Factual and Procedural Background
The case concerns a partnership known as the Partnership, which operated as marketing and advertising consultants for sports clients. The Partnership originated from an earlier partnership and evolved through various partnership agreements and deeds of variation, culminating in a consolidated partnership agreement effective from November 1, 2000. The agreement included provisions for incorporation and restrictive covenants applicable to partners who ceased to be partners ("Succession Date").
The Partnership alleged that the Defendant resigned on May 6, 2005, and subsequently solicited clients and staff, including successfully enticing away a staff member, Ms Rutter. An injunction was initially granted on a without notice basis to enforce restrictive covenants, followed by undertakings from the Defendant. The Partnership sought a permanent injunction and damages for losses attributed to the Defendant's conduct.
On August 1, 2005, the Partnership's business and assets were transferred to a company ("the Company"). The Defendant was not informed of this transfer until March 3, 2006. Procedural disputes ensued, including applications for striking out the Defendant's defence and orders for substitution of the Company as party to the proceedings. Judgment was given in favor of the Partnership for damages and an injunction, but the Defendant opposed the substitution and sought permission to appeal.
Legal Issues Presented
- Whether the restrictive covenants in the partnership agreement were enforceable by the Company following the transfer of the Partnership's business and assets.
- Whether the Partnership had been dissolved such that the restrictive covenants ceased to have effect.
- Whether the Company was entitled to damages for losses occurring after the transfer of the business on August 1, 2005.
- The procedural propriety and effect of substituting the Company as a party after judgment.
Arguments of the Parties
Defendant's Arguments
- The restrictive covenants were unenforceable because the Partnership was dissolved either due to the Defendant's purported expulsion or cessation of trading on July 31, 2005.
- The transfer of assets to the Company did not transfer causes of action or entitle the Company to enforce the restrictive covenants.
- The Partnership should have been dissolved at inception due to alleged breaches and a director's disqualification involving one partner.
- The restrictive covenant excluding customers introduced by the outgoing partner applied, exempting the Defendant's solicitation of certain clients.
- The damages claimed were overstated, particularly regarding the contribution of the staff member enticed away and failure to deduct overhead costs.
Company's Arguments
- The transfer agreement effectively transferred the Partnership's business, assets, goodwill, and causes of action to the Company, entitling it to enforce the restrictive covenants and claim damages.
- The restrictive covenants, particularly clause 5.1.2 concerning solicitation of staff, were enforceable against the Defendant.
- The substitution of the Company as party to the proceedings was appropriate under CPR 19.2(4) because the Company's interest had passed from the Partnership.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Jacoby v Whitmore (1883) 49 LT 335 (CA) |
Enforceability and assignability of restrictive covenants intended to protect goodwill after transfer of business. |
Supported the principle that the Company could enforce restrictive covenants relating to solicitation of staff as such covenants passed with the goodwill. |
| Townsend v Jarman [1900] 2 Ch. 698 |
Benefit of restrictive covenants passes as incident to goodwill on sale of partnership business. |
Reinforced that restrictive covenants in partnership agreements can be enforced by transferee companies holding the goodwill. |
| Ord v Belhaven Pubs Ltd [1998] BCLC 447 (CA) |
Substitution of parties after judgment under former Rules. |
Supported the view that substitution under CPR 19.2 can be made after judgment. |
| Mercer Alloys Corp v Rolls Royce Limited [1971] 1 WLR 1520 |
Court's inherent jurisdiction to order substitution of parties. |
Used to justify the court's power to substitute parties post-judgment. |
| GUS Property Management Ltd v Littlewoods Mail Order Stores Ltd 1982 SC (HL) 157 |
Entitlement of transferee company to claim damages for loss occurring after transfer of property and rights. |
Analogous authority for the Company’s claim to damages after transfer of the business. |
| Offer-Hoar v Larkstore Ltd [2006] EWCA Civ 1079, [2006] 1 WLR 2926 |
Assignment of rights and entitlement to damages by assignee despite no loss to assignor after transfer. |
Supported the proposition that the Company could claim damages for losses occurring after acquisition of the business. |
| Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd (1992) 57 BLR 57, revd on other grounds [1994] 1 AC 85 |
Considerations regarding assignment of claims and avoiding legal gaps. |
Referenced in relation to the transfer of claims and avoiding a "legal black hole". |
Court's Reasoning and Analysis
The court carefully examined the partnership agreement, the transfer agreement, and the timing of the Defendant’s departure and subsequent conduct. It found that clause 5.1.2, restricting solicitation of staff, was enforceable by the Company because the benefit of such restrictive covenants passed with the goodwill and assets transferred. This was supported by established case law on the assignability of restrictive covenants protecting goodwill.
However, clause 5.1.1, which restricted solicitation of business and interference with clients, was limited to clients receiving services from the Partnership in the 12 months prior to the Succession Date. Since the Partnership ceased to exist after the transfer on August 1, 2005, no such client relationship could exist thereafter. The court held that it would be improper to rewrite the covenant to include the Company, and thus the injunction enforcing clause 5.1.1 could not stand.
Regarding damages, the court acknowledged that the cause of action was transferred to the Company, but questioned the entitlement to damages for losses occurring after the transfer date. The court referenced authorities allowing assignees to claim damages for post-transfer losses to avoid legal gaps. Nonetheless, the method of quantifying damages was questionable, and the Defendant was denied the opportunity to challenge this due to procedural defaults.
The court recognized an injustice if the Defendant could not contest damages for the post-transfer period and allowed the appeal to the extent of discharging the injunction relating to solicitation of business and part of the damages judgment after August 1, 2005. The court ordered an enquiry into whether the Company was entitled to damages for the post-transfer period and, if so, the quantum.
Procedurally, the court confirmed that substitution of the Company as party after judgment was permissible under the Civil Procedure Rules, supported by prior case law, and that the Defendant’s failure to challenge the substitution order limited his ability to contest it now.
Holding and Implications
The court ALLOWED THE APPEAL IN PART with the following outcomes:
- The injunction enforcing clause 5.1.1 (restricting solicitation of business and clients) was discharged as it could not be enforced by the Company after the Partnership’s dissolution.
- The judgment for damages awarded for losses after August 1, 2005, was discharged to the extent of £27,160, and an enquiry was ordered to determine whether the Company is entitled to damages for the post-transfer period and the amount thereof.
- No order for costs was made on the appeal.
- The case was to be transferred to the Central London County Court for the damages enquiry if the Company wished to pursue it.
The decision clarified the limits of enforceability of restrictive covenants following the dissolution of a partnership and transfer of its business to a company. It also affirmed the court’s power to substitute parties post-judgment under the Civil Procedure Rules. No new precedent was established beyond application of existing principles to the facts.