Basic Solutions Ltd v Sands

The Claimant company (Basic Solutions Ltd) seeks an injunction against a former employee (Mr Robert Sands). The application is based on allegations of breaches of express contractual provisions and, in the alternative, upon obligations of confidence arising by implication. The Defendant gave six months notice in September 2007 and ceased, effectively, to work for the Claimant after going sick in December 2007.

The Claimant is a supplier of chemical-based products and is currently in the process of preparing to tender to Network Rail for the supply of a product to combat the longstanding problem of “leaves on the line”. This concerns the problems caused by loss of adhesion between train wheels and the rails caused by a build-up of leaves. The Claimant has developed a chemical which is intended to address Network Rail’s needs in this respect and which is to be marketed as “Track Grip”.

While this process was under way, the Claimant was informed on about 17 April 2008 that the Defendant was also proposing to tender for the Network Rail contract on behalf of a company called Extreme Green International Limited (“EGIL”), which had been formed by his son in January of this year. The rival product was to be known as “Super Grip”. The Defendant had in fact begun in post as Managing Director of EGIL on 10 March. That was two days after the expiry of his six months notice period.

The order sought is in the following terms, namely that the Defendant should be:

Various contractual provisions are relied upon by the Claimant, although for the purposes of the application before me on 10 June 2008 Ms Downing confined her submissions on its behalf to the contents of a service agreement dated 29 May 2002. This contained certain restrictive covenants, which included an agreement on the Defendant’s part that he would not solicit business from “Relevant Customers” for the sale of “Relevant Products”. That is reflected in the terms of the injunction sought, as I have recited above. It is the Claimant’s case that Super Grip is a product which serves the same function as Track Grip and that it would be a breach of the relevant covenants for the Defendant to tender in competition. It is further suggested that Super Grip was only conceived by the Defendant as a result of his involvement with Track Grip during the period of his employment. It is said that this involves a breach of confidence through the use of the Claimant’s confidential information or know-how. That is a matter of dispute between the parties.

It was submitted by Mr Brochwicz-Lewinski, on the Defendant’s behalf, that the outcome of the interim application before me was likely in practice to be finally determinative of the parties’ rights in the matter since, if the Defendant were to be restrained from tendering, his opportunity to take advantage of the Super Grip product would be lost for the foreseeable future. The evidence is not entirely clear on the matter, but it is the Defendant’s case that Network Rail is working to a timetable which has to be complied with; he would not be able to compete if subject to an interim injunction, even for the limited period prior to a speedy trial. The relevance of this consideration is that the court, in coming to its decision, is not confined to applying the American Cyanamid principles and would be in a position to consider the broader merits of the case. This contention was not vigorously opposed by Ms Downing, although she was not prepared to commit herself on the point without fuller information as to the Network Rail tendering timetable.

The Defendant resisted the application on a variety of grounds. He argued that there is no evidence to support the proposition that he is in breach of any contractual provisions or of any of his obligations of confidence. In any event, he submitted that the express provisions relied upon are unenforceable. It was also to be part of his case that the financial position of the Claimant company was not such as to support any meaningful cross-undertaking as to damages. Alternative proposals were put forward, but in the event I need not consider this aspect of the case in any further detail.

I turn first to the relevant contractual clauses. It is necessary always to have regard to the public policy considerations underlying the law governing these matters. The law is concerned to permit fair competition. When construing the terms of restrictive covenants, therefore, it is necessary to address inter alia whether they would have the effect of restricting not only unfair but also fair competition.

The relevant definitions are contained in Clause 14.1.

“Relevant Customer” is defined as “any person, firm or company who or which at any time during the Relevant Period is or was negotiating with, a client or customer of, or in the habit of dealing with, the Company or any Group Company for the sale or supply of Relevant Products or Services, and with whom the Executive had personal contact or dealings on behalf of the Businesses or of which the Executive had personal knowledge during the Relevant Period in the course of the Executive’s employment under this Agreement”. (The word “Executive” obviously refers to the Defendant himself.)

“Relevant Period” is defined as “the period of two years immediately before the Termination Date”.

“Relevant Products or Services” is a term which covers “products or services which are of the same kind or of a materially similar kind to or competitive with any product or services sold or supplied by the Company or any Group Company within the Relevant Period and with which sale or supply the Executive was directly concerned or connected or of which the Executive had personal knowledge during the Relevant Period in the course of the Executive’s employment under this Agreement”.

The relevant restrictions under the heading “Non Competition” are to be found in Clause 14.4 of the Agreement:

“14.4.1

In the event that the Executive terminates this Agreement or the Company terminates this Agreement pursuant to Clauses 2.2 or 12 the Executive agrees that he will not, without the prior written consent of the Company, directly or indirectly and whether alone or in conjunction with or on behalf of any other person and whether as principal, shareholder, director, employee, agent, consultant, partner or otherwise for a period of 12 months from the Termination Date:

14.4.1.1 be engaged, concerned or interested in, or provide technical, commercial, or professional advice to, any other business which supplies Relevant Products or Services in competition with the Company or any Group Company in the Restricted Territory;

14.4.1.2 be engaged, concerned or interested in any business which at any time during the Relevant Period has supplied Relevant Products or Services to the Company or is or was at any time during the Relevant Period a Relevant Customer if such engagement, concern or interest causes or would cause a supplier to cease or materially reduce its supplies to the Company or the Relevant Customer to cease or materially reduce its orders or contracts with the Company;

14.4.1.3 hold any Material Interest in any person, firm or company which requires or might reasonably be thought by the Company to require the Executive to disclose or make use of any Confidential Information in order properly to discharge his duties to or to further the Executive’s interest in such person, firm or company.”

The material provisions under the heading “Non-Solicitation/Non-Dealing” are to be found in Clause 14.5 of the Agreement:

“14.5.1

In the event that the Executive terminates this Agreement or the Company terminates this Agreement pursuant to Clauses 2.2 or 12 the Executive agrees that he will not, without the prior written consent of the Company, directly or indirectly and whether alone or in conjunction with or on behalf of any other person and whether as principal, shareholder, director, employee, agent, consultant, partner or otherwise:

14.5.1.1 for a period of 12 months from the Termination Date so as to compete with the Company, canvass, solicit or approach or cause to be canvassed, solicited or approached any Relevant Customer for the sale or supply of Relevant Products or Services or endeavour to do so;

14.5.1.2 for a period of 12 months from the Termination Date so as to compete with the Company accept or facilitate the acceptance of any contract with or deal with in competition with the Businesses any Relevant Customer in relation to the sale or supply of any Relevant Products or Services or endeavour to do so … ”

There is an underlying issue of construction that is of some significance. The key provisions are the definitions of “Relevant Customer” and “Relevant Products or Services” contained in Clause 14.1.

It is, I believe, uncontroversial that prior to the termination of the Defendant’s employment, in March 2008, the Claimant had not sold any Track Grip to Network Rail, or indeed to anyone else, nor entered into any agreement for sale or supply. It is, however, accepted that some samples were supplied for Network Rail to test with a view to the Claimant being ultimately permitted, if the tests proved satisfactory, to tender for the Network Rail contract. The question which immediately arises is whether or not the provision of those samples (in or about September 2007) would constitute the “supply of Relevant Products or Services”. The Defendant submits that the answer is in the negative and that, accordingly, none of the restrictive provisions contained in Clauses 14.4.1.1, 14.5.1.1 and 14.5.1.2 has been triggered.

It is the Defendant’s case that the notion of “supply” cannot include the mere submission of samples for testing (with a view to possible future sale and supply). There is perhaps some support for this contention to be found within the wording of the contract itself, in Clause 14.4.1.2, which would appear to contemplate, as the mischief sought to be avoided, the possibility of a Relevant Customer ceasing or materially reducing its orders or contracts with the Company. That would suggest that the parties had in mind the interruption of an ongoing relationship. Against this background, in particular, it would appear highly artificial to include within the concept of “sale or supply of Relevant Products or Services” the provision of samples for testing.

In construing restrictive covenants, the court should seek out the natural and ordinary meaning of the words concerned and try to identify what the parties would have intended in the circumstances in which the agreement was reached. One should focus on the commercial realities.

I would accordingly uphold Mr Brochwicz-Lewinski’s submissions in this regard. I hold that the mere provision of samples for the purpose of testing (albeit with a view to possible sale or supply in the future) would not be sufficient to constitute “supply” for the purposes of Clause 14.

Furthermore, Mr Brochwicz-Lewinski submitted that the relevant 12-month periods stipulated in the contract are excessive. That is to say, such a long period goes beyond what is necessary for the protection of any legitimate business interests on the part of the Claimant and would have the effect of clamping down on legitimate competition. One often comes across shorter periods of restriction, such as three months or six months. I asked Ms Downing in the course of submissions whether there were any particular factors about this business which would require the protection to be extended for a period as long as 12 months. Her response was that there are sometimes long lead times in the industry and gave the illustration of the prolonged period required for being permitted to tender for the Network Rail contract.

Nevertheless, the matter has to be judged at the time the contract was entered into (in 2002) and the particular circumstances involved in Network Rail’s procedures are not, for that reason, directly relevant. I cannot see, as a matter of general principle, how the fact that there may sometimes be long lead times in tendering for and obtaining contracts should, in itself, have a bearing upon the period for which restrictive covenants should be effective. I do not consider, in all the circumstances, that the Claimant has managed to demonstrate that such a long period is reasonably necessary. Certainly no evidence has been adduced to that effect. I would therefore hold it to be unenforceable.

Another submission made by Mr Brochwicz-Lewinski was that the blanket introduction of “any Group Company” goes too wide and is not sufficiently targeted on the reasonable protection of the Claimant’s legitimate interests. If it were necessary to do so, I would also uphold that submission. It is not for the court to try to save an employer who has stipulated for unduly wide protection: see J A Mont (UK) Ltd v Mills [1993] IRLR 172.

The attack was also directed to the wording of Clause 14.4.1.3. One needs to be very careful about a clause which appears to give the employer stipulating for it the right to determine what shall constitute a breach of contract. In any event, it is clear that it would have to be judged what “might reasonably be thought” as at the time the “material interest” was acquired. In this case, that would be 10 March 2008. At that time EGIL was not, according to the evidence, involved in the Network Rail matter and it would be necessary to look at the nature of its business at that time.

The Defendant has made it clear that he accepts that he should not carry out any of the prohibited activities with regard to goods and services he dealt with in the two years prior to termination (i.e. 2005–2007). During that period he was dealing with a different and irrelevant range of products (i.e. those concerned with de-icing). EGIL deals with cleaning products and, according to the evidence of the Defendant, the Claimant company has not sold or supplied products falling within this category since 2006. Indeed, his own involvement with that range ceased in 2004. On the face of it, therefore, there would be no scope for breach of his obligations or impermissible competition in that context.

The Claimant has raised the alternative argument that the Defendant is, irrespective of any express contractual provisions, in breach of a duty of confidence owed in equity. The nature of this case appeared to fluctuate in the course of submissions. It has been put in various ways. One suggestion was that it was inherently confidential information that the products currently on the market, as well as that being proposed by the Claimant, are based on sand in solution. This is hardly confidential information in itself, since it is well known that Network Rail have problems with the impact of ground sand on the working parts of the engines. Moreover, one of the products is actually known as “Sandite”. Another proposition was that the Defendant had become aware of the proportion of sand in the Claimant’s proposed product, but this is irrelevant since Super Grip was specifically designed, at his instruction, to avoid the use of sand altogether.

Another difficulty confronting the Claimant in this context is that evidence was produced from Mr Donmall, the chemist who came up with the Super Grip product between March and May of this year. He expressly said that he was given no detailed instructions by the Defendant and certainly no information deriving from his employment with the Claimant. The Defendant himself also denies this. Nothing has been produced from the Claimant to suggest that either of these witnesses is not telling the truth. Nor was any application made to cross-examine either of them on their witness statements. As things stand, therefore, there is nothing to weigh in the scales against their evidence, such that I could conclude that there is in this respect a serious issue to be tried.

At one stage the argument was raised that it was confidential information, in itself, that Network Rail was in the market for a new “leaf-busting” product. This has not been pleaded and it appears to have been raised for the first time in the course of oral argument. Furthermore, there is an important e-mail exhibited to the Defendant’s witness statement from Mr Philip Scott, the Contract and Commercial Manager of Network Rail, which states:

“ … I was given the task of reviewing the market to see if any other suppliers were interested in supplying a product that would both encourage competition and/or enhance the performance of the current product …

Several suppliers indicated that they would like to be involved, so preliminary talks and discussions took place including Network Rail Engineers to ascertain if any of these products had potential or were viable before we moved to a tender process.”

Mr Scott also pointed out that, in accordance with EU legislation, Network Rail is required to seek tenders from a minimum of three suppliers for all its products. None of this seems consistent with the proposition that the mere fact that Network Rail is in the market would have about it the necessary “quality of confidence”.

Even for the purpose of establishing a serious question to be tried, in the context of American Cyanamid, it is necessary for an applicant to go beyond mere assertion. The Claimant’s case on breach of confidence appears to be based partly upon inviting an inference from certain uncontroversial facts, partly upon assertion and partly upon speculation.

At one stage, for example, it appeared to be the Claimant’s primary case that a breach of confidence could be inferred from the proposition that Super Grip was an identical or similar product to the Claimant’s Track Grip. This is bare assertion. The evidence before the court now, from the Defendant and from Mr Donmall, flatly contradicts this and demonstrates that the product is novel in certain respects. The Claimant was not in a position to contradict this.

Both in advance of the hearing before me and in the course of it, the offer was made by the Defendant to present the court with confidential information identifying specifically the make-up of the Super Grip product. The purpose of this was to demonstrate that it was a unique product and one that was quite different in its constituents from Track Grip. The gauntlet was thrown down and the Claimant was invited to do likewise, so that the court could on a confidential basis resolve this conflict once and for all. The Claimant’s advisers declined to take this proposal up. No criticism attaches to them for this, of course, but I am not prepared to accept, in the light of the evidence before me, that there is even a triable issue as to whether or not Track Grip is identical to the Claimant’s product or has been copied from it.

What does emerge from the uncontradicted evidence of Mr Donmall is that Super Grip is based on a specially made ingredient which is harder than sand and that it is suspended in a medium with “sponge-like characteristics”. This has the advantage of maintaining the material in suspension more efficiently than existing products. It also contains a fluorescent dye which would enable train drivers to see it on the tracks and to make any necessary adjustments to speed. Although Ms Downing suggested that it may emerge at trial that Mr Donmall is not a witness of truth, I have no basis whatever to suppose that this is so. That is simply Micawberism.

As I have said, the nature of the Claimant’s case consists largely of speculation or assertion. I can illustrate this by reference to certain short passages in the evidence of its witness, Mr Martyn Paul.

For example in paragraph 9 of his witness statement Mr Paul states:

“ … I believe … that the creation of Super Grip has simply used the knowledge gained while [the Defendant] was employed by the Claimant. Either that knowledge is based upon analysis of the samples taken and retained by the Defendant or by use of the Claimant’s specifications, whether in whole or in part, or by the general knowledge and ‘know-how’ gained while in the Claimant’s employment.”

(It is necessary to have in mind here the Defendant’s evidence as to his extensive experience in the field going right back to 1976 – long before he joined the Claimant.)

Further on, in paragraph 11, he makes these further assertions:

“I am informed and believe that a timescale of under one month, from a standing start would not be sufficient to produce a product of this nature, leaving aside the point already made that the end result is identical or very similar to our product. It is my belief, based both on technical advice given and the facts generally that a chemist instructed by the Defendant could not have produced such a similar product unless he had based it either upon actual specifications for Track Grip, or upon analysis of a sample of it, or using information removed from the Claimant, whether by the taking of actual documents or the use of general information retained or discussions in which he participated or commenced this development earlier i.e. whilst still employed by the Claimant.”

At paragraph 14 it is stated:

“It is simply not possible that Super Grip can have replicated Track Grip without some use of the information acquired by [the Defendant] and I do not accept that he has not in fact made use of the actual product to copy it.”

In the teeth of the unchallenged evidence from Mr Donmall and the Defendant, I cannot attach any significant weight to these bold assertions. Track Grip is not replicated in Super Grip and Mr Donmall had no input from the Claimant’s know-how. The Claimant is making serious allegations against the Defendant, including to the effect that he kept samples and sought to copy them in breach of his duty of confidence, but it is incumbent upon the Claimant to produce at least some evidential support to weigh in the scales against the clear evidence from the Defendant and Mr Donmall. The decision was made not to apply for an adjournment of the hearing before me, but, even if one had been obtained, I cannot see any basis for thinking that any solid evidence would have been forthcoming to support Mr Paul’s accusations.

I have come to the conclusion that the Claimant fails to surmount the initial American Cyanamid hurdle of demonstrating a serious issue to be tried, whether in the context of alleged breaches of the contractual terms before me or that of breach of an equitable duty of confidence. The application for an interim injunction is an attempt to prevent the Defendant from competing in the tendering process for the purpose of providing Network Rail with a new product. Both Counsel accept that it is legitimate to take into account public interest considerations. That is especially appropriate here, given the problems caused over the years by “leaves on the line” with regard both to cost and inconvenience. This public interest dimension is appropriate to be taken into account as part of the background. There may be circumstances in which such considerations would have to take second place to the protection of a party’s legitimate interest in protecting its trade secrets or confidential information. This is not such a case. The strategy of the Claimant at the moment would appear to be simply to prevent competition from the Defendant rather than his taking an improper or unfair advantage.

So far as the second limb of American Cyanamid is concerned, it is effectively neutral. Damages would not be an adequate remedy for either the Claimant or the Defendant because, it would appear, they would have to proceed on the rather speculative basis of a lost chance.

When it comes to the balance of convenience (or “balance of justice”), it seems to me that the scales come down firmly in favour of the Defendant. If he is prevented from participating in the tendering process, that will stifle his opportunity for the foreseeable future. If, on the other hand, he is permitted to take part, the only adverse consequence for the Claimant is that it would face one more competitor in the open market.

These are the reasons why I informed the parties at the close of the hearing that an injunction would be refused.