Hydra Plc & Ors v Anastasi & Ors

Sometimes when businessmen fall out it is a straightforward parting of the ways. In this case men who have for some time worked in harmony now feel great bitterness. The litigation process has not helped. Feelings on both sides run high.

The First Claimant (Hydra) is a reseller in the data networking, internet performance and security markets. Among the products it sells are those designed and manufactured by a Californian company – Redline Networks Inc. (Redline).

Mark O’Hara is Managing Director of Hydra. The Company was formed in 1997. Martin Anastasi started work for Hydra at that time. He remained an employee until April 2003. He then set up Tomax Solutions LLP (Tomax) which supplied his services to Hydra. In August 2004 Mr O’Hara decided he no longer wanted Mr Anastasi’s services. Those services ceased on 30^th September 2004 pursuant to a Compromise Agreement of 21^st September.

Keith Marsh started work with Hydra as a salesman in 1998. He left in about 2000 to work for Cisco Systems Inc. for about 6 months but returned in June 2001and remained employed by Hydra until 23 December 2004. He left to join Mr Anastasi at Tomax.

The principal allegations made by Hydra are that Mr Anastasi and Tomax are in breach of terms of the Compromise Agreement; that Mr Marsh is in breach of restrictive covenants in his contract of employment; and that he is in breach of implied terms and/or fiduciary duties. Mr Marsh admits certain comparatively minor breaches.

I have heard a good deal of evidence but a striking feature has been the absence of any evidence from any of Hydra’s many customers about any attempt to poach them. Furthermore Mr O’Hara has refused the request from the Defendant’s solicitors for his consent to the customers being asked to say whether they had been approached or not.

(a) Mr O’Hara.

According to Mr Anastasi it was Mr O’Hara’s accountant who suggested in early 2003 that it would be advantageous to Hydra and to Mr Anastasi for his services to be provided through an LLP.

In February 2004 Mr O’Hara had a heart attack. This coincided with a downturn in market conditions. Mr Anastasi found that after the heart attack Mr O’Hara became more introverted and much more bad tempered. Mr O’Hara blamed Mr Anastasi for the downturn in Hydra’s business.

Mr Anastasi was upset by the proposed termination. He had always maintained that he was entitled to a 50% share in Hydra. That Mr O’Hara disputed. Eventually it was agreed in principle that Mr Anastasi should receive £200,000.

The parties to it were Hydra, Tomax and Mr Anastasi. Although dated 21^st September 2004 it does not appear to have been finally executed until 30^th September. Under clause 3 of the Compromise Agreement Mr Anastasi and Tomax agreed that they would: -

“(d)

not approach any actual, prospective or potential customer (“Customer”) as identified in the current pipeline (“the pipeline”) within a period of 9 months of today (“Restraint Period”) in connection with the sale of any product that is similar in purpose and/or functionality to the product (“Product”) as identified in the Pipeline as relates to that Customer.

(e)

not solicit or entice away any employee of the Company for the period of 12 months following the Termination date;

(f)

not collude, or otherwise assist any other person or entity in undertaking any of those matters in respect of which either you (Mr Anastasi) or Tomax have undertaken above;”

In relation to (d) there was not in fact at the time produced any Pipeline document precisely identifying the customers referred to.

The terms were set out in a letter to him dated 16^th May 2001. He was employed as a “sales account executive”.

Clauses 13 and 14 provided as follows:-

Restrictive covenants

Confidentially (sic)

details of the Company’s business methods, finances, prices or pricing strategy marketing or development plans, product development plans or strategies;

Paul Gracie is the sales director of Europe for Redline. He took up that post in February 2004. He was interested in achieving greater revenue and market penetration in the UK and Ireland.

Mr Marsh discussed with Mr Legg the possibility of the two of them setting up as a value added distributor for Redline. Although recollections differ among the various witnesses it is clear there was at least one meeting, probably in September, involving Mr Gracie, Mr Marsh and Mr Legg at which this possibility was discussed. Mr Legg recollects a couple of discussions with Mr Gracie. He says it was his own view that he and Mr Marsh did not have sufficient expertise and knowledge to operate and manage a distribution business so he referred the opportunity to a client of his, Online Group.

It is clear that Mr Gracie did not consider them to have the requisite experience or knowledge. Mr Gracie reached the conclusion that Mr Anastasi and Tomax did have what was needed and in consequence Redline decided to appoint them as the distributor. The Distributor Agreement is dated 10^th November 2004. Under it Tomax agreed to distribute Redline products and to sell only to Resellers and not to sell directly to any end user customer. An initial suggestion to Mr Gracie on behalf of Mr O’Hara that this was not a genuine document was not pursued.

After Mr O’Hara’s heart attack Mr Marsh noticed that he had become much more aggressive and less communicative both to him and other members of staff. When Mr Anastasi left he realised how much he had been protected from this.

He made various suggestions for improving the business and morale of the staff. Those he says were ignored by Mr O’Hara. He thought particularly after Mr Anastasi left that he should have been promoted. However Mr O’Hara was not prepared to promote him. He said in evidence that Mr O’Hara was a reasonably nice chap but working for him became a bit of a nightmare. According to Gareth Lauder the Managing Director of Data Integration Limited Mr Marsh approached him in October 2004 enquiring whether there were any opportunities for him to work at Data Integration. Mr Marsh indicated during their meeting that he was proposing to approach Mr Anastasi to ask the same question. Mr Lauder was prepared to offer him a job but in the event Mr Marsh opted for Tomax.

He says that he approached Mr Anastasi who initially was reluctant to offer him a position because he was concerned about his commitment and the financial situation.

Mr Anastasi confirmed that he did have reservations. He had doubts about increasing Tomax’s overheads and doubts whether Mr Marsh would really put the effort in. He had had discussions with Hiten Mistry who was going to join him. They met with Mr Marsh on 17^th or 18^th October and reached agreement in principle but he said that he reserved his position and nothing was finalised. He needed to stand back and consider certain aspects carefully including the strength of the market.

Mr Marsh accepted that he had sent emails on the 19^th October making reference to his new business partners. He considered that he was somewhat over enthusiastic at the time. It was not actually agreed until Hiten Mistry had got back from holiday in mid to late November. He signed a draft partnership agreement on the 30^th November, the partnership to commence on the 1^st January 2005. However he said when he showed it to a lawyer friend he said it was awful and it was never in fact signed by Mr Anastasi. He did sign a registration document on the 1^st December 2004 registering his appointment as a partner as from 1^st January 2005.

According to Mr Marsh he told Mr O’Hara that he was going to leave to join Tomax at least one and a half weeks before he gave him his official notice on 1^st December.

On 2^nd December Mr O’Hara sent Mr Marsh a long email seeking to persuade him to stay with Hydra. In it he set out in detail the disadvantages to Mr Marsh of joining Tomax as a 25% shareholder; the problems of taking a reduction in income; and the lack of security. He pointed out that there was a risk that Mr Anastasi would not put in the requisite effort. He accepted that in terms of status Hydra had not served Mr Marsh well. He also accepted that during the past few months Mr Marsh’s performance had exceeded his expectations. He concluded “having done so much to help me over the last few months I feel I owe it to you to try and provide the best opportunity available for you to provide for your family and further your career.”

Mr O’Hara suggested that he had decided before Mr Marsh’s decision to leave that he had earned the right to have a go at senior management. He suggested that he had not been able to get hold of Mr Marsh to tell him. Mr Marsh’s reaction to that suggestion in cross examination was that if Mr O’Hara had in truth wanted to get hold of him there was no difficulty whatsoever. I do not accept Mr O’Hara’s evidence on this point.

Mr Legg maintains that during the first two weeks of October Mr Marsh repeatedly told him that Mr Anastasi was trying to persuade him to join his new distribution company, but he was resisting because he was concerned about Mr Anastasi’s lack of commitment and work ethic. Mr Marsh disputes that he told Mr Legg that Mr Anastasi was trying to persuade him to join.

There is also dispute between them as to the circumstances in which Mr Marsh sent an email to the rest of his staff on the 21^st December announcing his departure. According to Mr Marsh an internal salesman, Leigton Kirby had already left in October; the well respected senior engineer Kevin Hughes was leaving and Mr O’Hara and Mr Legg were concerned about the morale of Hydra.

Mr Legg accepts that he asked Mr Marsh to send an email to the staff announcing his departure and that Mr Marsh asked him what he should say. He told him to try not to make Hydra look bad as a result of his departure but he did not write it.

The email sent referred to Mr Marsh having been offered a stake in the new company and the offer was so great he just could not turn it down. Mr Marsh maintains that the relevant part of the email was drafted by Mr Legg who told him that “he didn’t want to scare the troops too much.” Mr Legg disputes this. He says that he had asked Mr Marsh to send an email to the staff announcing his departure. Mr Marsh after a few days approached him and asked him what he should say. He told him simply to try not to make Hydra look bad as a result of his departure. I accept Mr Marsh’s evidence about this.

The issue is whether Mr Anastasi approached Mr Marsh and persuaded him to leave or whether Mr Marsh wanted to go anyway and approached Mr Anastasi.

Mr Marsh in cross examination put the matter thus “Martin did not approach me; I approached him. Nothing changed my mind – I was enthusiastic about setting up a distribution company; I was fed up with working for Mr O’Hara; I was not going to let another opportunity pass me by … I had to do a fair deal of persuading to get this job, including taking a fairly substantial pay cut.”

I make the following findings:-

After Mr Marsh left he did provide assistance to Hydra in particular in going to hand over meetings where Mr Legg was introduced to customers.

There are issues as to the scope and enforceability of restrictive covenants in (a) the Compromise Agreement and (b) Mr Marsh’s contract of employment. There is also dispute about implied terms and fiduciary duties.

The Defendants contend that this clause which prevents Mr Anastasi or Tomax from approaching customers or prospective customers on the Pipeline is not sufficiently certain to be enforceable. The Claimants contend that the absence of a Pipeline document was the fault of Mr Anastasi and that a careful analysis of the surrounding evidence can show which customers would have been on it.

Mr O’Hara was advised by his solicitor prior to signing the agreement that the reference to a “ Pipeline” was less protective than the original wording. He was advised against signing the agreement as drafted. Mr O’Hara maintains that the blame lies with Mr Anastasi. He contends that they agreed that Mr Anastasi would attach the Pipeline to the Compromise Agreement. He says that he himself could not do so as he did not have the ACT database on his computer. I reject Mr O’Hara’s evidence about this. Had there been such an agreement with Mr Anastasi it is difficult to accept that there would not have been some reference in the contemporaneous documentation. There is none. Furthermore had he wished to obtain a copy of the Pipeline he could have asked Kat Palmer who worked a few feet away from him or could have asked Mr Marsh to print off the document for him. In addition it appears that Mr Anastasi would have had more difficulty in producing the document because he was not in the office at the material time.

Mr Barnett points out correctly that the clause does not prohibit dealing with such customers. It is an agreement “not to approach any actual prospective or potential customer as identified in the current Pipeline… in connection with the sale of any product that is similar in purpose and/or functionality to the product as identified in the Pipeline as relates to that customer”. Accordingly to be in breach there has to be an approach and the approach has to be in connection with the sale in effect of a similar product. The purpose of this clause was to prevent Tomax or Mr Anastasi attempting to divert from Hydra identified business opportunities which were understood between them to be in the pipeline. No party insisted on the production of a specific document because I conclude they recognised that the customer name and product were ascertainable at that time without significant difficulty.

Mr O’Hara has attempted to reconstruct the Pipeline as at September 2004 by identifying both customer and product. The product is not identified any further than the supplier e.g. Redline, Teros or Blue Coat. Each deal is set out as an anticipated sum to be received and an assessment as to the probability of it coming to fruition. There were 74 entries on his initial list. At the start of his evidence he withdrew 6 of them. A further 7 are disputed by Mr Anastasi.

While questions have arisen over Mr O’Hara’s credibility in the reconstruction of the Pipeline I do not accept the Defendants contention that it is unenforceable through uncertainty. The onus is on the Claimants to establish that the entries are properly there either because there is no dispute about them or on the basis of the evidence put before me. I shall deal with the relevant disputed entries separately.

Under clause 3e Mr Anastasi and Tomax agreed they would “not solicit or entice away any employee of the Company for a period of 12 months following the termination date”. It is contended on behalf of the Defendants that this clause goes further than is reasonably necessary to protect Hydra’s legitimate business interests.

Mr Barnett on behalf of the Defendants points to the approach of the Court of Appeal in Hanover Insurance Brokers v Schapiro [1994] IRLR 82 where the Court was considering an appeal against the discharge of an injunction seeking to enforce a non-solicitation of employees clause. Dillon LJ. said this:

“the effect of the injunction under paragraph 1(b) of the Order would be to prevent the defendants, as employers in the insurance brokerage business in competition with HIB which they are entitled to set up, from poaching employees from HIB. The difficulties in law in the way of a non-poaching agreement between employers are very clearly explained in the decision of the Court in Kores Manufacturing Co Ltd v KolokManufacturing Company Ltd [1959] Ch. 109. In particular the employee has the right to work for the employer he wants to work for if that employer is willing to employ him. Moreover, the restriction as drawn would apply to all employees of HIB irrespective of expertise or juniority, and would apply to those who were employees at the time of the solicitation or enticement even if they had only become employees after all the defendants had left HIB’s service. HIB cannot impose a mere covenant against competition on the defendants. That is why a covenant not to canvas persons who become customers of HIB only after the defendants had ceased to be employees of HIB would be invalid. The same must be the case with employees.”

In Dawnay, Day & Co v DeBraconier D’Alphen [1997] IRLR 285 Robert Walker J. held that a clause in a shareholders agreement pursuant to a joint venture prohibiting managers from soliciting or enticing away any person who is “at the time being a director, officer, employee or other servant of the company” was unenforceable as an unreasonable restraint of trade. That was in contrast to the restrictive covenant in their service agreements which prohibited them for a year after their employment terminated from “soliciting or enticing away anyone who during the Defendants employment, was a director or senior manager of the company.”

Each case has to be looked at on its own facts. Hydra was a small company with only 12 employees at the time of this agreement. This was a commercial agreement between experienced businessmen with equal bargaining power. Hydra was entitled to protect the stability of its relatively small workforce. I conclude that clause 3 (e) is not unreasonably in restraint of trade by reason of the fact that it does not distinguish between senior and more junior staff.

Mr Bacon however contended that the scope of this clause was more extensive particularly in relation to the prohibition on enticing. He maintained that even if it were the case that Mr Marsh approached Mr Anastasi and sought to persuade him to let him join the new venture then Mr Anastasi by agreeing in principle that Mr Marsh could have a share in the business would be enticing him.

In Austin Knight (UK) Ltd v Hinds [1994] F.S. R 52 it was argued on behalf of the Claimant that by submitting an offer to a former customer, even one who had approached the Defendant, the Defendant had “endeavoured to entice away” that customer. Vinelott J. rejected that submission and at page 59 said:

“that is not I think, comprehended in the usual meaning of soliciting, and as regards endeavouring to entice a customer away, if (the) submission were well founded the covenant would amount to a covenant not to deal with customers of (the Claimant). ”

Mr Barnett contends that appropriate synonyms for entice are “tempt, lure, persuade, inveigle.” I conclude that the interpretation advanced by Mr Barnett is correct. If I am wrong about this then I am driven to the conclusion that the restraint in the clause would be unreasonably wide and in consequence the clause would be unenforceable.

Under clause 13.1 Mr Marsh agreed that he would “not Directly or Indirectly following the Termination Date except with the prior written consent of the Company in writing:-

It is contended on behalf of the Defendants that under their respective agreements with Redline, Tomax is a Distributor and is only entitled to sell to resellers; Hydra is a reseller and is only entitled to sell to end users.

Mr O’Hara appeared in his witness statement to agree. He said of the Defendants: “they (both) deny approaching any of the Claimants customers for the purpose of competing with the Claimants and say as distributors they would not be competing. If they act only as distributors for Redline and do not solicit end user customers in the Claimants area, that would be correct, however I believe the evidence suggests that this is not the case.”

Mr Bacon however argues that if Tomax sells to a reseller and the reseller sells to an end user who was a customer/prospective customer of Hydra then Mr Marsh would be in breach of clause 13.1.2 because he indirectly through Tomax would be supplying goods (again indirectly) to a Hydra customer. He went so far in argument as to maintain Mr Marsh would still be in breach if the reseller happened to sell to X who happened subsequently to sell on to another end user who was a customer /prospective customer of Hydra.

I do not consider Mr Bacon’s arguments are sustainable. The definition of “Directly or Indirectly” is designed to prevent Mr Marsh contending for example that it was Tomax who was supplying rather than him. In addition I do not consider that the words “without prejudice to the generality of the expression” so widen it’s meaning as to embrace Mr Bacon’s interpretation. But the further point is this :-

Clause 13.1.5. Under this clause Mr Marsh is not entitled for a period of 12 months to “offer employment to or employ or enter into partnership or association with (or offer to do so) or retain the services (or offer to do so) whether as agent, consultant or otherwise of any Key Person”.

“Key Person” is defined as “ a person who was at any time during the period of 12 months immediately prior to the Termination Date engaged or employed as an employee, director, consultant (other than a professional advisor) or agent of the Company and who was both:

(a)

a person with whom you personally dealt during your employment by the Company;

(b)

employed or engaged in a financial, managerial, sales, engineering, executive, professional or similar capacity;”

It is argued by the Defendants that Mr Anastasi was not a “Key Person” because his services were provided to Hydra through Tomax. I do not accept that contention. While he was not employed as an employee or director he was “engaged as a consultant or agent”. Mr Marsh dealt with him personally at Hydra and Mr Anastasi was engaged in a sales capacity.

There is dispute as to whether Mr Marsh and Mr Anastasi are in fact in partnership. Mr Marsh registered at Companies House as a partner as from 1st January 2005. He has held himself out as a partner. On the other hand I accept his evidence and that of Mr Anastasi that they have yet to agree performance targets on which Mr Marsh’s profits would be paid out and/or the way in which Mr Marsh would “buy in” to the partnership. The Claimants point to Regulation 7(1) of the Limited Liability Partnership Regulations 2001which provide for a presumption that all members of a LLP share equally in the profits in the absence of an agreement to the contrary. That does not of course determine whether a partnership has yet been formed. However the evidence points towards Mr Marsh and Mr Anastasi being in partnership and I find that they have been in partnership since 1^st January 2005.

The clause does not on its face prevent Mr Marsh being an employee of Tomax or Mr Anastasi. It is of some significance that when Mr O’Hara was informed by Mr Marsh that he was going off to work with Mr Anastasi at Tomax and it was proposed he should have a 25% stake in the business it did not occur to Mr O’Hara that Mr Marsh might be in breach of clause 13.1.5 in so doing. When asked in evidence what losses flowed from Mr Marsh’s status as a partner rather than as an employee he agreed that no losses flowed. Nonetheless Mr Marsh is technically in breach of this clause by virtue of being a partner of Mr Anastasi.

Under this clause Mr Marsh is not entitled for a period of 12 months to “solicit or attempt to solicit; accept; or place orders for, the supply of goods or services from any Supplier where as a consequence such Supplier may or is likely to cease supplying, reduce its supply to or vary the terms on which it supplies such goods or services to the Company.”

It appeared to be contended initially on behalf of the Claimant that if Tomax bought from Redline and sold to a reseller who resold to an end user who had at one time been a customer of Hydra that Mr Marsh would be in breach of this clause.

If that were to be the effect of the clause it would in my judgment have been unreasonably in restraint of trade. In the event the Claimant has stepped back from such argument and has relied on other covenants and duties.

The alleged implied terms are set out in paragraph 19 as follows:-

Mr Marsh accepts there was an implied duty of fidelity and good faith but does not accept that it embraces the alleged fiduciary duties. There is no dispute about the implied duty of trust and confidence. However it is contended on his behalf that there was no “implied duty of confidence” as his duty in this regard was fully set out in clause 14. I agree with that contention.

It was alleged that the First and Second Defendants owed to Hydra the following fiduciary duties:-

In Nottingham University v Fishel[2000] IRLR 471 Elias J. in the course of a comprehensive review of the authorities on the extent of an employees’ fiduciary duties pointed out that unlike trustees, company directors and liquidators the essence of the employment relationship is not typically fiduciary at all. At paragraph 90 he said

“its purpose is not to place the employee in a position where he is obliged to pursue his employer’s interests at the expense of his own. A relationship is a contractual one and the powers imposed on the employee are conferred by the employer himself. The employee’s freedom of action is regulated by the contract, the scope of his powers is determined by the terms (expressed or implied) of the contract, and as a consequence the employer can exercise (or at least he can place himself in a position where he has the opportunity to exercise) considerable control over the employee’s decision making powers”

and then at paragraphs 97 and 98 he said

“Accordingly, in determining whether a fiduciary relationship arises in the context of an employment relationship, it is necessary to identify with care the particular duties undertaken by the employee, and to ask whether in all the circumstances he has placed himself in a position where he must act solely in theinterests of his employer. It is only once those duties have been identified that it is possible to determine whether any fiduciary duty has been breached, as Lord Upjohn commented in Phipps v Boardman [1967] 2AC 46 at 127:

‘having defined the scope of [the] duties one must see whether he has committed some breach thereof and by placing himself within the scope and ambit of those duties in a position where his duty and interest may possibly conflict. It is only at this stage that any question of accountability arises.’

“It follows that fiduciary duties may be engaged in respect of only part of the employment relationship, as was recognised by Lord Wilberforce, giving judgment for the Privy Council in New Zealand Netherlands Society v Kuys [1973] 1WLR 1126 at 1130:

A person … may be in a fiduciary position quoad a part of his activities but not quoad other parts: each transaction, or group of transactions, must be looked at.”

Mr Marsh was an external salesman. He therefore had contact with customers and potential customers. He had a good deal of technical knowledge. He was not a director. Although he would have liked to have had a management role Mr O’Hara would not give him one.

In British Midland Tool Limited v Midland International Tooling Limited [2003] EWHC 466 at paragrah 94 Hart J. said

“the employee’s duty of fidelity to his employer, although in some respects similar in content to the director’s fiduciary duty to the company and although it is itself sometimes described as a fiduciary duty (see e.g. A-G v CapeBlake(Jonathan Limited,third party) [1998] Ch. 439, is by no means identical. Importantly it does not include, in the usual case, any prohibition as such on being in a position where his duty as employee and his self interest may conflict.”

In G D Searle and Co Ltd v Celltech Ltd [1982] FSR 92 Cumming-Bruce LJ at 101 said:

“the law has always looked with favour upon the efforts of employees to advance themselves, provided they do not steal or use the secrets of their former employer. In the absence of restrictive covenants, there is nothing in the general law to prevent a number of employees in concert in deciding to leave their employer and set themselves up in competition with him.”

In the instant case the Claimants can rely on restrictive covenants. In my judgment, however, Mr Marsh’s position was not a very senior one and his tasks were not such as to lead to the additional fiduciary duties or implied duty of fidelity in the respects particularised over and above those accepted on behalf of Mr Marsh. It was accepted on his behalf that there was a duty to serve Hydra with good faith, not to make a secret profit, not to pass on confidential information and not to exploit Hydra’s maturing business opportunities.

It is also contended that Mr Marsh had a duty to disclose his own misconduct in the sense that he admits that there were certain breaches of his duty to Hydra yet he did not tell Mr O’Hara about them. The well established rule in Bell v Lever Brothers Ltd [1932] AC 161 is that employees are not obliged to disclose their own past misconduct or breaches of contract. The decision in Tesco Stores v Pook [2003] EWHC 823 does not affect the general principle. That case was concerned with a development manager in Tesco’s commerce department who received a bribe. He was quite clearly in a very senior position “just below Board level” and in accordance with the principles enunciated in SybronCorporation v Rochem Limited [1983] IRLR 253 would have been obliged to disclose breaches of duty by fellow employees. It was held that it would have been absurd had he not been under an obligation to disclose his own breaches. The distinction, however, in my judgment relates to the position that he occupied. The same obligation did not rest on Mr Marsh in the context of this case.

It is accepted on behalf of the First Defendant Mr Anastasi, that certain fiduciary duties existed in relation to his employment up until 1^st April 2003. Between that date and 30^th September 2004 it is contended on his behalf that it was Tomax and not Hydra who employed him. That is in fact so. He contends accordingly that he was not under any fiduciary duties to Hydra during that period. This issue has not been ventilated during this case. The fact of the matter is that the Claimants rely on the provisions of the Compromise Agreement and/or contend that Mr Anastasi induced breaches of Mr Marsh’s contract of employment. I have not been addressed at all about Mr Anastasi’s fiduciary duties for the apparent reason no party considers that they really have a part to play in this case. Accordingly it is unnecessary for me to resolve this interesting but otiose issue. In any event the factual conclusions I later reach do not indicate breach of the pleaded fiduciary duties.

Hydra contends that Mr Anastasi and Tomax have induced/procured breaches by Mr Marsh of his contract of employment and/or that they are liable for dishonest assistance.

It is not in dispute that the tort of procuring or inducing a breach of contract has the following elements:-

It is not necessary to satisfy the “knowledge element” for the Claimants to demonstrate that the Defendant or Defendants had actual knowledge of the terms of the contract. Constructive knowledge or recklessness will suffice to establish liability.

“Dishonest assistance” unsurprisingly requires dishonesty. Lord Nicholls in Royal Brunei Airlines v Tan [1995] 2 A.C. 378 said at page 389

“it will be helpful to define the terms being used by looking more closely at what dishonesty means in this context. Whatever may be the position in some criminal law or other context (see for instance R v Ghosh [1982] Q.B. 1053), in the context of the accessory liability principle acting dishonestly, or with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances. This is an objective standard.”

The House of Lords considered what was meant by dishonesty in Twinsetra vYardley [2002] 2 A.C. 164 where Lord Hutton stated

“dishonesty requires knowledge by the defendant that what he was doing would be regarded as dishonest by honest people, although he should not escape a finding of dishonesty because he sets his own standards of dishonesty and does not regard as dishonest what he knows what would offend the normally accepted standards of honest conduct”.

It is admitted in the Defence that Mr Marsh was in breach of an express term to devote all his working time, attention and abilities to his duties to Hydra (clause 1.3.3 of his contract of employment). It is admitted that towards the end of his employment he devoted a small amount of his time during working hours to developing his own prospective business and that of Tomax. Hydra contends that in addition to taking preparatory steps for Tomax he also diverted work away from Hydra and passed confidential information to Tomax. The instances relied upon by Hydra are set out in paragraphs 23 and 24 of the Particulars of Claim.

I shall deal with them in turn.

The alleged instances of steps taken to solicit clients or prospective clients and/or to divert business away or to discuss the new venture with clients and prospective clients are set out in paragraph 24 of the Particulars of Claim.

24.1 On 7^th September 2004 Mr Marsh sent Mr Anastasi contact details of a person at Network Physics. There is however as Mr O’Hara accepted no evidence of Tomax attempting to do any business with Network Physics and no evidence of any work being diverted away from Hydra.

Centercore Ltd. (‘Centercore’) was set up by News International Limited as its purchasing arm for IT. Centrecore also acts as a re-seller to a range to corporate customers. Hydra had previously sold to Centercore for use by News International.

On the 16^th December 2004 Mr Marsh prepared a quotation for Centercore on behalf of Tomax. That quotation was for £25,462 and it related to two web processor appliances at a discounted price and one year’s support contract.

It is admitted in the Defence that this breached Mr Marsh’s obligation to dedicate his time during working hours to Hydra’s business. It is, however denied that Mr Marsh or Tomax were competing with Hydra in relation to this transaction. They contend that Centercore was acting as a re-seller and not end user. The end user was EMAP for FHM.com. They contend that under the terms of Hydra’s re-seller agreement with Redline, it is only entitled to sell to end-users and not to re-sellers.

This was entered into on 3^rd July 2002. Clause 3.1 provides:

“Appointment. Subject to the terms of this Agreement, Redline authorises and appoints Re-seller to Sell, on a non-exclusive basis, the Products solely in the Territory to End Users, in the Territory”.

Clause 1.1 provides:

“End-User means a purchaser of the Products that acquires such Products from Re-seller for its own internal use and not for re-sale, transfer, or distribution to third parties”.

EMAP/FHM.com features on Centercore’s list of clients. Mr Gracie said that Centercore was ‘essentially a re-seller’. Mr Judd said that Centercore is a re-seller not an end-user. On the other hand, it is apparent that Hydra did historically sell to Centercore when Centercore acted as the purchasing arm of News International. Furthermore, when the possibility of this business was first raised with Mr Judd by Mr Marsh on 27^th October, Mr Judd thinks that he made the point to Mr Marsh that this was a Hydra opportunity. That of course was before the 10^th November agreement with Tomax had been signed.

I conclude that under the terms of the Reseller Agreement, Hydra is entitled to re-sell to Centercore when it is operating as the purchasing arm of News International but is not entitled to re-sell to Centercore when Centercore is selling to a third party such as E-Map/FHM.com.

Mr Legg in the witness box raised another matter. He said that he understood that Centercore’s proposal was to act as host of the website for FHM.com and therefore it would not be acting as a re-seller. This was not a matter raised by Mr O’Hara when he gave evidence. Nor did it feature in either of Mr Legg’s witness statements. It was raised the first time in the second week of trial. It was not Mr Marsh’s understanding of the proposal although his original e-mail of 27^th October does make reference to Centercore hosting for FHM.com.

There was no direct evidence from Centercore before me on this matter. It may in the light of subsequent events be of little importance. I am surprised that had Centercore merely intended to host the website, this was not raised in evidence at an earlier stage. I find that probably what was proposed was a re-selling.

What happened after Mr Marsh left Hydra?

Will Centercore proceed with a purchase of this Redline product through anyone?

According to Mr Marsh, Centercore are looking at other products because FHM.com is graphic intensive, and Redline is not very good with graphic intensive sites. Mr Legg’s evidence was that he had recently met with To-Arne Gisvold of Centercore. He told Mr Legg that Redline was not doing the job with FHM because FHM had a lot of issues and they were going to look at other products.

I find that the chance of Centercore placing any order for this Redline product in respect of E-MAP/FHM.com is very slight indeed. In percentage terms, it is in single figures and is highly speculative. After testing they have found the product does not do what they require of it and the investment would not be justified. In these circumstances the “chance” is so slight in my judgment as to be disregarded.

It is necessary to deal with one other allegation against the Defendants in relation to Centercore. By amendment at the start of the trial it is alleged that after the 7^th February 2005, Centercore sought a quotation from Matrix, a company at which one Andy Mills works. It is alleged that Mr Mills is a close friend of the First and Second Defendants and that the Defendants passed on to Matrix, information relating to this business opportunity and/or suggested to Centercore that they should seek a quote from Matrix, in the hope or expectation that Matrix would then purchase the necessary equipment from Tomax and/or in order to maximise the possibility of Hydra not winning the business.

On 8^th November 2004 Mr Jon Moore of Future Publishing Ltd., (‘Future Publishing’) sent to Mr Marsh at Hydra a request for a proposal (RFP) for a border security requirement. The RFP was quite a detailed specification of what Future Publishing required. Mr Marsh referred this to Mr Hughes, Hydra’s senior engineer. He and his team researched Hydra’s current products and concluded that they did not have a single reliable product that would meet all the requirements. There was a product which came close to meeting some but not all of the criteria, manufactured by a company called Servgate.

In consequence, Mr Marsh on 12^th November informed Mr Moore that it was difficult to think of a single product that would fit all of his requirements. He suggested that there were products that fitted the majority of the needs such as Fortinet. He suggested they might be assisted by Data Integration, a reseller with specific fire walling experience.

Mr O’Hara contended that this was in breach of Mr Marsh’s obligations to Hydra. He said that a salesman’s job is to sell and that Hydra did have the expertise to do the work for which this proposal was sought. Mr Marsh’s position was that although it was a salesman’s job to sell, it was not his job to sell a product that in the longer term was going to be detrimental to Hydra’s reputation and indeed also to his own.

It was also contended by Mr O’Hara that Mr Marsh might have purchased the Fortinet device from a Value Added Distributor and that his failure to do so was a breach of his obligations to Hydra. Mr Marsh pointed out that the timescale for return of the RFP was very short and there was simply insufficient time to go to a value added distributor, and get engineers trained up on another system such as Fortinet, so that a proper service could be provided. Mr Hughes’ evidence was that he did not think that Fortinet was a good product either.

It is clear from the evidence of Mr Lauder that Data Integration had been working with Future Publishing for a number of months on this particular project. Data Integration was sent the RFP on 8^th November. Indeed the RFP itself begins ‘the purpose of this document is to allow multiple re-sellers to propose an alternative infrastructure to the firewall protection that Future Publishing has installed”…. As Mr Marsh pointed out, it was obvious that Hydra was only one of a number of re-sellers who were being asked to put forward a proposal.

I find that Mr Marsh referred this matter to Data Integration with good reason. He properly and responsibly took into account what he was told by Mr Hughes. I do not accept Mr O’Hara’s contention that Hydra could properly have dealt with this proposal. I accept the evidence of Mr Hughes and Mr Marsh on this matter.

Mr Marsh says that he told Mr O’Hara about the situation and complained that Hydra firewall technology was weak. I accept Mr Marsh’s evidence on this

In March 2005 Hydra anticipated receiving an order from Racing Post for Pipex. Redline clearly considered Hydra was likely to get an order because it asked Hydra to purchase the product in advance which Hydra did in September 2004.

In his hand over notes on 15^th December 2004 Mr Marsh said the order was expected and he hoped to close the business before he left. A delay was caused by contractual issues. In the event another reseller Matrix put in a lower quote and won the business. It is alleged against the Defendants that they passed information on to Matrix relating to this business opportunity and/or suggested to Pipex/Racing Post that they seek a quote from Matrix in the hope or expectation that Matrix would purchase the equipment from Tomax.

No evidence whatsoever has been called in support of these contentions. According to Mr Gracie and Mr Judd Redline was approached by Pipex at the end of March. Pipex had decided to buy the Redline product but wanted an alternative quote. Mr Gracie put the matter this way “we became aware that Pipex wanted other quotes. Watson phoned me – they were resellers – so I passed them on to Tomax. Keith Marsh replied saying, “if this is Racing Post, I cannot quote.” I then spoke to Watson and asked him if it was for Racing Post. He said no, then asked me for other resellers so he could get multiple quotes. I gave him the name of Matrix. Matrix buy direct from us as they have a distribution arm, Norwood Adams. All this was taking place in the last few days of the quarter. I was just passing on a name. The Matrix distribution arm bought these devices direct from us. Pipex bought from them because everything was messy with Tomax, so they decided to put it through Norwood Adams. I agree Racing Post had had a quote from Hydra. But Pipex wanted an alternate quote. The alternate quote was significantly less, so they bought it from someone other than Hydra.”

On 30^th March Mr Marsh emailed Mr Gracie at Redline saying, “in the unlikely event that this has something to do with Racing Post I would prefer to keep well away. Let Redline handle it.” Tomax did not quote or have anything to do with this transaction.

Mr Graham Watson was the purchasing director of Pipex. Having been given Tomax’s details by Redline he spoke to Mr Marsh on the telephone on 29^th March asking him to quote. His recollection is about a week later he was advised by Mr Judd that Hydra and Tomax were in litigation and it would not be advisable to pursue a purchase “through either.” Mr Judd says that he has never spoken to Mr Watson at all. Mr Watson agreed that he could be mistaken about the call being from Mr Judd. He did not recall the exact conversation but the gist was that if he placed an order with either he might get caught up in the litigation. He agreed that it was Pipex’s usual practice to get more than one quote and in this instance Matrix gave a significantly lower quote than Hydra (the margin was £15,000).

I make the following findings:-

Hydra had good reason to think it would win the order in relation to Racing Post

Tomax through Mr Marsh initially became involved at the suggestion of Redline but quickly stepped back from any involvement in the business opportunity.

Pipex would have sought an alternative quote as a comparison with Hydra’s in any event.

Matrix became involved at the suggestion of Redline.

There is no foundation whatsoever for the allegation that the Defendants passed on to Matrix information relating to the business opportunity or that they suggested to Pipex/Racing Post that they should seek a quote from Matrix.

Mr Judd did not advise Mr Watson not to deal with Tomax or Hydra but it is likely that he understood from someone at Redline that he might get caught up in the litigation process between Hydra and Tomax if he dealt with either of them.

The real reason for Pipex accepting the Matrix quote was that it was so much lower than that from Hydra.

Hydra had previously done business with CSC, reselling to Schroders. The products it sold however were not Redline but those from Cisco and Neoteris.

On 10^th February 2005 Mr Poermandya of CSC Australia based in Victoria, contacted Redline with a view to testing some Redline equipment for possible rent or purchase. The end user was to be an Australian company BHP Billitan. Mr Poermandya wanted the demonstration box sent to Maidstone in Kent for testing.

At the start of his evidence Mr O’Hara handed in to the court his reconstructed pipeline where instead of “CSC – Schroders” there was simply “CSC”. That amendment I concluded was not accidental. It was a somewhat curious attempt to disguise the fact that Hydra’s business with CSC had only been in connection with ongoing supply to Schroders. Whereas in this instance the end user was to be BHP Billiton.

Neither party can take credit for the fact there is no satisfactory evidence before me as to whether the Australian company CSC is a separate legal entity from the CSC with whom Hydra had previously done business. This should have been easy to resolve. However the balance of the evidence suggests that CSC Australia and CSC UK are probably separate legal entities. More importantly BHP Billiton the potential end user was never a Hydra customer and supply via CSC to them would not be in breach of Mr Marsh’s covenant.

It also is clear that the CSC invitation to quote came via a Redline lead on the 15^th February 2005.

This business opportunity arose sometime after Mr Marsh left Hydra. I am satisfied that there is no question of diverting a business opportunity or acting in breach of any fiduciary duty as far as he is concerned. I am also satisfied that there was no breach by Mr Anastasi or Tomax of any duty that rested on them.

Since June 2000 Hydra had done a good deal of business with ABN Amro. On 28^th June 2004 Hydra sold them two Redline E/X3200 units.

On 18^th October 2004 ABN Amro was supplied through Hydra with an evaluation unit with 3200 software.

On 9^th December 2004 Mr Marsh on behalf of Hydra submitted a quote to ABN Amro for £33,876.00 for two E/X3200 units and £4,742 for annual support.

Mr O’Hara alleges that Mr Marsh deliberately failed to give a discount so that Hydra would not get the business and that a discount had been given for the June transaction.

However Mr Marsh said Mr O’Hara was very much against giving discounts and Mr O’Hara himself accepted that he was not in favour of discounts unless forced to give them. Furthermore it is apparent from an analysis of Mr Marsh’s commission statement in relation to the June sale that no discount was given on that occasion.

Data Integration also submitted a quote to ABN Amro on 9^th December through Hiten Mistry. The price for the equipment was £33,916.00 less 5%. The annual support was £4,070.00.

Mr O’Hara alleged that Data Integration had been tipped off about the price Hydra quoted and were thus able to undercut. That allegation was strongly refuted by Mr Lauder of Data Integration and indeed during the course of the trial was expressly withdrawn.

Data Integration had been approached by ABN Amro early in December for a quote. ABN Amro had asked Redline to suggest a further reseller. Mr Judd suggested either Data Integration or Cable and Wireless. Mr Mistry regarded Cable and Wireless as too big. Hydra had a problem at this time with its engineers in that Mr Hughes was about to leave. Mr O’Hara accepted that ABN Amro would have known about that and accepted it might have been a factor making them reluctant to accept the Hydra quote. Mr Mistry said that of the remaining engineers his own technical knowledge was greater than theirs. That was a concern when looking at the maintenance and support aspect of any transaction. It turned out that Data Integration engineers had experience of Redline products from previous employers even though Data Integration had not previously supplied Redline themselves.

Mr Mistry, who I found to be a witness of integrity, said that he did not pass Mr Marsh information about Data Integration’s quote. He pointed out that he had spent 10 years building his professional reputation and he would not compromise it over a small transaction such as this.

Mr Maxey was the network architect of EDS working on behalf of ABN Amro. According to him the network portion of the project which gave rise to the need for the equipment for which quotes were given in December did not arise until mid-October 2004. However as he had only joined ABN Amro in mid-September he may not have been in a good position to know when the decision to place an order with Redline had first been identified. Mr Mistry was however clear that it was not identified internally until mid-October. This appears to be consistent with the sending of the demonstration box on 18^th October which is likely to have been requested once the need had been identified and was likely to have followed within a few days of the request.

Mr O’Hara maintains that this potential supply of this equipment would have been on the pipeline as at 21st September or 30^th September. The defendants contend that the reconstructed pipeline is a manifestly suspect document. They point to the fact that the outset of his evidence Mr O’Hara indicated that six entries should not have been on there and they were withdrawn. Mr Anastasi disputed a number of the entries and there remain seven about which there is disagreement including ABN Amro. It is difficult in most instances to determine whether the disputed entries should or should not be on the pipeline.

In relation to ABN Amro if Mr Mistry is right about the need not being identified at ABN Amro until mid-October Mr O’Hara accepted the ABN Amro/Redline deal or deals would have to be removed from the pipeline. I have to bear in mind that Mr Mistry is now part of Tomax and that I must approach his evidence with caution. However he, Mr Maxey and Mr Lauder struck me as thoroughly truthful witnesses. I accept their evidence. I also accept the evidence of Mr Marsh and Mr Anastasi on this aspect of the matter.

I find as follows:-

Mr Marsh was not in breach of the restrictive covenants; neither was he in breach of implied or fiduciary duty. Mr Anastasi and Tomax are not in breach of the terms of the Compromise Agreement. Neither are they liable for procuring a breach of contract nor are they liable for dishonest assistance.

In November 2004 Mr Anastasi sent a quote to DSI Technology for supply of some Redline equipment. Mr Anastasi claims that Tomax was entitled so to do because DSI Technology was a reseller. He contended that DSI should not be on the Pipeline. According to him Hydra had agreed a sale of equipment to Bulldog and a day or two before the sale took place Bulldog asked for the sale to be routed through DSI. Mr O’Hara said “very occasionally, an end user would request to buy via another entity, which neither Redline nor Hydra had any problem with. One such customer was News International who buys everything through its procurement arm Centercore. Another was where we supplied some Redline equipment via DSI Technology at the end user’s request.”

The Tomax quote to DSI in this instance was a resale to the Daily Star. The Daily Star has never been a customer or prospective customer of Hydra.

Mr O’Hara was asked why, if it is his principal case that customers were being poached, there was no evidence from any of them. He was also asked why he had not asked any of them if they had been approached and why he objected to the Defendants solicitors asking the same question. He advanced two reasons:-

In relation to (i) above he contended that the Defendants had not made full disclosure. They contended that they had and had offered Mr O’Hara the opportunity of having their computers inspected by an independent computer expert to check if there was any undisclosed material.

Mr O’Hara accepted that none of his customers had told him that there had been any approach to them by or on behalf of the Defendants. He accepted that he had disclosure of the Tomax bank statements which did not indicate any inconsistency with the invoices that they had disclosed. He accepted that he had spoken to Paul Judd about who Tomax had done business with and Paul Judd had said that he did not believe that Tomax was doing any business with Hydra customers. While I can understand why Mr O’Hara may not wish the Defendant’s solicitors to have any contact with Hydra customers it is difficult in the circumstances to accept his other reasons if he genuinely believes that the Defendants are behaving as he alleges. I am driven to the conclusion that the Defendants have not been approaching Hydra customers.

It is probably the case that Mr Anastasi and Tomax had the requisite knowledge of Mr Marsh’s contract of employment in the sense that while they did not know its actual terms they knew it contained restrictive covenants and they could without too much difficulty have discovered its terms.

I am though unpersuaded on the evidence that they procured or induced any breach of contract. Neither am I satisfied that there was any intention to interfere with the performance of his contract.

During the case I suggested more than once that the parties might be better off attending to their businesses and trying to earn money rather than sitting in court day after day at considerable expense, after undertakings had been given and an offer of recompense had been made for Mr Marsh’s admitted breaches. Mr O’Hara, Mr Anastasi and Mr Marsh all nodded in apparent agreement. Sadly it appeared the battle lines had been too deeply drawn.

I have set out the limited breaches of contract/duty on the part of Mr Marsh as I have found them to be. I am not satisfied that there is any tortious, equitable or contractual liability on the part of Mr Anastasi or Tomax.

I shall need to hear further submissions from the parties on what damages should be awarded and what consequential orders should be made in the light of my findings.