Gardiner Graphics Group Limited v Russell Pay
In the case of Gardiner Graphics Group Limited v Russell Pay, the court had to consider a claim for damages by the claimant company against the defendant (for whom this firm acted) for alleged breaches of restrictive covenants contained within a shareholders agreement.
Mr Pay had been employed by the claimant group of companies for a considerable time. Following a number of corporate related changes, it was alleged that Mr Pay was offered the opportunity to receive shares in the business and so the focus of the case was in relation to the terms of a shareholders agreement, which included the following provisions:
“8.1 No party shall during the times specified below, carry on or be employed, engaged or interested in any business in England and Wales which would be in competition with any part of the Business, [of the Claimant group of companies] including any developments in the Business after the date of this agreement. The times during which the restrictions apply are
- Any time when the party in question is a Shareholder; and
- For a period of 12 months after the party in question ceases to be a Shareholder.
8.2 No party shall, except as an authorised representative of the [Claimant], in the same area of business in which the [Claimant] operates and during the times specified below, deal with or seek the custom of any person that is, or was within the previous 12 months, a client or customer of the [Claimant] or, where the party is no longer a Shareholder, any person that was a client or customer of the [Claimant] at any time during the period of 12 months immediately preceding the party in question ceasing to be a Shareholder. The times during which the restrictions apply are:
- any time when the party in question is a Shareholder; and
- For a period of 12 months after the party in question ceases to be a Shareholder.”
The Shareholders Agreement did not address the consequences of a shareholder ceasing to be employed by the Claimant, but it was dealt with in the Claimant’s Articles of Association. Article 13.6 provided that “If any holder of a… D Share… subsequently ceases to be an employee of the Company… [he] shall immediately upon the written instruction of the Controlling Shareholder transfer the legal and beneficial ownership of such…Shares… to such person…as the Controlling Shareholder may direct.” Article 13.5 prohibited the transfer or other disposition of the shares without the ‘controlling shareholder’s prior written consent.
Mr Pay’s employment ended on 30th September 2019 and within a relatively short time he found employment with another company which had been one of the Claimant’s suppliers.
In brief, the Claimant alleged that Mr Pay was in breach of the covenants in the Shareholders Agreement by (a) joining a competitor and (b) by dealing with 3 of the Claimant’s customers whilst employed by the competitor.
During the case itself, there was some legal arguments about whether the Shareholders Agreement was, in fact, binding on Mr Pay (either because it was not executed as a deed, a lack of consideration and because Mr Pay had been assured that he would be provided with some expert advice in respect of the agreement).
However, the main thrust of the argument involved Mr Pay’s contention that the covenants in clauses 8.1 and 8.2 were unenforceable as being an unreasonable restraint of trade.
In a nutshell, the Court decided that the relevant covenants were unenforceable. In coming to this conclusion, the Court considered that in practical terms, clause 8.2 when read with Article 13.6 imposed a restriction on Mr Pay of an indefinite duration. In simple terms, if the company chose not to require Mr Pay to transfer his shares, then Mr Pay would remain a shareholder of the company, in which case he would be caught by the covenants in the Shareholders Agreement.
As the judge described this position in the Judgement: “A restriction of a potentially indefinite length in the context of a case of this kind was in my judgement unreasonable. Accordingly, clause 8.2 is unenforceable as being in restraint of trade. If this outcome appears harsh from the Claimant’s perspective, it is I fear a product of an attempt to impose restrictive covenants on an existing employee who had not previously been restrained in this way in return for a very modest if not illusory benefit.