Scully UK Ltd v Lee

Factual and Procedural Background

The Appellant was employed by the Respondent under a contract containing restrictive covenants. The primary dispute concerned the enforceability of two clauses (17(c) and 17(d)) in the employment contract relating to restrictions on post-termination business activities and solicitation of clients. The Appellant resigned and accepted employment with a competitor company. The Respondent initiated proceedings seeking injunctions to enforce the restrictive covenants and prevent the Appellant from engaging in certain business activities and soliciting clients. Interlocutory injunctions were initially granted but later discharged. The trial judge held clause 17(c) enforceable but clause 17(d) unenforceable. Both parties appealed: the Appellant challenged the enforceability of clause 17(c), and the Respondent cross-appealed to enforce clause 17(d).

Legal Issues Presented

1. Whether the restrictive covenant in clause 17(c) of the employment contract was enforceable.
2. Whether the restrictive covenant in clause 17(d) of the employment contract was enforceable.

Arguments of the Parties

Appellant's Arguments

• The clause 17(c) should not be construed to restrict the Appellant from engaging in any business that does not compete with the Respondent.
• The covenant was excessively wide, not limited to actual customers or competing businesses, and included unreasonable restrictions on shareholding and involvement in advertising businesses.
• There was insufficient evidence that the Respondent had a legitimate interest to protect, particularly regarding confidential information.
• The clause was unreasonable in scope, duration, and geographical extent.
• Severance of unreasonable parts of clause 17(c) was not appropriate as the obligations were interdependent and not trivial.
• Clause 17(d) was objectionable for including suppliers without legitimate interest and for its duration.

Respondent's Arguments

• Clause 17(c) should be construed as restricting the Appellant from engaging in any competing business, supported by the phrase "any other business which competes".
• The clause was intended to protect the Respondent from rivalry in the trade and confidential information.
• The restriction should be limited to overspill prevention and tank gauging equipment used in the petrochemical industry.
• The duration and geographical extent of the restrictions were reasonable.
• Clause 17(d) was enforceable except for the inclusion of suppliers, which should be severed.
• The two-year duration of clause 17(d) was reasonable given the nature of the industry and lead times for projects.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by construing clause 17(c), focusing on whether the restrictive covenant was limited to competing businesses or applied more broadly. It held that the natural language of the clause imposed a broad restriction on involvement in any business dealing with overspill prevention or tank gauging equipment, not limited to competitors or the petrochemical industry. The phrase "without prejudice to the foregoing" indicated that the subsequent limitation to competing businesses did not restrict the earlier broad terms.

Regarding the reasonableness of clause 17(c), the court applied established principles from leading cases on restraints of trade, emphasizing that such covenants must protect legitimate interests such as confidential information and trade connections without unduly restricting the employee's ability to earn a livelihood. The court found that the Respondent possessed confidential information justifying protection but that the clause was overly broad in scope, particularly in restricting shareholdings, involvement in advertising, and applying to non-competing businesses.

The court rejected the severance of unreasonable parts of clause 17(c) because the obligations were interdependent and severance would amount to impermissible amendment rather than excision. Consequently, clause 17(c) was held void and unenforceable.

For clause 17(d), the court accepted the trial judge’s construction and reasoning. The absence of a spatial limitation and the broad inclusion of suppliers were problematic. The court agreed that no legitimate goodwill interest existed in suppliers and thus that part was unenforceable. The duration of 24 months was not per se unreasonable, but the Respondent failed to demonstrate that this period was necessary to protect goodwill and trade connections. Therefore, clause 17(d) was held unenforceable.

The court allowed the Appellant’s appeal and dismissed the Respondent’s cross-appeal.

Holding and Implications

The court held that clause 17(c) of the employment contract was void and unenforceable due to its unreasonable breadth and inability to sever offending parts. Clause 17(d) was also held unenforceable.

The direct effect is that the Appellant is not restrained by these restrictive covenants from engaging in the challenged business activities or soliciting clients as described. No new precedent was set; the decision applies established principles on the reasonableness and enforceability of restrictive covenants between employer and employee, reinforcing the requirement for such clauses to be narrowly tailored to protect legitimate interests without unduly restricting the employee's right to work.