SG & R Valuation Service Co v Boudrais & Ors

MR JUSTICE CRANSTON: Absent an express provision for garden leave, can an employer achieve the same result in the case of misconduct by an employee? This question arises in relation to the first and second defendants, employees of the claimant, on this application for interim relief. Already these defendants have given important undertakings as to the use of information belonging to their employer and as to not approaching its other employees with a view to recruiting them to a competitor. However, they seek to take up employment with the competitor immediately and do not want to serve any period of garden leave. The claimant seeks to prevent this.

The background to the application is as follows. SG & R Valuation Service Company LLC is a limited liability company formed under the laws of the State of Delaware. It is an international consulting and advisory company specialising in the hotel sector. It trades in the United Kingdom as HVS International from a London Office (“the claimant”). The first defendant is Dominic Boudrais, a director, who began employment with the claimant in June 1998. The second defendant, Karen Smith, began employment with the claimant in March 2001 and became a director in July 2005. The first defendant had responsibility mainly for Central and Eastern Europe and the second defendant was responsible for the United Kingdom and Ireland. This interim application concentrates on these two defendants. The third defendant, Mark Finney, worked as a consultant for the claimant. He began employment in that regard in March 2007 and worked for just over a year. These three defendants are entitled “directors”, although they are not company directors in the accepted sense. The fourth defendant, Collier CRE plc is a limited company and is a large property consultant surveyor and valuer in the United Kingdom. The fifth defendant is a related company of the fourth defendant, and I refer to defendants 4 and 5 without distinguishing between their functions. Although the claimant and the fourth and fifth defendants have cooperated on business deals, they are also competitors in the sector. The fourth and fifth defendants are prospective employers of the first, second and third defendants.

The immediate events with which I am concerned began, in effect, on 4^th April of this year when the first defendant resigned, giving three months’ notice. That was followed three days later by the resignation of the second defendant, again giving three months’ notice. Almost immediately, overnight on the 7^th and 8^th April, the claimant started to discover that there was wrongdoing on the part of these two defendants and the third defendant. The claimant asked the first two defendants to remain at home, in effect to take garden leave. Subsequently, on 11^th April, they sent letters of suspension to the first two defendants. Then on 16^th April there were letters of resignation with immediate effect from the first two defendants sent on their behalf by their lawyers in which they accepted what they said was a repudiatory breach by the claimant in requiring them to remain at home. Subsequently, there has been a letter from the claimant inviting the first two defendants to a disciplinary hearing to be heard later this week.

Two preliminary points need to be mentioned. First, none of what follows is a final determination of the factual issues arising. I have just characterised the behaviour of the first three defendants as “wrongdoing”. At this stage all that needs to be said is that there is a serious issue to be tried in this regard as to whether these three defendants are in breach of contractual and other duties which they owe to the claimant. Final determination is for trial, as with the behaviour of the fourth and fifth defendants.

Secondly, the legal background to this wrongdoing can be taken as read. Employees owe duties, implied by law, to their employer: first, a duty of good faith and fidelity; secondly, a duty not without reasonable and proper cause to act in a manner calculated or likely to destroy or seriously damage the relationship of trust and confidence between them and the employer (Malik v Bank of Credit and Commerce International SA (in liquidation) [1998] AC 20; thirdly, a duty not to misuse confidential information; and, fourthly, in the case of senior employees, fiduciary duties are owed to their employer (University of Nottingham v Fishel [2000] ICR 1462.)

With these preliminary points to one side, let me give a very brief resume of what led to the events of early April and this application. There is a considerable body of material, mainly emails, but also affidavits of the parties. Chronologically, matters begin in early February when the first defendant made a PowerPoint presentation to the fourth and fifth defendants, setting out what the first three defendants could bring to the fourth and fifth defendants as employees. Then the material is probably best summarised by category. First, there are emails evidencing an appropriation of confidential information from the claimant, although the confidentiality of some of the material has probably been overplayed. There are email trails evidencing the collection of contact information. For example, on 24^th March the first defendant sends a particularly troubling email, where he suggests resignation on 1^st April and says:

Next, there are emails indicating plans to take business opportunities to the fourth and fifth defendants. Thus, there is an email from the third defendant to the fourth and fifth defendants, “Subject: Current Workload and Transferability”, saying:

A particularly unattractive feature of the email traffic overall is that there is the occasional expressed intention to damage the claimant’s business. Some of the emails are entitled “Project Chaos”. On 24^th March the first defendant speaks of mass resignation having “maximum negative impact on [the claimant]”.

That is by way of a very brief summary of the background. It will be for the trial to consider all of this, plus additional evidence in its context, and to resolve the factual issues. Once it had been discovered that there was a removal of the claimant’s confidential information, the attempted diversion of business opportunities and the soliciting of staff, the claimant made a “without notice” application against the first three defendants on 11^th April, and this court made an order requiring the first three defendants to deliver up and preserve certain items and not to use or divulge certain information. Pursuant to that order, documents were delivered up and affidavits were sworn by the first three defendants. Subsequently, on 22^nd April the matter came before another judge of this court, and on that occasion undertakings were accepted and orders made. This is the return date for that application.

The hearing in the current application concentrated on the first and second defendants, although there was an ancillary matter relating to the fourth and fifth defendants, to which I return. Fortunately, in relation to the first two defendants most of the issues have been resolved. They have delivered up what is said to be confidential information and given undertakings not to use it. They have generally been prepared to delete information and to provide confirmation of such deletion, and they have accepted that they should not undertake to solicit any of the claimant’s employees to leave its employment until after early July 2008, which is the date when their notice of resignation would otherwise be effective. In relation to the third defendant, for the sake of completeness, I note that he has undertaken that any fees paid in relation to certain potential clients will be placed in a joint bank account with the claimant.

Thus the present hearing concentrated on the main issue, which is the extent to which the first and second defendants could be placed on garden leave. Can they be compelled to spend time, in effect the period of their notice, on garden leave thus preventing them from straightaway joining employment of the fourth and fifth defendants, the claimant’s business rivals?

In approaching this matter it has been necessary to take into account that the employment of the first and second defendants with the claimant will end in early July, on 3^rd and 6^th July respectively. That is the expiry of the required three months’ notice period. Although a trial may be possible in June or early July, judgment may well be reserved. Therefore, it is likely that no trial can take place before at least the great majority of the notice period has expired. The outcome of this application will therefore be a determination of this particular issue and, in the light of that, both parties have said that it is appropriate for me to have regard to the merits of the respective parties’ cases, greater regard than would normally be the case on an application for interim relief (Lansing Linde Ltd v Kerr [1991] 1 WLR 251). Inasmuch as the law is concerned, that I can readily do, for I have had the benefit of full argument by experienced counsel in the area. That is less easy to do, but possible, with some crucial factual matters.

The contracts between the claimant and the first and second defendants are dated 31^st May 1998 and 5^th March 2000 respectively. They are relatively short documents, basically similar, setting out the salary and providing that the employee should have the opportunity to earn a bonus. Termination, in the case of the first defendant, is by three months notice on both sides although, in the case of the second defendant, it is one month as far as the claimant is concerned, but three months on her side. The asymmetry occurred on her promotion to be a director. That promotion to director, as I said earlier, was in 2005. The contracts refer to the claimant’s disciplinary rules and disciplinary procedures, being “presented in the HVS International Employee Manual”. There is a variation provision which says that the contracts can be varied through collective agreement in discussion with employees. Importantly, there is no express power to place employees on garden leave.

During argument there was some discussion as to why the claimant should get the benefit of, in effect, a garden leave clause when it had not bargained for it. That approach certainly has its attractions. The notion of garden leave has been around for some 15 years, and it might be thought that it would be a standard feature of employment contracts of this nature. However, the absence of an express clause is not an end of the analysis. At one point the claimant suggested that the first and second defendant agreed to be placed on garden leave. There was an email on 24^th March when the first defendant said that he supposed that he and the second defendant would be on garden leave, which would allow them to develop their tools of trade. In email correspondence immediately after they were asked to remain at home the first defendant said he had no idea of his status, and the second defendant asked for a clarification of her status. However, the submission that this in some way indicated that the first and second defendants accepted a period of garden leave is completely unreal. There was also mention of the fact that in their affidavits they had said that they were “employed” by the claimants. That adds nothing whatsoever. Their lawyers made quite clear that they were purporting to accept what they said was the employer’s repudiation.

A major contention of the claimant was that the defendants were suspended under an express contractual power pending disciplinary investigations. Earlier I mentioned that the original contracts had referred to an employee manual, but at the time of the contracts there is no evidence that there was an employee manual. There is an employee manual now, dated 11^th March 2008, of nearly 80 pages in length. The first defendant was certainly involved in drawing up that manual, although the first defendant cannot recall whether he received a copy and the second defendant says that she never received a copy. Both, however, are included on the circulation email for the manual. That employee manual contains a power of suspension: the company reserves the right to suspend employees as a precautionary measure whilst certain matters are investigated. Such suspension is to be on full pay for up to 28 days. In rare cases the suspension may be longer.

The suggestion is that that clause and that employee manual has been incorporated into the first and second defendants’ contracts of employment. In my judgment, any suggestion that that suspensory power was incorporated in the defendants’ contract falls at the first hurdle. Even if the reference to the HVS International Employee Manual in the original employment contracts can be read as incorporating the manual as it exists from time to time, which I doubt, there is still Addendum 1 of the 2008 manual. That requires the employee’s signature to three propositions: that they have received and read the manual and understand, inter alia, its rules; that they understand that, should the contents be changed, HVS may require an additional signature to indicate awareness of and understanding of these changed contents; and that they understand the above statements. There is no evidence that the first and second defendants signed this addendum. In my judgment, there is no arguable case that they are bound by the manual or the power of suspension contained within it.

Reference was made by the claimant to the ACAS Code of Practice on Disciplinary and Grievance Procedures. That suggests, sensibly enough, that where there is a difficulty with an employee and an allegation of gross misconduct a brief period of suspension on full pay should be undertaken. As I have said, that may well indicate good practice, but it says nothing about the contractual position of these defendants. Not only is there no evidence it was incorporated in their contracts, by usage or otherwise, but it lacks contractually binding language.

If there is no express entitlement to suspend employees for disciplinary reasons or to place them on garden leave, is there a right otherwise provided by law for an employer in effect to do so? Novices in this area might well have thought that the way the law would approach this issue would be to do so directly. In other words, the law would ask whether there is an implied power to require garden leave or to suspend as part of the employment contract. If there were such an implied power, then the law would need to consider the conditions under which it should be exercised. It would be necessary to confine the power to protect employees against its abusive use. This is not an unfamiliar problem in other areas of the law, including contract law, which has grappled with the limits to the exercise of discretionary power. However, this approach was not argued before me. All the authorities approach the matter in a completely different way. They ask the question: under the contract of employment is there a right of an employee to work? If employees do not have that right to work, then they can be sent home and given no work, even though the contract of employment continues. If they have the right to work, however, the subsequent question to ask is: in what, if any, circumstances does the employer have the right nonetheless to require them to stay away from work?

There are a series of cases where particular categories of employee are regarded as having the right to work. The seminal case is Collier v Sunday Referee Publishing Co [1940] KB 647. In that case Asquith J (as he then was) said:

Although cases like Collier v Sunday Referee Publishing Co are still authoritative, the approach now is to determine whether an employer has the right to work by means of the construction of the contract of employment. The test laid down in the leading decision, William Hill Organisation Ltd v Tucker [1999] ICR 291, is to ask whether the bargain between the employer and the employee is such that there is a right to work, in other words, whether the obligation of the employer is not confined to payment of the agreed remuneration, but also includes the obligation to provide work. Thus I must ask whether the employment bargain between the claimant and the first two defendants is merely limited to payment of the salary and, within the discretion of the claimant, of a bonus, or whether it goes further to involve an additional obligation to provide work and, in a negative sense, not to send the defendants home on garden leave. The factors taken into account in the William Hill case in assisting the construction of the employment contract were the unique nature of the employee’s role, the skills involved in his job and whether those skills would atrophy through lack of use, and the provisions of the particular contract of employment.

In my judgment, there is a right to work in this case. First, the first and second defendants’ work is specialised. They have significant skills. Those skills include attracting new work. Contacts are important in doing that, and any dissociation from the market for a substantial period would result in those skills becoming stale. In the case of the second defendant there is the additional feature that she underwrites property valuations and that skill requires, I would have thought, regular use and contemporary knowledge of the market. Secondly, these defendants occupy high positions within the claimant. Although they are not company law directors, they are directors – two of the five directors of the London office – and nothing said suggests their role should be belittled. Thirdly, there is their right to bonus. That is discretionary, but on the documents it is clear that the bonuses were a substantial part of their remuneration package. So there is an indirect financial interest and without the ability to earn that bonus then the defendants are adversely affected.

If there is a right to work, does that mean that employers must always provide work and can never keep the employee away from it? Here is another instance where the language of rights misleads. The right to work is not an unqualified right. It is a construct of the law and should not be taken to mean an absolute right to work in practice. Indeed, in the William Hill case Morritt LJ set out the limits of the claim being advanced there by the employee. It was not being suggested that the employer had an obligation to find work if there was none to be done, or none which could be done with profit to the employer. Nor, in that case, did the employee contend that the employer was bound to allocate work to him in preference to another employee if there was not enough for both of them. Morritt LJ said:

These propositions about the need for employees to demonstrate a readiness and willingness to perform the work can be put another way – looking through the lens of the employer. In other words, the issue becomes on what grounds can an employer keep an employee away from work despite the employer having a right to work. This is the way the matter is stated in a leading authority, Harvey on Industrial Relations and Employment Law. At paragraph [563]-[570] the learned authors opine that the combined effect of William Hill and Langston v Amalgamated Union of Engineering Workers [1974] ICR 180 is that

In my judgment, therefore, the law is clear. Employees who have a right to work have that right subject to the qualification that they have not, as a result of some prior breach of contract or other duty, demonstrated in a serious way that they are not ready or willing to work, or, to put it another way, that they have not rendered it impossible or reasonably impracticable for the employer to provide work. The breach of contract or other duty must constitute wrongdoing, by reason of which they will profit or potentially profit. In such circumstances, there is no obligation on the employer to provide work, although the contract of employment is ongoing. This is not an implied term in the employment contract but is a qualification to the legal construct, the right to work.

In this case, considering the merits as closely as the circumstances of this application permits, the first and second defendants have breached their contractual and other duties in such a way so as to fall within this qualification. They have exhibited behaviour which demonstrates that they are not ready and willing to work in accordance with their contract of employment. In particular, as mentioned earlier, they have demonstrated in some respects a specific hostility towards the claimant which almost of itself means they have forfeited the right to be provided with work. In the alternative language of Harvey, the employer must not unreasonably withhold work when there is work to do, but, in the present circumstances, it is not unreasonable for the claimant to do so.

It follows that the first and second defendants, in my judgment, remain employed by the claimant. Until the notice period elapses they therefore remain subject to continuing contractual and other duties. In keeping them away from work there has been no repudiatory breach by the claimant for the first and second defendants to accept, as they purported to do in the letter of their lawyers of 16^th April. There was reasonable and proper cause for the claimant to make its demand that they remain at home. It is therefore not strictly necessary to address two further arguments advanced by the claimant but, for the sake of completeness, I will offer some brief remarks.

RDF Media Group plc v Clements [2007] EWHC 2892; [2008] IRLR 207 was advanced as authority for the proposition that an employee who has destroyed the mutual trust which is at the base of the employment relationship, who is, in other words, in repudiatory breach of contract, cannot purport to accept any separate repudiatory breach by the employer. Here it is said that if the claimant acted in repudiatory breach of contract by requiring the first and second defendants to stay at home, such a breach was a consequence of their prior breach of the implied duty of trust and confidence resulting from their earlier misconduct. Thus it would be inequitable to allow them to rely on an acceptance of a repudiatory breach by the claimant which arose only as a consequence of the prior breach of contract by them. The proposition is based on two House of Lords’ authorities, Bremer Vulcan Schiffbau und Maschinenfabrik v South India Shipping Corp [1981] AC 909 and Paal Wilson v Partenreederei Hannah Blumenthal [1983] 1 AC 854. In brief, the issue involved arbitration clauses where neither party pursued the arbitration with any great diligence. It was said that in that case there was a mutuality of obligation and a mutuality of breach and, therefore, neither party could rely on the other’s conduct as amounting to breach.

At present I remain unconvinced that, while there may be a mutuality of obligation, in particular of trust and confidence, in the employment relationship, there is, in the type of circumstances in this case, a mutuality of breach which justifies applying the approach in these two House of Lords’ authorities. Rather what I perceive as typical in this type of case is separate, sequential breaches, one by the employee and one by the employer. Moreover, I would be concerned about situations where, if the employee was in repudiatory breach, the employer could take whatever repudiatory breach it wished and the employer could not accept the employee’s repudiation as bringing the employment relationship to an end. That could lead to some very undesirable scenarios in the employment relationship. I understand the RDF case is on appeal.

The claimant also puts the application on the basis of the springboard jurisdiction. That jurisdiction as a basis for an injunction began with confidential information and is designed to prevent the person with confidential information from taking advantage of the springboard which possession of it confers (for example, Roger Bullivant Ltd v Ellis [1987] ICR 464). The springboard operates for a period until the information is public, the confidence is lost, or for as long as it can be estimated the information can be lawfully assembled. The jurisdiction has been widened to neutralise any unfair advantage which those acting in breach of duty or those knowingly participating in their breach may obtain. It seeks to deprive wrongdoers of the fruits of their breach of duty and to restore the position to before the wrongdoing (Midas IT Services v Opus Portfolio Ltd 21^st December 1999, a judgment of Blackburne J in the Chancery Division at pages 18 and 19.) In this case the claimant advanced the argument for springboard relief in particular on the basis of the breaches of fiduciary duty by the first and second defendants in not disclosing their wrongdoing. There is also the separate duty that senior employees have, a duty to report the misconduct of each other. The claimant argued that had the first and second defendants not breached those duties, the claimant would have been aware much earlier of the planned move to their competitors, the fourth and fifth defendants. Instead of the claimant being afforded the opportunity of nipping this threat in the bud, the defendants had furthered the competitive disadvantage which the claimant would suffer. As a consequence of the wrongdoing the defendants gained a head start in their endeavour of setting up in competition on behalf of the fourth and fifth defendants. In those circumstances, it is said, a springboard injunction is justified.

I am not persuaded that this is a case where the springboard jurisdiction should be exercised. The confidential information, as I indicated earlier, has been handed back or sterilised. There is no evidence that it has been used. In my view, it would be wrong to assume the misuse of information and to accept that the defendants have misled the court and lied on affidavit in the assurances they have given in this regard. The resignation of employees is lawful provided the notice period is served, and it is not unlawful to move to competitors. On the facts of this case, given the success of the claimant in forestalling matters, the springboard jurisdiction is not founded.

I have as far as possible made an assessment of the claimant’s prospects of success. In my view, the law supports the contention that it has not repudiated the contracts of employment with the first and second defendants and that the contracts continue until the lapse of the notice period. Nonetheless, it is necessary to consider the balance of convenience in granting injunctive relief. In this regard it is necessary to take into account the factors relevant to the exercise of discretion. On the one hand, in Provident Group plc v Hayward [1989] ICR 160 Dillon LJ indicated that where there was a period of notice under a contract of employment, and it was not an excessive period, then it may be said, forcefully and correctly, that employers should be able to obtain its protection. He said:

On the other hand, there is the point, addressed in William Hill by Morritt LJ, that the grant of an injunction does or may have an anti-competitive effect (at 301H-302A). His Lordship pointed out that courts should be careful not to grant interlocutory relief to enforce a garden leave clause – that in a case where there is an express garden leave clause – to any greater extent than will be covered by a justifiable covenant in restraint of trade. In this case the first and second defendants submit that the prevention of competition, without more, is no basis for the grant of an injunction in support of a post-termination restriction. They suggest that the reality of the position is that the employment relationship is over. The purported disciplinary action which is in train is completely unreal, so that the grant of injunction would simply be to protect a bare right to prevent competition. Covenants in bare restraint of trade, in the defendants’ submission, are bad.

Not without difficulty, my conclusion is that the balance of convenience favours interim relief. At its simplest, the effect will be that the first and second defendants will work out their period of notice. There seems nothing wrong with that, even taking into account the asymmetry for the second defendant of that notice period, compared with the notice period in her regard in favour of the claimant. The defendants are protected by the undertakings to pay their salaries and the cross-undertakings as to damages. There can be no legitimate expectation that the defendants would have had work during the notice period. It will be recalled that the first defendant even expected to serve a period of garden leave before moving to the fourth and fifth defendants. The claimant should not be expected to lose the benefit of the notice period and the sterilisation of the defendants’ activity during that period.

I can take this matter shortly. The application in this regard is for deletion of material which the fourth and fifth defendants have. In the submissions by the claimant this is said to be a usual order. It is said that the material that the fourth and fifth defendants have is confidential information as to, for example, details of employees of the claimant and their business opportunities. The argument is that if undertakings have been given not to use this information then it should be reasonably easy to delete it. Reference is made to affidavits by the fourth and fifth defendants that they have not used the information and have not passed it on. Therefore, it is said, a destruction order should follow as of course.

In my judgment, this is an area which should be approached with some diffidence. As a matter of principle the court should take a course which involves the least injustice if it turns out to be wrong. I have no way of knowing whether it will be time-consuming and costly for the fourth and fifth defendants to do a thorough IT audit so as to ensure that all computers and servers have been checked and all relevant files deleted. That being the case, and given the undertakings, I refuse this particular application.