UK: Case Comment: Boydell v NZP Ltd & Anor [2023] EWCA Civ 373

The Court of Appeal recently handed down judgment in the case of Boydell v NZP Ltd & Anor [2023] EWCA Civ 373, in which an employee challenged the High Court's decision to sever parts of a restrictive covenant, and then grant an interim injunction enforcing the amended terms.

The judgment provides an interesting development to the case law on enforcement of post-employment restrictive covenants and will be of interest to employers and employees, whose main area of dispute is not the employee's actions, but rather the covenant's enforceability. The approval of the High Court's decision demonstrates flexibility at the interlocutory stage to ensure a level of protection over employers' interests pending a full trial, avoiding an all-or-nothing approach to the enforceability of restrictive covenants. The judgment also provides insight into what case merits the parties may be required to show in particular circumstances, including the nature, extent and complexity of the issues in dispute between the parties.

Read our case comment to read more about the Court's approach to this issue, and the extent to which the American Cyanamid principles may or may not be strictly followed.

Construction and severance at the interlocutory stage in restrictive covenant disputes

The Court of Appeal recently handed down judgment in the case of Boydell v NZP Ltd & Anor [2023] EWCA Civ 373, in which an employee challenged the High Court's decision to sever parts of a restrictive covenant, and then grant an interim injunction enforcing the amended terms.

The judgment makes clear that the task of construction and severance was enabled by the case having little factual dispute with bearing on the construction of the covenant. It appears the High Court would be reluctant to undertake these tasks in cases where a trial is needed to resolve factual disputes that go to the core of a contract's construction.

The case will be of interest to practitioners, providing an additional consideration when deciding how to approach making or resisting an interim injunction application, and the impact the decision may have on the relative bargaining positions of the parties in the substantive case.

It remains to be seen what impact this decision will have on the litigation surrounding restrictive covenant disputes. However, following the Court of Appeal's approval of the High Court's approach, in disputes between parties over the meaning and/or enforceability of restrictive covenants (where little material factual dispute exists on those issues), there now appears to be a means of killing two birds with one stone; dealing with the matter of interim injunctive relief and dealing with the issue of strike out. So that if the High Court can form a view of a covenant's enforceability and consider severance, then with no material facts in issue capable of changing that view if decided at trial, it would seem to follow that there is little left of substance to litigate.

It is important to highlight that in its judgment, the Court of Appeal did not refer to its judgment in Forse v Secarma [2019] IRLR 587. In Secarma (at [28]-[31]), it makes clear that when employers apply for an interim injunction to enforce restrictive covenants, and the duration of the restriction is likely to have been mostly or fully run before trial, part of the balance of convenience test requires that the court should take account (to the extent possible) of the prospects of the claimant succeeding or failing at trial. If this exercise is to be completed, the burden is on the employee to demonstrate why they ought not to be bound by the contract: see Dyson Technology v Pellerey [2016] EWCA Civ 87 [28]-[31]. Given this burden on employees, the willingness of the court to engage in an exercise of severance at an interlocutory stage could indicate there is scope for employees to meet the burden in relation to parts of the contract, resulting in an amended set of terms being enforced.

Background

The business of the First Claimant ('NZP') was in a niche area of the pharmaceutical industry: the development, production and sale of bile acid derivatives to pharmaceutical companies. The Second Claimant was the Group owner of NZP. The Defendant ('Dr Boydell') was a former employee, whose former position was 'Head of Commercial – Speciality Products'. Following his resignation and stated intention to join another company to head their "bile and acid business", his employment ended on 25 January 2023.

NZP issued proceedings on 24 January 2023 seeking to enforce, inter alia, a set of restrictive covenants contained in Dr Boydell's employment contract (cited at [9]). These related to carrying out work for third parties in business endeavours that were in competition with the business of NZP or any other companies in the group (such work being specialised and related to animal-derived products with pharmaceutical applications). On proceedings being issued, Dr Boydell gave a written undertaking to abide by the covenants pending determination of NZP's application for an interim injunction, which was ultimately heard by HHJ Auerbach ('the Judge') on 23 February 2023.

In an oral judgment delivered the following day, the Judge granted interim injunctions against Dr Boydell to enforce post-termination restrictive covenants, but following a process of severance, the Judge did not grant the interim injunction on the terms set out in the employment contract, but rather in slightly modified terms.

The four grounds of appeal brought by Dr Boydell (cited at [11]) before the Court of Appeal (before Bean LJ, with whom Macur and Coulson LJJ agreed in dismissing the appeal) were essentially that:

1. The Judge had erred by concluding that the clause prevented work for a competitor. The Judge should have found that it prevents work for any company which has an element of its business which is in competition, and thus ought to have found the clause unenforceable for being too wide;
2. The Judge erred in not finding the clause was unduly wide as it prevented work in an area of a business even if they were not competitive;
3. The Judge erred in not finding restrictions on work in certain business activities were too wide as they were not related to NZP's business; and
4. The judge erred in his approach to severance, in that elements of the clause removed were impermissible or illegitimate. The sum total of this was that the contract was impermissibly rewritten.

Interim injunctive relief: the American Cyanamid principles

In American Cyanamid Co v Ethicon Ltd [1975] AC 396, the House of Lords set out 3 questions to ask when deciding whether to grant an interim injunction. Question 1 forms the first stage of the test, while questions 2 and 3 are effectively combined into the second stage. The questions are:

1. Is there a serious question to be tried? (If the answer is no, the application would fail);
2. Would damages be an adequate remedy for either of the parties injured by granting/not granting the injunction?; and
3. If not, where does the balance of convenience lie?

American Cyanamid: To what extent should a judge at an interlocutory stage consider the merits of the cases advanced?

No significant challenge was made to the "serious question to be tried" test set out in American Cyanamid. Rather, the focus was mainly on the "adequacy of damages as a remedy and the balance of convenience" test, and to what extent the Judge ought to have considered the disputed enforceability of the contract. Bean LJ observed that a common occurrence in interim injunctive relief applications (as the Claimants did in this case, both in the High Court and Court of Appeal), was arguing that all that was needed to demonstrate the merits of the case was to show a serious question was to be tried. However, in Fellowes & Son v Fisher [1976] 1 QB 122 (at p.137), Browne LJ set out guidelines for considering "adequacy of damages as a remedy and the balance of convenience" in 7 guidelines. Guideline 6 is of relevance:

Accordingly, considering merits may continue into the balance of convenience test in limited circumstances. Indeed, Bean LJ remarked (cited at [14]) that while American Cyanamid was a "seminal decision" it was "neither a statute nor a biblical text, and should not be read as if it were either."

Bean LJ noted that American Cyanamid was a large and complex patent claim, with a full hearing not for another 4 years and requiring 100 days of court time. In contrast, Bean LJ remarked that employment contract disputes could be of a much smaller scope; in line with the statutory test requiring granting of injunctive relief be just and convenient, it may be unjust for the Court to restrict itself to considering merits in the context of whether a serious question is to be tried (cited at [14]). Bean LJ reinforced this by reference to the decision of the Court of Appeal in Lansing Linde v Kerr [1991] 1 WLR 251, in which it was held that in some cases "it is permissible for the judge to form at least a preliminary view of the claimant's prospects of success, and to factor that in at the 'balance of convenience stage' of the analysis". Examples of such cases included those where it will not be possible to hold a trial until the period of the covenant has expired, or substantially expired.

How far can a judge at the interlocutory stage go in determining a contract's true construction and enforceability?

Bean LJ referred to Planon v Gilligan [2022] IRLR 684, a case in which standard-form wording had been used in the covenant. Accordingly, there was no difficulty determining what the covenants meant, nor had there been any need for severance. In contrast, Bean LJ referred to Chadwick LJ's judgement in Arbuthnot Fund Managers Lyd v Rawlings [2003] EWCA Civ 518 (cited at [15]), in which it was stated that where no factual dispute with a bearing on the construction of the disputed terms exists, or the factual disputes are resolvable without a trial, the judge at interlocutory stage is as well placed as a trial judge to deal with matters of construction.

In the present case, the parties agreed that the Judge was placed to deal with the issues on construction. The Judge remarked that where the covenant wording is clear and undisputed, it would be routine for the Court to undertake the task of deciding what it means. However, the Judge warned of the need to account for the surrounding context in which the contract was agreed so far as that can be determined to have been known to the parties.

For the purpose of the interlocutory application before him, the Judge had adopted the approach that: (i) the starting point was the facts as asserted by the Claimants; but that (ii) any material disputes of facts may impact whether interim relief should be granted until those disputes are resolved at trial (cited at [18]). Bean LJ agreed (cited at [19]):

As such, the application in the present case was for strike-out. Indeed, counsel for Dr Boydell conceded that the appeal could only succeed if it is "plain and obvious that the covenants are unenforceable" (cited at [21]).

Contractual Construction and Severance

Bean LJ provided a helpful synopsis of the principles of construction (cited at [22]-[26]), and importantly on the issue of severance noted (at [27]) confirmed the approach to be taken in relation to restrictive covenants, namely:

1. Severance was not limited in restrictive covenants to parts which were trivial or merely technical, though a cautious approach should be taken, and severance should not result in needing to add to or modify the remaining words;
2. Adequate consideration for the remaining terms can be ignored in the usual situation; and
3. Whether severance would result in a significant change to the effect of the restrictions within the contract (the employer must be the one to demonstrate this). This concerns changes to the legal effect of the actual words as opposed to, for example, the impact the company or employee might perceive.

Bean LJ considered that the restriction was too widely drafted in the contract, and that the Judge had been entitled, at least at the interlocutory stage, to sever the words from the covenant and grant an injunction on a more limited basis.

A restriction on carrying out activities for third parties (whom were not noted as part of the severed words) in competition with any of the group companies was too broadly drafted, particularly given names of specific companies were stated as being competitors. The restriction on engaging in activities relating to the supply chain were considered severable on the basis that it could broadly be construed to prevent, for example, working at retail pharmacies. This was because the intended restriction was largely focussed on the specialised nature of NZP's business. Applying the officious bystander principle in Skilton, it was clear the parties would not have prevented such work, and therefore the clause went far beyond what was reasonably necessary to protect NZP's legitimate interests. However, while Bean LJ deemed a serious question was to be tried about whether any of the Group companies had significant business in areas which were distinct from NZP's, permission for the Defendants to cross-appeal against the removal of words was refused.

In considering whether the severed clause was nevertheless still too wide, Bean LJ took into account the highly specialised and niche nature of NZP's business. In this highly specialised field of bile acid products, it was unrealistic to expect that, should Dr Boydell take up employment with a direct competitor of NZP, Dr Boydell could be insulated from activities concerning bile acid products in direct competition with his previous employer. Bean LJ distinguished the case from Ashcourt Rowan Financial Planning v Hall [2013] IRLR 637, where the restriction would prevent the employee from working at all in a sector which was not in a similar way highly specialised or niche (haulage, distribution and logistics).

Accordingly, Bean LJ dismissed the appeal, concluding that "it is not plain and obvious that [the relevant clause] was incapable of severance; nor that, as severed by the judge, it was nevertheless too wide to be enforceable".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.