Factual and Procedural Background
Until 20 December 2006, the first defendant was a director and owned half the share capital of the claimant company ("One Step"), which provided supported living services to children leaving care and vulnerable adults, primarily in West London and the Thames Valley, with potential expansion into the Midlands. On that date, the first defendant sold her shares in One Step, resigned as director, and entered into a deed restricting competition and solicitation of clients for three years. The second defendant, her civil partner and an employee of One Step, also agreed to similar restrictive covenants upon termination of her employment.
Unknown to One Step, the defendants had incorporated Positive Living Limited in July 2006, commencing trading in August 2007. Positive Living operated in the same geographic areas and offered similar services, including rented accommodation and support for vulnerable adults, and was successful, ultimately sold in September 2010 for over £12 million.
One Step brought proceedings alleging breaches of restrictive covenants, misuse of confidential information, inducement to breach, and conspiracy. The defendants denied competition or unlawful conduct, and the second defendant challenged the reasonableness of the covenants against her. The court determined issues of liability and the nature of remedies, deferring quantification of damages.
Legal Issues Presented
- Whether the defendants breached the non-compete covenants by operating Positive Living in competition with One Step.
- Whether the defendants breached the non-solicitation covenants by soliciting One Step's significant clients.
- Whether the restrictive covenants entered into by the second defendant were unreasonable and unenforceable.
- Whether the first defendant breached obligations of confidence by misappropriating and using confidential information of One Step.
- The appropriate remedies available to One Step for any breaches found, including whether an account of profits or Wrotham Park damages should be awarded.
Arguments of the Parties
Appellant's Arguments (One Step)
- Positive Living was established to compete directly with One Step and solicited One Step’s local authority clients.
- The restrictive covenants should be interpreted broadly to protect One Step's goodwill and business interests in West London and the Thames Valley.
- The defendants misused confidential information belonging to One Step to establish Positive Living.
- The restrictive covenants against the second defendant were reasonable given her close personal and professional association with the first defendant.
- Ordinary damages would be insufficient; One Step should be entitled to an account of profits or Wrotham Park damages due to difficulty proving actual loss.
Respondents' Arguments (Defendants)
- The businesses of Positive Living and One Step were not in the same market; similarities were superficial.
- Positive Living did not breach the restrictive covenants; the covenants should be narrowly construed, especially limiting non-solicitation to certain clients.
- The second defendant’s restrictive covenants were unreasonable restraints of trade as she was only an employee.
- Positive Living’s registration as a domiciliary care agency distinguished it from One Step and meant they served different client needs.
- One Step had no established business in the Midlands at the time, so Positive Living’s activities there did not breach covenants.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Clarke v. Newland [1999] 1 All ER 397 |
Principles of construing restrictive covenants, including context and purpose. |
Used to guide interpretation of non-compete and non-solicitation covenants in light of business realities and factual matrix. |
| Allied Dunbar v. Weisinger [1988] IRLR 60 |
Reasonableness of non-compete clauses wider than non-solicitation clauses to protect goodwill. |
Supported the court’s view that the non-compete covenant was broader than the non-solicitation clause and reasonable. |
| Dawnay, Day & Co. Ltd. v. D'Alphen [1998] ICR 1068 |
Non-compete clauses protect existing business and business in advanced preparation. |
Applied to assess whether One Step’s plans for Midlands constituted protectable goodwill; court found plans not in advanced stage. |
| Emersub v. Wheatley (unreported, 3 July 1998) |
Restrictive covenants must be no wider than necessary to protect legitimate interests. |
Supported enforcement of second defendant’s covenants given her close association with first defendant and transaction context. |
| Attorney General v. Blake [2001] 1 AC 268 |
Damages may be measured by benefit obtained by wrongdoer; account of profits available in exceptional cases. |
Guided the court’s approach to remedies, rejecting account of profits as exceptional but considering Wrotham Park damages appropriate. |
| Experience Hendrix v. PPX Enterprises Inc [2001] All ER (Comm) 830 |
Account of profits not appropriate unless exceptional circumstances exist. |
Supported refusal of account of profits despite flagrant breaches, due to availability of other remedies. |
| Giedo van der Garde BV v. Force India Formula One Team Ltd. [2010] EWHC 2373 (QB) |
Wrotham Park damages as a form of compensatory damages where loss is difficult to quantify. |
Supported awarding Wrotham Park damages as just compensation in this case. |
| WWF World Wide Fund for Nature v. World Wrestling Federation Entertainment Inc [2008] 1 WLR 445 |
Wrotham Park damages awarded when loss cannot be measured solely by identifiable financial loss. |
Confirmed appropriateness of Wrotham Park damages where contractual breach causes difficult-to-quantify loss. |
Court's Reasoning and Analysis
The court began by construing the restrictive covenants in light of their purpose and the factual context at the time of the agreement, applying established principles from Clarke v. Newland. It rejected the defendants’ narrow interpretation of the non-compete covenant as subsidiary to the non-solicitation clause, finding both to be independent and reasonable restrictions designed to protect One Step’s legitimate business interests.
Evidence showed that both One Step and Positive Living operated in the supported living market in West London and the Thames Valley, providing similar services to overlapping client groups, including adults with varying care needs. The court found that differences such as Positive Living’s registration as a domiciliary care agency did not place the businesses in separate markets, particularly given the common practice of “split provisioning” of care services by local authorities.
Regarding the Midlands, the court found that One Step’s plans were not in an advanced state of preparation at the relevant time, distinguishing this from the position in Dawnay, Day & Co. Ltd. v. D'Alphen. Thus, Positive Living’s activities in the Midlands did not breach the non-compete covenant.
The court accepted One Step’s identification of seven local authorities as significant clients for the purposes of the non-solicitation covenant and found that the defendants did solicit these clients, breaching the covenant. It rejected the defendants’ argument that only authorities placing multiple clients were significant, emphasizing the value of any long-term referral.
The second defendant’s restrictive covenants were found reasonable and enforceable, given her close personal and professional relationship with the first defendant and the integral role of her covenants in the sale transaction.
The first defendant was found to have breached her confidentiality obligations by wrongfully taking and using confidential information from One Step, with the court rejecting her explanations and finding her an unsatisfactory witness.
On remedies, the court acknowledged the difficulty in quantifying One Step’s loss and the inadequacy of ordinary damages alone. It declined to order an account of profits, considering the breaches not sufficiently exceptional. However, it found that Wrotham Park damages were appropriate, allowing One Step to elect between these and ordinary damages for assessment.
Holding and Implications
The court held that the defendants breached the non-compete covenant by operating Positive Living in West London and the Thames Valley from August 2007 to December 2009, but did not breach it in relation to the Midlands.
Both defendants were found liable for breaching the non-solicitation covenants by soliciting significant clients of One Step. The first defendant also breached her confidentiality obligations.
Regarding remedies, the court ruled that One Step was not entitled to an account of the defendants’ profits but was entitled to damages to be assessed either on the basis of Wrotham Park damages or ordinary compensatory damages, with One Step having the election between the two.
The decision directly affects the parties by affirming liability for breaches and setting the framework for damages assessment. The court did not establish new legal precedent but applied established principles to the facts, particularly regarding the construction of restrictive covenants and the availability of Wrotham Park damages in breach of contract cases.