Pricewaterhousecoopers LLP v Carmichael

This is the hearing of an application by the claimant (“PwC”) for an order restraining the defendant (“NC”) from breaching clause 13.10 of the PwC LLP members' agreement dated 31 December 2002 as amended thereafter by various members' resolutions ("MA").The application as issued originally sought injunctions restraining breach of various other post-termination restraints within part 13 of the MA, but those elements of the application have been compromised.

The MA contains a comprehensive disputes' resolution provision within part 17, which culminates in clause 17.2.1(iii), which it is common ground constitutes an arbitration agreement between the parties to this dispute. The parties have, or shortly will refer the dispute concerning the enforceability of the post-termination restraints to arbitration. There is currently a hiatus caused by a connection between the proposed arbitrator and NC's solicitor. However, it is anticipated this will be resolved within a few days. This application is brought pursuant to section 44(3) of the Arbitration Act 1996. The circumstances leading to this application are not seriously in dispute, at any rate for the purposes of this application.

PwC is a well-known professional services firm. It currently has some 926 partners, each of whom are members whose relationship is governed by the MA. NC joined PwC in 2011 and became a partner and member on 1 July 2013. NC was a member of PwC's refinancing and restructuring group (“RRG”).

PwC's case is that NC has had access to significant confidential information while he was a partner. PwC’s evidence in support of its application is contained in a statement from Mr Perkins. He states at paragraphs 21 and 22 of his statement as follows:

At the end of 2016, PwC was approached by FTI Consulting ("FTI") concerning a proposed acquisition by FTI of PwC's RRG. That culminated in an offer from FTI in May 2017 that was rejected. PwC alleges that thereafter FTI attempted to recruit some or all of the partners in PwC’s RRG. Three partners in the RRG retired from PwC in or around the end of January 2018. NC was one of those partners. He gave notice to retire on 25 January 2018. PwC's case is that each intended to join FTI. NC does not dispute

On 28 March 2018, PwC wrote to NC informing him that his retirement had been approved with a period of 12 months' notice and requiring him to take garden leave from 1 April 2018 until 24 January 2019 when his retirement was to take effect. This was a period of just over nine months. The letter informing NC of these arrangements stated amongst other things:

On 17 December 2018, PwC wrote to NC again, again drawing attention to the post-retirement restrictions contained in the MA. Insofar as is relevant, that letter stated:

Shortly thereafter, NC retained solicitors and on 25 February 2019, those solicitors wrote to PwC informing PwC that NC would be starting work with FTI, "this coming Wednesday", that is 27 February 2019. PwC responded by requiring undertakings from

Following further correspondence concerning what NC's solicitors considered was an unwarranted delay in fixing the hearing of the injunction application, on 11 March 2019, NC's solicitors served his evidence opposing the application for an injunction and at the same time informed PwC that NC planned to start work at FTI that day, alleging that the failure to list the application was a breach of the conditions under which NC had offered his contractual undertakings to comply with, amongst other things, clause 13.10 of the MA. It was that which caused PwC to move its present application.

At the start of the hearing NC applied for an order that the substantive application be heard in public. I dismissed that application for the detailed reasons I gave at the time, applying the rules and principles set out in CPR 62.10 and the authorities relating to the confidentiality of the arbitral process. It remains an issue as to whether or not this judgment will be published. (Footnote: ¹)

Turning now to the substantive application, there is no dispute between the parties that I have jurisdiction to make the orders sought applying section 44 of the 1996 Act. The claimant's case is that I should approach this application applying the principles set out in American Cyanamid v Ethicon [1975] AC 396, following the decision of the Court of Appeal in Lawrence David v Ashton [1989] ICR 123. NC submits this is wrong and in the circumstances I should take into account PwC's prospects of success at trial applying the principles set out in Lansing Linde v Kerr [1991] 1 WLR 251. The basis for this submission is NC's contention that it will not be possible to hold an arbitral hearing before the date when the claimant accepts any injunction will expire, that is 24 July 2019.

Mr Ciumei QC on behalf of NC submits there is little or no prospect of the parties obtaining a hearing before mid-May 2019, and the publication of the Award will take further time, and in the result it is unlikely or perhaps even highly unlikely that the dispute concerning the enforceability of clause 13.10 will be resolved before 24 July 2019. Mr Ciumei submits, therefore, that in practice the effect of granting an injunction at this stage will be determinative of the dispute concerning the enforceability of clause 13.10. That is not quite right, because if NC succeeds in the arbitration, he will become entitled to claim under PwC's cross-undertaking in damages.

Mr Howe QC on behalf of PwC submits that Mr Ciumei's submission is mistaken essentially for two reasons. First, he maintains that it is likely that the arbitration hearing to resolve the issue concerning the enforceability of clause 13.10 will take place and the award resolving that dispute is likely to be published much sooner than 24 July 2019, and secondly, because it is contemplated that the arbitrator will be able to consider the question of interim relief at a directions' hearing which is planned to take place subject to the appointment of an arbitrator in the next two to three weeks. Mr Ciumei submitted that this last point was without substance because the arbitrator would be in the same position as me. I reject that last point simply because the arbitrator will have a much clearer idea than I do as to when a final arbitral hearing can take place.

I have come to the conclusion that it is likely that an arbitration hearing confined to the enforceability of clause 13.10 of the MA and the publication of an Award limited to that issue can take place well before 24 July 2019. We are now at 15 March 2019. Given the limited factual issues that will arise and that most of the time needed will be taken up with legal submissions, I do not see that a final hearing would last longer than two days, and the award will not be lengthy. It is realistic to suppose that the process can be completed by mid-May at the latest. That being so, it will be possible to hold a final arbitral hearing relating to the enforceability of clause 13.10 before the expiry of the period for which PwC claims an injunction. In those circumstances, I accept Mr Howe's submission that I should determine the application applying American Cyanamid principles.

The American Cyanamid principles are well known. The first issue that arises is whether the claimant has a real prospect of succeeding in this claim at trial. This is not a high-threshold standard. As Diplock LJ emphasised in American Cyanamid (ibid. at 407 to 408) the court must be satisfied merely that the claim is not frivolous or vexatious. NC's main submission is that clause 13.10 is so obviously unenforceable that the threshold test has not been passed. 16.Clause 13.10 provides as follows:

As is well known, there is a materially different approach to restrictive covenants contained in contracts of employment from that adopted to covenants contained in contracts for the sale of businesses. It is also clear that there is a different approach adopted in relation to covenants contained in partnership deeds. The leading authority on this point remains Bridge v Deacons [1984] 1 AC 705.

Mr Ciumei submits that clause 13.10 is one of the widest import that it is possible to contemplate, because it restrains NC from working for any business which is in competition with PwC or any related firm or overseas firm as defined within the agreement. He says that this is a very large category when the definitions contained in the MA are considered, and is too wide when the more limited scope of the other covenants contained in part 13 of the MA are considered. The concept of services referred to in clause 13.10 is not that which is defined in the MA, and so could conceivably prevent NC from undertaking any type of work in a competitor firm even if wholly unconnected with his previous role at PwC or with the mainline business of the competitor firm.

Mr Howe submits that clause 13.10 is designed to protect the value of PwC's confidential information, business and goodwill. It applies to all partners and does not exceed the scope of the firm's business. He submits that to assert that the services concept has the

In my judgment, PwC has demonstrated a sufficiently arguable case to satisfy the threshold requirement in American Cyanamid (ibid.) As Mr Ciumei acknowledged in paragraph 21 of his written submissions, and as I have noted already, it is only if a claim is frivolous or vexatious that a claim will fail to pass the test. I do not consider that the claimant's claim is either frivolous or vexatious, either by reference to any of the points deployed on behalf of NC individually or when considering all of them in the round together. On the contrary, I consider it is plain that there is a serious issue to be tried.

PwC justifies enforcing clause 13.10 by reference to the facts and matters referred to in paragraphs 21, 22 and 28(e) of Mr Perkins's witness statement that I set out earlier in this judgment. In my judgment, it is plainly arguable that PwC is entitled to protect its confidential information, business and goodwill by a non-compete clause -see in this regard Littlewoods v Harris [1977] 1 WLR 1472 per Lord Denning MR at 4178 F – G. It is arguable that a non-compete clause is the appropriate method for protection for the reasons given by Lord Denning in his judgment in the Littlewoods case at 1479, where he said:

It was submitted on behalf of NC that the combination of gardening leave, in this case nine months, and the six-month period fixed by clause 13.10 made the six-month period contained within clause 13.10 too long or even far too long to make the clause even arguably enforceable. I do not accept that the arguability of PwC's case is necessarily or inevitably defeated by the length of time that the restraint applies. That may be correct on the basis of evidence adduced at the final arbitral hearing but it does not justify the conclusion that PwC does not have a sufficiently arguable case at this stage. It may be, for example, that there will be evidence concerning the fixing of the length of garden leave by reference to what access NC had to what types of confidential information. It may be that the evidence that emerges in the course of the trial will provide further detail in relation to the evidence that currently exists concerning the long-tail characteristics of the confidential information to which NC had access. The implication of the evidence available is that he had extensive access to highly confidential information that is of longterm value.

I do not accept that the inclusion within clause 13.10 of the words, "in the reasonable opinion of the management board" makes the clause more unacceptable than would otherwise be the case. The difficulty with a business such as PwC's business is that the extent of its subsidiary and associated businesses will change over time. The mechanism adopted a practical means by which all relevant subsidiaries can be brought within the scope of the covenant. It was submitted that the inclusion within the clause of the reference to the reasonable opinion of the board introduced impermissible vagueness. I do not accept that point makes PwC's case unarguable. It is at least arguable that the inclusion of the word "reasonable" introduced the possibility of challenge using the agreed dispute resolution procedure contained in the MA. It is open to an ex-partner to seek clearance from PwC before commencing any new role. If there is a disagreement, it can be resolved ultimately by arbitration. I accept that arbitration may not be as convenient or as affordable as litigation. However, it was the choice of the parties to adopt arbitration as their preferred means of dispute resolution. Although it was submitted that NC did not have a choice about this or indeed about agreeing to the covenants contained in part 13 of the MA, that does not assist for present purposes. NC is a senior and experienced practitioner in his chosen field. He chose to become a partner on the terms on offer. It is at least arguable that is a sufficient answer to his claim to a lack of equality of bargaining power.

In summary, for these reasons there is a serious issue to be tried as to whether clause 13.10 confers more than adequate protection particularly having regard to the principles set out in Bridge v Deacons and Littlewoods v Harris, bearing in mind the approach to construction in relation to such clauses referred to in Skilton.

It is now necessary to consider the following stages of the American Cyananid test. Although it is submitted on behalf of NC that PwC overstates the extent to which damages would not be an adequate remedy by exaggerating his access to and retention of confidential information, that is not an issue that can be resolved at this stage. On PwC's case, damages would not be an adequate remedy. Not merely would a breach be difficult to prove, but loss would be difficult to prove as well, and there is no evidence from which it can be inferred that NC has the means to meet such a claim for damages should one be commenced.

It was submitted on behalf of NC that the availability of the cross-undertaking in damages was not a satisfactory remedy for NC. The basis of this submission was that the hardship caused by not being able to work for the period identified in clause 13.10 was being suffered now and during the period when the non-compete clause applies. Any claim under the cross-undertaking will come many months after the injunction would have expired if granted. In my judgment, this point does not assist NC. It is a problem that faces all respondents to injunction applications. The only issue identified by Lord Diplock in American Cyanamid is whether the respondent will be adequately compensated under the cross-undertaking. NC will be. The problem that NC identifies is the necessary consequence of adopting the cross-undertaking as a mechanism for protecting a respondent against whom an injunction is made, as opposed to some other and more flexible mechanism. However, there is no authority that justifies attempting to alter the scope or effect of the cross-undertaking offered by PwC.

In those circumstances, the final stage of the American Cyananid test, the balance of convenience, does not really arise. However, NC claims that the effects of the order will be draconian so far as he is concerned and, therefore, the balance of convenience lies in not granting the injunction sought. In paragraph 38 of his witness statement, NC states:

I do not consider these factors would justify me in refusing the injunction sought. NC was paid a substantial sum of money while on garden leave at a time when he knew from the correspondence referred to earlier that PwC were seeking to enforce the post-termination covenants contained in the MA against him. He has not disclosed the nature of his arrangements with his new employer. If and to the extent that PwC has acted unlawfully in taking the steps referred to by NC in paragraph 37 of his witness statement, then those issues can be resolved in the arbitration if they are referred.

In the result, I am satisfied that PwC should be granted the injunction sought, and I will hear counsel further as to the drafting, in particular as to the drafting necessary to ensure there is a speedy hearing before the arbitrator once appointed and with liberty to apply to the court pending the appointment of the arbitrator.