Personnel Hygiene Services Ltd v Mitchell

LORD JUSTICE WALLER: This is an appeal from a decision of His Honour Judge Seymour QC sitting as a deputy High Court judge, dated 19 December 2008. There was before him an application by Public Hygiene Services Ltd ("PHS") for an interim injunction seekiNg to enforce against Mr Mitchell certain restrictive covenants which were contained in a Share Purchase Agreement entered into on 12 July 2007 (the "SPA"). Under that agreement Mr Mitchell, as a shareholder, had sold 400 shares in a company, Rent a Crate UK Ltd, for a sum of £394,480. Following the share purchase, Mr Mitchell had continued to be employed by a subsidiary of Rent a Crate UK Ltd, a company called Rent a Crate Ltd, under a service agreement dated 12th May 2004. That service agreement has been put before us, but it was not before the judge.

Mr Mitchell's employment did not, however, continue for very long and ultimately his contract was terminated under a compromise agreement dated 31 August 2007, entered into between Mr Mitchell, Rent a Crate Ltd (his employer) and also with PHS. That compromise agreement contained restrictive covenants. They were of slightly greater duration than those in his service agreement and they were of less duration than those contained in the Share Purchase Agreement and that compromise agreement also contained an entire agreement clause.

When the matter came before the judge consideration was given as to how the application for an injunction should be dealt with. Mr Mitchell's side had not had two clear day notice; there was a possibility of an adjournment of the application; the possibility of a speedy trial was ventilated. Ultimately the parties agreed that there was one point with which the judge could deal. The judge was persuaded to decide one question, which was whether the restrictive covenants in the compromise agreement had superseded and entirely replaced the restrictive covenants in the SPA. The deputy judge, in his judgment, held that they had. He refused permission to appeal and indeed permission to appeal was initially refused on paper by Sir Paul Kennedy, but ultimately, after an oral hearing, Lord Justice Moore-Bick on 30th April this year, gave permission to appeal. He directed the appeal be heard as soon as reasonably possible and it is in those circumstances that it has come on today, in late July.

All that is before us is the question whether the judge was right in his view that the compromise agreement restrictive covenants took the place of the share purchase restrictive covenants. If he was wrong, the matter will have to be returned to a High Court judge to deal with the issue whether an injunction should be granted. As will become apparent from this judgment and later parts of this judgment, we take the view that the judge was wrong and that is going to mean that the dealing with a preliminary point will have turned out to be a long way round.

It was, as I see it, most unfortunate that Mr Mitchell's service agreement was not placed before the judge. It is right that when one looks at the compromise agreement one sees a clear reference to the service agreement, but it is seeing that agreement in its full terms which brings its relevance properly to the attention of the court deciding this question of construction.

With that agreement, one can see that the history of agreements is as follows. On 12 May 2004, Mr Mitchell entered into a service agreement with Rent a Crate Ltd. It was a detailed agreement, it was terminable on six months' notice in writing by either party (see clause 26.1) and, by clause 28.1, it contained "post-termination restrictions". (a) and (b) of 28.1 sought to restrain Mr Mitchell from competing for a period of six months from the termination date:

It seems that in November 2004, then later in April 2007, Mr Mitchell received share options in Rent a Crate UK Ltd, the holding company. These options were exercised in the course of selling the whole of the share capital of Rent a Crate UK Ltd to PHS, under a Share Purchase Agreement dated 12th July 2007. Under that agreement, six sellers, including Mr Mitchell, sold their shares in Rent a Crate; as I've said, Mr Mitchell was selling 400 shares for something over £390,000. The total consideration paid by PHS was approaching £6 million.

The Share Purchase Agreement contained certain covenants. They are set out in clause 10 of the SPA. It is unnecessary to read them all out and the detail of them; it is sufficient to say that they were covenants which were going to apply for three years from the completion of the sale and they covered many of the same matters that were covered by the restrictive covenants in the service agreement. But it is important to emphasise that they were, of course, covenants being given on the sale of shares, the sale of a business, and that is a different context to covenants which were entered into in relation to a service contract.

The SPA also contained an entire agreement clause at clause 16. It was in these terms:

Mr Kibling, I think, would place reliance on those last words "the subject matters of this agreement", because he accepts that that entire agreement clause did not mean that the service contract of Mr Mitchell had in any way been superseded nor, more narrowly, did it mean that the restrictive covenants contained in the Share Purchase Agreement had in some way superseded the restrictive covenants in the service contract.

Six weeks after the Share Purchase Agreement, Mr Mitchell's service contract was brought to an end by a compromise agreement dated 31 August 2007. Mr Kibling has sought to refer to what his client thought he was doing, or to matters of background to that compromise, but none of the details of any dispute that there was between Mr Mitchell and Rent a Crate Ltd, or Mr Mitchell and PHS is in evidence or before the court. The question of construction which the judge had to resolve it was agreed should be resolved by reference to the written agreements that we have.

It is clause 10 of the compromise agreement that contains a reference to restrictive covenants. 10.1.1 provides:

It also provides:

Then if one goes to Schedule 2, one finds restrictive covenants which very much cover the same matters as the restrictive covenants in the service contract and indeed many of the same matters as are in the Share Purchase Agreement. Those covenants in fact extend the duration of any restriction, so far as Mr Mitchell is concerned, if one compares them with the restrictions in his service contract, but they are of much lesser duration than the restrictions contained in the SPA.

At first blush, one might see the force of Mr Kibling's argument; the argument that attracted the deputy judge and attracted Sir Paul Kennedy when refusing permission to appeal on paper. Here were parties dealing with restrictive covenants in August 2007 which were to apply to Mr Mitchell post-termination of his employment. The Share Purchase Agreement contains such covenants and they were of greater duration than those ultimately being negotiated under the compromise. Furthermore, here one sees PHS as a party to this compromise. They were not the employer, they were not a party to the service contract and thus, at least at first sight, that's inconsistent with the compromise only being concerned with Mr Mitchell's service contract with Rent a Crate. Then there is an entire agreement clause which provides that all previous agreements be superseded. So the argument goes that it must have been the intention that the compromise which dealt with restrictive covenants was intended to supersede the SPA covenant.

As attractive as that argument looks at first sight, in my view a proper analysis shows it to be flawed. First, as at the date of the compromise agreement, there were in being two agreements, both containing restrictive covenants: one, the service contract with covenants that might be justified by reference to that relationship, and a share sale agreement which might be justified by reference to that relationship. I use the word "justified" because it is well-known that covenants in restraint of trade are unenforceable, save to the extent that they can be justified as in the interests of the public and in the interests of the parties. As is also well-known, justifying a restraint where goodwill or a business is being sold is quite different from justifying a restraint imposed on an employee at the end of his contract of service.

Most significantly, by its express terms and the last sentence of clause 10.1.1, the compromise was seeking to deal with Mr Mitchell's service agreement. The restrictions cover the same grounds as those covered in the service contract and on any view it was intending to replace the restrictions in the service contract with those in the compromise, and on the express wording of clause 10.1, one would think it did not appear to be intending to go further. Indeed there is no reason why, having two agreements in being previously with restrictive covenants in them, there should not be a continuation of two agreements with restrictive covenants in them.

So far as the judgment of the judge is concerned, it would seem to me that although he cited clause 10.1.1, and possibly because he did not have that service agreement before him, he never properly dealt with the fact that there had been two agreements in being with restrictive covenants in them and never properly dealt with the fact that there was no reason why that should not continue and never properly dealt with that final sentence of clause 10.1.1.

There are certain other points with which I should deal. First, the point taken by Mr Kibling is, why should PHS have been a party if it wasn't intended to deal with the Share Purchase Agreement? The answer to that is that there was a reason why they should be parties. One reason was that Mr Mitchell's employment for six weeks, or seven weeks or thereabouts, was at a time when PHS were the holding company and it wouldn't be at all surprising if, in an attempt to make sure that this was a final and binding agreement compromising any claims that Mr Mitchell might have, that PHS should be a party to the contract. Furthermore, in fact PHS had some interest in the restrictive covenants that were being negotiated under the compromise agreement, in that there had been this period of employment. Mr Cavendor suggested that only came about in a rather convoluted way by reference to clause 5 of Schedule 2. That may be so, but they certainly had an interest.

In fact, the scope of the covenants was slightly different. The compromise agreement extended to Eire, whereas the SPA was limited to the United Kingdom. That may not be that significant and certainly, as it seems to me, is not as significant as the express terms of clause 10.1.1 to which I have already referred.

Of course it is important that there is no inconsistency as between the covenants in exactly the same way as, under the service agreement, while that ran alongside the Share Purchase Agreement, so these covenants can run alongside the Share Purchase Agreement covenants as well and there is no inconsistency between them.

What, then, of the entire agreement clause? Mr Kibling has had a difficult row to hoe, if that is the correct expression, in relation to this clause because he has to accept that there were certain aspects of the Share Purchase Agreement which were going to continue in any event. There are two examples one can pick up. One is clause 5.1, which relates to the completion statement which has to be delivered within 120 days, and that was a statement which had to be delivered to the sellers' accountant, therefore it was a clause which Mr Mitchell could enforce. There is also clause 9.1 which deals with confidential information, which again Mr Kibling accepted would be binding on Mr Mitchell. So there were certain aspects of the Share Purchase Agreement which were bound to survive the entire agreement clause.

It seems to me that it is only if one interprets the entire agreement clause as relating to restrictive covenants that there can be any argument that the restrictive covenants of the compromise agreement have been superseded. But it is not possible to construe clause 18 as applying only to the restrictive covenants. It clearly applies, if it applies at all, to agreements in the most general language and if it was to catch the restrictive covenants in the Share Purchase Agreement, that could only be because one would have to construe it as an agreement that superseded the Share Purchase Agreement in its entirety. As has really had to be accepted by Mr Kibling, that is an almost impossible construction of the clause. He relies on the fact that the wording in the entire agreement clause (as different from other clauses that he has placed before us) does not contain words such as "respecting the subject matter hereof". The reality, as he ultimately felt constrained to accept, is that the addition of those words really adds nothing.

The compromise agreement was itself clearly concerned with the termination of the service contract. It could not have been agreed by clause 18 that the whole of the SPA would go, and in that case, as it seems to me, the entire agreement clause does not supply any answer. It particularly doesn't supply any answer because one always has to come back to clause 10.1.1. Clause 10.1.1 is an express provision which acknowledges that the restrictions set out in the service agreement are no longer applicable. That puts the matter beyond peradventure.

In those circumstances, I would allow the appeal and I would direct that the compromise agreement did not affect the restrictive covenants in the SPA and I would direct that the matter must now go back to the judge to continue any hearing as to whether an interlocutory injunction should be granted.

LORD JUSTICE KEENE: I agree. It is a great pity that the service agreement was not put before the judge. Apart from the one formal reference to it when he sets out clause 10.1.1 of the compromise agreement, he makes no reference to it in his judgment and it does not feature in that part of his judgment which sets out his reasoned conclusions. Yet it is, in my view, crucial to an understanding of the purpose and function of the compromise agreement, which was in essence seeking to deal with the employment relationship of the respondent with the company and not with his role as a seller of shares.

So far as the respondent's arguments based on clause 18, the entire agreement clause in the compromise agreement, are concerned I fully agree with the views just expressed by my Lord: it was not intended to apply to the obligations contained in the SPA. I too would allow this appeal and agree with the order which my Lord proposes.

LORD JUSTICE ELIAS: I agree with both judgments.