Enforcing employment contracts - Case Round-Up: September 2014

In this month's round-up, Mark Shulman consultant solicitor with Keystone Law looks at recent cases on enforcing notice periods and interpreting restrictive covenants.

Mark Shulman, Consultant Solicitor at Keystone Law

Enforcement of notice period**
Section 236 of the Trade Union and Labour Relations (Consolidation) Act 1992 ("TULR(C)A" ) provides that:

"No court shall, whether by way of-

(a) an order for specific performance or specific implement of a contract of employment, or
(b) an injunction or interdict restraining a breach or threatened breach of such a contract,

compel an employee to do any work or attend at any place for the doing of any work".

In two recent High Court cases, the Court considered whether to grant an injunction to enforce an employee's notice period. Both cases involved determining whether the employee would either have to go on working for their former employers or "starve or be idle".

In [Elsevier Ltd v Munro]() [2014] EWHC 2648 (QB), the court granted an injunction to prevent the employee working for a competitor during his notice period.

Mr Munro was the CFO with Elsevier Ltd ("Elsevier"), with access to highly confidential information. His contract of employment specified that 12 months' notice had to be given by either side to terminate the contract.

A competitor, Cengage Learning Inc ("Cengage") offered Mr Munro a more attractive role as its CFO. In April 2014, Mr Munro gave the Elsevier notice of resignation, stating that:-

"In short, the hopes and expectations I have had…have come to nothing and I have therefore reached the decision to leave. Accordingly, insofar as this is required, please accept this as the required written notice of my resignation."

Mr Munro proposed to take up Cengage's offer after a period of transitional arrangements with Elsevier, which he suggested should end on 31 May 2014. However, Elsevier objected to that proposal, relying on the requirement in Mr Munro's contract of employment that he give them 12 months' notice. After further exchanges, Mr Munro ceased working for Elsevier at the end of May 2014, having claimed that "In the circumstances, both in respect of the matters leading to my resignation and our subsequent dealings…, I find myself now in an untenable position in respect of my continued employment with Elsevier".

The company sought an injunction to prevent Mr Munro from commencing employment with or providing services to Cengage or any other competitor and from breaching his duties of good faith, fidelity, trust and confidence for a period of 12 months.

The two broad issues that arose for decision were:

(1) Was Mr Munro still bound by his contract of employment, or was he constructively dismissed?

(2) If Mr Munro was still bound by his contract, should its terms be enforced by any, and if so what form of, injunction?

Was there a constructive dismissal?
The Court found that the explanation for his departure from Elsevier was that Mr Munro had unexpectedly received a job offer from Cengage which he found very attractive and for that reason wanted to move. There was no constructive dismissal. Although Mr Munro's pleaded case set out extensive allegations of conduct by the company relating to the period between August 2012 and February 2014 and said to have involved a repudiatory breach of contract arising from his change of duties and a significant internal reorganisation, at no point had Mr Munro treated that alleged conduct as entitling him to leave. He had continued in his post as CFO, albeit unhappily and the Court held that by doing so he had affirmed the contract and Mr Munro's complaints had not emerged until after he had decided to accept the job offer from Cengage.

Further, in his resignation letter Mr Munro had given "the required" notice to terminate his employment. So, far from accepting a repudiation, he had thereby affirmed the contract and there was no constructive dismissal.

*Should an injunction be granted?
*Mr Munro was in breach of the obligation under his contract of employment to devote his time and attention to the Claimant's affairs whilst employed by the company. The Court pointed out that it was trite law that specific performance would not be granted of any positive obligation to work.

However, the company was seeking an injunction to prevent the existing breaches of the express negative contractual obligations in Mr Munro's contract prohibiting outside interests whilst employed by the company and the implied term that he would not assist or take up employment with a competitor during the currency of his employment with the company.

The key issue was whether the Court should exercise its discretion to enforce those contractual prohibitions by injunction, rather than by an award of damages.

It was well settled that the Court would not exercise its discretion to enforce a contractual prohibition on working for another employer during a notice period if this would be tantamount to granting specific performance of the contract of service. However, that would be so if the employee's only choice was to work for the current employer or face starvation. The cases which established that proposition were cases where the employer was offering no pay to the employee whilst away from the employer's business. But that was not the position in the present case as Mr Munro would be paid, whether or not he continued to work for the company.

Mr Munro also submitted that it was not enough for him simply to be paid; he also had a legitimate concern to actually carry out work. If he did not work and the injunction was granted, he could not work for anybody else. His submission was that as he did not wish to work for the company, he could not be forced to do so; hence, the practical effect of the grant of the injunction would be to compel idleness for the remainder of the 12-month notice period.

However, the Court viewed Mr Munro's contention as "ill-founded". Although public policy prevented "compulsory sterilisation" and "potential atrophy of skills", the company had asked Mr Munro to continue working until January 2015. Mr Munro had himself chosen to stop working for the company. It therefore did not lie in his mouth to complain of "idleness" which he had chosen in breach of his contract of employment. He was accordingly absent by choice and without leave.

An employer seeking to enforce an obligation not to work for another during employment will need to show that an award of damages would not be an adequate remedy. An employer would probably not be granted an injunction to prevent an employee working for another during his notice period if the other business had nothing whatever to do with that of the claimant employer. However, an employee may in an appropriate case be restrained from fostering the profitability of a rival during his employment.

It is not necessary to demonstrate that an employee would misuse confidential information of his employer if permitted to work for the rival (Evening Standard Co. Limited v Henderson [1987] ICR 588 (CA). However, if it could be shown that the employee has obtained and may misuse confidential information, that can be a separate ground supporting the grant of an injunction (Provident Financial Group v Hayward [1989] ICR 16).

Was Cengage a competitor?
Would Mr Munro be fostering the profitably of a rival? There was persuasive evidence that Cengage was one of the Claimant's primary competitors. It was impossible and unnecessary to be precise about the manner in which Mr Munro would advance the business of Cengage to the detriment of Elsevier. It was enough if there was a likelihood that during his period of his notice, Mr Munro would "foster" Cengage's business in areas which competed with the company and thereby cause substantial damage. The Court could not see how damages could be a sufficient remedy for injury of that nature. Also, the assessment of damages would present grave problems of proof and quantification. These conclusions were themselves enough to justify the grant of an injunction to enforce Mr Munro's express and implied obligations not to compete.

*Might confidential information be used?
*But there was an additional justification for the injunction. Although the Court did not believe that Mr Munro was an individual who would deliberately misuse information that he retained from documents, it was all too easy for someone who has possession of information of this kind to make use of it without even appreciating they are doing so. He would retain in his memory confidential information learned by him whilst working for Elsevier which was relevant to and of value to Cengage and therefore a risk that such information would, during the notice period, be misused by Cengage. It was unreal to suggest that an individual could make a clear division in their mind between what was confidential and what was not. The risk was not merely short-term as the information in question included long-term strategic planning information.

Damages would therefore not be an adequate remedy; the misuse of confidential information could be insidious and hard to prove and the difficulties of establishing causation would be considerable.

Whilst the claim for an injunction to restrain a breach of the duty of good faith was unsound because the wording would be too vague and uncertain, it was appropriate to grant an injunction until the end of Mr Munro's contractual notice period to enforce the prohibition on him working for Cengage and to prevent the substantial risk of misuse of confidential information

Another recent case on the same topic is [Sunrise Brokers LLP v Rodgers]() [2014] EWHC 2633 (QB). The case raised the interesting issue of whether, when an employee leaves his employment without giving proper notice stating that he will never return, the employer can keep the contract of employment alive, so as to be able to enforce the employee's obligation not to work for anyone else, while simultaneously refusing to pay the employee any wages on the basis that the employee is no longer ready and willing to work for the employer.

Mr Rodgers originally joined Sunrise as a derivatives broker but subsequently signed a new contract in October 2011 when its Precious Metals Desk was established. That contract was terminable by Sunrise on giving 3 months' notice, but was not terminable by Mr Rodgers until the expiration of an initial period of 3 years, and thereafter only by giving a further 12 months' notice.

Mr Rodgers continued to work on Sunrise's Precious Metals Desk, although he became increasingly disenchanted with his life at Sunrise. He was subsequently offered a job with EOX Holdings LLC ("EOX"), which like Sunrise, was an interdealer broker and one of Sunrise's principal competitors.

It was common ground that EOX's intention in recruiting Mr Rodgers was so that he could help to set up a Precious Metals Desk for EOX in New York, to compete for business with Sunrise's Precious Metals Desk. His contacts and expertise in the world of precious metals derivative contracts, built up while working for Sunrise and at Sunrise's expense, would be of great value to EOX in launching its competing business.

On 27 March 2014 Mr Rodgers took a screenshot from his Sunrise computer, showing the figures for the last quarter's business on the Sunrise Precious Metals Desk and then went to see one of the Sunrise directors and stated that he "was leaving Sunrise and wanted to leave now". Mr Rodgers never returned to work.

Following exchanges of correspondence between the parties respective solicitors, the company's solicitors wrote to Mr Rodgers' solicitors, offering to accept a notice period for Mr Roger expiring after only 6 months (rather than full notice) from the date of Mr Rodgers' written resignation (given on 16 April 2014). By this time, it had become apparent to Mr Rodgers that he had not been paid salary or bonus by Sunrise for April and Mr Rodgers solicitors contended that there had been a repudiatory breach of contract by failing to pay that salary and that his employment had thereby  been terminated with immediate effect.

Sunrise sought a declaration that Mr Rodgers remained in the employment of Sunrise and an order restraining Mr Rodgers from working elsewhere, during his notice period and an injunction to enforce the subsequent period covered by the post-termination restrictive covenants in his contract of employment.

*Had the employment terminated?
*Sunrise's case was that Mr Rodgers remains employed by Sunrise, and would so remain until the reduced period of notice to which Sunrise has voluntarily agreed. During that period, Sunrise wished Mr Rodgers to work as normal  (they said in order to facilitate a proper handover of clients) and confirmed that he would be paid in accordance with his contract (but if he did not come into work, Sunrise has no contractual or other obligation to pay him). Thereafter, the post termination restrictions should apply for their full periods.

Mr Roger's case was that Sunrise could not purport to employ him whilst at the same time as refusing to pay him. Sunrise's failure to pay his April salary and bonus therefore amounted either (i) to an acceptance of his repudiatory breach in leaving his employment without notice in March, or (ii) as a repudiatory breach by Sunrise, which Mr Rodgers had accepted. On either basis, his employment had ended.

Mr Rodgers submitted that even if those contentions were wrong, the Court should not enforce the contract with Sunrise, as the company would not pay him if he did not work for them and the effect therefore would be that he must either "work or starve".

As for his restrictive covenants, the terms of the contract demonstrated that the maximum protection that Sunrise required was a period of 6 months from the last client contact. Since the last client contact was on 27 March 2014, the restrictive covenants should not be enforced against him beyond 26 September 2014.

Should the contract be kept alive?
Sunrise relied on the recent decision of the Supreme Court in [Societe Generale, London Branch v Geys]() [2013] 1 AC 523, where Lord Wilson had accepted:

".. The general rule is that a repudiated contract is not terminated unless and until the repudiation is accepted by the innocent party ... contracts of employment cannot provide a general exemption to that rule because it would be manifestly unjust to allow a wrongdoer to determine a contract by repudiatory breach if the innocent party wished to affirm the contract for good reason."(emphasis added)

The Court's analysis was that in the light of the decision in Geys, when Mr Rodgers announced that he was leaving and not coming back, Sunrise had did have good reasons at that time to affirm the contract and to keep it alive in that;

* until Sunrise had been informed that Mr Rodgers had already accepted employment with EOX , Sunrise could legitimately have hoped (and did in fact hope) to persuade Mr Rodgers to return; * the desire to keep Mr Rodgers for as long as possible from working for EOX was "an entirely legitimate and sensible commercial reason".

*Had the right of affirmation been lost?
*Had Sunrise lost its right to affirm the contract by its decision to cease paying Mr Rodgers while he continued to refuse to come to work?  No, said the Court. The case authorities showed that work (or readiness and willingness to work) and wages were, in general, mutual obligations. Therefore, the employee must be ready and willing to do the work in exchange for the wages, and the employer must be ready and willing to pay the wages in return for the work. So, Sunrise's decision to cease paying Mr Rodgers did not amount to an acceptance of his repudiatory breach. Mr Rodgers' entitlement to payment was dependent upon his readiness and willingness to work. It followed that Mr Rodgers still remained employed by Sunrise, and (and unless something occurs to change the position in the meantime) would so remain until the reduced period of notice to which Sunrise had voluntarily agreed expires on 16 October 2014.

In the light of section 236 of TULR(C)A (above), there could not be an injunction granted by the Court if the effect would be to compel Mr Rodgers to work for Sunrise. Whilst the Court observed that "Mr Rodgers' behaviour has been entirely selfish, and has shown scant regard for his contractual obligations", "…it is not the function of this Court to punish what it may regard as shabby conduct .." (see Nichols Advance Vehicle Systems Inc v De Angelis (21 December 1979, unreported)). Therefore, that behaviour should not influence the Court's decision on what was an appropriate remedy.

With regard to the period to the end of Mr Rodgers' notice, the Court accepted that what made a broker attractive to his clients were his sociability and his knowledge of the market. For so long as Mr Rogers was being prevented from working as a broker, he could not maintain either. In the exercise of its discretion, the Court was therefore unwilling to enforce the contract so as to prevent Mr Rodgers from doing any work of any kind during his notice period without Sunrise's prior consent.

However, an injunction requiring Mr Rodgers to obey the terms of his contract until October 2014 – at least to the extent of not working for EOX or for any similar competitor firm to Sunrise and not contacting his former clients from Sunrise - was an appropriate order.

It was not the case that Mr Rodgers "would either have to go on working for his former employers or starve or be idle", especially as he had himself been happy to confirm that he would not start work elsewhere until September 2014. The Court considered that the extra month to October 2014 could hardly be said to be materially compulsive on him to return to his former employer; nor was it oppressive.

As Mr Rodgers was not on "garden leave" the Court would not order Sunrise to pay Mr Rodgers. He had absented himself from work, but should he (contrary to his settled and stated intention) choose to return to work out his notice, Sunrise for its part would need to keep its promise to pay him.

The Court declared that Mr Rodgers remained employed by Sunrise, and (and unless something occurred to change the position in the meantime) would so remain until the reduced period of notice to which Sunrise has voluntarily agreed (i.e. until 16 October 2014).

As to the period following expiry of notice, it was common ground between the parties that the post termination restrictions in Mr Rodgers' contract were reasonable and were not unenforceable as being in restraint of trade. However, that did not automatically mean that the Court would enforce them by injunction at the time of termination.

The terms of Mr Rodgers' contract were such that the normal period of notice would have been 12 months (of which there could normally be 6 months garden leave), followed the period of post termination restrictions. The contract provided that his post termination restrictions were to be reduced by any period that Mr Rodgers spent on garden leave. It was accepted that maximum period of restraint that Sunrise reasonably required for the protection of its legitimate interests was 6 months from the last client contact.

Bearing this in mind, the Court was therefore willing to make an order which in effect provided an overall period of 10 months restraint. This was based on the fact that there would normally be around a 4 month period for a structured handover during garden leave, followed by a period of 6 months necessary protection under the post termination restrictions. Since Mr Rodgers' last client contact was on 27 March 2014, the Court modified the specified post-termination restrictions to limit them for the period from expiry of the notice period on 16 October 2014 only until 26 January 2015. Having regard to the 1st January 2015 start date agreed by Mr Rodgers with EOX, it did not seem to the Court that such an order would be oppressive.

**How should a Court approach the interpretation of a restrictive covenant when faced with a contractual provision that is ambiguous in its meaning?

In [Prophet PLC v Huggett]() [2014] EWCA Civ 1013, the Court of Appeal confirmed that where there is one interpretation leading to an apparent absurdity and the other to a commercially sensible solution, the Court is likely to favour of the latter. However, such an approach can only be adopted in a case in where the provision is truly ambiguous and has clear alternatives as to the sense that the parties intended to achieve. Which of these situations arose in Prophet?

*The Claimant worked for Prophet which designed two software products for use in the fresh produce industry (Pr2 and Pr3), comprising a suite of integrated software applications covering many of the functions of businesses supplying fresh products, such as accounting, purchases and sales, warehousing, packing and transport.

The Claimant was recruited as the UK Sales Manager and he signed the following restrictive covenant ("clause 19"):

'The Employee shall not during the continuance of this Agreement, or for a period of twelve months from the determination thereof (for whatever reason or in whatsoever manner), without the consent in writing of the Board of Directors of the Company, …carry on or be engaged, concerned or interested in any business which is similar to, or competes with, any business of the Company in which the Employee shall have worked whilst employed hereunder…. Provided that this restriction shall only operate to prevent the Employee from being so engaged, employed, concerned or interested in any area and in connection with any products in, or on, which he/she was involved whilst employed hereunder.'

The Claimant left Prophet and joined another company, K3, who also designed software for use in various sectors including the fresh produce sector. Prophet sought an injunction which prevented the Claimant from joining the new company until 1 year had elapsed, in compliance with the restrictive covenant. **

*What did the restriction cover?
*At the original trial, Prophet accepted that clause 19 covenant, on a literal interpretation, gave them no protection. That was because on a literal reading of the words that followed the first sentence, the only such products with which Mr Huggett was so involved were Pr2 and Pr3, which neither K3 nor any company other than Prophet provided.

However, Prophet's submission to the judge was that as the literal reading of the proviso rendered clause 19 pointless, that indicated that such an interpretation could not be its true meaning. Prophet's submission was that "any products" in the proviso would not prevent the Claimant working for K3 in connection with other products , but would bar him from working for K3 in connection with any business software designed for the fresh produce industry.

The judge agreed that the literal interpretation in the second sentence did render clause 19 pointless. He concluded that it was clear that 'something had gone wrong' in the drafting and that the proviso did not give effect to what the parties intended to achieve by it. In the end he held that what was required by way of a curing of the mistake in the drafting of the proviso was the addition to the end of the clause of the words 'or similar thereto'.

Having so interpreted clause 19, the judge moved on to consider whether the covenant was enforceable and held that it was and that it was appropriate to enforce it by the grant of an injunction.

*Was the judge's approach right?
*Mr Huggett's case was that the judge was wrong in his approach to the interpretation of clause 19. Whilst there may in certain cases be a justification for applying a 'blue pencil' to a covenant,  that approach would only be appropriate if it was not also necessary to add to or modify what then remained. The judge had wrongly written additional words into the covenant so as to give it a wider effect than its apparent ordinary meaning.

Prophet maintained that the purpose of clause 19 was clear: it was directed at protecting Prophet's legitimate interests by restricting Mr Huggett's post-employment competitive activities and any reasonable person would understand 'any products' in the second sentence as 'business process computer software designed for the fresh produce industry'.

*Correct approach
*The Court of Appeal decided that the natural meaning of the words 'any products' in their context in the clause 19 proviso was those products with which Mr Huggett was involved whilst employed at Prophet - namely Pr2 and Pr3. Accordingly, the 'literal' interpretation of the proviso resulted in the covenant having no relevant teeth and as imposing no material restraint upon Mr Huggett.

When faced with an ambiguous provision, if there is a clear choice between an interpretation that gives rise to an apparent absurdity and one that achieves a commercially common sense result, a Court would ordinarily favour the latter interpretation. However, such an approach could only be adopted in a case in which the language of the provision is truly ambiguous and admits of clear alternatives as to the sense the parties intended to achieve. The present case was "…manifestly not such a case". The proviso was "unambiguously clear" and the words 'any products' referred only to Pr2 and Pr3.
The proviso to clause 19 was a carefully drawn piece of legal prose in which the draftsman had chosen his words with deliberate and specific care. It was neither for the judge nor the Court of Appeal to re-make the parties' clause 19 bargain. "Prophet made its clause 19 bed and it must now lie upon it".

As the meaning of the proviso was clear, there was no basis for interpreting it differently and it followed that Mr Huggett's proposed activities with K3, which did not provide either Pr2 or Pr3, would involve no breach of clause 19 and the appeal was therefore allowed and the original injunction discharged.

Mark Shulman* is a Consultant Solicitor with Keystone Law and an accredited workplace and employment mediator. His blog on new employment legislation can be found here.

Published: 07/09/2014 21:20

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