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Tidying Up Split Ends: Petrodel and Restrictive Covenants

Using a company to breach restrictive covenants;
Reasonableness of covenants when selling a hairdressing franchise;
Alleged repudiatory breach

For a one-day speedy trial, both the list of issues to be resolved and the range of authorities that needed to be considered by Mr Martin Chamberlain QC, sitting as a Deputy Judge of the High Court in Rush Hair Limited v (1) Hayley Gibson-Forbes; (2) S J Forbes Limited, was rather remarkable, involving as it did revisiting several classic propositions in the law relating to restrictive covenants and adapting them for modern circumstances.

At a superficial level a judgment enforcing a two-year two-mile radius non-competition covenant against a hairdresser might seem shocking. Although law students are often taken to a number of old cases such as Marion White Ltd v Francis [1972] 1 WLR 1423 in support of the proposition that hairdressers can be subject to enforceable post-termination restraint so as to protect the customer connection that a good stylist is able to build up, such restrictions must be modest in duration and ambit if they are to be enforced. In the Rush Hair case however, the Deputy Judge accepted that a different approach to covenants is warranted where the covenants were not in an employment contract but actually in a Share Purchase Agreement in which Ms Gibson-Forbes had sold her interest in a Windsor hairdressing franchise back to Rush Hair.

The other covenant which Rush Hair sought to enforce raised even more interesting legal issues. The covenant in question restrained Ms Gibson-Forbes from canvassing, soliciting, enticing or employing certain individuals for a period of two years. She had not done so directly but a company of which she was a director, the Second Defendant, had done so. It was submitted on her behalf that as the covenant did not expressly prohibit this mode of indirect conduct, she was not in breach. There is surprisingly little authority on the point other than Gilford Motor Co v Horne [1933] Ch 935 and although it is standard wording in injunctions for a person who is enjoined not to do something to not do it either directly or indirectly, the Deputy Judge had to decide whether such a covenant restrained indirect conduct such as had occurred here. However he did not consider that Gilford assisted. The difficulty with that case is that it uses the language of ‘device’ and ‘sham’ suggesting that a person will only be prevented from using indirect means if he or she does so in a deliberately evasive manner. That was not what had happened here.

The Deputy Judge turned to the decision of the Supreme Court in Prest v Petrodel Resources Ltd [2013] 2 AC 415 and to the consideration given in that case to the so-called “concealment principle” (“that the interposition of a company or perhaps several companies so as to conceal the identity of the real act actors will not deter the courts from identifying them, assuming that their identity is legally relevant”) and the “evasion principle” (“that the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company’s involvement, and a company is interposed so that the spate legal personality of the company will defeat the right or frustrate its enforcement”).

The Deputy Judge developed five propositions from Petrodol which it is anticipated will now become a helpful guidance for practitioners dealing with restrictive covenants whenever there is this sort of alleged indirect breach and the covenant has not made express reference to indirect conduct. Those five propositions are:

“First, a person who has entered into a covenant not to “employ” another must not employ that other either himself or through an agent. That is because the agent’s acts are, in law, those of his principal, the covenantor. This explains why, when a court enjoins someone from doing some act, the standard wording forbids the doing of the act “directly or indirectly”.
Second, when a company acts through its director, the director is normally the agent of the company, not the other way round. A covenant not to do a particular act can be framed so as to prohibit the doing of that act as agent for another. The covenant in the Gilford Motor case is an example. Whether any particular covenant prohibits acts done as agent for another is a matter of construction.
Thirdly, where a person who controls a company uses that company “as a cloak or sham”, i.e. “so as to conceal the identity of the real actors”, the application of the “concealment principle” enables the court to conclude that the acts apparently done by the company are, in fact, acts of the person controlling it (on Lord Neuberger’s analysis [in Petrodol] of Gilford Motor Co v Horne, because the use of the company as a “cloak” makes the company the agent of the controller).
Fourthly, where a controller interposes a company so that the separate legal personality of the company will defeat a legal right or frustrate its enforcement, the “evasion principle” enables the court to pierce the corporate veil, i.e. to treat the company’s acts, in law, those of the controller.
Fifthly, where an act has in fact been done by a company, and not by its controller (and where neither the concealment principle nor the evasion principle applies), it is not an abuse to rely on that fact.”

The Deputy Judge held that neither the concealment principle nor the evasion principle applied to the facts before him but that as a matter of construction (i.e. under his second proposition) the covenant in question covered acts done both on Ms Hayley Gibson’s own behalf and also those acts done by her as agent for another. He held that there was sufficient ambiguity in the wording of the covenant to permit such a construction, this not being the sort of case that the Court of Appeal considered in Prophet plc v Huggett [2014] EWCA Civ 1013 where, in the absence of such ambiguity, the covenantee was left stuck with a covenant that had “no relevant teeth”.

Having upheld the reasonableness of each of the covenants, the Deputy Judge then rejected a submission made on behalf of the Defendants that Rush Hair had repudiated the SPA (and, as a consequence, its ability to enforce the restrictive covenants contained in it) by writing a letter which stated in response to earlier breaches that it was seeking repayment of the sums that it had paid to her and intended to bring a claim against her for damages. He held that Rush Hair had not had any further substantial obligations under the SPA and as the main continuing obligations which were owed at that time were owed by Ms Gibson-Forbes (namely to comply with the restrictive covenants) it would have been surprising if Rush had sought to treat the contract as at an end, citing Geys v Societe Generale [2013] 1 AC 513 in support of the proposition that what is required to bring a contract to an end is a “conscious intention to bring the contract to an end, or the doing of something that is inconsistent with its continuation.”

Chris Quinn was instructed by Peter Sheppard of Osborne Clarke LLP on behalf of Rush Hair Limited. Chris offers an all-day workshop to law firms on the complete anatomy of restrictive covenants in the High Court. If your firm is interested in such a workshop then please contact the Business Development team here at Littleton.

The case judgement can be viewed HERE.

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