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Manchester Civil Justice Centre
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Jane Lambert
Court of Appeal (Lords Justices Lewison, Phillips and Snowdon) Cheshire Estate & Legal Ltd. v Blanchfield and others [2024] EWCA Civ 1317 (5 Nov 2024)
This was an appeal from the judgment of His Honour Judge Bever sitting in Manchester as a judge of the High Court. The learned judge had dismissed with costs a claim by Cheshire Estate & Legal Ltd. ("Cheshire Estate") against two of its former directors and the company that they were setting up for conspiracy and breach of fiduciary, contractual and confidential duties.
The Alleged Wrongdoing
The defendants were accused of taking preliminary steps to set up a competing enterprise before they had resigned as Cheshire Estate's directors. Those steps included registering the trading name of the new business, incorporating the company as the corporate vehicle for their venture, appointing themselves as directors of that company, seeking professional indemnity insurance for their new business, setting up a website, opening a bank account, applying for regulatory approval and entering discussions with several litigation funders including one funder with which they had dealt when they were at Cheshire Estate.
The Judgment
The trial judge held that those preparatory steps had not "crossed the line", or otherwise put the defendants in breach of their fiduciary duties to Cheshire Estate. He also held that they were not liable for conspiracy because they had not intended to harm the claimant. They had not breached any restrictive covenants in their service contracts. Nor had they breached their obligation of confidence. Accordingly, the claimant had not been entitled to springboard relief.
The Appeal
Cheshire Estate appealed against all of Judge Bever's findings though it abandoned its claim for injunctive relief on the first day of the hearing. The appeal came before Lords Justices Lewison, Phillips and Snowdon on 16 and 17 July 2024. They handed down their judgment in Cheshire Estate & Legal Ltd v Blanchfield and others [2024] EWCA Civ 1317 on 5 Nov 2024.
Purpose of the Appeal
Though Cheshire Estate argued that it might be entitled to damages if it could establish that the defendants had been in breach of their contractual or fiduciary duties the company had not pleaded any recoverable loss in its particulars of claim. Lord Justice Phillips concluded at para [11] of his judgment that the primary purpose of the appeal was to reverse Judge Bever's order as to costs.
Breach of Covenant
At trial, Cheshire Estate had sought an injunction to enforce a restrictive covenant in the directors' service contracts. That provision prohibited the directors from supplying or soliciting any person with a view to supplying, services that were the same as, or similar to, and in competition with, Cheshire Estate's services, to any client or customer of Cheshire Estates with whom the director had had material dealings during his service for 12 months after termination of their contracts. Judge Bever had accepted that the restriction was lawful and enforceable but could find no evidence that the defendants had solicited clients or customers of the claimant or had made any threats to do so. Moreover, the one-off nature of the work handled by the claimant was such that there was little repeat business. Consequently, solicitation of existing clients was not a real concern. In the circumstances, the Court of Appeal held that the trial judge had been right to decide that injunctive relief was not appropriate.
Breach of Confidence
The claimant company had also claimed an injunction to restrain a breach of confidence. As the defendants had already delivered up the documents that Cheshire Estate claimed to be confidential at an interim injunction application before Judge Bever a few months before trial, His Honour refused a perpetual injunction on the ground that the defendants no longer had access to confidential information. Again, the Court of Appeal upheld the trial judge.
Springboard
Cheshire Estate shad ought an injunction to restrain the defendants from providing any competing products or services for 12 months by way of "springboard" relief. The "springboard" remedy is intended to deprive a wrongdoer of any head start he or she may have gained from his or her unlawful acts as in
Roger Bullivant v Ellis [1987] ICR 464 or
QBE v Dymoke [2012 EWHC 80 (QB). Judge Bever did not believe that the defendants' conduct had been unlawful. Even if it had, he would have held that the duration of any advantage would have been very limited indeed. On appeal, the claimant accepted that the claim to an injunction for 12 months had been unrealistic, but suggested that 2 or 3 months could be justified. Lord Justice Phillips could see no basis to interfere with the trial judge's assessment in that regard. Nor could he interfere with the judge's further decision that he would have refused an injunction as a matter of discretion given that there was no allegation that the defendants had started to trade or that Cheshire Estate had lost clients or that its workflows had been affected.
Duty of Fidelity
Lord Justice Phillips observed that Mr Justice Etherton had considered the authorities and relevant legal principles in detail in
Shepherds Investments Ltd v Walters [2006] EWHC 836 (Ch), [2007] 2 BCLC 202. After considering paras [41] to [43] of Lady Justice Arden's judgment in
Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244, [2005] 2 BCLC 9 and
Mr Justice Hart's in British Midland Tool Ltd v Midland International Tooling Ltd. [2003] EWHC 466 (Ch), [2003] 2 BCLC 523, Mr Justice Etherton had said at para [106] of his judgment in
Shepherds that:
"..it is plain that the necessary starting point of the analysis is that it is the fiduciary duty of a director to act in good faith in the best interests of the company (
Item Software at para [41]), that is to say "to do his best to promote its interests and to act with complete good faith towards it", and not to place himself in a position in which his own interests conflict with those of the company (
British Midland Tool at paragraph [81] and
CMS Dolphin Ltd v Simmonet [2001] 2 BCLC 704 at paragraph [84])."
In Item Software a director of the claimant company who was setting up a competing company persuaded a third party which had been in negotiation with the claimant to break off those negotiations with the claimant and do business with the new company instead. The Court of Appeal and the judge below held that the director had breached his duty of fidelity by failing to disclose his intention to compete with the claimant.
Restraint of Trade
On the other hand, Mr Justice Falconer had identified a countervailing public interest in Balston Ltd v Headline Filters Ltd [1990] FSR 385 which mitigated the duty to disclose:
"In my judgment an intention by a director of a company to set up business in competition with the company after his directorship has ceased is not to be regarded as a conflicting interest within the context of the principle, having regard to the rules of public policy as to restraint of trade, nor is the taking of preliminary steps to investigate or forward that intention so long as there is no actual competitive activity, such as, for instance, competitive tendering or actual trading, while he remains a director."
Reconciling the Public Interests
Mr Justice Hart said in para [89] of his judgment in British Midland Tool:
"….A director's duty to act so as to promote the best interests of his company prima facie includes a duty to inform the company of any activity, actual or threatened, which damages those interests. The fact that the activity is contemplated by himself is, on the authority of
Balston's case, a circumstance which may excuse him from the latter aspect of the duty. But where the activity involves both himself and others, there is nothing in the authorities which excuses him from it. This applies, in my judgment, whether or not the activity in itself would constitute a breach by anyone of any relevant duty owed to the company. It does not, furthermore, seem to me that the public policy of favouring competitive business activity should lead to a different conclusion. A director is free to resign his directorship at any time notwithstanding the damage that the resignation may itself cause the company: see per Lawrence Collins J in
CMS Dolphin Ltd v Simonet [2001] 2 BCLC 704 at para 95. By resigning his directorship he will put an end to his fiduciary obligations to the company so far as concerns any future activity by himself (provided that it does not involve the exploitation of confidential information or business opportunities available to him by virtue of his directorship). A director who wishes to engage in a competing business and not to disclose his intentions to the company ought, in my judgment, to resign his office as soon as his intention has been irrevocably formed and he has launched himself in the actual undertaking of preparatory steps. Although this might seem inconsistent with the wide statement of principle in
Balson's case, it is not inconsistent with the decision in that case on its particular facts: as already noted…the intention to compete does not appear to have been formed prior to the resignation as a director."
Lord Justice Phillips read Mr Justice Hart's analysis as meaning that the director's obligation to disclose preparatory activities arises (and only arises) when a director has formed an irrevocable intention to form a competing business regardless of whether he is acting alone or with others. He also noted that Mr Justice Etherton had concluded at [108] of
Shepherds that each case turned on its own facts:
"What the cases show, and the parties before me agree, is that the precise point at which preparations for the establishment of a competing business by a director become unlawful will turn on the actual facts of any particular case. In each case, the touchstone for what, on the one hand, is permissible, and what, on the other hand, is impermissible unless consent is obtained from the company or employer after full disclosure, is what, in the case of a director, will be in breach of the fiduciary duties to which I have referred or, in the case of an employee, will be in breach of the obligation of fidelity. It is obvious, for example, that merely making a decision to set up a competing business at some point in the future and discussing such an idea with friends and family would not of themselves be in conflict with the best interests of the company and the employer. The consulting of lawyers and other professionals may, depending on all the circumstances, equally be consistent with a director's fiduciary duties and the employee's obligation of loyalty. At the other end of the spectrum, it is plain that soliciting customers of the company and the employer or the actual carrying on of trade by a competing business would be in breach of the duties of the director and the obligations of the employee. It is the wide range of activity and decision making between the two ends of the spectrum which will be fact sensitive in every case. In that context, Hart J may have been too prescriptive in saying, at paragraph [89] of his judgment, that the director must resign once he has irrevocably formed the intention to engage in the future in a competing business and, without disclosing his intentions to the company, takes any preparatory steps. On the facts of
British Midland Tool, Hart J was plainly justified in concluding, in paragraph [90] of his judgment, that the preparatory steps had gone beyond what was consistent with the directors' fiduciary duty in circumstances where the directors were aware that a determined attempt was being made by a potential competitor to poach the company's workforce and they did nothing to discourage, and at worst actively promoted, the success of that process, whereas their duty to the company required them to take active steps to thwart the process."
Findings of Fact
Judge Bever made the following findings of fact. First, the directors did not intend their company to trade until 12 April 2023 which was the end of their contractual notice period. Secondly, the directors did not form a settled or irrevocable intention to compete with Cheshire Estate until mid to late Dec 2022 or early Jan 2023 and that intention was not cemented until they received the "minded to approve" notification from the SRA on 6 Jan 2023. They resigned their directorships on 10 Jan 2023 and were placed on garden leave on 12 Jan. Thirdly, as of 10 Jan the directors' plans were at a very early stage. They had no clients, no funding, no premises and no staff and had not made a clear decision about what services to offer. Fourthly, although the directors had had dealings with a litigation funder on behalf of Cheshire Estate in late Dec 2022, on the balance of probabilities that funder no longer represented a business opportunity to Cheshire Estate. That company had entered into an exclusive arrangement with another funder which would have precluded it from engaging any further with the previous funder. Having said that, there was no evidence that that funder could not have worked with both Cheshire Estate and the directors if Cheshire Estate had been in a position contractually to do so.
Applying the Law to the Facts
Judge Bever observed that there was no hard and fast rule or guidance as to whether, and the extent to which, the taking of preparatory steps was permissible or constituted a breach of duty. He stated that the steps taken by the directors to prepare for their new business venture fell into the middle ground identified by Mr Justicr Etherton in
Shepherds. He noted that within that middle ground, each case turns on its own facts. In his view a key issue related to the directors' intentions and frame of mind at the time the contentious steps were taken and, in particular, when they formed a settled intention to establish their new business.
Trial Judge's ConclusionsHaving found that the directors did not form a settled intention to leave Cheshire Estate until mid to late Dec or early Jan 2023, His Honour concluded that the majority of the actions taken by the respondents by way of preparatory steps did not cross the line or constitute a breach of their fiduciary duties. He pointed out that it was entirely possible that those steps could have been unsuccessful in which event the respondents may well have remained at Cheshire Estate and not sought to set up their own business. He also held that the steps taken by the directors would not have affected their ability to serve Cheshire Estate faithfully, honestly and to the best of their abilities. They could have remained in post even though they had taken those steps. Judge Bever found the position regarding the funder more finely balanced. However, based on his other findings, he decided that a reasonable person looking at the facts of the case would probably have concluded that there was no real possibility of conflict arising out of the directors' dealings with that funder. The judge therefore concluded that the defendants were not in breach of their fiduciary or statutory duties by failing to report their tentative plans to Cheshire Estate.
Submissions to the Court of Appeal
Cheshire Estate submitted that the directors' actions went well beyond legitimate conduct. They did not simply discuss possibilities but set themselves up to be ready to go as soon as possible. Their actions were secretive and underhand and well past what was acceptable. Their dealings with Cheshire Estate's former funder was a case in point. The defendants had been defined as key workers in Cheshire Estate's agreement with the funder. Were they to leave the funder could have terminated its funding to Cheshire Estate, leaving the claimant to find a new litigation funder. The claimant also challenged Judge Bever's findings of fact.
Judgment of the Court of Appeal
Lord Justice Phillips noted at para [39] of his judgment that Judge Bever's was 69 pages long and consisted of 523 paragraphs. The learned judge had conducted a very thorough review of the facts on the basis of the extensive evidence before him and had come to conclusions that were plainly open to him. Referring to
Volpi v Volpi [2022] EWCA Civ 464 findings of fact by the court below could be disturbed only if they were plainly wrong and that was something that the claimant could not show. Accordingly, he dismissed Cheshire Estate's appeal. Lord Justice Snowden and Lord Justice Lewison delivered concurring judgments.
Comment
Claims for breach of confidence by departing directors or employees are often intermingled with breach of contract and fiduciary duty claims and actions to enforce restrictive covenants. Though they are not always regarded as intellectual property cases they involve a similar balancing exercise between the protection of a party's interests and the promotion of competition.
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