“11.2. Until the date 24 months after the Relevant Date [being the later of the date of termination of employment by the Group (not relevant in the case of the Defendant), the date that he no longer holds any Shares or the date of payment of the final instalment of the Option Price pursuant to Clause 15.5(b) – which I set out below], no Seller will directly or indirectly without the Purchaser’s prior consent: (a) carry on or be engaged, concerned or interested in competition with the Group, in the Restricted Activities [being the provision of products and/or services of a competitive nature to the products and/or services provided by the Group Companies in the twelve months prior to the date of the alleged breach of Clause 11.2] within the Prohibited Area [being any countries in which the Group Companies have carried on the business of marketing communications and ancillary services at any time in the period of twelve months prior to the date of the alleged breach]; (b) solicit or knowingly accept any orders, enquiries or business in respect of the Restricted Activities in the Prohibited Area from any Client [being a client or potential client of any Group Company which has placed any order in connection with the Restricted Activities during the twelve months prior to the date of the alleged breach or which was in discussions with and Group Company in relation to such provision in such period]; (c) divert away from any Group Company any orders, enquiries or business in respect of the Restricted Activities from any Client; or (d) employ, solicit or entice away from or endeavour to employ, solicit or entice away from any Group Company and senior employee or consultant employed or engaged by that Group Company.”
“The Purchaser recognises the importance of the Group to the Sellers and to the value of the Interim Payment and the Final Payment. Accordingly, the Purchaser commits as set out below to ensure that the interests of each Seller in that goodwill is properly protected. The Purchaser will not (and will procure that no other member of the WPP Group will) at any time until the end of the last financial period relevant to the calculation of the Consideration without the Sellers’ prior written consent other than within the Group Companies, trade in any of [twenty three identified] countries…using [specified] names.”
“a) A Seller whose employment with the Company is lawfully summarily terminated by the Company where that Seller: i) has committed any act of gross misconduct… ii) is convicted of an offence of dishonesty or violence… iii) is found in a court of law to have committed any deliberate act of harassment… and (in any such case) there is material prejudice to the interests of the Group arising from the facts giving rise to such termination or b) A Seller who is (a) in breach of Clause 11.2 hereof.”
“he was its founder, a leading business personality in the sector, and had very strong relationships, both with clients and with many senior employees… we did need to ensure he retained a business interest – the shareholding – that would keep him involved and “interested”in ensuring the success of the company and also help us protect the business via covenants.”
“As Clause 11.1 makes clear, these restrictions are intended to protect the value of the goodwill in the group of companies which the ...Claimant...was purchasing. This was both the goodwill at the point of purchase and the anticipated goodwill during the period in which the Sellers retained an interest in the business. That goodwill is represented by the...Claimant’s interest in and the value to it of the stability of the Group’s customer connections, the Group’s ability to attract new customers (through the recommendation of existing customers and through the maintenance of its reputation) and the stability of the Group’s work force… 32. The date of payment of the final instalment of the option price under Clause 15.5(b)... is the date upon which the individual ceases to have any involvement in the business which he has sold. The period of restraint is defined as being the period up until twenty four months following the Relevant Date. 33. …Given the strength of [the Defendant’s] long-standing connections with clients and senior employees and his high profile as a successful businessman in the Middle East, I have no doubt that this period was necessary in order to protect the business. At the time that the [Agreement] was agreed, we did not anticipate that those connections would diminish to any significant degree whilst he maintained a shareholding in the company. This was because he was and remained such a well known figure within the region and was so strongly identified with this business; indeed he was known to be the founder of [it].”
“It is obvious that in many types of business the goodwill would be well-nigh unsaleable if it was unlawful for the vendor to enter into an adequate covenant against competition.”
“Relevant Date means in respect of a Seller the later of the date of termination of his employment by the Group, the date that he no longer holds any Shares or the date of payment of the final instalment of the Option Price pursuant to Clause 15.5(b).”
“It may clearly appear that the express view of the bargain may have been the elimination from the sphere of competition of the powerful personality of a possible rival who, by the very terms of the contract, had been paid for disappearing into retirement, carrying his sheaves with him. In such cases a restraint is enforced by the law.” v) ‘Judicial deference’, referred to in Proposition (viii) is of particular significance in this case. Kores v Kolok (supra), there referred to, is a very different, and probably exceptional, case, where the two significant players in the relevant (newspaper) business, according to the judgment of Jenkins LJ at 125 “have, as it seems to us, sought to do indirectly that which they could not do directly, by reciprocal undertakings between themselves not to employ each other’s former employees, entered into over the heads of their respective employees, and without their knowledge”
“The essence of a penalty is a payment of money stipulated as in terrorem of the offending party.”
“The question whether a sum stipulated is [a] penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach.”
“It will be held to be [a] penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.”
“If…the sum agreed to be paid is in excess of any actual damage which can possibly, or even probably, arise from the breach, the possibility of…a bona fide pre-estimate of damage has always been held to be excluded.”
“There is a presumption (but no more) that it is [a] penalty when “a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage”.”
“It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties.”
“It is perfectly true that forupwards of a century the courts have been at pains to define penalties by means of distinguishing them for liquidated damages clauses. The question that has always had to be addressed is therefore whether the alleged penalty clause can pass muster as a genuine pre-estimate of loss. That is because the payment of liquidated damages is the most prevalent purpose for which an additional payment on breach might be required under a contract. However, the jurisdiction in relation to penalty clauses is concerned not primarily with the enforcement of inoffensive liquidated damages clauses but rather with protection against the effect of penalty clauses. There would therefore seem to be no reason in principle why a contractual provision the effect of which was to increase the consideration payable under an executory contract upon the happening of a default should be struck down as a penalty if the increase could in the circumstances be explained as commercially justifiable, provided always that its dominant purpose was not to deter the other party from breach.”
“I have…found valuable Colman J’s further observations in Lordsvale…which indicate that a dichotomy between a genuine pre-estimate of damages and a penalty does not necessarily cover all the possibilities. There are clauses which may operate on breach, but which fall into neither category, and they may be commercially perfectly justifiable.”
“It is now evident that the power to strike down a penalty clause is a blatant interference with freedom of contract and is designed for the sole purpose of providing relief against oppression for the party having to pay the stipulated sum. It has no place where there is no oppression.”
“If the effect of a provision in a contract between A and B is to entitle B to receive sums at the expense of A in the event of non-performance by A of one or more of his obligations under that contract, and those sums are not a genuine pre-estimate of the damage which is likely to be suffered by B in the event of such breach, then the proviso must, I think, prima face fall within the penalty area; it cannot make any difference whether B is to receive such sums by way of direct payment by A or by way of retention at A’s expense.”
“The penalty rule has been seen to have application beyond the paradigm situation of a provision that requires the payment of a sum of money in the event of breach. It has been held to apply to a clause entitling the innocent party to the retransfer of the property which had previously been transferred to the contract breaker (Jobson...) and (see Workers Trust...) to a clause which requires a contract breaker to forfeit a deposit or sum of money due or to become due to the other party in the event of breach. ...Whatever the position may be in a higher court, the decision in The Fanti... that a clause entitling the innocent party to a breach of contract by the other party to withhold a payment otherwise due is subject to the penalty rule binds me.”
“Does it make any difference then, that the penalty in the present case is not a sum of money? In principle, a transaction must be just as objectionable and unconscionable in the eyes of equity if it requires a transfer of property by way of penalty on a default in paying money as if it requires a payment of an extra, or excessive, sum of money… There should be no distinction in principle between a clause which requires the defaulter, on making default in paying money, to transfer shares for no consideration, and a clause which in right circumstances requires the defaulter to sell shares to the creditor at an undervalue. In each case, the clause ought to be unenforceable in equity in so far as it is a penalty clause.”
“Accordingly, once a court becomes awarethat the amount claimed by the plaintiff is a penalty arising on default of payment of a specific sum of money, the legal consequence which follows, as day follows night, is that the amount claimed will be scaled down by the court to a sum equal to the unpaid principal, with interest and costs. That consequence, albeit having its historical origin in equity, is not dependent upon the court exercising a discretion to grant or withhold relief having regard to all the circumstances. It is a consequence which for many years has followed automatically, regardless of the circumstances of the default. In this respect, as the law has developed, a distinction has arisen between the enforcement of penalty clauses in contracts and the enforcement of forfeiture clauses. A penalty clause will not be enforced beyond the sum which equals the actual loss of the innocent party. A forfeiture clause, of which a right of re-entry under a lease on non-payment of rent is the classic example, may also be penal in its effect. Such a clause frequently subjects the defaulting party in the event of non-payment of rent or breach of some other obligation, to a sanction which damnifies the defaulting party, and benefits the other party, to an extent far greater than the actual loss of the innocent party. For instance, the lease may be exceedingly valuable and the amount of unpaid rent may be small. But in such a case the court will lend its aid in the enforcement of the forfeiture, by making an order for possession, subject to any relief which in its discretion the court may grant to the party in default. Normally the granting of such relief is made conditional upon the payment of the rent with interest and costs. If that condition is not complied with, and subject to any further application by the tenant or other person in default for yet more time, the forfeiture provision will be enforced. Thus the innocent party is in a better position when seeking to enforce a forfeiture clause than when seeking to enforce a penalty clause in a contract. This is not the occasion to attempt to rationalise the distinction. One possible explanation is that the distinction is rooted in the different forms which the relief takes. In the case of a penalty clause in a contract, equity relieves by cutting down the extent to which the contractual obligation is enforceable: the “scaling down” exercise, as I have described it. In the case of forfeiture clauses equitable relief takes the form of relieving wholly against the contractual forfeiture provision, subject to compliance with conditions imposed by the court. Be that as it may, I see no reason why the court’s ability to grant discretionary relief automatically granted in respect of a penalty clause if, exceptionally, a contractual provision has characteristics which enable a defendant to pray in aid both heads of relief.”
“38. The provisions set clear restrictions on each Seller, explaining the type of behaviour which is absolutely prohibited and cannot be tolerated given WPP’s very significant investment in the Group. [The Defendant] and Joe had of course also received substantial sums of money under the transaction, so restrictions of this nature are to be expected. 39. As I have explained above, provisions like these are negotiated and included in the contractual framework for every WPP acquisition as WPP must have a mechanism for protecting the investment it makes in any given business. This was particularly the case in this instance given the influence and standing of [the Defendant] and Joe within the Middle East advertising community. They were both figureheads for the THG Group and were key to the success of the business historically. It was therefore critical for WPP that it sought to ensure that they continued to support the business or, at the very least, not to act against its interests. It did so by including the terms I have referred to above. 40. I recall that the remedy was fully and specifically negotiated and agreed with Lewis Silkin, the lawyers for [the Defendant] and Joe, at the time in relation to the terms of clause 11.2, the definition of Defaulting Shareholder and, in the case of Joe, the restrictive covenants contained in his service agreement. ”