the balance of convenience as favouring the defender for the reasons identified by the Lord Ordinary at paragraph [19] of her opinion and reproduced at paragraph [2] above. The reclaiming motion is refused.

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	Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Sundolitt Ltd v Addison [2017] ScotCS CSIH_15 (17 February 2017) URL: http://www.bailii.org/scot/cases/ScotCS/2017/[2017]CSIH15.html Cite as: [2017] ScotCS CSIH_15, [2017] CSIH 15

Scottish Court of Session Decisions