Hinton- Article
Introduction
David Hinton and another v SEI Investments (Europe) Limited concerned a High Court claim by Mr Hinton (and his putative new employer) against his former employer (SIEL) for a declaration that the post-termination non-competition covenant in his employment contract was unenforceable. The case required the Court to determine the admissibility of matters arising after the parties entered into the employment contract containing the covenant (notwithstanding that it is well-established that the enforceability of restrictive covenants must be assessed by reference to what the parties contemplated when the covenant was agreed).
Background
The claim was issued in March 2024. The Particulars of Claim pleaded certain facts and matters relating to the extent of Mr Hinton’s exposure to allegedly confidential information during his employment, as well as certain other facts relating to events which occurred during (and indeed after) his employment ended. These matters were relied on (in large part) to support Mr Hinton’s case that the non-competition went further than reasonably necessary to protect his former employer’s alleged legitimate business interests.
The pleading of those matters meant that it would be necessary for SIEL to give disclosure of documents containing the confidential information to which (so it alleged) Mr Hinton had been exposed to during his employment.
On 20 March 2024 SIEL issued an application to strike out those parts of the Particulars of Claim.
When SIEL served its Defence, it did not bring a counterclaim for an injunction to restrain Mr Hinton from breaching the non-competition covenant in the event that it won at trial (ie. in the event that, at trial, the Court determined that the non-competition covenant was enforceable).
The parties agreed that the claim should be determined at a speedy trial with a very tight directions timetable (the trial started in April 2024). At the hearing of Mr Hinton’s application for the trial to be expedited towards the end of March 2024 (shortly before the end of the Court term) the Court directed that it would not be appropriate for SIEL’s strike out application to be heard during the Court’s vacation and subsequently directed that the application should be heard at the start of the trial.
This left SIEL in a position where it was obliged to disclose confidential information notwithstanding that it contended that the parts of the Particulars of Claim which necessitated such disclosure fell to be struck out.
The strike out application
SIEL’s strike out application was duly heard at the start of the speedy trial. The basis for its application was that the reasonableness of covenants has to be determined by reference to the parties’ intentions at the time the relevant covenant is entered into and that, accordingly, events after that date are irrelevant and inadmissible. It drew the Court’s attention to the significant body of case law to the effect that the reasonableness of restrictive covenants must be assessed by reference to the parties’ circumstances and expectation when the contract containing the covenants is agreed and not in light of what actually happens during the performance of the employment (including, for example, the often cited case of TFS Derivatives v Morgan [2005] IRLR 246 (QB) at paragraphs 36–38)).
SIEL also sought to draw an analogy between the approach to determining the enforceability of restrictive covenant and the approach to construing contracts. In the latter context it is well-established that post-contractual matters are inadmissible for the purposes of interpreting a contract’s meaning (see, for example, the decision of the House of Lords in James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 583 at 603).
Mr Hinton opposed the strike out application. He contended that it was not in dispute that the existence of legitimate business interests and the reasonableness of restrictive covenants must be assessed by reference to what the parties intended or contemplated at the time the relevant employment contract was agreed. That did not mean, however, that post-contractual matters (including the extent to which a former employee in fact had access to confidential information during their employment) is irrelevant or inadmissible when it comes to the Court’s determination of those matters. Critically, the Court can consider evidence of post-contractual matters insofar as they cast light on what the parties intended or contemplated at that time they contracted. This is clear from the judgment of the Court of Appeal in Coppage v Safety Net Security Ltd [2013] IRLR 970 (CA) in which Sir Bernard Rix held as follows at paragraph 9:
“The question of reasonableness has to be asked as of the outset of the contract, looking forwards, as a matter of the covenant’s meaning, and not in the light of matters that have subsequently taken place (save to the extent that those throw any general light on what might have been fairly contemplated on a reasonable view of the clause’s meaning).” (emphasis added).
Indeed, in Coppage itself the Court of Appeal relied on post-contractual events as casting light on what the parties expected when they contracted (at paragraphs 2, 8, 14 & 20).
As for the analogy which SIEL sought to draw between: (a) the Court’s approach to deciding whether a party has a legitimate business interest or whether a covenant is reasonable; and (b) the well-established principles which restrict a party’s right to rely on post-contractual matters for the purpose of construing the meaning of a contract, Mr Hinton contended that those principles did not apply. In deciding whether a party has legitimate business interests or whether a covenant is reasonable, the Court is not simply engaging in an exercise of contractual construction. This is apparent from the Supreme Court’s decision in Harcus Sinclair LLP v Your Lawyers Ltd [2022] AC 1271 (SC) where it put beyond any doubt that the Court’s assessment of whether an employer has a legitimate business interest (and whether a covenant is reasonable) does not simply turn on the terms of the contract. Account should be taken of the parties’ non-contractual intentions at the time the contract was agreed (paragraphs 70-71 & 77-79).
The Court’s conclusion on the strike out application
In Mr Hinton’s case the Court dismissed the strike out application. The Court gave a relatively brief extemporaneous judgment which essentially accepted the contentions put forward by Mr Hinton, albeit the Court couched its judgment in terms of it being “arguable” that the post-contractual matters are admissible if they cast light on what was in the parties’ contemplation at the time they entered into the employment contract. The application was, after all, for a strike out and so the Court did not need to reach any final determination on the point.
Commentary
An unusual feature of the case was that SIEL did not bring a counterclaim for an injunction to restrain Mr Hinton from breaching the non-competition covenant in the event that it won at trial. Typically, a defendant former employer would bring such a counterclaim. The consequence of doing so is that, if the covenant is held to be enforceable, the former employer will likely still need to persuade the Court that it needs final injunctive relief (ie. that it would suffer harm if the employee was not restrained from breaching the covenant). In a case where the covenant is intended to protect confidential information, that means proving that the employee had in fact had access to confidential information the misuse of which would harm the former employer, which in turn means disclosing the confidential information which the former employer needed to protect in any event (irrespective of its relevance to the question of the enforceability of the covenant).
Whilst the dispute in Mr Hinton’s case was therefore somewhat unusual, employers should note that, even if the proceedings relate only to the enforceability of a covenant designed to protect confidential information and do not concern injunctive relief, they may still have to disclose at least some of the confidential information to which the employee had access during their employment (ie. the very information which the former employer seeks to protect). There are measures which can give an employer in this position comfort- in particular the agreement (or imposition by the Court) of a ‘confidentiality ring’. Thought should be given to agreeing (or applying for) such measures as soon as it becomes apparent that they might be needed.
