LTE Scientific Ltd. v Thomas & Anor

LORD JUSTICE LONGMORE: I will ask Lord Justice Neuberger to give the first judgment.

LORD JUSTICE NEUBERGER: On 6th December 2001 Mr David Thomas sold the assets and goodwill of Autoclave Control and Engineering Ltd, now called BDWS Ltd ("ACE") to LTE Scientific Ltd ("LTE") for £600,000 under a sale agreement. On the same day he entered into a service agreement, whereby he was to act as a technical director of LTE. The service agreement contained (in clause 17) restrictive covenants on Mr Thomas' activities, including (in clause 17.2.1) a restriction on his right to work for competitors of LTE until 12 months after he left that company's employment.

Mr Thomas resigned from LTE on 31st March 2004. According to LTE's particulars of claim in this action, Mr Thomas was in breach of his obligation to LTE both before and after 31st March 2004. In particular, it is alleged that he carried out services after he left for Astell Scientific Ltd and ESTS (GB) Ltd, competitors of LTE, in breach of clause 17.2.1.

On 25th September 2004 proceedings were issued by LTE against Mr Thomas seeking injunctive relief and damages, and in particular an injunction to restrain breach of clause 17.2.1. The next day, on the basis of a detailed affidavit from Mr Colin Perry, LTE obtained from McCombe J without notice an interlocutory injunction restraining Mr Thomas from infringing clause 7..2.1, and in particular for working for the two competitors of LTE. McCombe J also made orders for disclosure against Mr Thomas and his wife.

Subsequently Mr Thomas put in his evidence on 20th September, including evidence touching on the validity of clause 17.2.1. The injunction was continued by Simon J on 23rd September on the basis that, in the normal way, it continued until trial or further order. On the same day Simon J ordered that there be determined as a preliminary issue:

LTE, having already served a long affidavit with exhibits from Mr Perry (largely concerned with the breach of the express and implied obligations of Mr Thomas) served a second affidavit from Mr Perry on 2nd October concentrating, but by no means exclusively, on the preliminary issue. He described the circumstances in which the service agreement was drafted and other evidence to show that the sale agreement and service agreement "were closely interrelated", and also explaining the purpose of clause 17.2.1.

The reason that such factual material is said to be relevant to the preliminary issue according to LTE is essentially twofold. First, to show the sale agreement and the service agreement were closely related, even perhaps to the extent of being viewed as part and parcel of the same transaction. This is because the court is less critical of restrictive covenants which are part of agreements to sell a business than those which are part of a service contract. Secondly, to show the extent of Mr Thomas' technical knowledge and his value to LTE and the nature of competition in the relevant industry, which is the design, manufacture, service and repair of autoclaves - which are used to sterilise medical and laboratory equipment. This is said to be relevant to the question of whether the restrictive covenant is necessary to protect LTE's business.

Mr Perry's second affidavit also contained a significant amount of material which has no relevance to the preliminary issue as I see it, but was no doubt to deal with Mr Thomas' affidavit of 20th September.

Having obtained an extension of time, Mr Thomas served his evidence on 21st October 2004. On 3rd November, LTE drafted an application for a case management conference which was not issued until 9th November. The purpose of the case management conference was in effect to vary the direction given by Simon J. LTE sought, first, permission to file a third affidavit of fact from Mr Perry in reply to Mr Thomas' affidavit of 21st October; secondly, permission to serve expert evidence; thirdly, although not sought in the application, an order that witnesses be cross-examined; and fourthly, an extension of the hearing from half a day to two days.

By that time the trial date had been allocated as floating for 2nd or 3rd December (i.e. Thursday or Friday of this week, today being Monday). On 26th November His Honour Judge Shaun Spencer QC, sitting as a deputy judge the Queen's Bench Division, refused any of this relief, save that he extended the estimated length of the hearing to one day.

In his judgment the judge explained that the relevance of the extrinsic evidence and therefore of cross-examination was not for him, as the judge concerned with case management or with varying directions, but was for the judge hearing the preliminary issue, and he saw no reason for departing from that thinking which he said was behind the order of Simon J. He refused permission to call expert evidence because he considered that the need for it, if there was a need, could have been foreseen by LTE by 23rd September when Simon J made his order and that if he, Judge Spencer, permitted expert evidence, there would be a severe risk of the loss of the trial date.

Judge Spencer referred to Mr Perry's third affidavit as being wanted by LTE "to repair an oversight" and that LTE had "missed the bus". The judge then permitted further argument because counsel for LTE felt that he may not have been given a fair opportunity to deal with some of the arguments. Having heard further argument the judge gave a short further judgment confirming his view, and recording the fact that he had not even had sight of LTE's proposed expert report the admission of which would be very likely to lead to an adjournment.

LTE urgently applied in writing for permission to appeal. I ordered that the application be heard as soon as possible by two Lords Justices, with the appeal to follow if permission was granted.

We have now heard from Mr Moxon-Browne-Browne QC on behalf of LTE and from Miss Padfield, who has stepped into the breach in Mr Bard's absence, on behalf of Mr Thomas.

In principle, as Miss Padfield says, an appellate court should be slow to interfere with a case management decision. That is especially so where it is a case management decision of the judge assigned to the case, but that of course is not the position here. Nevertheless, a case management decision frequently involves assessing the weight to be given to various factors and coming to a conclusion as to where the net balance of advantage or fairness lies. That is precious close to the exercise of a discretion. So the same self-denial applies in an appellate court. Nonetheless, where the judge has reached a decision which is so unreasonable that an appellate court considers no judge could have reached it or his reasoning can be shown to be defective, it is the duty of an appellate court to interfere.

I turn first to the question of expert evidence. As the judge rightly recorded, even though he was being invited to admit expert evidence, he did not have the report in front of him, even in draft. We have had the benefit of the proposed expert's report. It from a Mr Andrew Roberts, a partner in Grant Thornton UK LLP. Having read his proposed evidence, I am firmly of the view that the judge's refusal to admit it was right and permission to appeal should not be given in that connection. In the first place, it seems to me that the report is inherently inadmissible, on the grounds that it is simply unhelpful. In saying that I am not calling into question the expertise from Mr Roberts. Far from it. It is clear that he has considerable experience in the field of the sale and purchase of businesses and has written a book on the subject, "The Complete Guide to Selling Your Business". His report is short. The main part of the report largely consists of quotations from his book. In so far as they are helpful, they can no doubt be cited to the judge.

So far as Mr Roberts's application of those general comments to the present case are concerned, he merely says that because it is usual to have a particular type of restrictive covenant in the sale of a business, it seems sensible to have one in this case. I do not think that is the sort of expert evidence which is going to be helpful to the judge. He also gives evidence about the fact that if the restrictive covenant had not been included in the service agreement, then the sale of the business may not have gone ahead, or it would have gone ahead at a lower price. That is not something he can say, in the sense that it is not an expert view. It is purely based, as he himself says, on what Mr Perry of LTE told him. If this evidence is to be relied on to support the proposition that the two agreements should be read together, it is inadmissible and unhelpful.

If, contrary to my view, the evidence of Mr Roberts is relevant and helpful, then for the reasons the judge gave I consider it would be inappropriate to admit it. I appreciate that, by shutting out evidence which on this hypothesis I am assuming is relevant and helpful, could be said to be prejudicial to the party who is seeking to put it in, LTE. But it appears to me that the loss of the trial date in the present case would be inevitable if this evidence were admitted, because it would have to be considered and answered and the answer would then have to be considered by LTE.

The loss of the trial date is of itself something to be avoided if at all possible, but in the present case the loss of the trial date would be particularly unfair on Mr Thomas because, if he succeeds on the preliminary issue, then there must be a good chance that the interlocutory injunction which currently runs against him will be discharged. Given that the interlocutory injunction in that connection will run out in March because it is a only a one-year restrictive covenant, it seems to me that it would be thoroughly unfair to admit expert evidence if it resulted in an adjournment of the hearing date, particularly as I agree with the judge that, if there was a need for expert evidence, it would have been as clear to LTE on 23rd September when the directions were given, as it would have been on the date when they appeared before judge.

In those circumstances, I would not give permission to appeal on that issue. Nor would I give permission to appeal on the question of cross-examination. Initially it seemed to me that it was hopeless to suggest that the judge should have ordered cross-examination on the basis that it was a matter for the trial judge. But having heard from Mr Moxon-Browne, I can see some force in the point that, if cross-examination had been ordered, there would be that much better prospect of the parties knowing where they were and the court knowing rather more clearly how long the hearing of the preliminary issue was likely to take. However, for my part I am persuaded by Miss Padfield that to order cross-examination, particularly at this stage or when the matter was before Judge Spencer, would be inappropriate. To order cross-examination without qualification would simply lead to the possibility of substantial arguments before the judge as to whether it was open to him, because of the terms of the order, to limit topics, and (if as I think it would be) there would then be an argument as to which topics should be the subject of cross-examination. That seems to me to be a very unhelpful state of affairs. One might just as well have the whole question of cross-examination left to the trial judge. Alternatively, this court or Judge Spencer would have had to identify the issues on which cross-examination could take place. It seems to me that that would be undesirable, as Miss Padfield says, because we are not as well seised of the detailed issues as the trial judge will be. It will be open to him to hear the parties on the merits on a preliminary basis in order to decide what aspects of cross-examination (if any) would be helpful.

Having said that, what I for my part would be prepared to do is to go this far. First, it looks to me -- and to be fair Miss Padfield accepted this, as I understand it -- very likely that there will be cross-examination. Secondly, I am very sceptical about the notion that the judge is going to be helped by any evidence, let alone cross-examination, as to the negotiations between the parties. Even after Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, it is well established that the intention of the parties as to what a document should mean is not admissible on the issue of what it means.

Thirdly, it does seem to me that there is a strong case (at least at the moment) made out by Mr Moxon-Browne that evidence would be admissible, and cross-examination therefore potentially relevant, as to the nature of the market in which ACE (and possibly LTE) operated in December 2001, and possibly the nature of ACE's and LTE's businesses at the date of the sale agreement, as well as Mr Thomas' expertise and importance to LTE and ACE at that date. I would like to emphasise (especially in the absence of Mr Bard who appeared for Mr Thomas below) that, consistently with what I said earlier, it is not my intention either to indicate to the judge that those are issues or, indeed, the only issues, on which cross-examination should be permitted. I am simply saying that, on the basis of what I have heard today from the two counsel before us, that they seem to me to be potentially relevant issues of fact.

Finally, there is the question of Mr Perry's third affidavit. The judge seems to have excluded the evidence on the basis that LTE should have appreciated that that evidence would be needed, or at least the evidence in paragraph 11 and onwards in that affidavit would be required for the purpose of the preliminary issue and they had (as the judge put it) missed the bus.

I agree with Mr Moxon-Browne that the mere fact that a party should have appreciated that evidence would be needed is not normally enough of a reason on its own for shutting out that evidence at a late stage. But if, as in the case of expert evidence, it can be established that real prejudice would be caused to the other party by admitting the evidence, then the fact that the party seeking to put in the evidence should have foreseen the need for such evidence does become a material, possibly a highly material, matter. In this case the evidence of Mr Perry which is sought to be put in is really concerned with the state of the market in which ACE and LTE operated and with Mr Thomas' expertise. These are all matters which are already very much in issue between the parties. They were matters on which Mr Thomas plainly is knowledgeable, and in relation to his own experience uniquely knowledgeable. They are matters which, on the basis that cross-examination is likely, are going to be touched on in cross-examination and will possibly play an important part in cross-examination. They include matters which, as my Lord pointed out in argument, it would be difficult to exclude Mr Perry from raising, if he is cross-examined, and I would have thought would be difficult to object to counsel for LTE putting to Mr Thomas if he is cross-examined.

It appears to me that there will be no real prejudice to Mr Thomas if this evidence is admitted, provided he is given the opportunity to reply to it. In my judgment, the judge did go wrong in not directing himself on prejudice. To be fair, most of the argument and most of the judgment seems to have been devoted to the expert evidence. It may be that, as sometimes happens, as a result of the bad part of the application (namely expert evidence) being raised, the judge dealt with the two parts of the application together.

Whatever the cause, I do not think he directed himself on the question of prejudice, and if he had done so I think he would have come to the conclusion that in the end, as Mr Moxon-Browne put it -- and Miss Padfield I do not think was not disposed to object it to -- this was something of a storm in a teacup issue. In my view, paragraph 11 ff. of Mr Perry's affidavit should be admitted and Mr Thomas should be permitted to answer them by 4.00 pm on Wednesday. That does not necessarily give LTE much time to deal with his answer, but to that extent I do think the judge's point that they have themselves to blame for not thinking of this point earlier can fairly be invoked against them.

Given that Mr Thomas should have until 4.00 pm on Wednesday, there would be much to be said for the hearing of the preliminary starting on Friday rather than Thursday. However, as I have indicated, it is essential that this preliminary issue is disposed of without delay. For my part, if I could convey a message to the Clerk of the Lists it would be to the effect that this matter may well last more than a day and if it is a choice between Thursday and Friday or Friday and Monday, then Friday and Monday would be preferred. But if it is a choice between Thursday and Friday or adjourning the application into next week or beyond, then it should be Thursday and Friday.

Miss Padfield was anxious to emphasise that Mr Thomas was understandably concerned about the delaying effect of allowing Mr Perry's affidavit, and for my part I quite accept that that is a legitimate point of concern on his part. But with the indications I have given, I believe that that concern can be accommodated.

I would therefore refuse permission to appeal on all issues, save in relation to Mr Perry's third affidavit, which I would permit to be adduced, albeit that paragraphs 3 to 10 should be ignored for the purpose of the preliminary issue. Paragraphs 11 onwards may be relevant, and I use the words "may be" because the first part in paragraph 11 onwards does seem to me strongly arguably to go into an area of intention which is not admissible I would have thought.

To that extent, and to that extent only, I would allow this application and the appeal.

LORD JUSTICE LONGMORE: I agree. Miss Padfield submitted that it would not be right for this court to question what was essentially a case management order of the deputy judge. To the extent that we dismiss the applications in relation to expert evidence or orders for cross-examination, I of course agree.

The further evidence of Mr Perry, to the extent that we have allowed it, stands rather differently. It is not usually convenient to declare that a witness who stands ready to give his evidence and be cross-examined should be restricted in what he wishes to say while giving that evidence. To the extent that Mr Perry's new evidence deals merely with what was in his mind during negotiations, the judge will of course have no difficulty in deciding that it is irrelevant and inadmissible. But to the extent that the further evidence is admissible at all, it would not be sensible to declare now that it should not be given unless the respondent can show real prejudice. No such real prejudice is here shown or was indeed relied on by the deputy judge.

To this limited extent, therefore, the application in relation to that matter for permission to appeal will be granted and the appeal allowed.

I also agree that it is essential that the preliminary issue come on for hearing this week. More than a day it seems may be necessary, and if possible preparations should be made for two days to be available if required.