Estate agents’ branch manager subject to three-year, three-mile covenant in restraint of trade–Validity of covenant upheld–Relevance in this regard (a) of manager’s record in his previous employment, (b) of his attitude to the rules of conduct
This was a
claim by Calvert, Hunt & Barden, estate agents, of 57 High Street,
Chislehurst, Kent, against a former employee, Mr Eric George Elton, of
Pickhurst Mead, Hayes, Kent, for an injunction restraining breach by him of a
covenant limiting his business activities for a period of three years after his
employment ceased, and for damages.
Mr B J F
Galpin (instructed by Zeffertt, Heard & Morley Lawson) appeared for the
plaintiffs, and Mr I H Maxwell (instructed by H Montlake & Co) represented
the defendant.
Giving
judgment, GRAHAM J said: This is an action by a firm of estate agents, Calvert,
Hunt & Barden, to enforce a covenant in restraint of trade against the
defendant, Mr Elton, who was employed by them from about January 1972 until
about July 1973. One branch of the argument before me raises specifically a
point on which there appears to be a dearth of authority, namely, whether in
considering the validity of such a covenant it is permissible to take into
account circumstances which point to the fact that the employee, prior to the
date of the covenant, has been guilty of improper professional activities or
other conduct making his trustworthiness in some respects questionable. If it
is proper to take such matters into account at all, is consideration of them
relevant, not only to the question whether the taking of a covenant in that
particular business is permissible or not, but also to the question of the
reasonableness of the extent of such covenant?
The plaintiffs argue that it is proper to take such matters into account
in relation to both questions, and the defendant that it is not, at any rate in
respect of the second question.
The facts are
that the plaintiffs are estate agents practising in the London Borough of
Bromley and have offices with overlapping areas of activity in Chislehurst and
Bickley. This case primarily concerns the Bickley office, which the plaintiffs
decided to reactivate in the middle of 1972 after the departure of its former
manager at some earlier date. They advertised for a new manager, and after interview,
the defendant was taken on in that capacity, with no fixed time-limit to his
employment, at a salary of £1,000 per annum and commission at a flat 10 per
cent. As a result of learning, shortly after the start of his employment,
certain matters which will be mentioned hereafter, the plaintiffs insisted that
the defendant should enter into a service agreement containing a restrictive
covenant which would become operative if and when he left the plaintiffs. At
this point it is useful to note certain clauses in the agreement, which was not
in fact entered into until August 25 1972. Clause 9 contains the covenant, and
reads as follows:
‘9. AFTER the
termination of the Employee’s employment hereunder howsoever occasioned the
Employee shall not for the period of three years after he shall cease to be
employed hereunder directly or indirectly undertake carry on or be concerned
engaged or interested either alone or in partnership with or as manager agent
or servant of any other person firm or corporation or otherwise in the business
of auctioneer valuer surveyor estate agent property manager insurance agent or
mortgage broker within a radius of three miles of any branch of Calvert, Hunt
& Barden at which he has been employed as Manager and shall not during the
said period on behalf of himself or any other person firm or corporation
canvass or solicit orders from any person firm or corporation who shall at any
time during the continuance of his employment hereunder have been a customer of
the Employer nor use any professional information which he may have obtained in
the course of and incidental to his employment hereunder to the detriment or
attempted detriment of the Employer.’
Clause 8 gives
a power to dismiss the defendant, if guilty of conduct causing damage or bringing
discredit to the branch office. Clause 2 should also be noted, since it
demonstrates that the original salary and commission figures were substantially
increased over those at which Mr Elton was originally engaged. In particular
the commission was on a rising percentage. The evidence showed that on being
asked to enter into a service agreement, Mr Elton had at first demurred but
then had agreed, provided there was some advantage given when he did so. The
increased figures were the result. The evidence also showed that these figures,
actually agreed, were generous for the job in question.
The
circumstances giving rise to the matters referred to above arose as follows.
The defendant, who was a member of the professional body known as the National
Association of Estate Agents, came into the branch at Bickley as manager, and
his only assistant was a secretary. He was therefore in effect the Bickley
branch so far as the outside world was concerned. He was described by Mr J Hunt
[a partner of the firm of Calvert, Hunt & Barden] as a zealous worker, and
in fact as ‘over-zealous in respect of his own interests.’ This description was based on action which,
Mr Hunt said, the defendant took on several occasions shortly after he had
started work at Bickley. The Bickley and Chislehurst branches were in fact run
together in the sense that all inquiries and instructions which came first into
one office were promptly transmitted to the other to ensure that there was as
great a chance as possible of effecting the business in question, since it did
not matter to the profits of the partnership which office finally did the deal.
The rule as to commission was, however, that whenever the second office
effected business which originally was booked by the first, half the commission
was attributed to each office. An office only got the full commission if it
effected the deal and had also been the first to receive the instructions in
question. Mr Hunt was responsible for overseeing the financial operations of
the firm, including those of the Bickley office, and found that on more than
one occasion Mr Elton had claimed full commission on deals on which he was
entitled to only half commission, because the original instructions had been
received by the Chislehurst office. Another matter to which Mr Hunt testified
concerned the essential trust which estate agents must place in each other. The
necessity for such trust was emphasised not only by Mr Hunt but also in
cross-examination by Mr Crowhurst, an independent estate agent called for the
defendant. It is in fact one of the rules of the National Association of Estate
Agents that an agent who learns that a vendor, not on his books, has a property
for sale, and who finds a purchaser for that property, before introducing that
purchaser to the vendor must ask whether the latter
whether he is willing to give him a subagency, and if not, must withdraw from
the transaction. In one case a vendor, who came from Otford, complained to Mr
Hunt that the defendant had approached him, saying that he had a purchaser who
had agreed to buy the vendor’s property. The vendor was angry because he had
never instructed the plaintiffs or Mr Elton, and Mr Hunt, in accordance with
the recognised practice, promptly gave instructions to withdraw from the
transaction.
Now at the
first interview prior to entering the plaintiffs’ employment, the defendant had
stated that he had been in partnership with Mr J H Cox, another estate agent
trading under the name Wheekers at Catford. When asked why he had left, he said
that Wheekers was really only big enough to support one estate agent, and that
when it was proposed to bring in both Mr Cox’s son and Mr Elton’s son, it was
obvious that the partnership would not be able to support four partners. The
plaintiffs had no reason to doubt this statement at the time. In April or May
1972, however, as a result of the behaviour of the defendant to which Mr Hunt
objected, the plaintiffs decided that they must make further inquiries about
the defendant from Mr Cox. This they did, and the three partners went to Mr
Cox’s office and were told, inter alia, by him that in fact the
defendant had appropriated some of what was properly the firm’s money, notably
two items from insurance concerns and one sum of about £100 obtained from a
client as an ex gratia payment. Such payment, Mr Cox considered, clearly
belonged to the firm and should have been paid into the firm’s account.
Further, there had earlier been irregularities in respect of claims for
expenses for petrol used in the firm’s business. The total figure concerned in
all these items was of the order of £200. These matters were confirmed by Mr
Cox, who was called for the plaintiffs, and he said that after he had discovered
them he made it clear to the defendant that the trust between them had ceased
and it was impossible for the partnership to continue. He said that he was
willing to continue to employ the defendant’s son and to repurchase the
defendant’s share of the partnership, and that he would say nothing to third
parties about it if the defendant left. At first the defendant agreed to go,
but later refused to do so, and Mr Cox was compelled to issue a writ asking for
dissolution of the partnership. The matter was finally settled shortly before
the case was heard, and the partnership was dissolved on May 18 1971. Mr Cox
further testified that his agreement with the defendant also contained a
restrictive covenant, the material restrictions being three miles and five years.
In fact, the three miles in question covered both the office of Douglas Carlton
& Associates in Mottingham, at which the defendant now works, and the
office which they proposed to open at Lee, a short distance to the north of
Mottingham. It follows that if in fact the restrictions in both agreements are
reasonable, the defendant is in breach of both of them. At a further interview
with the defendant he was told the facts and that the plaintiffs would back him
if he wished to bring any action against Mr Cox. This he declined to do, in
spite of denying that what Mr Cox said was true.
I should at
this point make it clear that I find the facts which I have stated above to
have been proved to my satisfaction. I watched the demeanour of Mr Elton, and
was not impressed with the content of his evidence or the way in which he gave
it. He frequently was unable, as he reiterated on a number of occasions, to
remember what had happened when it was sought to pin him down on important
matters, and in my judgment he was also often evasive and inaccurate. I have no
hesitation in preferring the versions of Mr C E Barden, Mr Hunt and Mr Cox as
to what happened whenever, which was frequently, there was a conflict between
what they said and what the defendant said.
The matters
above referred to all took place prior to August 25 1972, the date of the
agreement here in question. That date is important, because the reasonableness
or otherwise of the covenant must of course be tested as at that date: see Scorer
v Seymour Jones [1966] 3 All ER 347, per Salmon LJ at 351. Furthermore,
it is well to bear in mind that it is the reasonableness or otherwise of this
covenant in this agreement with which the court is concerned, and that
the onus to justify this covenant lies on the plaintiffs. Restrictive covenants
in agreements between estate agents and their employees as a class of
agreements are not in issue and are not relevant except in the most general
sense. What, then, are the principles upon which one must proceed? It was argued by Mr Maxwell for the defendant
that, while admitting that a covenant was proper here, the test of
reasonableness of such a covenant is objective, by which I understood him to
mean that the agreement must be looked at without consideration for any purpose
of the personality, habits and history of the particular employee. The
question, he said, is what is reasonable between any employer and any employee
of the relevant category in this business, in this district, at the relevant
time; the employee’s character and record are entirely irrelevant and must be
rejected from consideration, because otherwise too great an uncertainty would
be introduced into the law governing these transactions. Counsel then went on
to say that the particular circumstances here were closer to those in such a
case as Strange v Mann [1965] 1 WLR 629, a case about a
bookmaker’s manager, than to those in, for example, Fitch v Dewes
[1921] 2 AC 158, a case concerning a solicitor’s managing clerk.
In Strange’s
case there was an area restriction of 12 miles and a time restriction of three
years. It was held that the business and the way it was conducted, being
principally on the telephone, were such that it was unlikely that customers
would seek out the servant after he had left his employer, that he had acquired
no personal goodwill or confidential information or knowledge, and that in such
circumstances an area restriction was not necessary to protect the employers’
business but was really directed against competition per se, and the
covenant was therefore unenforceable. In Fitch v Dewes the
covenant was unlimited in time and as to area was expressed to cover ‘a radius
of seven miles of the Town Hall of Tamworth.’
At page 164 Lord Birkenhead points out that one must first of all decide
on the proved facts what the employer is entitled to be protected against,
because only then can one decide whether the covenant in question exceeds what
is required for that purpose. The business of an attorney, he said, ‘depends
upon the existence of goodwill; upon the association and the intimacy which
exist between him who carries on that business and the clients of the firm, an
intimacy founded upon many complex considerations not easily to be defined, but
very easily to be understood.’ At page
165 he adds that if the employment came to an end the employee ‘should not be
in a position to use the intimacies and the knowledge which he had acquired in
the course of his employment in order to create a practice of his own in that
same place and by doing so undermine the business and the connection of the
respondent.’ The restriction was held to
be reasonable.
In the cases
cited to me, it seems that ‘public interest’ had there been looked at in a
broad sense of some economic or business advantage to the public at large,
since it was held, for example, that it was in the public interest that proper
restrictive agreements should be allowed ‘because otherwise solicitors carrying
on business without a partner would be extremely chary of admitting competent
young men to their offices and to the confidential knowledge to be derived from
frequenting those offices.’ A similar
broad view was taken by Sellers LJ in Scorer’s case, referred to above,
when at page 349 he stated that the employee in the case before him was unqualified
‘without such restraints as the society appropriate to one or other of those
activities of auctioneer or estate agent would impose.’ He approved the finding of the judge that ‘it
would not be against the public interest if another unskilled man should be
prevented from setting up. The less unqualified persons uncontrolled by any
professional rules there are the better.’
Sellers LJ went on, however, to say that ‘so long as that aspect is not
overstrained it might commend itself to many people.’ For myself, I agree it is certainly important
not to go too far in this respect, since public interest must not be used to
validate a covenant which otherwise might be considered doubtful. The true
question is whether the covenant is reasonable and necessary in the
circumstances to protect the particular employer and is not otherwise against
public interest. Public interest may thus sometimes
particular restriction is reasonable and necessary to protect the particular
employer’s business it seems to me that, provided any possible bargaining
inequality between the parties has been allowed for, it is normally in the
public interest that such restriction should be valid. Such a restriction is in
those circumstances an exception to the general rule that there must not be
interference with individual liberty of action in trading: see, for example,
Lord Macnaghten’s well-known speech in Nordenfelt v Maxim Nordenfelt
Guns & Ammunition Co Ltd [1894] AC 535, 565.
Mr Galpin, for
the plaintiffs, argued that the true question was whether in all the relevant
circumstances this covenant was necessary to protect the plaintiffs’ business
and was not against the public interest. The difficulty is, of course, in
defining what are the relevant circumstances. The circumstances which counsel
submitted were relevant included the activities of the defendant which Mr Hunt
had objected to, and the information of the defendant’s previous activities and
conduct given to the partnership by his previous employer, Mr Cox. They were
relevant, he argued, both to the necessity for the covenant and to its limits.
On that basis, he contended that the area and time restrictions of three miles
and three years were certainly not wider than necessary to protect the trade
connection and reputation of the plaintiffs; but even if such circumstances
were not relevant, the restrictions were still reasonable and the agreement
should be supported. So long as they were not restricting competition per se,
the plaintiffs were entitled to ask for and could expect to get the full extent
of the protection considered necessary in such circumstances. In the light of
the defendant’s previous conduct and activities, this, notionally at any rate,
could be argued to result in a wider restriction being reasonable in his case
than in the case of an employee otherwise similar but of unblemished
reputation.
In answer to
my request for any authority supporting the proposition that an employee’s
reputation and position were relevant considerations both to the existence of
and to the extent of the restriction, Mr Galpin, in addition to the Scorer
case, cited Haynes v Dorman [1899] 2 Ch 13. In that case, the
father of the defendant was employed by the plaintiff as traveller and manager,
and by reason of his employment had much valuable information about the
plaintiff’s business and customers. The defendant was a young man living with
his father, and one of the matters which Rigby LJ appears to have taken into account
(see page 27) was the fear on the plaintiff’s part that the defendant, who was,
at the time when he applied to the plaintiff for a job, in the employment of a
rival firm, might in conversation with his father acquire knowledge of facts
which might give him, and through him the plaintiff’s rivals, an undue
advantage. This case was in the last century and seems to me to go a long way
if the reasonableness of the restriction in issue was really dependent upon
such a fear. An examination of the case shows, however, that there were other
perfectly good reasons why, in the circumstances of that business and of the
nature of the employment of the defendant, it was held to be reasonable to
impose the restriction of 25 miles and of unlimited duration, when the son
became the employee of the plaintiff.
The matters
which are of primary importance in the present case are clearly the nature of
the business and the area over which it extends, the confidential information
as to the plaintiffs’ clients which the employee may be expected to gain, and
the influence which he may be expected to exert over them. The evidence
established that an estate agent’s business is very dependent on the
personality of its partners and employees. They necessarily, over the years,
learn a lot about many of their customers, and about their circumstances and
requirements. This is especially true in a dormitory area as opposed to
somewhere like the centre of the metropolis. Many of the plaintiffs’ sales and
purchases were from, as it was called, repeat customers, that is to say from
clients who, during their lifetime, remained in the same general area but from
time to time, as their circumstances altered, moved from one locality to
another and from a smaller to a larger house or vice versa. This was confirmed
by the evidence of the defendant himself, as well as by his witnesses, and he
agreed that it was a valuable connection. Taken by and large, Bickley and
Chislehurst are areas where the houses are larger, of better character and more
expensive than in Mottingham, in which the defendant’s office is situated, or
in the nearby area of Lee. As already stated, the Bickley and Chislehurst
offices of the plaintiffs were run together, and I think it is quite fair to
regard this method of doing business as giving each office an effective sales
area larger than it would be if each was in widely-separated and not contiguous
areas. This was confirmed by Mr Barden, who said that they had at Bickley a
flow of business from Mottingham via the Chislehurst branch. As the map shows,
the Mottingham and Chislehurst areas extend nearly to the edge of the
three-mile circle from Bickley.
The evidence
as to the areas covered by the various offices with which the witnesses in this
case are concerned–for example, Bickley, Chislehurst, Mottingham and New
Eltham–was to some extent conflicting. The plaintiffs’ witnesses’ figures
generally tended to be larger than those of the defendant and his witnesses. In
these dormitory areas, where there are quite a large number of estate agents,
the greatest volume of transactions is generally found in properties situated
fairly close to the office. It is equally clear that though there may not have
been much of it, the business activities both of the plaintiffs’ partnership
and of the defendant’s witnesses, Mr Crowhurst and Mr A Spencer, extended up to
about 10 miles, or on occasion even further, away from their respective
offices. These long distances, however, I regard as isolated cases and ignore
for present purposes. It is impossible to be precise, but it seems, and I so
find, that the bulk of the business, including that of the plaintiffs, is done
within an area of approximately three miles’ radius. The defendant’s area was
said by the defendant to cover a somewhat smaller radius, perhaps up to 1 1/2
to 2 miles, but Mr Hunt made it clear that the plaintiffs’ transactions often
covered a three-mile radius and, though not so often, certainly extended up to
five miles. Giving the matter the best consideration I can, after listening to
the evidence, I consider that a radius of three miles from Bickley, on the
facts as to distance of sales from that office, is a perfectly reasonable
figure. I think the plaintiffs were entitled to impose a restriction of that
distance in order to obtain adequate protection against any employee in the
defendant’s position who would necessarily acquire influence over and personal
information about many of the plaintiffs’ customers who came and gave
instructions to the Bickley office, and, in those cases where he effected such
sales or purchases, to the Chislehurst office. The conclusion is based solely
on the facts which were proved before me as to the area, as to the nature of
the plaintiffs’ business at the Bickley office, and as to the defendant’s
position in that business. If it is permissible to take into account also the
character of the defendant and his previous activities as part of the relevant
circumstances, then my view that three miles is eminently reasonable is
reinforced.
The true legal
position I consider to be as follows. Facts as to previous unprofessional
activities and unreliability of an employee in a particular professional
position are relevant to, though not determinative of, the question as to
whether or not it is reasonable and proper to insist upon a covenant at all,
because they indicate what may well take place in a business of that nature. So
far as the reasonableness of the extent of the covenant actually taken is
concerned, it is, I think, right to say that such facts, if proved, can go no
further than justifying the employer in insisting that he is entitled to go to
the maximum limits necessary and proper to protect his business interests and
reputation. Such limits must, however, still be reasonable, as tested by the
case of any professional employee filling that particular position, whatever
his reputation, if they are not to be held to be too wide and contrary to
public interest. So here, evidence was given by Mr Hunt, and confirmed by Mr
Crowhurst, that any ex-employee, if he behaves in an unprofessional way in or
too near to the area of his erstwhile employer, can only bring discredit on
such employer’s business. This I can well believe, and it seems to me a general
matter which an employer is entitled to take into account in insisting upon a
covenant of appropriate area, but I do not think such employer should be
entitled, in the case of a particular employee, to impose a covenant wider than
would be reasonable in the case of
potential employee of bad reputation is to refuse to employ him.
As regards the
length of time-limit of three years, there was not really very much dispute,
though Mr Maxwell argued that it was too long. The plaintiffs emphasised that
the limit of three years was necessary to take care of the repeat customers,
and the intention was to specify a period beyond which it was not likely that
customers would, if they felt so inclined, follow the defendant into his new
employment. Equally, after three years his influence and knowledge of the
plaintiffs’ customers was not so likely to enable him to follow them. As it is
sometimes put, by that time the telephone line will have gone cold. To my mind,
and I so hold, there is nothing unreasonable in this limit. If the defendant’s
character and activities are also relevant to this, then it seems to me the
plaintiffs were all the more justified in specifying three years as a minimum,
since the defendant had already shown a willingness in his early dealings for
the plaintiffs to make use of his knowledge of their customers’ requirements in
an unprofessional way. I therefore hold that this covenant, the subject of this
action, is necessary to protect the plaintiffs’ business and reputation, and
there is no reason for holding it invalid on the ground that it is against
public policy.
An injunction
was granted restraining the defendant until July 31 1976 from directly or
indirectly undertaking, carrying on, being concerned, engaged or interested,
either alone or in partnership with, or as manager, agent or servant of, any
other person, firm or corporation, or otherwise, in the business of auctioneer,
valuer, surveyor, estate agent, property manager, insurance agent or mortgage
broker within a radius of three miles of the plaintiffs’ premises at 12
Southborough Road, Bickley. His Lordship told Mr Maxwell that although he had
listened very carefully to his (counsel’s) submissions in support of a stay, he
was not satisfied that this was a case in which the operation of this
injunction should be held up for more than seven days, which would enable the
defendant to ask the Court of Appeal for further time. The plaintiffs were
given an inquiry as to damages, and costs.
