Beckett Investment Management Group Ltd & Ors v Hall & Ors [2007] EWCA Civ 613

[2007] EWCA Civ 613Case No A2/2007/0464
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION (HHJ SEYMOUR QC)
HQ06X03256
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 28/06/2007
Before
THE MASTER OF THE ROLLSLORD JUSTICE CARNWATHLORD JUSTICE MAURICE KAY
Between
Beckett Investment Management Group Ltd & orsAppellantGlyn Hall & orsRespondent
(Transcript of the Handed Down Judgment ofWordWave International LtdA Merrill Communications Company190 Fleet Street, London EC4A 2AGTel No: 020 7421 4040 Fax No: 020 7831 8838Official Shorthand Writers to the Court)
Mr Christopher Lundie (instructed by Messrs Gateley Wareing) for AppellantMr Peter Oldham (instructed by Messrs Bradshaw Hollingsworth) for RespondentHearing Hearing date : 21 May 2007
Judgment
[1]Any financial services company relies on employees to attract and retain a client base. If those employees who deal directly with clients leave the company and set up on their own account or go to work for a rival company, it is not unnatural that, one way or another, sooner or later, the clients will follow them. Although they have been the clients of the company rather than of its employees, from the clients’ point of view it may well be the personal relationship with an individual adviser in which they have particular trust and confidence. A tension therefore arises between the interest of the company in protecting its client base in the event that one or more of its employees depart and the interest of such employees who wish for the freedom to develop their careers elsewhere. The clients are not captive. In this situation, it is inevitable that employers include in contracts of employment clauses which seek to limit the ability of employees to take the client base with them. This is the context of the present appeal.[2]Beckett Investment Management Group Ltd (BIMG) is the holding company within a group of companies (the Beckett Group) which provides financial services. Beckett Financial Services Ltd (BFS) is a subsidiary which provides advice and services to clients. Beckett Asset Management Ltd (BAM) is another subsidiary. Its purpose is to provide investment advice and management services. Mr Hall is an independent financial adviser, registered with the Financial Services Authority. His expertise is in the fields of investment advice and pensions. He had been employed within the Beckett Group for some years before entering into a contract with BIMG dated 1 January 2004. By that contract he was employed as Sales Director by BIMG. He was also a director of BFS and of BAM. He was based at the Leicester office of BFS. Mr Yadev is also registered as an independent financial adviser. His expertise is the provision of investment advice. He had been working within the Beckett Group for some time before 1 January 2004 but, on that date, he too entered into a new contract with BIMG. His status was that of financial consultant. He was based at the Leicester office of BFS. BIMG had no dealings with clients and provided no direct financial advice. All that was done by BFS. The contracts which Mr Hall and Mr Yadev had with BIMG contained identical clauses under the heading “Restrictions after Termination of Employment”.[3]On 28 April 2006 Mr Yadev submitted a letter of resignation to take effect on 31 May. It was addressed to Mr Hall, to whom Mr Yadev had indicated that he intended to establish his own business. At the time of receiving Mr Yadev’s resignation, Mr Hall’s own position was fluid. The terms upon which he would stay or leave were the subject of discussions and correspondence. The details are no longer relevant. It is sufficient to record that his employment by BIMG came to an end on 11 August 2006.[4]Meanwhile, Mr Yadev had obtained a shell company called Trueway Finance Ltd which was incorporated on 8 June and on 24 July 2006 its name was changed to Hyrifa Ltd (Hyrifa). It was the vehicle through which Mr Yadev was to run the new business. On 14 August, Mr Hall joined Hyrifa.[5]In the present litigation, BIMG, BFS and BAM have sought to establish that Mr Hall, Mr Yadev and Hyrifa have behaved unlawfully in the setting up and running of Hyrifa and have inflicted loss and damage on the claimant companies. The pleaded case alleged numerous causes of action, embracing conspiracy, the misuse of confidential information, breach of fiduciary duties and breach of express and implied contractual terms.

The trial

[6]The trial of the action took place from 22 – 25 January 2007 before His Honour Judge Richard Seymour QC, who handed down his judgment on 16 February. He was very impressed with the evidence of Mr Hall, Mr Yadev and their witnesses, as a result of which he made unchallenged findings of fact in their favour. He also accepted the evidence of the claimants’ witnesses but he rejected the inferences upon which the claimants’ case was based. The most relevant findings of fact are to be found in the following extract from the judgment:
“Mr Yadev and Mr Hall did not discuss Mr Yadev’s proposed new business at all until the day Mr Yadev handed in his resignation from BIMG, 28 April 2006 … By this date Mr Hall had written his letter of resignation of 4 April 2006, but had been in discussion with his fellow directors about the possibility that he would stay. The first discussion between Mr Yadev and Mr Hall was in May 2006 and at that time Mr Hall agreed in principle to join Mr Yadev in the new business. Mr Hall even at that time was considering all his options. He made his final decision on 30 June 2006. Mr Yadev and Mr Hall … each worked loyally and industrially for BIMG and BFS until each left his employment … Mr Hall and Mr Yadev never discussed or agreed that each or either of them should act in breach of his contract of employment in order to advance the business of Hyrifa. In fact … each of them set out not to solicit the custom of any existing BFS customer, but each decided, independently, that it was not unlawful for him to act for a former client of BFS who specifically requested him to act … They did not discuss the views to which they had come on this point at any stage prior to the commencement of this action. … Mr Yadev retained 17 files belonging to BFS after the termination of his employment by oversight and not out of some impure motive … Mr Hall was not aware of who Mr Yadev was acting for Trueway or Hyrifa whilst Mr Hall remained at BIMG. Even after Mr Hall joined Hyrifa I accept that essentially Mr Yadev and Mr Hall each had his own customers with whom he dealt and was not aware in any detail of the identities of the clients of the other until that issue fell to be addressed in the context of the present action. … Hyrifa has in fact done business for 32 clients for whom BFS had previously done business and been in contact with a further 31.”
[7]In view of these findings, much of the claimants’ case fell to the ground, including the grave allegation of conspiracy and the related issues of misuse of confidential information and breach of fiduciary duty. Essentially, the only surviving issues were as to the alleged breaches of express terms which related to post-termination restrictions. These issues included points of construction, enforceability and breach. The judge resolved all the important points in favour of the defendants and the claim was dismissed.

Express terms regarding Restrictions after Termination of Employment

[8]In each of the contracts of employment, the relevant provisions are to be found in clause 17. Clause 17.2 is in the form of a 12 month non-solicitation clause. As the judge found no breach of it, nothing now turns on it. The present focus is on clause 17.3 which provides:
“The employee hereby agrees with the Company that for the period of his … employment and for the period of 12 months immediately following the termination of his … employment with the Company he … shall not, whether on his own account or with, through, for or on behalf of any other person, firm, company or organisation, directly or indirectly, deal with or attempt to deal with, any Relevant Client for the purpose of supplying, or seeking to supply, thereto any Prohibited Services.”
[9]“Prohibited Services” are defined in clause 17.1.2 as meaning “the provision of advice in relation to pensions, life assurance, investments and other advice of a type provided by the Company in the ordinary course of its business at the date of termination of the Employee’s employment with it.”[10]“Relevant Client” is defined in clause 17.1.3 as, primarily, “any person, firm, company or organisation whom or which was at any time during the period of 12 months immediately prior to the termination of the Employee’s employment a client of the Company (or Subsidiary Company) with whom or which the Employee dealt in the course of his … employment during that 12 month period.” That primary definition was extended in a way to which I shall return in paragraph 30.

Construction issues

[11]The judge held that, in the construction of a covenant in restraint of trade, the same principles are to be applied as in the construction of any other written term: Arbuthnot Fund Managers v Rawlings [2003] All ER (D) 181, (per Chadwick LJ, at para 21). The principles are those identified by Lord Hoffmann in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896, 912H-913E. That much is common ground.[12]At the trial, two points of construction taken on behalf of the defendants related to the words “deal” and “client” in clause 17.3. Essentially, Mr Oldham was contending for wide constructions which by their very width would have rendered the terms unreasonable. However, the judge rejected his submissions. He held that the word “deal” means “do business with” and that “client” means “someone for whom for the time being the professional person is in any contractual relationship under which he is to provide some service”. In the context of clause 17.1.3, the words “a client of the Company (or Subsidiary Company) with whom or which the Employee dealt in the course of his employment during that 12 month period” therefore meant “a person for whom BIMG or BFS or BAM performed a service, and with whom Mr Hall or Mr Yadev (as the case may be) did business, during the 12 months prior to the termination of his employment”. No one now disputes the correctness of those constructions.[13]The central point of construction that remains in issue relates to the definition of “Prohibited Services” in clause 17.1.2 which then impacts on the scope of the restriction on dealing contained in clause 17.3. At trial and on this appeal Mr Oldham submitted that the words “of a type provided by the Company in the ordinary course of its business at the date of termination of the Employee’s employment with it” qualify everything that goes before in the definition, namely, “the provision of advice in relation to pensions, life assurance, investments and other advice”. Mr Lundie on the other hand, submitted that the words “of a type provided by the Company in the ordinary course of its business” qualify only “other advice”. The judge found for Mr Oldham’s construction. This has a dramatic consequence. As “the Company”, that is BIMG, did not provide advice about anything to anybody but acted simply as a holding company, the judge’s construction led him to conclude that the restriction on dealing comprised in clause 17.3 was of no practical utility whatsoever. None of the clients who had transferred to Hyrifa had ever been advised by BIMG. Their dealings had been with BFS. “The Company” was specifically and narrowly defined in the contract to mean BIMG and, in the judge’s view, “the well established individual personality of a limited liability company in law was [not] to be disregarded if the Company in question was a member of a group of companies”. On this basis, the judge said (at paragraph 100):
“… it follows that neither Mr Hall nor Mr Yadev was in breach of clause 17.3 because neither of them supplied or sought to supply advice of a type provided by BIMG in the ordinary course of its business at the date of the termination of his employment. It follows that the claims of the claimants against the defendants all fail.”
[14]The judge nevertheless went on to consider other issues which would have arisen had he reached the opposite conclusion on this point of construction. I shall have to return to these other issues later. For the moment, I concentrate on this central issue.[15]I start with the first of Lord Hoffmann’s principles (Investors Compensation Scheme, above, at p.912H):
“Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.”
[16]It is pertinent to recall that both Mr Hall and Mr Yadev had been employed within the Beckett Group for some time, were familiar with the restructuring which was the catalyst for the new contracts and were well aware of what the respective roles of the holding company and the subsidiaries were going to be thereafter. In those circumstances, I would be reluctant to find for a construction which deprives a covenant of all practical utility in circumstances where all parties were familiar with the background to and the aim of the clause. Mr Oldham submitted that we are almost in contra proferentem territory but I reject that submission. Lord Hoffmann’s first principle lives easily with the words of Sir Nathaniel Lindley MR in Haynes v Doman [1899] 2 Ch 13, at page 25, quoted with approval by Lord Denning MR in Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472, at page 1481:
“Agreements in restraint of trade, like other agreements, must be construed with reference to the object sought to be attained by them.”
[17]Taking this approach, I consider that the only sensible construction of clause 17.1.2 is a wider one which enables it to apply to advice of the kind in fact provided by BFS. The judge was dissuaded from such a wide construction because he considered that the words “the Company” in clause 17.1.2 were not followed by the words “or Subsidiary Company” as was the case in clause 16 dealing with trade secrets and confidential information and, indeed, some of the later provisions of clause 17. He said (at paragraph 99):
“… if the parties meant to include in any particular reference to BIMG reference to its subsidiaries, they did so. In the end, in my judgment, the latter is the only sense one can make of the frequent use of the words “the Company (or Subsidiary Company)”, where they appear. Thus, even though the effect of such construction is to deprive clause 17.3 of practical utility … I hold that what was prevented by clause 17.3 of the relevant contracts of employment, as a matter of construction, was only doing business with ‘clients’, in the sense which I have construed that expression, for the purpose of supplying or seeking to supply advice of the type provided by BIMG at the dates of the respective terminations of the contracts of Mr Hall and Mr Yadev.”
[18]For my part, I do not feel driven to such a futile conclusion. I do not attach such significance to the differential use and non-use of the words “(or Subsidiary Company)”. To do so ascribes to the parties and to “ a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract” an understanding that they were agreeing upon a pointless provision. Moreover, unlike the judge, I do not feel inhibited by a purist approach to corporate personality. The judge referred to the words of Lord Denning MR in Littlewoods Organisation Ltd, above, (at page 1482F):
“The answer is, I think, the law today has regard to the realities of big business. It takes the group as being one concern under one supreme control.”
[19]The judge declined to take a lead from that on the ground that it was not part of the ratio of the case and was not expressly assented to by the other majority member of the court, Megaw LJ. However, it seems to me that it is an approach which has other support. Thus, in Stenhouse Ltd v Phillips [1974] AC 391 PC, an authority which will be relevant to later aspects of this case, Lord Wilberforce rejected the purist approach “technically attractive though it may appear”. In the circumstances of that case, he considered that “The subsidiary companies were merely agencies or instrumentalities through which the appellant company directed its integrated business.” (at page 404D) These words resonate in the present case.[20]For all these reasons, I reject the narrow construction adopted by the judge and consider that the fact that the clients dealt with BFS rather than BIMG is not fatal to the reliance which the claimants seek to place on clause 17.3, subject to its enforceability.

Enforceability

[21]Post-termination obligations of the kind exemplified by clause 17.3 are, in the hallowed phrase, covenants in restraint of trade. To be enforceable at the suit of the covenantee, they must satisfy requirements that are not in dispute. The principles were established in a quartet of cases in the House of Lords a century and more ago, namely Nordenfelt v Maxim Nordenfelt CoLtd [1894] AC 535; Mason v Provident Clothing and Supply Co Ltd [1913] AC 724; Herbert Morris Ltd v Saxelby [1916] 1 AC 688; and Fitch v Dewes [1921] 2 AC 158. The principles there expounded and their subsequent development were summarised by Sir Christopher Slade in Office Angels Ltd v Rainer-Thomas and O’Connor [1991] IRLR 214. I refer to the parts of his summary (at page 217) which are of particular relevance to the present case: “(1) If the Court is to uphold the validity of any covenant in restraint of trade, the covenantee must show that the covenant is both reasonable in the interests of the contracting parties and reasonable in the interests of the public: see for example Herbert Morris Ltd v Saxelby … (at page 707 per Lord Parker of Waddington) … (3) In the case of contracts between master and servant, covenants against competition are never as such upheld by the Court … (4) The subject matter in respect of which an employer may legitimately claim protection from an employee by covenant in restraint of trade was further identified by Lord Wilberforce in Stenhouse Ltd v Phillips [above paragraph 19] at page 400 as follows ‘The employer’s claim for protection must be based upon the identification of some advantage or asset inherent in the business which can properly be regarded as, in a general sense, his property, and which it would be unjust to allow the employee to appropriate for his own purposes, even though he, the employee, may have contributed to its creation.’ (5) If, however, the court is to uphold restrictions which a covenant imposes upon the freedom of action of the servant after he has left the service of the master, the master must satisfy the Court that the restrictions are no greater than are reasonably necessary for the protection of the master in his business: see Mason v Providence Clothing and Supply Co Ltd … at page 742 per Lord Moulton … ” ‘The employer’s claim for protection must be based upon the identification of some advantage or asset inherent in the business which can properly be regarded as, in a general sense, his property, and which it would be unjust to allow the employee to appropriate for his own purposes, even though he, the employee, may have contributed to its creation.’[22]When considering clause 17.3 in the present case, the judge adopted the modern approach of considering, first, whether the claimants had legitimate business interests requiring protection in relation to the employment of Mr Hall and Mr Yadev, and, secondly, whether clause 17.3 provides no wider a protection than is reasonably necessary for the protection of those interests.[23]His answer to the first of those questions was conditioned by the approach he had adopted to the construction of the clause. He concluded that BIMG, as the sole covenantee, had no legitimate interest “or, indeed, any interest at all”, which would be protected by clause 17.3. BIMG had no clients. BFS had clients but was not party to the covenant. As I have explained, I do not accept the approach of the judge. It was too inhibited by considerations of corporate personality. In my judgment, the reality is just the same as that described by Lord Wilberforce in Stenhouse Ltd v Phillips in the passage to which I have already referred. More fully extracted, it reads (at page 404D-E):
“The subsidiary companies were merely agencies or instrumentalities through which the appellant company directed its integrated business. Not only did the appellant company have a real interest in protecting the businesses of the subsidiaries, but the real interest of so doing was that of the appellant company. It is not necessary to resort to a conception of ‘group enterprise’ to support these proceedings. The case is, more simply, that of the appellant’s business being to some extent handled for it by subsidiary companies.”
I have no doubt that BIMG had a legitimate interest to protect by a restrictive covenant.[24]The next question is as to the reasonableness of clause 17.3. Although the judge considered that BIMG had no interest to protect, he went on to make findings in relation to BFS. In view of the conclusion that I have already expressed about BIMG, I can ignore the finding of the judge that even BFS did not have a legitimate interest to be protected. He proceeded to find that, on the alternative basis that it did have a legitimate interest, clause 17.3 failed the test of reasonableness. He said (at paragraph 114):
“… the period of 12 months for which the restraint was sought was in fact purely arbitrary. The clause was thus, in my judgment, too wide on that account. If the reason for a covenant was [to give the covenantee the opportunity to try to stabilise its client base following the departure of an adviser and to rebuild client contact and personal trust], what was needed was only a period long enough to enable BFS to make contact with a client … and thereafter to have an adequate opportunity, if the client was not immediately persuaded to continue to do business with BFS, to seek to change his mind. I would have thought that three months would have been adequate for that purpose. Any longer period would have had the effect that the client, being unimpressed by the possibility of continuing to do business with BFS, was prevented from doing business with someone with whom he had confidence. Once BFS had made its pitch and had failed, to prevent a client from doing business with someone in whom he did have confidence seems to me to be contrary to public policy.”
[25]The first thing to notice about this is that it accepts in principle the reasonableness of a covenant against dealing in the circumstances of this case, notwithstanding the existence of the non-solicitation covenant in clause 17.2. I agree with the judge about that. In the course of submissions, I put to Mr Oldham a proposition gleaned from “A Practical Approach to Employment Law” 7th edition by John Bowers QC at paragraph 6.51 which is in these terms:
“The courts will, in most cases, carefully consider the nature of the market in which the employee was engaged. The narrower and more specialist the market, thus the more likely it is that a non-dealing covenant will upheld, given that clients will in those circumstances naturally gravitate to the ex-employee who opens a new, competing company in such a case.”
[26]Mr Oldham assented to that proposition. Whether or not the authorities cited in the book support it, I am sure that it is correct. Thus, the question comes down to this: was the judge right to hold that an otherwise reasonable restriction was vitiated by unreasonableness by reason of the fact that it was stated to last for 12 months rather than three months?[27]The main evidence upon which the claimants relied was that of Mr Barnes who stated, at paragraph 36 of his witness statement:
“… there are significant difficulties in policing a non-solicitation covenant … and that is why there is included a 12 month non-dealing covenant which gives Beckett the opportunity to try to stabilise its client base (into which much time and effort has been invested) following the departure of an adviser. We need this period of time to rebuild client contact, the nature of our business is sporadic and with some clients there may only be annual contact. It is important to rebuild personal trust and therefore a non-dealing clause is important and necessary for the protection of our business interests. A 12 month non-dealing clause such as this is standard in the industry.”
[28]The judge found that there was “really no pattern of regularity” in the contact between existing clients and BFS. Some might not seek advice for a number of years, others did so more often.[29]In my judgment, the judge adopted an unrealistic and erroneous approach to the question of duration. He considered the period of 12 months to be “purely arbitrary” but it was only arbitrary in the sense that any fixed duration bears an element of arbitrariness. His three month rationale is to my mind simplistic in so far as it addresses the relationship between the claimants and the clients but is deficient in having no regard to what BIMG and BFS would need to do to persuade clients to remain loyal. Mr Hall and Mr Yadev were not run of the mill, expendable employees. They were of enormous importance to the success of the Leicester office. To have any prospect of retaining the clientele, BIMG and BFS would need to recruit, organise, train and project suitable replacements. On any basis, this was an important aspect of the reasonable protection of their legitimate business interests. However, it was ignored by the judge who chose instead to attach significance to the fact that a non-dealing clause would prevent a client from doing business with someone in whom he had confidence for a period which the judge considered to be too long. It is apparent from the solicitor cases that a non-dealing clause may be valid notwithstanding the potential interference with the client’s choice as to whom to instruct and the degree of confidence which exists between client and solicitor: see Fitch v Dewes per Lord Birkenhead LC at page 165 and Bridge v Deacons [1984] 1 AC 705, per Lord Fraser of Tullybelton at pages 719C – 720B. During the period of restriction, the client is not compelled to remain with the covenantee. If he cannot await the expiration of the period of restriction, he can in the meantime seek the advice of any service provider with which the covenantor is unconnected. For these reasons, I consider that the confinement of reasonableness to a period of three months was wrong. Whilst I do not consider that a period in excess of 12 months would have been reasonable in respect of either Mr Hall or Mr Yadev, I am prepared to hold that 12 months was a reasonable period in both cases. In reaching this conclusion, I have specific regard to their seniority and importance, to the evidence about business patterns, to the logistics of replacing them, and to the uncontradicted evidence of an industry standard of 12 months. In my judgment, a non-dealing clause for 12 months was reasonable between the parties and reasonable in the interests of the public.

The extended definitions

[30]Thus far I have dealt with the restriction contained in clause 17.3 on a limited basis in the sense that, to the extent that it restricts dealing with “any Relevant Client”, I have concentrated on the first part of the definition of “Relevant Client” in clause 17.1.3. In fact, clause 17.1.3 has a more extensive definition than the one that I set out in paragraph 10 above. In addition to defining “Relevant Client” as a client in the strict sense, clause 17.1.3 goes on to provide:
“If the Employee so dealt with an individual in that individual’s capacity as an officer, employee or representative of any firm, company or organisation, that firm, company or organisation shall be deemed to be a ‘Relevant Client’ and the individual shall also be deemed to be a ‘Relevant Client’ in his or her personal capacity as well. If the Employee had, on behalf of the Company during the 12 month period, dealt with an individual on behalf of others that individual and those others shall be deemed to be Relevant Clients as well.”
[31]The judge referred to this as the “extended definition” of “Relevant Client”. He concluded that the extended definition is unreasonable. He said (at paragraph 116):
“The first point to note about this extended definition is that it is a deeming provision; it provides that something should be considered to be so which was not in fact so. That is important. … The object of the extended definition in clause 17.1.3 was to bring within the meaning of ‘Relevant Client’ people who would not otherwise have done so. It does not seem to me that there was any justification for such an extended definition.”
[32]Up to a point, I agree with the judge about this. To the extent that the individual referred to in both parts of the extended definition was acting on behalf of another, he was not himself the client. If, during the period of the restriction, he needed advice in his personal capacity about pensions or investment, I, too, consider that to restrain the covenantors and Hyrifa from dealing with him in that capacity is unreasonable. I do not consider that the judge was wrong so to find. On the other hand, to the extent that the extended definition deems the firm, company or organisation and “those others” to be clients, it seems to me that it is otiose. On simple agency principles, they are clients and fall within the primary definition of “Relevant Client” without the need for any deeming.[33]The final controversy on this appeal is as to whether the extended definition, being at least in part unreasonable, is severable from the primary definition. The judge, having referred to Attwood v Lamont [1920] 3 KB 571, concluded that severance was not possible. Accordingly, he found the unsevered provision to be an unreasonable restraint of trade not only because of the 12 month restriction, but also because of the extended definition of “Relevant Client”.[34]At one stage there was an assumption in the authorities that the courts should be reluctant to sever in favour of an employer in a restraint of trade case. In Mason v Provident Clothing Company Ltd (at page 745) Lord Moulton considered that a covenant should only be severed “in cases where the part so enforceable is clearly severable, and even so only in cases where the excess is of trivial importance, or merely technical, and not a part of the main purport and substance of the clause”. He was anxious to avoid the situation “when an employer had exacted a covenant deliberately framed in unreasonably wide terms, the courts were to come to his assistance and, by employing their ingenuity and knowledge of the law, carve out of this void covenant the maximum of what he might validly have required.”[35]To the extent that Lord Moulton was suggesting that there is a special rule referable to employment contracts, his observation has not found favour in the more recent authorities; see, for example, T Lucas & Co Ltd v Mitchell [1974] 1 Ch 129 and Stenhouse Ltd v Phillips, above. Like the judge in the present case, I find the appropriate starting point to be Attwood v Lamont. Lord Sterndale MR said (at page 577):
“I think, therefore, that it is still the law that a contract can be severed if the severed parts are independent of one another and can be severed without the severance affecting the meaning of the part remaining.”
[36]Drawing on the words of Sargant J in Nevanas & Co v Walker [1914] 1 Ch 413, 423, he considered severance to be applicable “where the two parts of a covenant are expressed in such a way as to amount to a clear severance by the parties themselves, and as to be substantially equivalent to two separate covenants”.[37]Younger LJ put it in this way (at page 593):
“The learned judges of the Divisional Court, I think, took the view that such severance always was permissible when it could be effectively accomplished by the action of a blue pencil. I do not agree. The doctrine of severance has not, I think, gone further than to make it permissible in a case where the covenant is not really a single covenant but is in effect a combination of several distinct covenants. In that case and where the severance can be carried out without the addition or alteration of a word, it is permissible. But in that case only.”
[38]Although strictly obiter, these statements have always loomed large in any consideration of severance. There is only one aspect of Attwood v Lamont which has been authoritatively rejected. That was the suggestion that, in employment cases, even where the prerequisite for severance is established, the court may nevertheless decline, as a matter of discretion, to order it. In T Lucas & Co Ltd v Mitchell, above, Russell LJ, giving the judgment of the court, said (at pages 136H- 137B):
“We are not alone in looking askance at this … point in Attwood v Lamont … we are able to state our preference for a system of law which holds that if you find two restraints which as a matter of construction are to be regarded as intended by the parties to be separate and severable, and the excision of the unenforceable restraint being capable of being made without other addition or modification, there is no third question, even in master and servant cases.”
[39]As I read that later judgment of the Court of Appeal, it expressly adopted the thrust of Attwood v Lamont but simply rejected the discretionary element.[40]In a number of more recent first instance decisions, a threefold test has been applied. In the employment context, its origin is to be found in Sadler v Imperial Life Assurance Company of Canada Ltd [1988] IRLR 388. Mr P J Crawford QC, sitting as a Deputy

Judge of the High Court said (at paragraph 19):

“… a contract which contains an unenforceable provision nevertheless remains effective after the removal or severance of that provision if the following conditions are satisfied: (1) the unenforceable provision is capable of being removed without the necessity of adding to or modifying the wording of what remains; (2) the remaining terms continue to be supported by adequate consideration; (3) the removal of the unenforceable provision does not so change the character of the contract that it becomes ‘not the sort of contract that the parties entered into at all’.” (1) the unenforceable provision is capable of being removed without the necessity of adding to or modifying the wording of what remains; (2) the remaining terms continue to be supported by adequate consideration; (3) the removal of the unenforceable provision does not so change the character of the contract that it becomes ‘not the sort of contract that the parties entered into at all’.”
[41]The final words were derived from the judgment of Buckley LJ in Chemidus Wavin Ltd v Societe pour la Transformation et l’Exploitation des Resines Industrielles SA (1978) 3 CMLR 514, 520. That concerned a restrictive trading agreement in a commercial context. The Sadler threefold test has been applied in a number of subsequent employment cases including Marshall v N M Financial Management Ltd [1996] IRLR 20 and T F S Derivatives v Morgan [2005] IRLR 246. Mr Oldham seeks to question these decisions on the basis that they are either an aberrant extension of Attwood v Lamont or that they apply only within a subset, the distinguishing characteristic of which is that they involved the future payment of money under the terminated contract.[42]In my judgment these more recent cases are neither aberrant nor merely applicable within a subset. In T Lucas & Co v Mitchell, above, at page 135, Russell LJ referred to the necessary approach, based on Attwood v Lamont, as being:
“a matter of construction, including the question whether one obligation can be removed or severed without altering the nature of the contract and without having to add or modify the wording otherwise than by excision.”
[43]I see no difference in principle between those words of Russell LJ and the third stage of the threefold test propounded in Sadler. It seems to me that the threefold test as there formulated is a useful way of approaching these cases and should be adopted.[44]Applying that test, I have no difficulty in coming to the conclusion that clause 17.1.3 is susceptible to severance. I would sever so as to leave only the primary wording that I set out in paragraph 10 above. That can be done without the necessity of adding to or modifying the remaining language. The remaining restriction continues to be supported by consideration. Moreover the severed part does not change the character of the surviving part to the extent that the character of the contract becomes “not the sort of contract that the parties entered into at all”.

Conclusion

[45]It follows from what I have said that I would allow this appeal. In my judgment, clause 17.3, properly construed, and modified by severance of the secondary part of clause 17.1.3, is valid and enforceable. The implications of that for the future of this case must remain to be seen. The period of restriction in the case of Mr Yadev has already expired and less than a quarter of it remains in the case of Mr Hall. I would invite written submissions from the parties as to what should happen next. I should also record that, following the success of the defendants at trial, the judge made an order for costs in their favour which had a substantial indemnity element. There was to be an appeal in respect of that element but, if the substantive appeal is to be allowed, the costs order below will fall to be quashed.[46]I agree.

The Master of the Rolls

[47]I also agree.

Cited in 29 later judgments

and 20 more of the most senior