Karen Morris-Garner and Another v One Step (Support) Ltd

JurisdictionEngland & Wales
JudgeLord Justice Christopher Clarke,Lady Justice King,Lord Justice Longmore,and
Judgment Date22 March 2016
Neutral Citation[2016] EWCA Civ 180
Docket NumberCase No: A2/2014/2727
CourtCourt of Appeal (Civil Division)
Date22 March 2016

[2016] EWCA Civ 180

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

MR JUSTICE PHILLIPS

[2014] EWHC 2213 (QB)

Royal Courts of Justice

Strand, London, WC2A 2LL

Before:

Lord Justice Longmore

Lord Justice Christopher Clarke

and

Lady Justice King

Case No: A2/2014/2727

Between:
Karen Morris-Garner
Andrea Morris-Garner
Appellants
and
One Step (Support) Limited
Respondent

Stephen Knafler QC and Charles Béar QC (instructed by Neves Solicitors LLP) for the Appellants

Craig Orr QC and Mr Mehdi Baiou (instructed by Pitmans LLP) for the Respondent

Hearing dates: 25 th and 26 th November 2015

Lord Justice Christopher Clarke
1

This case concerns alleged breaches of non-compete and non-solicitation covenants in the sale of a business providing "supported living" services for children leaving care and vulnerable adults.

2

"Supported living" is an alternative to placing vulnerable people in residential care homes. Instead the service supplier provides rented accommodation and the support services needed to enable them to live as independent lives as possible without the need for institutional care. The concept was introduced during the 1990s and developed pursuant to government policy during the early to mid-2000s.

The history

3

In setting out the relevant history below I adopt much of the summary contained in the judgment of Phillips J.

The business

4

Karen Morris-Garner ("KM-G"), the first appellant, qualified as a social worker in 1996 and was employed by the London Borough of Ealing as a Child Protection Worker. In May 1999 she left Ealing Social Services and set up her own business under the name One Step At A Time ("OSAAT"). OSAAT provided support (of which there was then a dearth) for young people leaving care. The business was based in Northolt, West London. In around 2001 Andrea Morris-Garner ("AM-G"), the second appellant, began working for OSAAT as its Operations and Area Manager. KM-G and AM-G (together "the appellants") are civil partners.

The first sale

5

OSAAT's business expanded rapidly. By an assignment dated 31 October 2002 KM-G sold OSAAT's business to One Step Support Limited ("One Step"), which had been incorporated on 13 September 2002 as the vehicle for the transaction. The purchase price was £ 1,450,000. £ 749,950 of that was funded by setting off a loan in that amount from KM-G to One Step. The effective purchasers of 50% of the business were the Costelloes. Martin Costelloe is a successful entrepreneur and Charmaine Costelloe is his wife. One Step's shareholders were KM-G and Mrs Costelloe each of whom owed 50% of the capital. Both were appointed its directors.

6

Mrs Costelloe and her husband and Aidan Costelloe entered into a Shareholder's Agreement of the same date with KM-G, apparently on behalf of members of her family (although they did not sign it), which included the following:

a) provisions for dealing with a situation of deadlock between the directors by the service of a Deadlock Notice, constituting an offer by the server of the notice to sell all their shares to the other party at the price specified, but also an alternative offer to buy all the other party's shares at the same price;

b) provisions restricting any shareholder, during the course of the agreement or for three years thereafter, from engaging in a business which was in material competition with One Step or soliciting One Step's significant clients, such provisions being in materially the same terms as the restrictive covenants subsequently entered into in 2006 (as to which see [13] below);

c) a provision that AM-G could act as an alternate director for KM-G.

7

The development of OS's business after the first sale was described by the judge in the following terms:

"16 One Step's business was thereafter run by [KM-G] and by Martin Costelloe, the latter taking on the role of placement resources manager. [AM-G] was at first the manager of the West London office, then became the Area Manager, and finally the Supervisor of the Area Manager.

17 Whilst the parties disagree as to the precise nature and proper characterisation of One Step's business in the ensuing period, certain matters are clear. First, One Step's supported living services were explained and marketed as extending well-beyond supporting young-people leaving care. In 2002 One Step engaged Nicholas Rootes, a copywriter, who produced a brochure for One Step's services by the end of that year. The brochure, which Mr Rootes explained was prepared primarily on dictation from [KM-G], referred to One Step supporting people including those with (i) mental health issues (ii) physical disabilities (iii) challenging behaviour (iv) offending behaviour and (v) mild to moderate learning difficulties, in addition to young people leaving care. Reference was also made to One Step having " flexible service options which allow us, in consultation with their social workers, to tailor the services we provide specifically to the needs and preferences of each person" and to the fact that " Assistance is given in accessing additional services and support groups, depending on each individual's needs".

18 Second, One Step's business prospered greatly in the period 2002 to 2005. In the year ended 31 October 2003 One Step made profits of £543,000 on sales of £1,957,000. By 2005 profits were £940,000 on sales of £5,027,000.

19 Third, in 2003 One Step established a new hub for its business in Reading, focusing on both children leaving care and on adults with mental health and learning disabilities. By 2005 One Step had 9 adult clients in Reading. Also in 2003 One Step set up a Family Assessment Centre in Reading."

8

In 2004 the working relationship between KM-G and Mr Costelloe broke down. Legal proceedings were threatened and One Step's business was significantly undermined. In late 2004 and early 2005 steps were taken to market One Step for sale. A proposed sale to Sovereign Capital Partners LLP ("Sovereign") fell through when they pulled out of the transaction in 2005.

9

On 6 July 2006 KM-G and AM-G incorporated Positive Living Limited. KM-G had 51% and AM-G 49% of the shares. No one else at One Step knew of this.

10

On 11 August 2006 Mrs Costelloe gave a Deadlock Notice to KM-G offering to sell her shares in One Step to KM-G for £ 3.15 m, or to buy KM-G's shares for the same price. KM-G elected to require Mrs Costelloe to purchase her shares.

The Sale Agreement of 20 December 2006

11

On 20 December 2006 KM-G entered into a sale agreement under which she agreed to resign as a director of One Step and to sell her 50% interest in One Step for £3,150,000 to Community Support Project Limited ("CSPL"), a company owned by Mr Costelloe which had acquired or was to acquire Mrs Costelloe's 50% of One Step.

12

That agreement was entered into pursuant to a Deed of Compromise executed on the same date between KM-G, One Step and the Costelloes, providing for a compromise of proceedings which had been brought by KM-G in the Chancery Division against Mrs Costelloe for specific performance of her agreement to purchase KM–G's shares in One Step.

The covenants

13

Under the Deed KM-G agreed, for a period of 36 months from the date of the Deed, to be bound by the following restrictive covenants, in which One Step was referred to as "the Company":

" 2.1. All information concerning the business transactions of the Company and of any person with whom the Company is in a confidential relationship shall be kept confidential unless or until [KM-G] can reasonably demonstrate that any such communication, information and material is, or part of it is, in the public domain through no fault of her own, whereupon to the extent that it is in the public domain or is required to be disclosed by law, this obligation shall cease.

2. [KM-G] shall not without the prior written consent of the Board (such consent to be withheld only so far as may be reasonably necessary to protect the legitimate interests of the Company);

2.1 engage as a director, principal, partner or consultant or accept employment or assist in any capacity in any business concern (of whatever kind) which shall be in material competition with the Company;

2.2 whether alone or jointly with or as principal partner agent director servant or consultant of any other person or persons directly or indirectly in competition with any of the businesses or activities of the Company as at the date of this Deed:

2.2.1 either on her own behalf or on behalf of any other person or persons knowingly canvass solicit or approach or cause to be canvassed or solicited or approached for orders in respect of any services provided or any goods dealt in by the Company any person or persons who at the date of this Deed or within one year prior to such date is or was a significant client or customer of the Company (and for the purposes of this clause it is agreed that the clients or customers of the Company are the local councils paying for the services provided by the Company rather than the consumers of those services);"

[Bold added]

14

One Step's case in respect of the Thames Valley and West London was not advanced (nor did the judge decide in their favour) on the basis that the covenants were breached by reason of Positive Living engaging in a line of business which One Step was not carrying on at the time of the restrictive covenants, nor was it the appellants' case that the covenants were unenforceable on the grounds that they precluded them from carrying on some business.

15

As part of the same transaction, AM-G (with the benefit of independent legal advice) entered into a Deed of Compromise with One Step, terminating her employment and waiving any rights or claims she might have against One Step. She also agreed to be bound for 36 months by restrictive covenants in identical terms to...

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