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Financial disincentives to resign and restraint of trade

Case Report: 20:20 London Ltd v Riley

[2012] EWHC 1912 (Ch)

Counsel for the Claimant: David Reade QC and David Pliener

Counsel for the Defendant: Anthony Trace QC and Sam Neaman

The Defendant sold his digital marketing business to the Claimant for a consideration of some £2.2 million in shares and cash. The terms of the sale were set out in a share and purchase agreement (“SPA”). Simultaneously the Defendant entered into a contract of employment with the Claimant.

Although the employment contract entitled the Defendant to resign on 6 months’ notice, the SPA contained a provision the effect of which was that if he “ceased to be an employee for any reason” (which would include resignation) at any time within the first three years, he would be obliged to repay the £1.5 million consideration (in some circumstances reducing on a sliding scale during the third year).

Upon the cessation of his employment after two years the Claimant sought repayment of substantially the whole of the £1.5 million cash consideration under the relevant provision in the SPA. The Defendant defended the claim on four bases. One defence was that the cash repayment provision on which the Claimant relied was a provision which effectively prevented the Defendant from resigning for three years, was an unlawful restraint of trade, and accordingly void and should be struck out.

The Claimant was represented by David Reade QC of Littleton Chambers (leading David Pliener). The Claimant sought summary judgment. It succeeded on all counts except the restraint of trade defence. On that Defence the Defendant, represented by Sam Neaman of Littleton Chambers (led by Anthony Trace QC) was given permission to defend.

In granting permission to defend on the restraint of trade point, the Judge stated (in paragraphs 42-44) that;

  • there is no doubt that a monetary benefit payable to a party if he does not work for a competitor will fall within the restraint of trade doctrine even if the contract does not oblige him to refrain from doing so (see Wyatt v Kreglinger [1933] 1 KB 793;
  • although this case was different, because it dealt with a financial incentive to an employee not to exercise a right to terminate his existing employment, in Electronic Data Systems v Hubble (1987, unreported, Court of Appeal), it was the view of two eminent Court of Appeal judges that an analogous situation requiring repayment of money upon resignation was capable of being a restraint of trade (because this was also a summary judgment application, the Court of Appeal was not called upon to decide whether the particular repayment provision in fact constituted an unlawful restraint in that specific case).

 The Judge concluded by saying that

 “there is no authority binding upon me which decides that a repayment provision can never through disincentive or “golden handcuff” effect amount to a restraint of trade requiring objective justification. Indeed [Electronic Data Systems v Hubble] appears to suggest the contrary.”

 This is the clearest judicial indication yet that a contractual financial disincentive to resign is prima facie a restraint of trade. Whether, in any particular case, it is unreasonable and therefore void, would be a subsequent matter of fact for the court to decide on the evidence in each instance.

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