Estate agents — Covenant restrictive of practice within two-year two-mile radius — Whether valid and enforceable
The plaintiff
and defendant entered into an agreement as partners to run an estate agency. By
the partnership agreement the defendant covenanted that he would not within a
period of two years from the date of termination of the partnership practice as
an estate agent either on his own account or in conjunction with any person,
firm or company within two miles of their premises. In May 1995 the defendant
left the partnership and later in 1995, obtained employment with a rival estate
agent within the two-mile radius. In the court below the recorder upheld the
validity of the restrictive covenant; the defendant appealed.
legitimate interest which the plaintiff was entitled to have protected. The
restrictive covenant was not a covenant against competition. On the evidence
before him, of the state of the market and estate agency in the locality, the
recorder was entitled to find that without the enforcement of the covenant,
there was a danger that the goodwill would be injured or damaged. It was a
covenant which was no more than adequate to protect the goodwill of the
interest.
The following
cases are referred to in this report.
Stenhouse
Australia Ltd v Phillips [1974] AC 391;
[1974] WLR 134; [1974] All ER 117; [1974] 1 Lloyd’s Rep 1, PC
This was an
appeal by the defendant, Mark Stuart Williams, from a decision of Mr Recorder
Axtell in Bournemouth County Court, in proceedings by the plaintiff, John
Gordon Espley, for breach of a partnership agreement.
Ian Peacock
(instructed by Ellis Jones, of Bournemouth) appeared for the appellant; Paul
Cairnes (instructed by Richards & Morgan, of Bournemouth) represented the
respondent.
Giving
judgment, Henry LJ said:
By a judgment delivered on April 10 1996, Mr Recorder Axtell upheld a
restrictive covenant in a partnership agreement restraining an estate agent in
certain ways. His judgment is now appealed to us.
The history of
the matter is this. The plaintiff, Mr Espley, was at the time of the hearing 51
years old. He had been an estate agent between the years 1985 and 1987. He
worked with the defendant, who, at the time of the judgment, was 31 years old,
at an estate agency firm. That firm was taken over by the Prudential. When he
left that firm in 1989 he was bound by a restrictive covenant imposed by the
Prudential that restricted him for a period of two years from working within
two miles and dealing in residential property. By the end of 1991 that covenant
was about to run out. He thought that he would set up his own firm with the
defendant. The defendant would specialize on the residential side. He would not
deal with the residential side until the two-year period of his covenant had
expired and would then deal with both the commercial and the residential sides.
They set up in Christchurch. Both of them knew the area well. It was the
plaintiff’s evidence that he had said from the word go that he intended the defendant
to be his partner. However, no final partnership agreement was drawn up until
February 15 1994. The nature of that agreement was this. Only the plaintiff had
put money into the business and that is reflected by the terms of the
agreement. First:
Financial
3.1 The
profits of the Partnership shall (unless the Partners otherwise agree in
writing) belong to the Partners in the following shares
Mr. Espley 65%
Mr Williams
35%
and they
shall bear all losses in the same proportions.
And then:
The goodwill
of the Partnership business and the firm name shall belong to Mr Espley alone
and Mr Williams shall not acquire any share or interest therein.
Then there
comes the three covenants relied on by the plaintiff. Chapter 7 in the
agreement:
Restrictions
following termination
7.1 Mr
Williams covenants with Mr Espley: —
7.1.1 that he
will not within a period of two years from the date of termination of the
partnership either on his account or for or jointly or in conjunction with or
on behalf of any other person firm or company whether directly or indirectly
practice as an estate agent or be in any way involved in the business of an
estate agency in either case within a radius of two miles of the premises.
That was in
Christchurch. Effectively that would have covered all of Christchurch, and
within that radius there were another 23 estate agencies:
7.1.2 he will
not within a period of two years from the date of termination of the
partnership either on his own account or for or jointly or in conjunction with
or on behalf of any other person firm or company whether directly or indirectly
solicit business entice clients or interfere with the relationship between Mr
Espley and any former customers of the Partnership and
7.1.3 he will
not at any time after the date of termination of the partnership use the name
Espley Brooks or [any other like name].
What happened
then was this. Business had been difficult over all of these years because of
the state of the housing market, and in May 1995 the plaintiff had talks with
another small estate agent with the prospect of a merger between them being
under consideration. The defendant was not attracted by this idea and he
decided to leave the partnership and did so in that May. He went to a firm
which unfortunately went into liquidation or a receiver was appointed, and so
from October 1995 he was out of work. His response to that was to get work as a
negotiator with Slades, a rival estate agent in Christchurch within the two
miles. As a result of his taking up employment there,
under appeal before us today.
However, from
the beginning he gave an undertaking agreeing to be bound by the
non-solicitation of customers clause in 7.1.2 and by the clause as to use of
name in 7.1.3, and so the live dispute was the two-year/two-mile restrictive
covenant restricting him from being employed or acting as an estate agent
within the period of that space or time.
It is conceded
that the judge correctly set out the law on the second page of the judgment. He
defined the three questions that he had to decide. He said:
The essence of
those authorities I take to be as follows: The plaintiff must establish that: —
(1) He has a
legitimate interest capable of being protected — here that is the ‘good will’
of ‘Espley Brooks’ which continues to trade as a firm of estate agents.
(2) The
restrictive covenants are no more than ‘adequate’ to protect the interest
meaning not excessive as regards area, duration or prohibited activities, and
(3) Without
the enforcement of such covenants the interest or good will could be injured or
damaged.
Those are the
three covenants to be looked at, and in relation to the first of those the
judge approached the matter in this way. He said:
It has to be
remembered that in 1993/1994 as now the residential market was fragile. In 1991
the plaintiff and defendant were starting ‘cold’ in a highly competitive
environment. In Christchurch with a population of 40,000 or so and with 23 or
so agents within several miles of the town centre and a limited supply of
houses for sale at any one time, the number of instructions from would-be
sellers would be highly contested. The plaintiff, I find, had put up to £20,000
of his own money into the business of Espley Brooks. By 1994 he had been
trading in the most difficult circumstances for only 2 1/2 to 3
years. He was vulnerable then to the
loss of a key figure who knew the Christchurch market and regardless of the
actual value of Espley Brooks ‘goodwill’ he had, I find a legitimate interest
to be protected. Goodwill of course is that intangible asset that is the good
name and reputation of a firm that encourages the public to use the services.
By 1994 the defendant had helped to establish that in a two-partner firm.
He said in
answer to the first question, that the goodwill was a legitimate interest
capable of being protected. This was the goodwill of a two-man firm of which
the plaintiff was the commercial partner and the defendant was the residential
partner. They were a natural combination from the beginning, as the judge
found, particularly as the plaintiff was banned by the tag end of the
restrictive covenant the Prudential had imposed on him from dealing in
residential property at the beginning of the partnership.
Aldous LJ has
defined goodwill, on the basis of earlier authority, as being the attractive
force which brings in custom. There were only two men bringing in custom into
this firm, the plaintiff and the defendant. That goodwill would seem to me to be
prima facie capable of protection, and the judge so found. However, his
finding is attacked by Mr Ian Peacock, for the appellant, on the basis that
this covenant 7.1.1 was, he says, in reality a covenant against competition. He
submits that what the plaintiff was entitled to protect was the customer base
of his firm and nothing else. He cites the case of Stenhouse Australia Ltd
v Phillips [1974] AC 391, a Privy Council case. In the speech of Lord
Wilberforce at p400, one gets the passage that Mr Peacock relies on. Lord
Wilberforce says:
The accepted
proposition that an employer is not entitled to protection from mere
competition by a former employee means that the employee is entitled to use to
the full any personal skill or experience even if this has been acquired in the
service of his employer: it is this freedom to use to the full a man’s
improving ability and talents which lies at the root of the policy of the law
regarding this type of restraint.
I break off
the quotation at that point to comment that, so far from Mr Peacock’s point of
view, so good. However, Lord Wilberforce continues in this way:
… the
employer’s claim for protection must be based upon the identification of some
advantage or asset inherent in the business which can properly be regarded as,
in a general sense, his property, and which it would be unjust to allow the
employee to appropriate for his own purposes, even though he, the employee, may
have contributed to its creation.
It seems to me
that the advantage or asset here is the goodwill of the partnership to which
the defendant had contributed, obviously because, as I have said, he was
numerically half of the attractive force of two people who were there. That
being so, the judge was quite entitled to find that this was not a covenant
against competition, but that this goodwill amounted to a legitimate interest
that the plaintiff was entitled to protect to make sure that half of the
attractive force did not move down the road to open up shop in a competitor’s
close by. That was a finding of fact made by the judge, one that he was quite
entitled to make. Though that alone would be sufficient to sustain that
finding, in my judgment, he was also right to have made it.
The linked
point to that, and perhaps a rather stronger point from Mr Peacock’s point of
view, is the argument that what was rightly capable of protection, so far as
the plaintiff was concerned, was their customer base. He submits, therefore,
that they were adequately protected by the covenant at 7.1.2 against soliciting
business, and that any covenant wider than that expressed in terms of 7.1.1 was
unnecessary and so too wide. His argument was not based on attacking either the
two years or the two miles but attacking fundamentally the existence of that
clause at all.
The judge was
in a much better position to assess the answers to all of these three questions
than we are. The reason for that is that in the case before him three
Christchurch estate agents gave evidence, the plaintiff, the defendant and the
defendant’s new employer, Mr Slade. We do not have the notes of the evidence
that they gave. That would make us doubly reluctant to interfere with findings
of fact arrived at by the judge.
Against that
background, we look at the answers to the second and third questions. It is
convenient to take the third question relating to vulnerability first. Clearly,
one would start from the position that it would be likely, if half the firm
moved down the road, and there was no covenant preventing that, that the
interest or goodwill could be injured or damaged, and so the judge found. He
dealt with the state of the market. He asked himself the right question, and he
found that such damage could arise. He said how in these words:
I accept the
argument that an intimate knowledge on the defendant’s part of the residential
market in Christchurch coupled with experience could give a competitive edge to
a rival. Such knowledge helps ‘pitch’ prices at the right level, that gives
rise to sales and more ‘sold’ boards and thereby the public perception so
important in estate agency, that the firm to instruct is the one that seems to
be doing the most business is both created and enhanced. Recommendations to
third parties to instruct the defendant based on past dealings with him could
also damage the plaintiff and in that instance the defendant would not have
solicited or canvassed those instructions. Christchurch is a small place and
knowledge of where the defendant is working is likely to be known by some
solicitors, building societies, employers or friends who could all choose to
give recommendations.
And then this
important sentence:
I emphasize
that Mr Slade employed the defendant because of his knowledge of the area and
an undertaking not to solicit or entice does not, in my judgment, go far enough
to protect the plaintiff’s interest.
Having made
those findings and having heard these three experts, the judge’s findings
cannot, in my judgment, be criticised or upset by this court.
I turn last to
the second question, namely whether the restrictive covenants are no more than
adequate to protect the interests, meaning not excessive, as regards area,
duration or prohibited activities. First, in relation to the two miles and
two-years covenant, as I have said, these figures have not been specifically
attacked. It has been the principle that has been attacked. It is unsurprising
that it has not been specifically attacked because it seems that they were not
unknown in Christchurch at the time. One has the hard evidence of Mr Espley’s
covenant with the Prudential and one has the finding by the judge that Mr Slade
in his evidence admitted that he had a similar restrictive covenant with Mr
Kay, his partner there, and the judge was to find that he accepted the
plaintiff’s evidence that such a covenant is customary for estate agencies in
the area both as to time and distance. The fact that it is customary in the
area does not tie this court’s hands, nor does it tie the judge’s hands. He
could have found that it was more than required. Had he thought that the
covenant against non-solicitation would work in practice, it may be that he
would have viewed the former covenant in a different light from that which he
did, but he found in terms, and realistically, that that covenant against
non-solicitation did not go far enough to protect the plaintiff’s interests.
The reason for that seems to me to be clear, namely, that, in practice, such
covenants are very difficult to enforce, if not impossible, as Mr Paul Cairnes
made clear before us.
In all those
circumstances, it seems to me that the judge was quite entitled to come to the
conclusion that he did and answer this question as well, having taken into
account the public interest in the way that he did, favourably to the
plaintiff. It seems to me that there are no grounds on which we can upset his
decision, and, for those reasons, I would dismiss this appeal.
Aldous LJ agreed
and did not add anything.
Appeal
dismissed.
