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[2] There is implied in all employment
contracts, in the absence of express statement, a duty of faithful service. This
involves a
promise on the part of the employee to perform well and faithfully
the work contractually agreed. That duty is a compendium of three
sub-duties: to
perform the work (the duty of obedience), to perform it well (the duty to
work with care and skill), and to perform it faithfully (the duty of fidelity).
This last duty is itself composed of
distinct elements – for example, the
duty of confidentiality whereby the employee must not disclose or misuse
confidential
information of the employer. The duty of fidelity can also involve
– in appropriate circumstances – a duty not to compete
with the
employer.[2] However, the
circumstances that will bring into play an implied duty not to compete
are unusual. For the most part, protection against competition must be sought in
express contractual provisions.
To understand the scope that the law allows to
such provisions, it is necessary to consider separately competition during the
period
of employment and competition after the employment has
terminated.
[5] Thus the common law provides no implied restriction on the freedom to compete after employment has ended. However, if the competing employment will involve the former employee in using or disclosing confidential information of the former employer, the former employee can be enjoined from entering into or continuing in that competing employment. This protection of confidential information derives not only from the implied contractual duty of confidentiality but also from the rules of equity. The result is that confidential information has protection without any express provision, but goodwill must be expressly protected by covenant. In saying that only goodwill needs an express covenant, I am not suggesting that restrictive covenants deal only with goodwill. Many deal with confidential information. The idea behind an express covenant restricting future employment in order to protect confidential information is that if an employee is not so bound, there will be nothing on which the employer can act until a disclosure or misuse has taken place (or is imminent). In most cases where a former employee, possessed of confidential information, is employed by a competitor, the former employer would not learn of a disclosure until after the event and it is frequently the case that the harm done cannot be adequately compensated. The former employer has more chance of learning of a proposed new employment with a competitor than of a proposed disclosure subsequent to such employment and thus more chance of acting to enforce the restraint before any disclosure has taken place. It is of course necessary that there is confidential information, ie, an interest deserving of protection. The following discussion of restrictions on competition relates only to restrictions for the protection of goodwill. While there are many earlier cases dealing with restrictive covenants for the protection of confidential information, in which the court needed to ensure that the area of employment in which the restraint operates is no more extensive than is necessary for the protection of that information (ie, that it does not extend to encompass employment where the information is not relevant), the cases in the period surveyed deal with covenants designed for the protection of goodwill.
[6] Employers may protect their goodwill by restraining the
ex-employee (for a reasonable period) from undertaking or being involved
in a
competing business. A related restraint can be found in what are often referred
to as ‘non-solicitation’ covenants:
a former employee (or partner)
will be restrained for a particular period from soliciting – or at times
even from accepting
– the custom of persons who were clients of the former
employer (or partnership) while the covenantor was associated with the
business.
This more limited type of restraint is appropriate where the former employee or
partner intends, or is likely, to set up
in business on their own account (or to
enter another partnership). It is worth noting that the most frequent source of
cases dealing
with such restraints today are various types of agencies –
advertising, real estate, employment, insurance and finance broking
–
where the customer base is perhaps the main asset of the business.
engaged or concerned or interested in the business of any employment agency within a radius of 25 miles of the office address, Banbury, Oxfordshire, and 10 miles from 47th Parade, Leamington Spa.[9]
The object of the rule of public policy against too wide an area is not primarily to protect the employee ... it is to protect the market open to prospective customers, to maximise the number of, in the present case, employment agencies available to them and to promote competition amongst them. But the area in the restriction here ... would not only prevent Mrs Spencer from serving customers inside the 25 mile area but also outside the area ... and for quite a substantial distance outside the area ... Prospective customers outside the 25 mile radius who would normally look to Oxford, for instance, or Northampton, as the centre at which they could find an employment agency, would be deprived of the possibility of going to an agency there with which Mrs Spencer was concerned.[11]
[10] In one of the very
few Australian cases (during the period under consideration) that consider the
validity of post-employment
restraints that expressly limit the former
employee’s area of
employment,[13] an injunction was
refused because of the unreasonable extent of the restraint clause. In
Interpersonal Pty Ltd v
Reynolds,[14] the clause sought
to prohibit the former employee from providing services as a personnel placement
consultant (for placement of secretarial
and administrative staff) at any place
within the Sydney or Melbourne metropolitan area for three months after
termination. Justice
Young in Equity, noted that the restraint covered a vast
area ‘involving most people likely to be employed within Australia
in
secretarial positions’,[15]
and concluded that the hardship on the defendant was such that an injunction
should be refused.
shall not at any time either during the continuance of this agreement or during the period of five years after it shall have determined, for whatever reason, practise as a solicitor from an office within a radius of five miles from Market Place, Huddersfield, nor shall he solicit or endeavour to entice away from the firm any person or persons who was or were clients of the firm prior to or during the continuation of this agreement. Nor shall he at any time within such period of five years from determination of the agreement, for whatever reason, either directly or indirectly, either on his own behalf or in relation to any persons, firm or company, accept or carry out instructions for or on behalf of any such persons as aforesaid, excepting persons, firms or companies introduced as clients of the firm by [himself].[17]
[13] Perhaps surprisingly, the
Court made no reference to any of these matters. Instead, it found the
unreasonableness in the fact,
contended by the plaintiff, that the clause was
intended to remain binding even in the event of a wrongful dismissal. This
contention
was based on the wording of the restraint: ‘shall not at any
time ... during the period of five years after it shall have determined,
for
whatever reason’.[20] The
circumstances of the termination made this contention necessary. When the
defendant was employed, the plaintiff had been in partnership
with one Reece. As
mentioned, the partnership deed provided that the partnership would come to an
end on 31 August 1983. The defendant’s
contract of employment was for a
term of five years, terminating on 3 September 1984. Some time early in 1983,
the defendant learned
from the plaintiff that the partnership would end on 31
August. On 31 March, the defendant informed the plaintiff that he was not
prepared to continue to work for the firm unless Reece was a partner, and that
he would regard himself as constructively dismissed
when the partnership
expired. He clarified this position in a letter of 6 April:
[T]he dissolution of your partnership with Ian Reece would have the effect of terminating my agreement, and that if such dissolution came about and you decided to offer me employment, I would feel unable to accept such an offer ... if you and Ian continue in partnership on whatever terms I have no intention other than to continue as a salaried partner for the remainder of the term of my agreement.[21]
[15] It is well established that a contract of employment entered into by a partnership is terminated by a change in the constitution of the partnership, unless it is expressly stated to be with the partnership as from time to time constituted, and that the termination is wrongful if it occurs without proper notice in the case of a contract of indefinite duration or if it occurs before the expiry of a fixed term.[22] The plaintiff therefore contended that Oates’s contract had been with the partnership as from time to time constituted. However, after detailed examination of the contract, the Court held that it was with the two partners as at the time it was entered into, namely, Briggs and Reece. Therefore, the expiry of the contract had the effect of a wrongful dismissal of Oates, which he had clearly accepted as releasing him. In normal circumstances, this would release him from all further obligations, including any restraint clauses.[23]
[16] The plaintiff
therefore had to argue that the particular restraint was so worded as to survive
the rescission. Justice Scott
held that the argument was unsound, and that,
despite the wording of the restraint, the defendant was discharged from it by
his election
to accept the plaintiff’s repudiation. He went on to add
that, even if he were wrong on this point:
A contract under which an employee could be immediately and wrongfully dismissed, but would nevertheless remain subject to an anti-competitive restraint, seems to me to be grossly unreasonable. I would not be prepared to enforce restraint in such a contract.[24]
[18] A number of subsequent cases have taken up the issue of covenants expressed to take effect on the termination of the covenantee’s employment, however caused. While such expression will not affect the outcome of a case where the termination amounted to a wrongful dismissal (as in Briggs v Oates), it may be crucial in the event of a dismissal with proper notice or dismissal following repudiatory breach by the employee. If the ‘however caused’ phrase is held to make the covenant unreasonable, then the covenant will be unenforceable unless the offending phrase can be severed. If the covenant is simply one that will not apply in the event of rescission by the employee, then it may be applied where the termination occurs lawfully.
[19] In Living Design (Home Improvements) Ltd v Davidson (‘Living Design’),[25] the covenant was expressed to govern the period following termination ‘however that comes about and whether lawful or not’. The Court of Session held that the clause was manifestly wholly unreasonable, and that it could not be saved by severance. ‘Blue pencil’ severance was allowable only where what is struck out is of trivial importance or is technical,[26] which in this case was very doubtful. A different approach was taken in PR Consultants Scotland Ltd v Mann (‘PR Consultants’).[27] There, the covenant merely referred to ‘termination of his employment hereunder (howsoever caused)’,[28] without specific reference to lawfulness. The Court of Session denied that the phrase made the covenant unreasonable. Lord Caplan distinguished Living Design on the basis of its specific reference, and held that the phrase ‘howsoever caused’ was not able to cover unlawful termination, but merely the many ways of lawful termination. There would, his Lordship said, ‘be no effective purpose in providing against a termination caused by the employer’s unlawful conduct’ since ‘by the operation of the principle of mutual contractual provisions the restrictive covenant would not be available to’ the employer.[29]
[20] A third version of the ‘howsoever’ phrasing was considered in D v M.[30] The covenant restrained solicitation of customers. It stated that ‘if this appointment ... is terminated for any reason whatsoever ... he shall not ... for a period of 36 months following the termination date’[31] solicit any persons customers of the employer during the 12 months preceding the termination date. ‘Termination date’ was defined in the contract as ‘the date on which this agreement shall determine irrespective of the cause or manner’.[32] The High Court held that the restraint was unenforceable as it stood and that the offending parts could not be severed since they were not ‘of trivial importance, or merely technical’.[33] Justice Laws stated that the covenant was unreasonable, on the authority of Living Design and Briggs v Oates.[34] It would, arguably, have been open to the Court to construe ‘irrespective of the cause or manner’ as referring to the various possible lawful terminations as was done in PR Consultants. It is possible that the High Court’s approach was affected by the surrounding issues. The defendant had been summarily dismissed by the plaintiffs and there was a serious contest as to whether the dismissal was justified by alleged misconduct. Additionally, the case was one in which the grant or refusal of an interlocutory injunction would in effect dispose of the action. Thus, to construe the covenant as reasonable would have the effect of justifying an injunction in circumstances where a final hearing, if the case had proceeded so far, would have shown the covenant to have lapsed on the termination.
[21] Thus, at this stage of judicial development,
there were two situations: covenants that on construction referred only to
‘whatsoever’
method of lawful termination (which were
acceptable), and those which on construction referred to all terminations,
lawful or unlawful (which were
unreasonable). However, the matter was taken
further by the Court of Appeal in Rock Refrigeration Ltd v Jones and Seward
Refrigeration Ltd.[35] Lord
Justice Simon Brown held that the earlier cases on the issue had proceeded on an
erroneous footing:
The law applicable to covenants and restraint of trade simply has no relevance to the present situation. Of course, covenants which purport to subject ex-employees to greater restriction than their erstwhile employers can justify are unenforceable, and elementary it is too that the legitimacy of such covenants falls to be determined as at the date they are entered into and not by reference to the circumstances in which the employment eventually terminates. But in my judgment the most basic premise upon which the whole restraint of trade doctrine is founded is that, but for the doctrine’s application, the covenant in question would otherwise operate to restrain the employee unduly. In other words the doctrine applies only where there exists an otherwise enforceable covenant. It renders unenforceable what otherwise would be enforceable.
The whole point about the General Billposting[36] principle is that, in cases of repudiatory breach by the employer, the employee is on that account released from his obligations under the contract and restrictive covenants, otherwise valid against him, accordingly cannot be enforced. Once that principle was decided, its future application necessarily postulated that such restrictive covenants upon their true construction would otherwise be enforceable against employees.[37]
especially as there was another equally, or almost equally, good way of protecting Mrs Marchington’s goodwill. I mean a clause forbidding Mrs Spencer to have to do with existing customers of [the former employer].[38]
(a) That he or she will not, at any time during the six months immediately following the termination of his or her employment, whether on his or her own account or on behalf of any other person, firm or corporation solicit custom from, deal with or supply (in connection with the trade or business of an employment agency) any person, firm or corporation who or which was a client of the company at any time during the period that the employee was employed by the company;
(b) That he or she will not at any time during the six months immediately following the termination of his or her employment whether on his or her own account or on behalf of or in the course of employment by any other person, firm or corporation, engage in or undertake the trade or business of an employment agency within a radius of 3 000 metres of the branch or branches of the company at which the employee was employed for a period of not less than four weeks during the period of six months prior to the date of such termination or in the case of branch or branches in the Greater London area then within a radius of 1 000 metres.[40]
[25] In relation to clause (b), the first point was to determine
whether it protected a genuine interest of the former employer. Protection
of
goodwill traditionally is concerned with the clients or customers of the
employer. Clause (a) protected this by its prohibition
on dealing with clients.
Clause (b), however, prohibited the former employees from carrying out the type
of business in which the
former employer was involved – on behalf, that
is, of any client, whether or not they were in any way connected with the former
employee. Such a prohibition obviously goes further than is necessary to protect
goodwill if that simply means clients or customers.
The plaintiff contended,
however, that what clause (b) was protecting was the former employer’s
connection with the pool of
temporary workers. In the Court of Appeal, Sir
Christopher Slade, with whom Mann and Butler-Sloss LJJ agreed, accepted that
this
was a part of ‘goodwill’ which an employer was entitled to
protect, though it must be acknowledged that this finding
was not particularly
strongly expressed:
[N]o authority has been cited to us in which it has been held that the only interest which an employer is entitled to protect is its connection with its customers ... [the plaintiff’s] pool of temporary workers is an important source of its revenue, because it enables it to supply staff to its employer-clients who will pay it commission. In principle, I can see no reason why the plaintiff’s trade connection with its pool of temporary workers should not in law be capable of protection by a restriction no greater than is reasonably necessary for such purpose.[41]
For a company who provides temporary workers to employers, the attraction, retention, and above all quality of those temporary workers is a crucial business asset. If I may say so without offence, they are ‘the product’ which the company is selling. It cannot of course prevent the workers from leaving ... but the base of temporary workers is a part of the plaintiff’s goodwill which I consider is a legitimate subject of protection.[42]
[28] However, even if the pool of temporary workers was
an interest of the plaintiff which might legitimately be protected, clause
(b)
went further than necessary to protect that interest – it did not merely
prohibit the defendants from placing members of
the pool; it prohibited all
involvement in the business of an employment agency in the specified area. Sir
Christopher Slade did
not take that point. Instead he raised the fact that it
did not identify that interest as the one to which it was directed: the
introductory
words of the clause referred specifically to ‘clients’.
Therefore, he stated, clause (b) had to be examined to see if
it went further
than was necessary for the protection of the ‘client’ portion of the
plaintiff’s goodwill. While
he accepted that there might be circumstances
where a mere non-solicitation clause would not be sufficient for the protection
of
‘client-goodwill’ – because the agency might not be aware
that the former employee’s competing firm was ‘whittling
away the
plaintiff’s trade connection’ – he denied that an area
restriction on employment would protect that connection,
since clients normally
placed their ‘orders’ by telephone and it would be of little concern
to them whether the competing
firm was within or without the area produced by
the circle of restriction;
While a covenant containing a territorial restriction in a suitably drafted form might well have been justifiable as a means of protecting the plaintiff’s connection with its pool of temporary workers, I am not satisfied that a covenant containing any territorial restriction was necessary or appropriate for the protection of its trade connection with its clients.[43]
[T]he restriction imposed by clause ... (b) placed a disproportionately severe restriction on the defendants’ right to compete with the plaintiff after leaving its employment and went further than was reasonable in the interests of the parties.[44]
On termination of this contract by either party, you will not for a period of 18 calendar months from the date of such termination directly or indirectly as principal, agent, director, partner, proprietor, employee or otherwise of any concern, business or businesses in competition with the business or businesses carried on by this company during the period of your employment with it solicit the custom or business of any person, concern, firm or company who to your knowledge is or has been during the period of your employment a customer of the company or associated companies so as to harm the goodwill of the company or so as to compete with the company.[47]
[33] This, according to Parker’s counsel, gave him
a prima facie right to six months’ notice of dismissal, and although there is in the contract of employment the alternative provision for the payment of six months’ salary in lieu, on its proper construction that does not remove the contractual entitlement, but merely recites the consequences of failure to give notice.[48]
[35] This is clearly correct, although it might be more completely accurate to say ‘what he receives is, in effect, damages’. Where a contract does not expressly provide for payment of wages in lieu of notice, the termination in that manner is a breach of contract. However, since the measure of damages for failure to give notice is the equivalent of wages for the notice period, the payment in lieu means that there is no loss to be compensated in damages and thus no action, in that the loss has been compensated already. As Glidewell LJ pointed out in Rex Steward,[51] the crucial distinction between Dixon v Stenor Ltd and the case before him was that there was no express provision in the contract in Dixon v Stenor Ltd for payment in lieu. His Lordship quoted with approval the judgment of Hawser J at first instance: ‘In my view, the clause offers two alternative methods of lawful determination (that is by six months’ notice or six months’ wages)’.[52]
[36] Not surprisingly then, the Court of Appeal rejected Parker’s argument on this point. Parker also argued that the restraint clause was unreasonable, and it was so held at first instance, on the grounds that the reference to a ‘person, concern, firm or company’ etc who ‘is or has been during the period of your employment’ a customer, covered persons who became customers after Parker ceased to be employed by the agency. The extension of the restraint to customers of associated companies was also held to be unreasonable. The Court therefore severed the phrase ‘is or’ and the reference to associated companies, and upheld the rest of the clause.
[37] Parker appealed, arguing that the clause was unreasonable and could not properly be made reasonable by severance. He claimed that the 18-month period was too long and that severance alone could not make this reasonable as it would leave a permanent bar on solicitation. The Court of Appeal dismissed the appeal. As to the length of the restraint, they considered 18 months reasonable in the case of an employee in a position such as managing director, though it might well be excessive in the case of an employee in a lesser position. As to severability, the Court of Appeal interpreted the restraint as composed of a number of separate prohibitions: on solicitation of those customers of the plaintiff company who had been customers at the date of termination of Parker’s employment contract; on solicitation of those customers who had become customers of the plaintiff after that date; and on solicitation of customers of companies associated with the plaintiff company. It held that the second and third of these could be validly severed, leaving the central prohibition on solicitation of those customers who were customers of the plaintiff at the date of termination as a reasonable restraint.
[38] As mentioned above, where there
is no issue of confidential information and the former employer’s interest
is merely in
protecting goodwill, a non-solicitation covenant has much more
chance of being upheld than one prohibiting employment or engagement
in a
business in the same field. Non-solicitation covenants do not limit the type of
work, but merely prohibit performing it for
the former employer’s
customers. Earlier cases limited the scope of such covenants to customers with
whom the former employee
had had relevant contact such that an
‘attraction’ might have developed causing the customer to
‘follow’
the former employee to the new business. In more recent
cases, the courts have exhibited a willingness to expand the scope of
non-solicitation
covenants, or at the least have refused to narrow it. In
Dentmaster (UK) Ltd v
Kent,[53] the Court of Appeal
ruled in favour of an interlocutory injunction to enforce a restraint on
solicitation of persons who had been
the employer’s customers during the
last six months of the employee’s employment and with whom he had dealt at
any time
during the course of his employment. Lord Justice Waite denied that it
was unreasonable to restrain the ex-employee from soliciting
customers with whom
he had not had any recent connection, particularly given the restriction to
those who had been customers within
the six months preceding termination. In
International Consulting Services (UK) Ltd v
Hart,[54] the High Court
(Strauss QC sitting as Deputy High Court Judge) upheld a restraint which
prohibited solicitation not merely of customers
but of persons with whom the
former employer had ‘negotiated’ as prospective customers, and even
where the former employee’s
contact with such persons had been unconnected
with the negotiations:
I do not think it is necessary to seek to establish any general rule as to whether a restraint on dealings with prospective customers is valid. In the present case, I think that it is justifiable. Because of the complexity of the subject-matter of the negotiations and the long period of time over which they are often conducted, ICS did in my view legitimately regard the connection with customers resulting from negotiations as forming part of their business goodwill which required protection. The fact that the restraint operated even where Mr Hart’s contact with the customer was unconnected with the negotiations, and was a long time in the past does not quite tip the balance. Because of his central and influential position, it could reasonably be considered that any previous contact might give him a rapport with the customer, and that he might have some input as a consultant into the preparation of a proposal for negotiations, even if he had no actual contact with the customer in connection with the negotiations.[55]
[40] However, a clause
restraining solicitation of customers/clients with whom the former employee had
not had contact was refused
enforcement in the NSW case of Burwood Night
Patrol Pty Ltd v Lagarde.[58]
The plaintiff company had some 1 000 clients and the defendant had had contact
with some 300 of them. Chief Justice McLelland in
Equity based his reasoning on
the underlying principle that
the interest of the plaintiff which may be legitimately protected by such a restraint is not the bare prospect of competition by the former employee, but rather the prospect of the former employee taking advantage of a personal relationship developed during the period of his employment ... legitimate protection might be sufficiently granted by confining the operation of any injunction to contact ... with persons, firms or companies with whom the defendant did have personal contact as an employee of the plaintiff company.[59]
far from confining the circumstances in which covenants in restraint of trade may be enforced to certain categories of case, and defining those categories strictly, the courts have moved in the opposite direction. The categories are not rigid, and they are not exclusive. Rather, the covenant may be enforced when the covenantee has a legitimate interest, of whatever kind, to protect, and when the covenant is no wider than is necessary to protect that interest.[61]
[T]he difficulties in law in the way of a non-poaching agreement between employers are very clearly explained in the decision of the court in Kores Manufacturing Co Ltd v Kolok Manufacturing Co Ltd[63] ... In particular, the employee has the right to work for the employer he wants to work for if that employer is willing to employ him ... Mr Serota submits that an insurance broker depends on its staff and the team will of its staff, and that the goodwill of an insurance broker’s business depends on its staff. So in a sense it does, as with any other company, but that does not make the staff an asset of the company like apples or pears or other stock in trade, nor does it entitle HIB to impose a covenant against competition on the defendants.[64]
They [the former employers] have a legitimate interest in maintaining a stable trained workforce in what is acknowledged to be a highly competitive business. That is an interest which the plaintiffs are entitled to protect against solicitation and enticement by the defendant.[67]
[45] In the Dawnay Day case, the Court of
Appeal again upheld an injunction enforcing a non-recruitment covenant, though
not as a matter of course. The
covenant in question prohibited recruitment of
any director or senior employee of the relevant employer. Lord Justice Evans
referred
to the submission of counsel for the appellant ex-employees that
Hanover Insurance had not been cited in the Ingham case. He noted
that counsel for appellant and respondent had agreed that neither Hanover
Insurance nor Ingham were binding in the case before him. He went
on:
I would agree with Leggatt LJ that an employer’s interest in maintaining a stable, trained workforce is one which he can properly protect within the limits of reasonableness by an undertaking of this sort. But it does not follow that that will always be the case.
The clause can be regarded as objectionable because it restricts not only rights of the former employee to recruit staff for his new business, but also the opportunities of the remaining employees to learn about future employment possibilities for themselves. However, their ability and right to do so through making enquiries of their own, and through advertisements and other channels of communication in the normal way is not restricted at all. The employer’s need for protection arises because the ex-employee may seek to exploit the knowledge which he has gained of their particular qualifications, rates of remuneration and so on, which the judge included in his general description of specific confidential information which the managers acquired.[69]
[47] However, his Honour noted that the plaintiff company had invested a great deal in staff training and that the staff worked as a close team. The decision does not, therefore, support an unlimited non-recruitment covenant in the absence of such special circumstances.
[48] Several points need to be made about the
development of the law on non-recruitment covenants. First, the originating
decision
in Kores Manufacturing Co Ltd v Kolok Manufacturing Co
Ltd[75] concerned an agreement
between two rival manufacturers not to ‘poach’ each other’s
employees. It was not a situation
in which the covenantor had formerly been
employed by the covenantee. Thus, it was a clear restriction on the ability of
non-parties
– the employees – to choose their place of employment.
Neither party to the agreement, as covenantee, had any influence against
which the other deserved protection. The situation is clearly different when the
‘poacher’ has previously worked
with the ‘game’. Second,
in three of the cases – Alliance Paper, Dawnay Day, and
TSC Europe – the employment contracts were accompanied by contracts
of sale in some form.[76] The
covenanting employee sold or transferred a business and undertook employment
with the purchaser. Thus in all the cases, the covenantor
had, through the
period of being ‘fellow employees’, an influence over other
employees, as well as particular knowledge of their terms of employment, which
could well predispose the other employees
to follow the covenantor to another
business. And in the three cases of ‘sale’, the qualities and
capacities of the workforce
were, to some extent at least, what the covenantor
had sold to the covenantee – and been paid for. The ‘mixed’
nature of the agreements containing the non-recruitment covenants was referred
to by the courts in all three cases, and it was a
common point that a rigid
categorisation was neither a necessary nor appropriate starting point for
consideration of the applicable
principles. Judge Levy QC in Alliance
Paper said:
the covenants into which [the defendant] entered should be viewed not only as those of an employee entering into a service contract, but also as those of the person who negotiated the sale of the shares.[77]
[51] Concurrent employment with more than one employer is not ‘competition’ in the sense that we must use the term. Nor is concurrent employment with more than one employer in the same field necessarily competition. Nor is it necessarily competition if the employee conducts their own business in the same field as the employer during their ‘spare time’. Special facts will be necessary to turn concurrent work into competition breaching an implied duty to work in the employer’s best interests. The case of Hivac v Park Royal Scientific Instruments Ltd (‘Hivac’)[80] provides an excellent example of the requisite type of ‘special facts’. In Hivac a number workers employed by the plaintiff manufacturer of valves for hearing aids worked in their spare time for the defendant who had just commenced manufacturing such valves. At the time this spare-time employment commenced, the plaintiff employer had an absolute monopoly in the small and specialised market for hearing aid valves. Moreover, wartime labour restrictions meant that the defendant could not have obtained any labour and therefore could not have entered the market unless its labour force was made of spare-time workers. The spare-time work was held to be a breach of contract. Another possible example given by Lord Greene MR in the course of his judgment in Hivac was that of a solicitor’s clerk who worked Monday to Friday for one solicitor, and Saturdays for another solicitor in the same town. In the first case, the opposition to the employer’s best interests lies in the fact that the spare-time workers enabled an incursion into the employer’s monopoly in a limited market. In the second example, the opposition would lie in the fact that professional ethics could mean that the clerk would be prevented in carrying out his Monday-Friday employer’s wishes that he act on a particular case because he had already become involved in the same case – for the opposing party – in the course of his spare-time work.
[52] Without an express duty of exclusive service, it will
not be a breach for an employee to work in their spare time in a field
of work
different from that of the employer’s business, for this cannot possibly
be a source of anything contrary to the employer’s
interests.[81] Nor will it be a
breach of duty for an employee to work in their spare time for another business
in the same field as the employer,
if the work is routine and the businesses in
the field are not in a situation of close competition, for example, a service
station
attendant who works in his spare time for another service station. For a
breach to exist, it is necessary that the spare-time work
gives to the
spare-time employer an advantage that could not be gained except by the services
of the particular employee, or imposes
on the main employer a disadvantage that
would not be suffered if the employee were not engaged in the spare-time
work.
[54] However, the theoretical freedom to include such clauses in employment contracts is of limited value if the clauses cannot be enforced. Breach of an exclusive service clause has always been remediable by damages, where loss flowing from the breach can be established and quantified. However, this can be difficult. The best way to gain the benefit of the clause would be by an equitable remedy – an order for specific performance of the contract, or an injunction prohibiting breach of the clause. Such a route to enforcement was subject to the orthodoxy (until the second half of the 20th century) that equitable remedies were not available for breach of employment contracts. This was presented as a matter of jurisdiction – equity cannot, may not, specifically enforce contracts of service; it was an established principle that equity would not do indirectly, by injunction, what would have the effect of specific performance in situations where specific performance was not permitted. Clearly, an injunction prohibiting breach of a clause indirectly has the same effect as an order for specific performance of it.
[55] Throughout the 1960s and 1970s, the orthodoxy changed. The barrier to equitable remedies came to be recognised not as a matter of jurisdiction, but as a matter of discretion. Equitable remedies are discretionary, the exercise of discretion being based on the application to the facts of the case of established criteria. Statements about the availability of equitable remedies in employment situations came to focus on the fact that certain of the established criteria would usually, or frequently, lead the courts to decline to exercise their discretion to grant the remedy sought.[82] However, even in the 19th century, when the view was that the barrier to equitable remedies in employment contracts was jurisdictional rather than discretionary, it had been recognised that injunctions would be available against a breach of contractual stipulations that were negative in substance. An exclusive service clause is negative in substance. It is a promise ‘not to work for’ anyone else, anyone else in the same field, or even a particular competitor.
[56] To fully appreciate current developments in this area, we must go back
a century and a half. The locus classicus of the law as to specific
remedies for breach of exclusive service clauses is the judgement of Lord St
Leonards in Lumley v
Wagner.[83] In that case, the
operatic soprano Johanna Wagner had contracted to sing for Lumley at Her
Majesty’s Theatre for a season of
three months. The contract contained an
exclusive service clause whereby she would not, during those three months, sing
for anyone
else at any other theatre. In breach of the clause, she refused to
perform at Lumley’s theatre, and signed on with Gye to sing
at Covent
Garden – the operatic equivalent of gazumping. Lord St Leonards granted an
injunction against breach of the exclusive
service clause – prohibiting
her from carrying out the arrangement with Gye. He denied that in so doing, he
was indirectly
enforcing what by orthodoxy he could not – the promise to
sing for Lumley.
[58] This is illustrated by a NSW
case from the period with which this article is concerned. In Curro v
Beyond Productions Pty Ltd
(‘Curro’),[86]
the appellant was a television presenter. She and her company, Talking Heads
Productions,[87] had contracted with
the respondent company to work on the production and presentation of its program
Beyond 2000. The contracts, entered into in 1991, were for one year with
options on the part of Beyond Productions Pty Ltd to renew them for
further
terms each of one year in the two subsequent years. The 1992 option was
exercised, with the effect that the second term was
due to expire on 11 August
1993. The contracts contained an exclusive service clause – cl
2(iii) – whereby Curro
agreed not to:
engage in any other presentation activity during the term of this Agreement, including the making of any advertisement or commercial announcement whether for use on television or radio or in the print media or any exploitation of her role as a presenter of the Programs without the prior written consent of Beyond, such consent not to be unreasonably withheld.[88]
[60] In
consideration of Curro’s challenge to the authority of Lumley v
Wagner, the Court indicated its intention ‘to endeavour to state in a
concise form what we understand the law to be on this
topic’.[89] That law, it said,
until recently had reflected three principles:
[F]irst, that under the doctrine enunciated by Lord Cairns in Doherty v Allman (1878) ... a court of equity would always grant an injunction to enforce a negative contractual promise made for consideration; secondly, that, by way of exception a negative promise would not be enforced by injunction if that would have the practical effect of compelling specific performance of a contract of personal service or if it would force the defendant either to perform that contract or remain idle (with overtones of destitution); and thirdly, by way of exception to the exception, in the case of special services a promise not to take employment with a competitor would, under the doctrine of Lumley v Wagner, be restrained.[90]
[62] The Court listed the various providers of
‘special services’ in relation to whom the doctrine had been applied
–
opera singers, film stars, actresses, rock singers, football players and
newspaper production managers – and stated that ‘how
many other
occupations fit within this category can be left to the course of subsequent
decisions’.[96] To the
appellants’ argument that one reason that the doctrine should be rejected
was that no satisfactory definition of ‘special
services’ could be
formulated, the Court replied that it was true, as it was of ‘many other
terms of practical utility,
both non-legal (eg, beauty, elegance) and legal (eg,
reasonableness,
unconscionability)’.[97] One
could respond that, in relation to the non-legal terms, the comment is
irrelevant, and in relation to the legal ones it is disingenuous.
Nevertheless,
the subsequent Australian case of Network Ten Ltd v
Fulwood[98] also falls within
the traditional approach. There an injunction was sought to enforce such a
clause in the contract of a television
news presenter. Justice Young in the
Supreme Court of NSW held the clause itself to be unremarkable in the particular
field of employment,
but declined to enforce it by injunction, given that there
were only weeks of the contract remaining, and that the application for
injunction had been delayed without adequate explanation. There was also doubt
in the judge’s mind as to whether it had been
sufficiently established
that damages would be an inadequate remedy.
[64] Moreover, reality is different from theory. If all a person’s training and experience is in relation to one type of occupation, it is in reality quite untrue to say that the person could easily go and earn remuneration in some other occupation. And this is particularly so with respect to the types of occupation in relation to which this dubious doctrine has been applied – occupations which require not merely training and experience, but (excluding newspaper production managers and possibly footballers) art. The doctrine is in reality merely the exhibition of a shocking philistinism. Would we really say to Don Plácido Domingo, if he attempted to breach such a clause, ‘Pues hombre! You can always go and manage a restaurant, or sell insurance, or work in a bank’? Perhaps Lord St Leonards would have done so; but would he have spoken in similar terms to a surgeon, an engineer, an architect, a butcher or a baker? To the extent that there is anything ‘special’ about the services in relation to which Curro noted the doctrine as having been applied, it is that most are artistic and well paid. Essentially, the doctrine recognises that Johanna Wagner, Bette Davis or – according to my example – Plácido Domingo, would remain idle during the period of the restraint if it were enforced, but that they would have sufficient previous earnings such that they would not ‘starve’ as a result of the idleness. But of course, the services of the surgeons, engineers, and architects hypothesised are also well-paid, hence my accusation of philistinism. At base, the doctrine says to practitioners of the performing arts, ‘we do not wish that surgeons, engineers, architects, butchers or bakers remain idle, because we – society – want what they do. But we do not need, nor do we care about, what you do’.
[65] It is also a questionable
practice to subject providers of these ‘services’ to a restriction
to which ‘ordinary
workers’ would not be subjected when we consider
other aspects of the common law’s treatment of performance contracts.
For
example, the traditional exception of performers from the ‘rule’
that there is no obligation on an employer to provide
work to do as well as the
agreed remuneration[99] is
contradictory to the idea that the performer could ‘go off and do
something else’. This exception recognises the importance
to the performer
of the opportunity to continue to practise their particular art. Is it logical
to say, on the one hand, that an
impresario would be compelled to give Domingo
the agreed role to sing while the Capital Territory Health Commission would not
have
been compelled to give the surgeon Mann operations to
perform,[100] and, on the other
hand, that the impresario could compel Domingo not to sing for others whereas
the Capital Territory Health Commission
could not have compelled Mann not to
perform operations for other health authorities? The NSW Court of Appeal noted
that Lord St
Leonards had said
to defendants in Mme Wagner’s position that
This rationale for such injunctions should be emphasised as learned counsel for the appellants at times seemed aghast at the suggestion that a Court of Equity should hold parties to their contracts.[101]
[67] In summary
then, it is the falsity of the supposed category of ‘special
services’ in theory and in practice –
a category to which counsel
for Curro rightly objected as beyond formulation – which undermines the
‘rule’ in Lumley v Wagner. The ‘rule’ is
wrong when it suggests that there is such a category, the adherents of which
have an ability, not enjoyed
by others, to leave to find remunerative occupation
elsewhere. Performers have no greater ability to do so: to the extent that their
ability to change occupations differs from that of ‘ordinary’
workers, it is less, not greater. And the ‘rule’
is objectionable in
its alleged foundation on good faith. If it were truly so founded, it would be
applied to all categories of workers,
or at least to all well paid categories.
In truth, it is founded on an unworthy amalgam of envy and philistinism. It is a
great pity
that the Court of Appeal turned away from the opportunity to consign
this historical monstrosity to the dustbin where it
belongs.[102]
[69] The plaintiff professed to be concerned about protection of confidential information, and sought an injunction prohibiting the defendant entering that employment until the termination of his contract with it, as partial enforcement of the exclusive service clause. The injunction was refused and the plaintiff appealed. The Court of Appeal dismissed the appeal. An obvious argument for refusal would have been that since the proposed employment was in the same field as the plaintiff, the clause – with its reference to ‘any other business or profession’ – did not apply to the situation, and any injunction would have to be based on the implied duty of confidentiality rather than on the express clause. However, that point was not taken and the Court of Appeal directed its attention to whether or not it would enforce the clause.
[70] Lord Justice Dillon noted, after setting out the
facts, that the short answer was that the decision of the court below to refuse
the injunction was a matter of discretion, and that the decision was not open to
appeal, since the judge could not be shown to have
misdirected himself. However,
he stated that
the case has a wider importance because these clauses are imposed on many senior executives and it may be that such executives are hardly in a position to negotiate over the terms of their contracts of service.[105]
[72] His Lordship then went on, in terms of general
principle:
Of course additionally the defendant will, by his activities, be helping Asda [the proposed new employer] which is in competition, to put its business on a sound economic basis. He may therefore make it a better run business. Now merely helping a competitor in that sort of way could not be restrained after the termination of the service agreement. On the other hand, for an employee to foster the profitability of a rival during the continuation of his employment could well, in appropriate circumstances, be restrained either under a clause in the contract like those in the defendant’s contract, or as a breach of the duty of good faith. I can well see that, if the notice under a contract for employment is not for an excessive period after notice the employee is no longer required to work his notice, it may yet be said
forcibly and correctly for the employer that the risk of his going to a rival and fostering the rival’s business before the expiration of his notice is one against which the employers are entitled to be protected because of the damage that it will do them.[107]
[74] I referred in the preceding paragraph to the
‘principle’ in quotation marks because Dillon LJ presented the
consideration
of the risk to the original employer as ‘questions of
discretion as to whether or not an injunction should be
granted’[108] rather than as
‘questions of principle’. In the event, in exercising that
discretion, His Lordship concluded that no
such risk existed during the
remaining six weeks of the defendant’s contract with the plaintiff and
consequently dismissed
the appeal. Lord Justices Taylor and Mann also stated
that, as a matter of discretion, the injunction should be refused.
[76] The defendant subsequently received an offer of employment as joint managing director from another company in the tissue industry, which he accepted. The plaintiffs sought an injunction to enforce the restraint clause, which was given at first instance but on limited terms, to apply only to named companies in the paper tissue industry. On appeal, the injunction was set aside. It should be noted that the employment contract had contained a term requiring 12 months’ notice to be given by the employer (and six months’ by the employee). Thus, for an earlier lawful termination, there had to be a variation. The severance agreement was such a variation – substituting earlier termination on consideration of the payment of the 12 months’ salary. That consideration was also available to support a valid restraint clause. The question was whether it was valid.
[77] The High Court held the restraint clause to be unreasonably wide and thus unenforceable. The judge at first instance had erred in believing that he could fashion and enforce a lesser restraint. Such an approach had never been allowed. Justice Laws (the judge at first instance) had found apparent support for the approach adopted in the judgment of the Court of Appeal in Provident Financial, seeing that case as ‘herald[ing] an approach somewhat more relaxed, flexible or practicable than may be gleaned from some of the old cases’.[111] Lord Justice Simon Brown pointed out the misinterpretation and misapplication of Provident Financial. In that case, the employment contract was continuing during the contractual notice period, but the employee was on garden leave. The restraint clause, which was partially enforced by a limited order, was as to employment with another employer during the term of the contract. Here, the contract had been terminated. The restraint in the severance agreement was a post-employment restraint. The severance pay did not convert the case into one of garden leave, and the situation could not be treated as if it were a garden leave case. Moreover, Simon Brown LJ denied that the only principle underlying refusal to enforce post-employment restraints was that of ensuring that employees could earn – would not have to choose between the previous employer on the one hand and idleness and starvation on the other – a choice obviated here by the severance payment. The ‘flexible’ order approved in Provident Financial was dependent on the fact that the employment still continued.
[78] The deciding
factor in J A Mont (UK) Ltd v Mills was thus that, in the
circumstances, the restraint was in fact a post-employment one and not one for
exclusive service during the
period of the employment contract. In GFI Group
Inc v Eaglestone,[112]
the restraint considered by the High Court was a true exclusive service clause:
The employee shall not, without the consent of the company, during the continuance of this agreement be engaged or interested, either directly or indirectly, in any capacity in any trade, business or occupation whatsoever, other than the business of the company.[113]
[80] It is to be noted that the
exclusive service clause in Eaglestone’s contract was framed in very broad
terms and was not
confined to the employer’s competitors. It prohibited
employment ‘in any capacity in any trade business or occupation
whatsoever’[114] during the
term of the contract. No reference to this was made in the decision of the case.
Additionally, the field of the contract
employment was not that of
entertainment, to which the earlier cases had been confined. This was true also,
of course, in Provident Financial. In concluding his decision, Holland J
delivered himself of some thoughts that echo those of the NSW Court of Appeal in
Curro:
I cannot, however, part from this matter without emphasising strongly one point that has been very much to my mind throughout the hearing. My understanding of the position of the defendant is that he is in a trade in which his word is presumably his bond and because his word is his bond and because of the support of his employers and because also of his own talents, he has prospered. I have heard various arguments and suggestions, supported by passages in affidavits, to the effect that for some reason, when one moves from the deals that he makes across a desk to his own employment contract, his word ceases to be his bond and, in essence, the matter simply becomes one of supply and demand. I deprecate that. If I had not the reasons that I have given, I would be strongly motivated to hold him to his word; that is to hold him to that 20-week period, and if there is a current impression that these periods in these contracts negotiated with these highly paid, highly skilled employees do not have the meaning that they purport to have, then the sooner that is corrected the better. I believe persons like the defendant should contemplate keeping to their word.[115]
Should you give inadequate notice or no notice to terminate your employment under clause 2 ... the company may elect to waive your breach of contract and hold you to the terms of this agreement for the notice period or a maximum period of six months whichever is the lesser period, in circumstances where it is reasonable to believe that you will be interested or concerned in any capacity in any business, company or firm carrying on the business of money-broking.[118]
[84] Reid QC, sitting as Deputy High Court Judge, found that there was a serious question to be tried, in terms of the plaintiff’s prospects of an injunction at trial. He found also that the balance of convenience favoured the plaintiff. There was no evidence that Rabey would be disadvantaged by not commencing new employment until the end of the garden leave: ‘There is no evidence that his earnings are dependent on [his] cutting edge being finely honed’ at the end of it.[120] The Deputy High Court Judge therefore granted the injunction. In argument, counsel for the defendant employee submitted that a garden leave provision (cl 10 being treated as such) would only be enforced if work were made available to the employee during the relevant period. Reid QC rejected this argument as not supported by the cited authorities.
[85] There are questionable leaps within his Honour’s judgment. The important factor, to my mind, is that the contract did not contain an exclusive service clause. There was no express statement limiting the employee’s rights to ‘spare-time’ work during the term of the contract. Such a limitation would have to be drawn from the implied duty of fidelity, as in Hivac. However, no argument was directed to whether the circumstances paralleled those in Hivac. It seems to have been accepted that cl 10 had the effect of an exclusive service clause once it was brought into play by a resignation without adequate notice and a refusal by the employer to accept that breach and rescind. However, cl 10 does not on its terms require exclusive ‘service’. It states that the employer will be entitled, following an inadequate notice to ‘hold you to the terms of this agreement for the notice period...’. The terms of the agreement to which the employee would be ‘held’ under cl 10 were, effectively, to carry out work as ordered by the employer. If the employer did not provide work during the relevant period, there was nothing in the contract to prevent the employee filling the idle time with work for someone else (provided it did not involve disclosure of confidential information and was not a breach in a Hivac sense). Admittedly, cl 10 referred to a ‘holding’ to the terms of the agreement only where ‘it is reasonable to believe that you will be interested or concerned in any capacity in any business ... carrying on the business of money-broking’. Thus, one can surmise that the clause was an attempt to provide a limited exclusive service requirement during an enforced garden leave during the notice period.
[86] In the event, whether it was
justifiable or not, Reid QC treated the case on the basis that cl 10 had the
effect it seems to
have been aiming for. It is on that basis that his
Honour’s comments as to ‘idleness’ are to be considered
–
will an exclusive service clause be enforced during a garden leave
period? Or is this unacceptable as condemning the employee to
the choice,
regarded as untenable in Warner Bros Pictures Inc v Nelson, of working
for the employer or remaining idle and starving? As Reid QC pointed out, in a
garden leave situation, starving will not
result from enforcing the exclusive
service clause. Therefore, a refusal to enforce by injunction would have to be
justified solely
on the ground that the injunction would condemn to idleness.
His Honour quoted from the judgment of Taylor LJ in Provident
Financial:
Whether idleness and starvation are to be considered conjunctively or disjunctively, I do not think a case such as that before us raises any such spectres. The defendant here is to have his full salary ... No starvation. Even considering idleness per se as a separate matter, it can hardly arise in this case. The defendant’s skills as an accountant ... are unlikely to atrophy in a period of three months. Nor is he likely to suffer severe withdrawal symptoms for loss of job satisfaction over that period.[121]
[88] In two further
British cases deriving from the area of finance management and securities, the
‘ancillary’ question
arose as to the relationship between an
exclusive service clause – plus garden leave and a post-employment
restraint on competition.
It was submitted in each case that where the employers
had protected themselves from competition through the activities of key
employees
through a contractually determined period of garden leave, it was not
appropriate to extend that period of protection by subsequently
enforcing the
post-employment restraint. In the first case, Credit Suisse Asset Management
Ltd v Armstrong,[125] the
Court of Appeal held that, prima facie, the presence of the garden leave clause
did not justify it in declining to give appropriate
effect to the restrictive
covenant. However, that was subject to the basic principles that the covenant
was limited to the degree
of protection of the covenantor’s interest that
was ‘adequate’. Thus in appropriate circumstances, a prior period
of
garden leave might have accorded sufficient protection to that interest, so that
the post-employment restraint went beyond what
was ‘adequate’. There
was no justification for limiting the scope of the post-employment restraints,
which either stood
or fell on the question of adequacy. Orders to enforce garden
leave clauses could be more flexible:
The court can exercise its discretion in deciding the permissible length of garden leave but, if the restrictive covenant is valid, the employer is entitled to have it enforced, subject to all the usual grounds on which an injunction may be withheld, such as delay and a finding that damages would be an adequate remedy in the circumstances. Moreover, it is to be remembered that the existence of a garden leave clause may be a factor to be taken into account in determining the validity of a restrictive covenant as at the date of the contract.
I would, however, add a caveat. Terms which operate in the restraint of trade raise questions of public policy. The opportunity for an individual to maintain and exercise his skills is a matter of general concern. I would therefore leave open the possibility that in an exceptional case where a long period of garden leave had already elapsed, perhaps substantially in excess of a year, without any curtailment by the court, the court would decline to grant any further protection based on a restrictive covenant.[126]
a narrow proposition and a broad one. The narrow proposition was that an employee appointed to a particular and unique position may not be excluded from that position in the absence of his consent or a term in the contract entitling the employer so to do. The broad proposition was that it is a guiding principle, not a universal rule, when construing a contract of employment, that the employee’s interest in doing his job, as well as being paid his salary, is now recognised; in particular in the case of skilled workers and others who benefit from practising their skills either because their remuneration depends on it or because their career prospects would be thereby advanced ... neither party appears to support the broad proposition.[130]
[93] In relation to restraints during the period of the employment, British courts have apparently discarded the objectionable category of ‘special services’ (confined to the entertainment industry), for the more logical one of ‘specified services’, accepting exclusive service clauses as legitimate provided the restraint on ‘other’ employment is confined to the specific field of business in which the employer is concerned and provided that the restraint is otherwise reasonable.[134] In assessing reasonableness, the employee’s temporary loss of the opportunity of exercising their particular skills is a matter to be weighed against the employer’s loss in those skills being exercised for a competitor. Effectively, the British courts have introduced into the consideration of exclusive service clauses the types of consideration previously developed in relation to post-employment restraints. Moreover, they have recognised the relationship between exclusive service clauses and post-employment restraints where the practice of garden leave has the effect of a post-employment restraint. They have also begun to treat the contracts as a whole when assessing restraints, rather than dealing seriatim with the various clauses. Thus while an exclusive service clause and a post-employment restraint clause may each be reasonable on their wording, to allow operation to both could go beyond the protection of the employer which would be adequate in the particular circumstances.
[94] The cases surveyed make it abundantly clear that
covenants restricting an employee in relation to ‘outside the
contract’
employment, whether concurrent or subsequent, are by no means
obsolete or generally inoperative. They are becoming more frequently
included in
employment contracts, and their operation and applicability are the source of
lengthy judicial analysis. They will be
enforced provided the employer has a
genuine interest to protect and provided that the covenant goes no further than
is necessary
to protect that interest. The situations in which the employer
has a genuine interest in limiting competition by the employee have
increased rather than decreased, with the spread of agency work and
financial
services, and new types or aspects of interest have been recognised. There is no
indication that the developments in these
areas will diminish; rather, their
scope is likely to continue to increase exponentially. A detailed understanding
of restraint of
trade principles is more than ever essential to employment
lawyers.
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