Guest Services Worldwide Ltd v Shelmerdine
| Jurisdiction | England & Wales |
| Judge | Lady Justice Asplin,Lord Justice Peter Jackson,Lord Justice Patten |
| Judgment Date | 04 February 2020 |
| Neutral Citation | [2020] EWCA Civ 85 |
| Date | 04 February 2020 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2019/2157 AND A3/2019/2294 |
[2020] EWCA Civ 85
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
(Chancery Division) Manchester Business and Property Courts
His Honour Judge Halliwell
BL-2019-MAN-000032
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Patten
Lord Justice Peter Jackson
and
Lady Justice Asplin
Case No: A3/2019/2157 AND A3/2019/2294
Mr Martin Budworth (instructed by BBS Law Ltd) for the Appellant
Mr Neil Berragan (instructed by Berrymans Lace Mawer LLP) for the Respondent
Hearing date: 18 th December 2019
Approved Judgment
This appeal is concerned with the proper construction of restrictive covenants in a Shareholders' Agreement and whether those covenants are unenforceable because of their duration and/or their nature and extent.
The appeal is against the parts of the order of His Honour Judge Halliwell dated 12 July 2019 by which he dismissed the Appellant's claim.
The Appellant, Guest Services Worldwide Limited (“GSW”) is in the business of producing maps for distribution to the guests of luxury hotels. Revenue is generated from advertising fees paid by businesses in the locality of the hotel in question, which are featured on the particular map. The hotels are situated worldwide and 90–95% of GSW's income stream is generated from overseas. The business was founded by the Respondent, Mr David Shelmerdine. In around 2011, he sold the business to Vicinity Group Limited which subsequently went into administration. GSW acquired the business from the administrators. Mr Shelmerdine was initially retained as an employee. It was Mr Shelmerdine, (amongst others) who visited locations outside the United Kingdom, organised the relevant map and the advertisers, before moving on to another luxury hotel.
In July 2015, GSW, Mr Shelmerdine and DLS Media Limited, Mr Shelmerdine's company, entered into a consultancy agreement in which DLS Media Ltd was defined as the “Consultant” and Mr Shelmerdine as the “Provider” (the “Consultancy Agreement”). In the Consultancy Agreement it was recorded that GSW carried on the business of producing advertising-based maps for distribution in four and five star hotels and that it required specialist services relating to advising, assisting and selling advertising to appear on the maps across the world. It was also recorded that the Consultant was in the business of providing personnel, that it could supply the Provider, Mr Shelmerdine, and that he had the appropriate skills and was willing to make himself available outside the United Kingdom only, through the Consultant, to provide the consultancy services. The appointment was to commence on 6 April 2015 and to continue until 6 April 2017, or such later date as the parties might agree. Amongst other things, at clause 10 the Consultancy Agreement contained post-termination covenants in relation to enticing away employees of managerial status and above, enticing away suppliers and introducers of business, solicitation, canvassing and dealing with customers and competition with the “Relevant Business” in the “Prohibited Area” (both of which terms being defined). The restrictions in the covenants applied for a duration of 12 months after the cessation of the consultancy.
Mr Shelmerdine was also a shareholder of GSW. He was party to a shareholders' agreement dated 15 June 2016 which was made between GSW and the persons listed in schedule 1 to the agreement who were referred to as “Shareholders”, of whom Mr Shelmerdine was one (the “Shareholders' Agreement”). It will be necessary to consider the Shareholders' Agreement in some detail. At this stage, however, it is sufficient to note that at clause 5 it also contained a number of covenants including a post termination non-competition covenant and restrictions in relation to the solicitation of clients or customers, and the solicitation of employees and suppliers. It is the proper construction of those covenants which is at the centre of this appeal.
The fixed term of the Consultancy Agreement having expired, Mr Shelmerdine continued to provide services to GSW through his company, known by that time as Destination Luxury Sales Limited. He did so on the understanding that commission would be payable pending a new agreement. There were lengthy negotiations in this regard which, by mid-2018, had culminated in a travelling draft of a new consultancy agreement. At clause 10, the draft contained a series of covenants which provided that Destination Luxury Sales Limited as the Consultant and Mr Shelmerdine as the Provider should not, for a period of six months after termination of the agreement, be engaged or interested in any capacity or otherwise in any other business which carries on “Relevant Business” as defined. There were also restrictions lasting for twelve months from the termination of the agreement in relation to enticing away employees of managerial status and above, enticing away suppliers and introducers of business, and the solicitation, canvassing and dealing with customers or clients and those whom GSW was negotiating in relation to the “Relevant Business”.
However, the negotiations faltered and the ad hoc consultancy arrangements between GSW and Mr Shelmerdine were terminated by notice which expired on 9 February 2019. It is not in dispute that as a result of the termination of the agency, Mr Shelmerdine was deemed to have served a transfer notice in respect of his shares in GSW pursuant to article 22.3 of the Articles of Association of GSW. As I understand it, nevertheless, Mr Shelmerdine remains a shareholder at present.
To return to the chronology of events, shortly after the agency arrangements were terminated, it was alleged that Mr Shelmerdine had used a map produced for GSW to solicit business in Gstaad, Switzerland in March 2019 and had subsequently solicited business from the Ritz Carlton, Budapest and the Metropole in Monaco.
By a letter dated 18 March 2019, GSW asked Mr Shelmerdine to complete and return a number of undertakings which were appended to the letter, which included undertakings to comply with the restrictions in clause 5 of the Shareholders' Agreement, to provide details of all hotels he had contacted and to provide details of any advertisers. Having failed to receive a satisfactory response, proceedings were issued on 1 April 2019 seeking an injunction restraining breach of post-termination covenants in the Shareholders' Agreement and what was referred to as the new Consultancy Agreement in the form of the travelling draft. An injunction to restrain Mr Shelmerdine from misusing confidential information belonging to GSW was also sought.
An application for an interim injunction was issued. At the first hearing of that application, Mr Shelmerdine offered undertakings over until trial except in relation to non-competition with GSW. Directions were given for a return day in relation to whether to grant an interim injunction in relation to non-competition with GSW and for a speedy trial. In the event, GSW decided not to pursue the application for an interim injunction in relation to non-competition, and the return date was vacated.
The trial took place before His Honour Judge Halliwell on 11 and 12 July 2019 and the judge gave an ex tempore judgment on the final afternoon of the hearing. The judge considered first whether Mr Shelmerdine was bound by the terms of the new Consultancy Agreement and decided that he was not. He held that whilst the parties had entered into the Shareholders' Agreement, they had not extended the Consultancy Agreement beyond the expiry of the agreed fixed term, being 6 April 2017, Mr Shelmerdine had provided services thereafter in anticipation that a new agreement would be reached but the parties did not reach agreement on the travelling draft in 2018 and, therefore, that Mr Shelmerdine was not bound by the provisions of that draft which had been referred to as the new Consultancy Agreement. See [37] – [41] of the judgment.
Secondly, the judge turned to the proper interpretation of the restrictions contained in clause 5 of the Shareholders' Agreement. Having noted that the scope of the restrictions was clear, the judge commented at [44] of the judgment that the restrictions only apply to “Employee Shareholders”, not the shareholders as a whole. Having considered the definition of “Employee Shareholder” the judge concluded that on a proper construction of clause 5 and the relevant definitions, if an employee, agent or director ceases to be an Employee Shareholder he must also cease to be subject to the covenants at that time. Accordingly, he held that it was no longer open to GSW to advance a claim on the basis of the covenants in the Shareholders' Agreement once Mr Shelmerdine ceased to be its agent in February 2019. See [47] of the judgment.
The judge's reasoning in this regard was as follows:
“44. However, the restriction applies to “Employee Shareholders” only, not the shareholders as a whole. I have already referred to the difficult contractual definition of “Employee Shareholder” in clause 1.1 of the Agreement. Although denoted as “Employee Shareholders”, the class encompasses “employees, agents or directors who are not employees”. It thus includes employees but also agents and/or directors. It refers to “employees, agents or directors” in the present tense but, by way of clarification, it states that those employees who are Employee Shareholders at the date of the Agreement are identified in the table to Schedule 1. It is thus implicit that shareholders who were not employees, agents or directors at the time of the Agreement can become Employee Shareholders if they become employees, agents or directors after the Agreement. It is logically consistent with this that a Shareholder who...
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