Dawnay, Day & Co Ltd v D’Alphen

A restraint of trade is not enforceable only within fixed categories such as sale-of-business and employment cases. The covenantee must have a legitimate interest, and the restraint must provide no more protection than is reasonably necessary.

A participant who supplies capital to a jointly owned trading venture may possess a proprietary or quasi-proprietary interest in its success, although a company carries on the business. An employer may also protect a stable, trained workforce against solicitation by a former employee. Enforceability remains fact-sensitive and depends on the restraint's scope, the parties' interests and the public interest.

Three experienced bond-broking managers established a jointly owned company with the respondent investment bank. The respondents supplied the venture's capital, while the managers contributed their skills, business connections and ability to assemble an effective broking team. The managers later left to join a competitor.

Robert Walker J determined a preliminary issue concerning covenants against competition, solicitation of customers and solicitation of senior employees. He held the relevant covenants valid and enforceable. The managers appealed, contending principally that the investment bank lacked a protectable interest because the jointly owned company carried on the business and owned its goodwill. They also challenged the covenants' breadth and certainty.

1. Appeal dismissed unanimously. Evans LJ delivered the leading judgment. Ward and Nourse LJJ agreed.

2. The established categories of restraint of trade are neither rigid nor exclusive. The court must identify the covenantee's legitimate interest and determine whether the restraint provides more protection than is reasonably necessary. The transaction must be assessed in substance and in its particular commercial setting. The court applied the broad and flexible approach in Esso Petroleum Co Ltd v Harper's Garage (Stowport) Ltd [1968] AC 269, Deacons v Bridge [1984] AC 705 and related authorities.

3. The respondent was not a mere investor. It supplied the capital necessary to establish a new, risky and potentially profitable joint venture whose success depended on the managers' contribution. This gave it a legitimate interest of a proprietary or quasi-proprietary nature in protecting the venture against competition and customer solicitation. Its inability to qualify as the managers' employer or as purchaser of a business did not prevent enforcement.

4. An unreasonably wide covenant cannot be saved merely by granting a narrower injunction. Nevertheless, the competition and customer-solicitation covenants were reasonable. They could protect lines of business which were in an advanced state of preparation when employment ended, as well as desks already trading. The managers knew the venture's plans, proposed client connections and confidential commercial information. The agreed one-year period was reasonable in a commercial bargain negotiated by business people of broadly equal bargaining power.

5. The expression “senior employee” was sufficiently certain. Its broad meaning was clear, although borderline cases might present difficulties in application.

6. An employer may have a legitimate interest in maintaining a stable, trained workforce and may protect it through a reasonable covenant against solicitation or enticement. That conclusion is fact-sensitive and does not validate every such covenant. Here, the managers possessed confidential knowledge of employees' qualifications and remuneration, and the one-year restraint was justified.

Order: appeal dismissed with costs.

1. Court of Appeal: The managers' appeal was dismissed unanimously, with costs.
2. High Court, Chancery Division: Robert Walker J determined the validity of the covenants as a preliminary issue. He held the competition, customer-solicitation and employee-solicitation covenants relevant to the appeal valid and enforceable.
3. High Court, Chancery Division: Lightman J had directed that the validity of the covenants be tried as a preliminary issue.