LAW REPORT: Employee was bound by restrictive covenant

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Rock Refrigeration Ltd v Jones and another; Court of Appeal (Lord Justice Simon Brown, Lord Justice Morritt, Lord Justice Phillips) 10 October 1996.

A restrictive covenant which was expressly provided to take effect upon the termination of a contract of employment "howsoever occasioned" was not necessarily unreasonable and thus unenforceable. But the employee would be absolved from further performance of the contract, and therefore of any restrictive covenants in it, if the termination was brought about by a repudiatory breach of contract on the employer's part.

The Court of Appeal allowed an appeal by the plaintiff, Rock Refrigeration Ltd, against a ruling by Sir Michael Davies that a restrictive covenant imposed on the first defendant, Michael Anthony Jones, in his contract of employment with the plaintiff was unenforceable against Mr Jones or the second defendant, Seward Refrigeration Ltd, his new employers. The appeal court ruled that the restrictions still applied in this case.

Eldred Tabachnik QC and Anthony Sendall (Ashurst Morris Crisp) for the plaintiff; Andrew Stafford (Eversheds, Manchester) for the defendants.

Lord Justice Simon Brown said it was essentially the correctness of the decision of Mr Justice Laws in D v M [1996] IRLR 192, which the judge followed in this case, that lay at the heart of this appeal. It was therefore convenient to analyse the basis on which that decision was reached.

Its starting point was General Billposting Co v Atkinson [1909] AC 118. The employers dismissed their employee "in deliberate disregard of the terms of the contract" so as "to evince an intention no longer to be bound by the contract". The employee, the House of Lords held, "was thereupon justified in rescinding the contract and treating himself as absolved from further performance of it on his part" so as no longer to be bound by the restrictive covenant which the employers were seeking to enforce.

In Briggs v Oates [1990] ICR 473, the question arose whether an assistant solicitor, whose contract had been brought to an end by the dissolution of the partnership which employed him, was still bound by a restrictive provision expressed to operate once the agreement "shall have determined for whatever reason". Mr Justice Scott held not. The first of his three reasons appeared to rely on the "mutuality" approach. The second was the General Billposting approach. But it was the third reason which was critical, since it was upon this that the decision in D v M was based. Scott J said:

But the point goes further. Suppose I am wrong. Suppose . . . that under the true construction of the contract clause 8 binds the defendant regardless of whether the 1979 agreement is brought to an end by . . . wrongful dismissal of the defendant . . . I would regard the clause 8 restraint as unreasonable as between the parties. A contract under which an employee could be immediately and wrongfully dismissed but would nevertheless remain subject to an anti- competitive restraint seems to me to be grossly unreasonable. I would not be prepared to enforce the restraint in such a contract.

It was to be noted that Scott J's third reason was expressly founded on the premise that reasons one and two were unsound.

In his Lordship's judgment, the law applicable to covenants and restraint of trade had no relevance to the present situation. The most basic premise upon which the whole restraint of trade doctrine was founded was that, but for the doctrine's application, the covenant in question would otherwise operate to restrain the employee unduly. In other words, the doctrine applied only where there existed an otherwise enforceable covenant.

The whole point of the General Billposting principle was that, in cases of repudiatory breach by the employer, the employee was on that account released from his obligations under the contract and restrictive covenants, otherwise valid against him, accordingly could not be enforced. Once that principle was decided, its future application necessarily postulated that such restrictive covenants upon their true construction would otherwise be enforceable against employees.

In short, Scott J was clearly right in the initial reasons he gave for holding the restrictive covenant unenforceable ag-ainst the wronged solicitor, and the essential premise for his conclusion that the covenant would constitute an unreasonable restraint of trade collapsed.

His Lordship would therefore hold D v M to have been wrongly decided.