EE & Brian Smith (1928) Ltd v Hodson & Ors

This case concerns an interim injunction granted in highly unsatisfactory circumstances by Calvert-Smith J to enforce covenants in employment contracts. At the end of the hearing on 15 November 2007 we granted permission to appeal against the judge’s order, allowed the substantive appeal and set aside the injunction, accepting a much more limited undertaking offered on behalf of the first defendant alone. These are the court’s reasons for that decision.

The claimant company, EE & Brian Smith (1928) Ltd, is in the business of sourcing and supplying fruit, fruit juice and vegetable products. It purchases from international suppliers and sells on to producers of soft drinks and similar products in the United Kingdom.

The second defendant, Mr Morgan, was formerly the sole shareholder and director of the claimant. He sold his interest in 2001 but remained with the company until late 2006. His employment terminated on 19 December 2006. Subsequently, on 10 May 2007, he set up the third defendant, The Juice Machine Limited, a company of which he is the sole shareholder and director.

The first defendant, Ms Hodson, worked for the claimant for many years and became a director in 2005. On 25 May 2007 she gave notice of her intention to resign from the company, purportedly to help in her husband’s business and to spend more time with her daughter. She declined an offer by the claimant to retain her as an employee on full salary until 30 June 2008 without requiring her to do any work. Her resignation took effect from 22 June. On 20 August 2007 she began to work for The Juice Machine Limited.

On 30 July 2007 the claimant received a letter from one of its major suppliers, Beckers Bester GmbH (“Beckers”), informing it that Beckers had decided to make alternative arrangements in the United Kingdom for the marketing and supply of its products. On 3 August it learned from a customer that Beckers intended to channel new contracts for the supply of its products through The Juice Machine Limited. Then, on 1 September, it was informed by three customers that they had had meetings with Beckers at which Mr Morgan and Ms Hodson were in attendance, and they had been advised that Mr Morgan and Ms Hodson were looking after Beckers’ interests. This was the first that the claimant knew of Ms Hodson working for The Juice Machine Limited.

After an exchange of solicitors’ letters, in which it was confirmed that Ms Hodson was working for The Juice Machine Limited, the claimant issued an application for an interim injunction on 18 September against all three defendants. We will deal later with the basis of that application and the order sought.

The application was heard by Calvert-Smith J on 26 September. At the end of the hearing he reserved judgment, making no order in the meantime.

On 12 October the claimant’s solicitors wrote to express concern about the delay in giving judgment. The letter suggested that if it was not yet possible to give a full judgment, the judge might hand down his order so that it could take effect, with judgment to be given at a later date. The judge adopted that suggestion. In a letter dated 19 October, addressed to the claimant’s solicitors but copied to the defendants’ solicitors and received by them on 23 October, he stated:

As a matter of principle, the injunction must have taken effect immediately and have been binding on the defendants as soon as they had notice of it. But a formal order was drawn up by the claimant’s solicitors and was approved by the judge in a further letter dated 25 October. The order was then sealed and served on the defendants. In the meantime the defendants’ solicitors had written to the judge making representations as to the effect of the injunction and requesting a stay pending the giving of reasons and an application for permission to appeal. In his letter of 25 October the judge said that he would hear any further argument on 5 November and declined to suspend the order pending the hearing.

On 26 October the defendants filed a notice of appeal and applied to this court for a stay of the order pending determination of the application for permission to appeal.

On the same day the defendants filed witness statements in compliance with the disclosure obligations contained in the order, without prejudice to their contention that the order should not have been made at all. In submissions before us the claimant placed considerable reliance on the information given in those witness statements as to the extent of the defendants’ dealings with third parties; but that material did not, of course, form part of the evidence before the judge.

On 29 October the appeal papers were referred to Richards LJ, as the relevant supervising Lord Justice. He directed that the application for permission to appeal be listed for hearing in the week beginning 12 November (the earliest practicable opportunity for the court to consider the matter after the judge had given his judgment on 5 November). He also ordered a stay of the judge’s order pending the hearing in this court.

The judge gave judgment on 5 November. At the hearing on that day the judge also made one substantive amendment to the order previously made. He refused permission to appeal. He ordered a speedy trial, to take place in January 2008, and gave directions accordingly.

Ms Hodson and Mr Morgan had employment agreements with the claimant which included post-employment obligations in materially identical terms, as follows:

“Key Employee” was defined as meaning:

Prior to Mr Morgan’s resignation from the claimant he had entered into a variation agreement which limited to three months the period of restraint in relation to Beckers but did not otherwise make any material change to his restrictive covenants.

In the evidence filed in support of the claimant’s application for an interim injunction, the main thrust of the case against Ms Hodson was that she was working with Mr Morgan in competition with the claimant; she had solicited business from, and had had business dealings with, Beckers; and it was to be inferred that as an employee of The Juice Machine Limited she would be involved in soliciting or accepting business from other Suppliers, and in soliciting business from or supplying goods or services to Clients or Prospective Clients, in competition with the claimant. She was thereby alleged to be in breach of clauses 3.3.4 to 3.3.7 of her employment agreement. In her case, the twelve month period referred to in those clauses runs to 21 June 2008.

In the same evidence the main thrust of the case against Mr Morgan was that he had enticed Ms Hodson away from the claimant or solicited her employment in breach of clause 3.3.3 of his employment agreement; that he was in a business relationship with her, contrary to clause 3.3.4; and that he had induced, procured, assisted in or otherwise facilitated the breach by her of her covenants. That Mr Morgan had enticed Ms Hodson away from the claimant was said to be supported by (i) the timing of the incorporation of The Juice Machine Limited and Ms Hodson’s resignation from the claimant, and (ii) the inconsistency between the reasons given by Ms Hodson for her resignation and the fact of her taking up employment with The Juice Machine Limited. The twelve month period referred to in the relevant clauses of Mr Morgan’s own employment agreement (and applicable otherwise than in relation to Beckers) runs to 19 December 2007.

It was said that both Mr Morgan and Ms Hodson had been central figures in the claimant company prior to the termination of their employment and had been in the front line of dealings with suppliers and customers. They both had significant knowledge of the claimant’s suppliers, customers, business strategies and other sensitive business information. In the case of Ms Hodson, in particular, that knowledge was very current and represented a valuable asset to The Juice Machine Limited or any other competitor of the claimant. They were both well known figures in the market, given their long-standing working relationship at the claimant, and if they continued to work together there was a clear and immediate risk that they might succeed in diverting further business away from the claimant.

The claimant’s evidence shows that a major concern was the loss of the Beckers business to The Juice Machine Limited. The defendants’ evidence, however, included a witness statement from the managing director of Beckers which made it clear that Beckers had taken a firm decision to move its business away from the claimant for commercial reasons; it had decided to place future business with Mr Morgan and The Juice Machine Limited, a decision which was unaffected by whether Ms Hodson was employed by that company; and it would if necessary make alternative plans but would not return to the claimant. In any event the fact that Mr Morgan’s period of restraint in relation to Beckers was limited to three months, which had already expired, meant that the claimant could not prevent Mr Morgan or The Juice Machine Limited from dealing with Beckers as a supplier.

The claimant therefore concentrated its efforts at the hearing on seeking to restrain Ms Hodson from working with or for Mr Morgan or The Juice Machine Limited. It also sought wider restraints against all the defendants as regards the soliciting of business from or dealing with other suppliers or customers of the claimant and as regards the use or disclosure of the claimant’s confidential information. The case in relation to non-solicitation and non-dealing was supported by a witness statement made just before the hearing, which adduced evidence of a visit by Ms Hodson and Mr Morgan at the end of August to another of the claimant’s suppliers, seeking (albeit without success on that occasion) to get it to use the services of The Juice Machine Limited to sell its products in the United Kingdom.

For their part, in their witness statements Ms Hodson and Mr Morgan gave innocent explanations of the history of their departure from the claimant company, the formation of The Juice Machine Limited, the move of Beckers’ business to that company and Ms Hodson’s employment with the company. Mr Morgan asserted that the injunction sought by the claimant would be “devastating for this fledgling business”, especially as the application came in the middle of the annual selling season, which, at least in the case of apples, was said to be September and October (and reference was also made to the placing of contracts in the last quarter of the year for delivery over the next twelve months). As for Ms Hodson, she described herself as “the principal breadwinner for my family” and said that she would be deprived of her income if the injunction were granted.

According to a witness statement from the defendants’ solicitor, at the hearing before the judge the defendants offered limited undertakings designed to hold the ring until a speedy trial, which it was thought could take place in November 2007. The defendants proposed that they deal simply with the Beckers business and that, whilst Ms Hodson would continue to work for The Juice Machine Limited, she would comply with the non-solicitation and non-dealing provisions in her employment agreement. Those undertakings were not accepted by the claimant. In relation to Ms Hodson, a particular concern expressed by the claimant was the difficulty of policing an undertaking of that kind if she continued to work for The Juice Machine Limited. The claimant also sought to meet Ms Hodson’s point about loss of income by offering to pay her salary pending the trial of the action.

The injunction granted by the judge and embodied in the sealed order was an elaborate one. In summary, paragraphs 1-5 related to Ms Hodson, paragraphs 6-12 to Mr Morgan, and paragraphs 13-15 to The Juice Company Limited. The principal elements were as follows:

Ms Hodson was restrained from working with, etc., any Key Employee, including Mr Morgan, in competition with the Claimant (paragraph 2). The detailed terms corresponded to clause 3.3.4 of the employment agreement.

Mr Morgan was placed under a similar restraint against working with Ms Hodson and was restrained from inducing, etc., a breach of her obligation not to work with him (paragraphs 7 and 9).

Ms Hodson and Mr Morgan were both made subject to non-solicitation and non-dealing restraints, in respect of Clients, Prospective Clients and Suppliers, in terms corresponding to clauses 3.3.5 to 3.3.7 of the employment agreement (paragraphs 3, 8 and 10).

Each of the defendants was restrained from making use of or divulging any information which was confidential to the claimant, which was stated to “include without limitation information relating to operations, finances, business, plans, products, processes, know how, clients, customers and suppliers” (paragraphs 1, 4, 6, 11 and 14).

Each of the defendants was required to provide a witness statement, no later than three days from the date of the order, detailing contacts and business dealings with Clients, Prospective Clients and Suppliers, as defined in the employment agreement, and setting out any use or disclosure of any confidential information concerning the business of the claimant (paragraphs 5, 12 and 15).

The Juice Machine Limited was restrained from inducing, etc., any breach of the order by Ms Hodson or Mr Morgan (paragraph 13).

By virtue of the definition of “Supplier”, the restraints on soliciting or dealing with Suppliers covered Beckers as well as other suppliers. The substantive amendment made by the judge at the hearing on 5 November was the express exclusion of Beckers from the definition of “Supplier” in paragraph 10.3 of the order, thereby making clear that Beckers did not come within the scope of the non-solicitation and non-dealing restraint in respect of Mr Morgan.

In his judgment on 5 November, giving his reasons for the grant of the injunction, the judge found that the claimant had established a strong case of breach of covenant, in particular that Ms Hodson had knowingly been in breach of her agreement with the claimant and that unless restrained she intended to continue to breach it; and that Mr Morgan had solicited that breach and intended to continue to encourage its breach and to breach his own agreement with the claimant in respect of suppliers other than Beckers (paragraphs 39-42). He rejected various defence arguments that the covenants were unjustifiably wide or of unreasonably long duration (paragraphs 43-49). He held that there would be no significant interference with Beckers’ business if the order were granted (paragraphs 50-51). He took the view that the undoubted interference with Ms Hodson’s ability to earn a living for herself and her family was not sufficient to prevent the court from granting relief against her: in the light of the history “she decided to do what she did with her eyes open”, and she clearly had skills which she could use in other employments (paragraphs 52-53). He did not consider there to have been unreasonable delay on the part of the claimant, or that relief should be refused by reason of differences between the original letter of complaint and the application to the court (paragraphs 54-57). Finally, he found that the least risk of injustice (see per Hoffmann J in Films Rover International v Cannon Film Sales Ltd [1987] 1 WLR 670) would be caused by the grant of the injunction subject to the deletion of certain passages from the order proposed by the claimant (paragraphs 58-59).

The first main problem about the judge’s order concerns the time when and manner in which the injunction was granted.

Applications for interim relief need to be dealt with expeditiously, since delay may frustrate the very purpose for which the application is made. It is often possible, at least in a reasonably straightforward case, for the judge to announce his decision and to give his reasons for it at the conclusion of the hearing or after a short adjournment. If that cannot be done, it is sometimes possible to announce a decision at the conclusion of the hearing but to reserve the reasons for it (as we did in the present case). If that is done, the reasons should follow without undue delay, especially if the decision is one that may be subject to appeal. It is sometimes necessary to reserve the decision as well as the reasons, because more time is required for consideration of the evidence and submissions; and the more complex the case, the longer the time that may be required. Again, however, it is important for the decision to follow without undue delay. In that situation one would normally expect the reasons to be given at the same time as the decision; but if there is a good reason to defer the giving of reasons, once more the delay should be kept to a minimum, especially if the decision may be subject to appeal.

The present case was not particularly complex, and the need for an early decision was highlighted by the evidence that the application for interim relief came in the middle of the annual selling season. In the circumstances, a delay of three to four weeks before announcing a decision was too long. The fact that the decision, when it came, was communicated by letter and that the judge declined to deal with representations about the effect of the order or to stay the order until judgment was given some two weeks later was also very unsatisfactory (all the more so because, as explained below, the order was too wide). The fact that the decision was communicated without reasons and that the parties had to wait a further two weeks or so before reasons were given created problems not only for the defendants in knowing how to formulate an appeal, but also for the Court of Appeal in determining how to deal with the appeal procedurally and what to do about the judge’s order in the meantime.

On behalf of the defendants, Mr Oudkerk rightly accepted that there can be circumstances where an injunction has to be granted as a matter of urgency without it being possible to give full reasons on the same day, but he submitted that that cannot apply where judgment has been reserved for almost four weeks, and that it was incumbent on the judge, having reserved his judgment, to go through a proper reasoning process before granting an injunction and to provide his reasons with his decision. He also submitted that the reasons given in the judgment ultimately delivered fell below the required standard, in that they did not enable the defendants to know why they had lost and in particular there was no reasoning to support such a wide-ranging injunction as was granted. In support of his submissions he cited Flannery v Halifax Estate Agencies Ltd[2000] 1 WLR 377 and English v Emery Reimbold & Strike Ltd[2002] 1 WLR 2409. The case so formulated is a straightforward reasons challenge, which we reject (and we should make clear our view that the judge’s judgment, when eventually delivered, was adequately reasoned). But the combination of factors to which we have referred gave not only the defendants but also the claimant legitimate cause for complaint about the way in which the matter was dealt with by the judge. We entirely understand and sympathise with the pressures of work upon the judge, but the course that this led him to take was unacceptable.

The second main problem about the judge’s order is that it was too wide. We have already touched upon this in part. Paragraph 10 of the order was drafted in a way that was apt to cover dealings by Mr Morgan with Beckers even though the claimant had made clear at the hearing that it was not pursuing its application for relief against Mr Morgan in relation to Beckers. The matter was resolved on 5 November by the variation of paragraph 10.3 of the order so as expressly to exclude Beckers from the definition of “Supplier”. The claimant says that this was clearly the intention all along, and the claimant’s solicitors wrote to the defendants’ solicitors on 24 October and again thereafter to make it clear that they did not consider Beckers to be covered. It does seem that the problem arose from an oversight in the drafting of the order put forward in the first place by the claimant. Nevertheless Mr Morgan was faced with the difficulty of being strictly bound to comply with the injunction as granted by the judge, which included on the face of it restrictions in relation to Beckers even if that was not the claimant’s intention.

Although Mr Oudkerk raised other points concerning the effect of the order on dealings with Beckers, the matter considered above is sufficient for present purposes.

A separate point on the width of the order is the inclusion in it of restrictions on the use and disclosure of confidential information. There was no sufficient definition of the information caught by the restrictions, nor any exclusion of information in the public domain. The evidential underpinning for such a restriction was also very thin. It is, however, unnecessary to consider the detailed submissions on this issue since Mr Duggan, for the claimant, sensibly acknowledged the difficulties he faced in relation to these provisions of the order and did not seek actively to defend them in his oral (as opposed to his written) submissions.

A further concern about the width of the order is that the restrictions on dealing with suppliers and customers prevented The Juice Machine Limited from fulfilling contracts already entered into before the order was made. The evidence about such contracts was very limited, but in principle, as Mr Duggan appeared to accept, there should have been an exception in relation to them. This is an issue that arose largely by reason of the lapse of time and the continued development of The Juice Machine Limited’s business between the hearing and the grant of the injunction.

The third main problem about the judge’s order concerns the balance of convenience. The position needs to be considered first as at the date of the hearing before the judge on 26 September. Mr Oudkerk contended, by way of inference from the fact that the judge did not grant any relief on 26 September, that the judge did not consider immediate relief to be necessary. We reject that contention. The reasonable inference is that the judge had simply not made up his mind one way or the other at that stage. That is understandable, since the decision was in our view a finely balanced one as at that date. The claimant had made out an arguable case and was at risk of losing further suppliers and customers, at an important time in the middle of the main selling season. On the other hand, consideration had to be given, inter alia, to the effect of an injunction on a fledgling business (an issue complicated by the claimant’s acceptance that it could not prevent Mr Morgan and The Juice Machine Limited from dealing with Beckers) and to its effect on Ms Hodson as the principal breadwinner of her family (a point counteracted by the claimant’s offer to pay her salary pending the trial of the action). It had to be borne in mind, too, that the obligations under Mr Morgan’s covenants ran only until 19 December 2007, though those of Ms Hodson ran until 21 June 2008. Our own assessment is that the overall balance at that time came down marginally in favour of accepting the undertakings offered by the defendants and ordering a speedy trial, rather than granting any additional interim relief to the claimant; but a contrary decision would not have been open to successful appeal if it had been made promptly and had been supported by reasoning and an order had been made in appropriately limited terms.

Whatever the position as at 26 September, matters had moved on by the time the judge came to make his decision. The defendants had continued with the development of the business of The Juice Machine Limited for a further three to four weeks. The main selling season was coming to an end. Mr Morgan’s covenants now had only two months to run. In our view those matters brought the balance down more clearly against the grant of the interim relief sought and in favour of a speedy trial. The judge did not address this aspect of the matter in his judgment.

The effect of the stay granted by Richards LJ was to restore the position that existed immediately before the judge’s order and to permit that state of affairs to continue for a further two and half weeks up to the hearing before this court. By the time of that hearing the balance of convenience came down decisively against the grant of interim relief. We took into account the claimant’s concerns about the steps taken by the defendants to obtain contracts since the date of the hearing before the judge. On the available evidence, however, the main selling season was now over. Mr Morgan’s covenants had only just over one month to run. It was made clear to us that Ms Hodson was still prepared to give an undertaking not to solicit business from or to deal with the claimant’s suppliers or customers. Such an undertaking would in our view give the claimant a significant degree of protection. We do not accept that the difficulties of policing the undertaking while she remains in the employment of The Juice Machine Limited are so great as to render the undertaking worthless. There is no sufficient basis for concluding that she would not take the undertaking given to this court seriously. A further consideration was that the parties were working towards a speedy trial in January 2008. In all the circumstances the better course, in our judgment, was to allow the existing position to continue, subject to Ms Hodson’s undertaking, for the relatively short period remaining until trial. To use the language of Films Rover International, that course appeared to us to carry the lower risk of injustice.

For all those reasons we decided to set aside the judge’s order and, whilst accepting the undertaking offered by Ms Hudson, to refuse any further relief to the claimant.

Mr Oudkerk submitted that, even if we were minded to adopt that course, we should also decide two further matters now rather than leaving them over for decision at the trial. The first was the validity of the restriction on use and disclosure of confidential information. It was unnecessary, however, for us to consider that matter further in view of the stance taken by Mr Duggan in relation to it (see paragraph 34 above). The second matter concerned the width of the definition of “Key Employee” in the employment agreement and whether the restriction on employment amounted to an unlawful restraint of trade even if the definition could be cut down by blue-pencilling. Mr Oudkerk suggested that a decision favourable to the appellants on that issue would probably bring these proceedings to an end without the need for a trial. Despite Mr Oudkerk’s blandishments, we took the view that it would be inappropriate for us to seek to determine that issue in isolation and that it was better for the case to be dealt with as a whole at the trial.

At the hearing we also reserved our decision on the costs of the appeal. Having given further thought to the matter, we do not think that it would be right to make any order in favour of one side or the other in advance of the trial. The just attribution of the costs of the appeal must depend in part upon the outcome of the trial. We have therefore decided that the costs of the appeal, like those of the application to the judge below, should be reserved to the trial judge.

Although we have referred to the trial, we reiterate the hope expressed at the hearing before us that the parties are able to reach a sensible compromise of this case so as to avoid the costs of a trial.