Literacy Capital PLC v Vanessa Jane Webb

The Claimant is an investment company which holds controlling shareholdings in other companies which purchased Mountain Healthcare Limited (Mountain).

The Defendant is a qualified nurse, doctor and business-woman who, with a business partner, ran and grew Mountain, a company providing medical services to sexual assault referral centres (SARCs).

For the hearing I was provided with two hearing bundles, two authorities bundles, two skeleton arguments and a late served witness statement from the Defendant.

This judgment deals with an application by the Claimant for an interim injunction to restrain the Defendant from trading in competition with a group of subsidiary companies owned by the Claimant including Mountain due to restraint of trade covenants nationwide with a 10 year duration.

There is only one issue to be determined. That is whether the restrictive covenants on which the Claimant relies are unenforceable under the common law. Within that issue are the following sub-issues:

In the Claim Form, which was dated the 19th of July 2024 but has not been issued, the Claimant sought a declaration that various restrictive covenants had been breached, an injunction prohibiting breaches and costs. The Claim Form stated that the cause of action was for breach of “restrictive covenants”. There are no Particulars of Claim. By a notice of application issued on the 19th of July the Claimant sought an interim injunction to restrain the Defendant from breaching non-compete and non-deal restrictions in a written investment agreement dated 27th October 2021. The application was listed for 1 hour and took 2.5 hours.

I have read evidence from the following witnesses:

I summarise the evidence put before me on this inter partes urgent application below. I am not making settled findings of fact because at this stage it is not the task of this court to resolve factual issues.

The Defendant, who is qualified as a nurse and a doctor is a forensic physician and a board member of the UK Association of Forensic Nurses. This is the steering group for SARC experts. She and a business partner bought Mountain in 2014 and converted it to a SARC provider to the Police services in England. She held a 25% shareholding. Mountain must have been successful because four years later she sold her shares to the Claimant via various subsidiary companies for around £4.7 million, which was paid in cash as to £215,000 and as to the rest by way of a deferred loan by the Defendant to the Claimant, to be repaid by a long stop date or before then if Mountain was sold on. She signed an Investment Agreement and Loan Agreement in 2018. She stayed on as a director of Mountain. 75% of the outstanding loan was described as “manager loans” and 25% as “vendor loans”.

On the 27th of October 2021 she decided to resign from Mountain and all other directorships connected with the Claimant and she renegotiated the sale of her shares to the Claimant or its subsidiaries which were valued at approximately £7 million at that time. She entered two written agreements, an Investment Agreement dated 27.10.2021 and a Loan Note Agreement of the same date (the 2021 Agreements). These agreements replaced the 2018 agreements. The Investment Agreement and Loan Notes Agreement had restrictive covenants in them preventing her from competing. I shall set them out in more detail later in this judgment.

In December 2021 the Defendant and her business partner formed a company called Nurture Health and Care Limited (Nurture) in which she holds a 28% shareholding and is the medical director. Originally, Nurture traded in fields unconnected with the Claimant’s the businesses but, after the end of the 12 month ex-employee non-compete, Nurture started to assemble SARC services and tendered in April 2024 to provide those services to the South Wales Police. On the 6th of July 2024 Nurture announced they had won the contract with South Wales Police to provide SARC services starting in September 2024. The Claimant became aware of this and two days later Mr Phagura held two phone calls with the Defendant about what he asserted were breaches of the restrictive covenants in the 2021 Agreements. Thereafter the Claimant issued the application. Various negotiations have taken place in the intervening period involving draft undertakings which do not impinge on this judgment.

The Defendant gave evidence that the Claimant’s subsidiary companies within what is called the RCI Group included Benchmark Management Consultancy; Community Court (which provides intermediaries to HMCTS); Prometheus (which provides secure patient transfers in the mental health sector); Elisian Software (which offers software solutions for businesses) and Venture People (a provider of mental health services assisting the regaining of independence after mental illness).

The Investment Agreement was made between the Claimant, the managers listed in Schedule One and many subsidiary companies owned by the Claimant. The following clauses are relevant to my judgment:

This was dated 27.10.2021 and contained the following terms:

In the application the Claimant relies on paragraphs 9.2(a)(iii) of the Investment Agreement 2021 and paragraph 2.1(a)-(c) of the Loan Note Agreement 2021. It is apparent that in 2018 the Claimant bought into Mountain when it was run by the Defendant for a substantial sum paid partly upfront and partly in arrears with a long tail set out in the Loan Note. Then, in 2021, the Defendant resigned and, the Claimant re-purchased all of her shareholding for around £7 million, subsumed the 2018 contract into the 2021 contract and issued a further Loan Note under which the loan was not to be repaid until the back end of 2028 or earlier sale of Mountain. Part of the deal was for the Claimant to pay the Defendant nearly £500,000 per annum in interest on the loan. There was a clause permitting the Claimant to cease paying interest if the Defendant breached the restrictive covenants. There were restrictive covenants limited to one year governing all of the staff who were paid out and ceased employment. A similar covenant governed the Defendant. The earlier ceasing employment covenant, from the 2018 Agreement, had a two year duration. However, the relevant restrictive covenant was a non compete covering all of the listed subsidiary companies’ businesses, for 7 years from 2021 plus a year after the loan was to be repaid at the long stop date, so 8 years in total. It was UK wide. The parties agree that the long stop redemption date was extended to 2030 at a time unknown to me.

The Claimant submitted that it was entitled to an interim injunction pending a return date or full trial, which they asked to be expedited and listed for five days commencing on the 2nd of November 2024. The Claimant submitted the Investment Agreement and Loan Note Agreement were both arms-length commercial agreements by parties of equal bargaining power. Counsel for the Claimant, in his skeleton, described the covenants binding the Defendant as “restrictive covenants” and asserted the Defendant had never disputed the validity of them. The Claimant proposed a draft interlocutory injunction which did not prevent the Defendant from continuing with her SARC contract in South Wales through Nurture but prevented any further competitive activities. The Claimant set out the substantial inter partes correspondence relating to proposed undertakings, all negotiated subject to the Defendant’s challenge to the validity of the restrictive covenants. I raised at the hearing whether I needed to be taken through any of the correspondence and invited counsel to do so. The Claimant’s counsel did not refer to or rely on any of it.

The Claimant submitted that, pursuant to American Cyanamid Co v Ethicon Limited [1975] AC 396, there were four steps for the Court to take: firstly, to determine whether there is a serious issue to be tried. Relying on the judgement of Lord Justice Nugee at paragraph 102 in Planon v Gilligan [2022] EWCA Civ. 642 [Planon], the Claimant submitted this was not a demanding test and was designed to exclude frivolous or vexatious claims. Secondly, to determine whether the balance of convenience favoured the grant or refusal of an injunction. Thirdly, when considering the balance of convenience it was submitted the Court should consider whether damages would be an adequate remedy for the Claimant if the injunction was refused, and fourthly, the Court should seek to take steps which would be the least likely to cause harm if the decision later turned out to be wrong.

Focusing on the restrictive covenants in the Investment Agreement, the Claimant submitted, relying on Credico Marketing v Lambert [2021] EWHC 1504 [Credico], and the judgment of Cavanagh J at para 230, that employment law restrictive covenants were not a guide in a commercial case such as this. Further, the restrictive covenants applied during the duration of the Investment Agreement and were not post termination of employment covenants. Finally, the Claimant relied on the judgment of Carr LJ in Quantum Advisory v Quantum Actuarial [2021] EWCA Civ. 227 [Quantum] at paras. 54 and 60-61, submitting that the doctrine of restraint of trade “may” not apply in commercial cases. In the alternative the Claimant submitted, relying on QBE Management v Dymoke [2012] IRLR 458, at para 210 in the judgment of Haddon-Cave J that the Court had to determine whether the Claimant/employer had shown any evidence that it had a genuine interest which required protection and if so the Claimant had to show that the covenant was no wider than reasonably necessary. Then, the Court would decide if the covenant was reasonable and whether, as a matter of discretion, injunctive relief should be granted, having regard to all the circumstances. The Claimant accepted that the burden is on the applicant to show the restraint covenants are no greater than reasonably necessary for the proper protection of its protectable interests. Reasonable necessity is assessed objectively by persons in the positions of the parties at the time the contract was entered into. Relying on para. 215 of the judgement of Haddon-Cave J, it was submitted that it would only be if the Court found that the restrictive covenant which was actually necessary was far less far reaching than the restrictive covenant actually imposed, when the Court would hold it to be unreasonable. Thus, the Claimant submitted, there was a serious question to be tried and the assessment of the validity of the restrictive covenants should not take place at the interim hearing. The Claimant submitted that the Defendant had not disputed the meaning of the covenant in the past. The Claimant sought to protect its investment in the goodwill of Mountain (see paragraph 38.2 (ii) of the skeleton argument). In relation to the balance of convenience, the Claimant submitted that it favoured granting the injunction because, without it, the Claimant's entire investment in Mountain would be at risk of “unquantifiable damage”.

In verbal submissions the Claimant went further than the skeleton. They submitted that the relevant goodwill was all of the business of all of the companies within the subsidiaries set out in the evidence. The Claimant submitted that there was no restraint of trade issue within their application. Whilst accepting in oral submissions that all of the circumstances were relevant when determining whether the common law on restraint of trade applied to the restrictive covenants in the 2021 Investment Agreement the Claimant submitted that employment was irrelevant to it and the selling of a trade or business was irrelevant. Instead, this was a pure commercial agreement, unrelated to the established law or public policy governing the validity of restraint of trade covenants in employment and the sale of business agreements. The Claimant accepted that no clause 16.5 (Investment Agreement 2021) barrister evaluation had been triggered by the Claimant’s assertion that the Defendant had breached the restricted covenant. When I opened up the issues of whether the evaluation clause was equivalent to an Arbitration Act clause providing exclusive jurisdiction both parties submitted that, because the application was not concerning any issue of breach, but was only concerning the issue of validity of the restrictive covenants, this Court should not concern itself with that question.

In summary the Claimant asserted that (1) there was a serious question to be tried: namely whether the public policy elements of restraint of trade law applied at all to the restrictive covenants; (2) that enforceability was a question for trial not for the interim injunction application; (3) that, as to duration and the question of whether there was a protectable interest, the case was nuanced and those matters should be dealt with at trial; (4) in relation to the question of whether damages would be a sufficient remedy and specifically in answer to the Court’s question about the Claimant saving £500,000 per annum by refusing to pay interest on the outstanding loan because of the alleged breach of the restrictive covenant, the Claimant relied on the bald assertion in the witness statement of Mr Phagura, that the damages were inestimable.

The Defendant’s case was restricted to raising one single issue. The Defendant asserted there was no serious issue to be tried because the restrictive covenants are void and no realistic argument to the contrary has been or could be raised. This was so because the covenants’ duration was far too long to protect any legitimate interest: eight years in total (in fact this had been extended, so I was informed during the hearing, to 10 years), which is manifestly too long in the context of any vendors selling any businesses to purchasers. Further, it was manifestly too long when compared with the restraint of trade covenant for managers, which was only 12 months in the 2021 Investment Agreement. Secondly, the Defendant submitted that the scope of the restrictive covenants was far too wide. Mountain only provided services for SARC assessment centres and yet the restrictive covenants covered all of the subsidiary group activities of the Claimant which went way beyond the activities of Mountain. These covered, for instance, management consultancy, software consultancy, the provision of staff to the HM Court Service and many other fields. Relying on the common law and in particular Herbert Morris v Saxelby [1916] AC 688; Wincanton v Cranny [2000] IRLR 716; and Allied Dunbar v Weisinger [1988] IRLR 60, the Defendant asserted there were no arguable prospects that these restrictive covenants would be upheld at trial.

In verbal submissions the Defendant eschewed relying upon the balance of convenience test to defend the application and stuck to the case set out in the written skeleton. It was submitted that there is no precedent for restrictive covenants lasting 10 years. This would prevent the Defendant from trading and exercising her skills within a field which was exceptionally needy of her skills. It was submitted that the Defendant’s skills were needed in the public interest. The restriction was for a period so long that it would ban her using her skills until her retirement age of 65. As to whether the common law in relation to restraint of trade applies, it was submitted that the context of this case is not pure commerciality but is instead employment and the sale of a business by the guiding mind of the business. Both contexts were well established within the common law of restraint of trade. The rationale for restricting directors who leave businesses is based on confidential information in relation to processes, products and customers. There is no precedent for restrictive trade covenants on employees lasting more than one or two years and certainly not 8 to 10 years. As for vendors, who are integral to businesses, who sell such businesses, the restraint of trade covenants necessary to protect the purchaser’s interest are again a well established field of restraint of trade common law. They are allowed to protect the goodwill tied partly to the name of the vendor which is purchased by the purchaser and to prevent competition for a necessary period in the same field. Likewise, there is no precedent in the case law for such restraint of trades upon vendors lasting longer than a year or two. The Defendant submitted the protection sought in the 10-year restrictive covenants was far wider and longer than was necessary to protect the purchaser’s goodwill in Mountain. The Defendant submitted that her case was equivalent to a summary judgment application on the restrictive covenants. She argued that the Claimant has no arguable prospect of proving the validity of the restrictive covenants. In relation to the underlying public policy rationale, it was submitted that there is a high public policy need for good SARC practitioners urgently to assess victims of rape and sexual violence and that excluding a senior practitioner from the market would be contrary to public policy. The Defendant submitted that the 2021 Agreements were equivalent to hybrid contracts, mixing employment and sale of business elements, both of which attracted restraint of trade analysis of the validity the restrictive covenants.

The doctrine relating to covenants in restraint of trade is summarised in Chitty on Contracts volume one 35th edition at paragraphs 19-203 to 19-219. The starting point for a covenant which restrains trade is that at common law such covenants are unenforceable because the public interest favours liberation of trade in a free capitalist society. It is only if the party relying on the restrictive covenant, which carries the burden of proof, can establish that the restraint is reasonable that the starting point is displaced. The concept of reasonableness is based upon various factors. The core factor was described in 1894 by Lord Macnaghten in Nordenfelt v Maxim [1894] AC 535 at page 565 thus:

When determining what is reasonable the Courts consider inter alia whether or not a covenant of a narrower nature would have sufficed. The extent or scope of the restrictive covenant is considered in relation to the areas of trade or service restricted; the geographical area covered and the duration of the restriction.

In Office Angels v Rainer-Thomas [1991] IRLR 214, at p 217, Sir Christopher Slade summarised the principles in relation to ex-employee restrictive covenants thus:

In Beckett v Hall [2007] ICR 1539, the Court of Appeal considered a 12 month restrictive covenant post termination banning approaching any client. Maurice Kay LJ ruled thus:

I glean from this judgment that the type of work which the Defendant was doing is directly relevant when assessing the scope of the restriction which the Claimant seeks to show is necessary to protect its interests.

In Wincanton v Cranny [2020] IRLR 716, the Court of Appeal considered an ex-employee 12 month non solicitation clause. The judgment was reported (in a short report) to have been as follows:

I take from this authority that an intentionally wide scope for the restricted work can be fatal to the asserted reasonableness of the restrictive covenant.

When considering which contracts attract restraint of trade law key guidance was given in Quantum Advisory Ltd v Quantum Actuarial LLP [2021] EWCA Civ 227, in which Carr LJ considered these issues at paras. 54, 60-68 and ruled thus:

I glean from this ruling that when approaching the question of whether the Agreements attract restraint of trade law this Court must look at the evidence and all the circumstances at the time of the contracts. There are certain categories of restrictive covenants to which the doctrine traditionally applies, in particular those by which an ex-employee undertakes not to compete with his ex-employer and those by which a business person, who has sold his business, agrees not thereafter to compete with the purchaser of the business, to protect the goodwill he sold to the purchaser. The doctrine has been held to apply to share-purchase agreements. Carr LJ continued the guidance thus:

In Credico v Lambert and ors [2021] EWHC 1504, Cavanagh J was dealing with restrictions in a trading agreement between C, a client supplier and D, an independent marketing company set up and contracted to C to supply independent face to face marketing staff for the introduced clients. It was terminable on 14 days’ notice and contained a restrictive covenant whilst current and post termination for 6 months, covering a 10 mile radius. He held that the restriction did attract restraint of trade law. In relation to the factors relevant to restraint of trade he ruled thus:

In Planon Ltd v Gilligan [2022] EWCA Civ. 642, the Court of Appeal were considering a 12 month, ex-employee, restrictive covenant by a software company. D started work with a competitor in the period. The Judge held the covenant unenforceable at the interlocutory injunction stage. On appeal the decision was upheld on different grounds: the balance of convenience. Elizabeth Laing LJ recited a run of exemplar cases in paras. 56-67 which I take into account and Nugee LJ ruled thus:

Bean LJ ruled as follows:

I take from this ruling that the interlocutory injunction stage is not generally the correct jurisdiction for an analysis of whether the scope of a restrictive covenant is reasonable or not. The rationale for this is plain. The full evidence is not before the court. So, for instance, in the application before me there are only two short witness statements. I know very little about the size or scope of the business run by Mountain or any of the other subsidiary companies owned by the Claimant. I have seen no standards from the relevant industries. No evidence has been put in as to whether the customer or prospective customer lists of Mountain included South Wales Police.

What is the scope of the restrictive covenants in this case? There is no dispute as to the scope of the restrictive covenants in this case. They lasted for a total of 10 years post agreement including one year after the loan is paid back to the Defendant on the long stop date. As to the businesses which they cover, they go far wider than just the services which Mountain delivered when the Defendant worked for them. They include management consultancy, supplying HM Courts with administrative staff and mental health services. As to the geographical scope, they cover all of the UK and the Channel Islands.

Do they unarguably attract the common law restraint of trade provisions? I have carefully considered the clear rule that such matters are best considered at trial not at the interlocutory injunction stage. In my judgment it could only be in very clear cases that this Court should take on the task of holding that restraint of trade law applies where there is a real issue about it. I must ask, is it at least arguable that the Investment and Loan Agreements are purely commercial agreements, unrelated to any matter which would likely attract restraint of trade?

The Defendant submitted that the restriction arose because of the Defendant’s special expertise having set up, grown and succeeded with SARC services at Mountain. In my judgment there was no other essence to the Agreements or the covenants than that. Nor was any put forwards. The Claimant bought the product of the Defendant’s labours in setting up SARC services through Mountain. The method of payment was a matter for the parties to agree but it did not stand aside from and unconnected to the services offered by Mountain or the profits made or the value of the shares which the Defendant held as a result of her growth of those services. The purchase price must have been premised on the value of the turnover of Mountain and the net profit and various projections. As Carr LJ stated in Quantum share purchase agreements attract the law of restraint of trade in the appropriate circumstances.

The circumstances in this case are clear. The Claimant bound the Defendant as an employee to restrictive covenants whilst she worked for Mountain and after she left. The leaving restrictions were for 12 months and were imposed when she left in 2021. They arose as a result of her status as founding director and it is not disputed that a 12 months, non-compete with Mountain restriction would have been reasonable by way of duration and business scope. But the covenants also sought to restrict the Defendant as vendor of the business of Mountain. These restrictions were set at a duration of 8 and then 10 years. No evidence has been put before the Court to justify the necessity for that duration. In attempting to discharge the burden of proof the Claimant has failed to provide any evidence of necessity for a 10 year covenant. As to the geographical scope, the only evidence of Mountain’s business was a reference to a contract with Norfolk and Suffolk Police in 2020-2021. The evidence was wholly silent as to any other Mountain contracts. The covenants were wide, nationwide. The Claimant has provided no evidence to justify a nationwide covenant other than the assertion that they had nationwide ambition. Evidence of Mountain’s SARC contracts around the country would have been easy to add in two lines to the witness statement of Mr Phagura if they existed. Evidence of Mountain’s customer lists for SARC centres around the UK in 2021 would have been simple enough to add to the evidence. None were provided. Evidence of the Police forces to whom Mountain had tendered would have been simple enough to have been provided. None were provided.

I turn then to consider the sale of the shares in the business by the Defendant to the Claimant. A long tail payout lasting 8-10 years was agreed. An interest rate of 7% was agreed in 2021 when interest rates were low. The market has moved in the Claimant’s favour but that is of no consequence, the time for consideration of the Agreements is the time they were made. I have no evidence of what the parties were negotiating or aiming to achieve when reaching that agreement. All that was submitted by the Claimant was that the restrictive covenants were needed to protect the goodwill of Mountain and all of the Claimant’s subsidiaries’ businesses for the £500,000 of interest to be funded each year. Protecting Mountain makes sense (albeit for not so long), but protecting the other, different, businesses makes no legitimate sense because the Defendant did not have expertise in any or most of those fields. So, the core of the legitimate protectable interest was only Mountain’s business. In my judgment, taking this and the directorship into account, it is beyond argument that the restrictive covenants arose from the Defendant’s status as an employee of the Claimant and as a founder and grower of the business and as vendor of the Mountain business to the Claimant and so attracted restraint of trade law. The facts of this case fall squarely within the jurisdiction of restraint of trade and I can see no arguable case for the Claimant to escape that conclusion.

If so, are these restrictive covenants unarguably void due to their wide scope and long duration? I have again carefully considered the clear rule that such matters are best considered at trial not at the interlocutory injunction stage. The scope of the restrictive covenants goes far beyond the core of Mountain’s services and so reaches far beyond any legitimate protectable interest. The covenants cover businesses which are wholly unrelated to Mountain. The duration of the restrictive covenants is far past the duration allowed in ex-employee cases and in sale of business cases. The Claimant could produce no exemplar case approaching anywhere near 8-10 years. The geographical scope, being Nationwide, was not justified by the Claimant providing any evidence of the geographical scope of Mountain’s contracts beyond Norfolk and Suffolk.

I have considered whether the restrictive covenants are severable, but I cannot see how they can be properly severed in a simple and clean way. The only suggestion made by the Claimant was to sever the 1 year “carry over” restriction after the loan is fully repaid but that does not resolve the 9 year duration before then or the width of the businesses banned or the geographical scope.

In my judgment this is a clear case of restrictive covenants being drafted so widely and of such long duration that they are plainly unenforceable at common law for breaching the public policy against restraint of trade. They seek to ban the Defendant from working in her chosen field of expertise, and many other fields, for a huge duration until her retirement age of 65. They seek to go far beyond protecting the Claimant’s legitimate interests in buying Mountain and protecting the goodwill received in that business.

I conclude, exceptionally, that it is appropriate at this stage to rule that on the facts of this case there is no arguable issue about the lack of validity of these restrictive covenants. They are void and unenforceable and the Claimant has not and will not at trial be able to raise any arguable case that they are either: (1) unaffected by restraint of trade law or (2) reasonable in scope and duration.

I dismiss the application for an interlocutory injunction on the grounds that the restrictive covenants relied upon by the Claimant in their Claim Form and application are void and unenforceable. There is no argument to the contrary which has any realistic prospect of success.

Had the full American Cyanamid test been addressed by the Defendant in argument I would have dealt with it in this judgment but the Defendant did not rely on the balance of convenience test and eschewed dealing with it.

A consequentials hearing should be listed early next term if the parties cannot agree the order. The time for permission to appeal is extended until 14 days after the order is issued.