Baldwins (Ashby) Ltd v Andrew John Maidstone

JurisdictionEngland & Wales
JudgeHis Honour Judge Simon Brown
Judgment Date03 June 2011
Neutral Citation[2011] EWHC B12 (Mercantile)
CourtMercantile Court
Date03 June 2011
Docket NumberCASE NO. 9BM40098

[2011] EWHC B12 (Mercantile)

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

BIRMINGHAM DISTRICT REGISTRY

MERCANTILE COURT

His Honour Judge Simon Brown QC

CASE NO. 9BM40098

Between:
Baldwins (Ashby) Limited
Claimant
and
Andrew John Maidstone
Defendant

Introduction

1

This claim arises out of a bitter battle between firms of accountants over clients in Leicestershire. It began with an injunction being sought arising out of the sale of the Defendant's substantial practice to Claimant, his employment by them and his subsequent move with some of his clients to a rival firm called Charnwoods whose managing partner was Mr Barnett. The bona fides and truthfulness of all concerned has, regrettably, been called into question and this judgment will have to resolve that in determining the claim for damages.

2

The claim is for damages for breach of covenant of the share sale agreement dated 14 th September 2007 whereby the Defendant sold his accountancy business in Ashby de la Zouch in Leicestershire to the Claimants for approximately £1m. The Claimant alleges that the Defendant breached a 3 year covenant in the agreement protecting the goodwill in the company by 'canvassing, soliciting or endeavouring to entice away' his former clients from them to a firm called Charnwoods in Loughborough where he commenced employment on 2 nd November 2009. It identifies 7 such clients.

3

The Defendant accepts that a few of his former clients followed him to Charnwoods, where he legitimately commenced practising, but strenuously denies that he 'canvassed, solicited or enticed' them away. He, and indeed they, contend that it was their own independent decisions to move their custom for the various reasons given by them in their witness evidence, as summarised in the Defendant's Closing notes which have duly been taken into account as part of the following judicial forensic analysis of the evidence.

4

It is therefore necessary:

(1) to construe what is meant by ' canvassing, soliciting or enticing away' in the contractual 'non solicitation' clause;

(2) to determine whether the Defendant intended to do so in relation to his 7 identified former clients;

(3) to determine whether the Defendant did any such acts in breach of that clause in respect of any of them; and

(4) to calculate what loss, if any, has been sustained by the Claimant due to any such breach(es).

(1) Construction

5

Clause 10.1.2 of the Agreement prohibited the Defendant for a period of 3 years from Completion from soliciting any person who had been a client of the Company in the 2 years prior to Completion:

"for a period of 3 years from Completion he/she will not for the purpose of any business supplying products or services similar to or capable of being used in substitution for any product or service supplied by the Company within the 12 months preceding Completion canvass, solicit or endeavour to entice away from the Company any person who during the period of two years prior to Completion has been a client of the Company or who has purchased or agreed or offered to purchase services from the Company or has employed its services or who has been canvassed by the Company (otherwise than by general advertising) with a view to becoming a client of the Company" [emphasis added];

6

The Defendant accepts that the clause applied to all persons identified in the Schedule and also former clients who had been clients within 2 years of Completion, including the 7 identified by the Claimant.

7

Contextually, this is an express (cp implied) restrictive covenant between 'Vendor and Purchaser of Business', as distinct from one between "Employer and Employee". As Chitty remarks at 16–115 (29 th edition), "Restrictive covenants between vendor and purchase are looked on with less disfavour by the court":

'I think it is now generally conceded that it is to the advantage of the public to allow a trader who has established a lucrative business to dispose of it to a successor by whom it may be efficiently carried on. That object could not be accomplished if, upon the score of public policy, the law reserved to the seller an absolute and indefeasible right to start a rival concern the day after he sold. Accordingly it has been determined judicially, that in cases where the purchaser, for his own protection, obtains an obligation restraining the seller from competing with him, within bounds which having regard to the nature of the business are reasonable and are limited in respect of space, the obligation is not obnoxious to public policy, and is therefore capable of being enforced. Whether – when the circumstances of the case are such that a restraint unlimited in space becomes reasonably necessary in order to protect the purchaser against any attempt by the seller to resume the business which he sold – a covenant imposing that restraint must be invalidated by the principle of public policy is the substance of the question which your Lordships have to consider in this appeal'. Per Lord Watson in Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] A.C. 535, 552–3.

8

The usual principles of contractual construction apply, as identified by Lord Hoffmann in Investors' Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896, 912H–913E.

'Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.'

9

The 'objective' of such a clause is critical to its interpretation.

'Agreements in restraint of trade, like other agreements, must be construed with reference to the object sought to be attained by them.' Per Sir Nathaniel Lindley MR in Haynes v Doman [1899] 2 Ch 13, at p.25, quoted with approval by Lord Denning MR in Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472, 1481.

10

The 'objective' is essentially to "protect the value of the goodwill' sold in the bargain struck.

11

There are two classic definitions of 'goodwill' that have stood the test of time: Lord Eldon in Cruttwell v Lye (1810) 7 Ves Jr 335:

'The goodwill which has been the subject of sale is nothing more than the probability that the old customers will resort to the old place'; and

Lord Macnaghten in Trego v Hunt [1896] AC 7:

'It is the whole advantage, whatever it may be, of the reputation and connection of the firm, which may have been built up by years of honest work or gained by lavish expenditure of money'.

12

Since that time, courts around the world have grappled with defining the elusive concept of 'goodwill'. In Commissioner of Income-tax v. Setty [1981] 128 ITR 294 (SC) the Supreme Court of India illuminatingly did so:

"Goodwill denotes the benefit arising from connection and reputation. The original definition by Lord Eldon in Cruttwell v Lye [1810] 17 Ves 335 that goodwill was nothing more than "the probability that the old customers would resort to the old places" was expanded by Wood V.C. in Churton v. Douglas [1859] John 174 to encompass every positive advantage "that has been acquired by the old firm in carrying on its business, whether connected with the premises in which the business was previously carried on or with the name of the old firm, or with any other matter carrying with it the benefit of the business". In Trego v. Hunt [1896] AC 7 (HL) Lord Herschell described goodwill as a connection which tended to become permanent because of habit or otherwise. The benefit to the business varies with the nature of the business and also from one business to another. No business commenced for the first time possesses goodwill from the start. It is generated as the business is carried on and may be augmented with the passage of time. Lawson in his Introduction to the Law of the Property describes it as property of a highly peculiar kind. In CIT v. Chunilal Prabhudas & Co. [1970] 76 ITR 566 the Calcutta High Court reviewed the different approaches to the concept (pp. 577, 578):

It has been horticulturally and botanically viewed as 'a seed sprouting' or an 'acorn growing into the mighty oak of goodwill'. It has been geographically described by locality. It has been historically explained as growing and crystallising traditions in the business. It has been described in terms of a magnet as the 'attracting force'. In terms of comparative dynamics, goodwill has been described as the 'differential return of profit'. Philosophically it has been held to be intangible. Though immaterial, it is materially valued. Physically and psychologically, it is a 'habit' and sociologically it is a 'custom'. Biologically, it has been described by Lord Macnaghten in Trego v. Hunt [1896] AC 7 (HL) as the 'sap and life' of the business. Architecturally, it has been described as the 'cement' binding together the business and its assets as a whole and a going and developing concern."

13

In the instant case, the 'goodwill' is the substantial tax accounting business the Defendant and his wife built up over 10 years in Leicestershire with strongly bonds developed with both personal and SME clients.

14

The clause was not, however, a strict "non-dealing" one that has a clear dividing line and is easier to police and adjudicate upon; it is an express "non-solicitation" of the type often described as a " Trego v. Hunt type clause".

15

As stated by Lord Herschell in Trego v. Hunt [supra] on page 20: " it must be treated as settled that whenever the goodwill of a business is sold the vendor does not, by reason only of that sale, come under a restriction not to carry on a competing business". Hence, in the instant case the Defendant was perfectly entitled to compete for business with the claimants in the area and to undertake work for his previous clients if they solicited him to do so without his...

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3 firm's commentaries
  • HR Bytes
    • United Kingdom
    • Mondaq United Kingdom
    • 17 August 2011
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    • Mondaq United Kingdom
    • 7 September 2011
    ...context of a commercial transaction, rather than an employment relationship, the High Court in Baldwins (Ashby) Ltd v Maidstone [2011] EWHC B12 (Mercantile) has given some useful guidance on the meaning of "canvassing or soliciting" in a restrictive Maidstone had sold his accountancy busine......

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