Ideal Standard International SA & Anor v Herbert

On an application for interim relief, the court must determine whether there is a serious issue to be tried and whether the balance of convenience favours an injunction. Restrictive covenants in shareholder agreements are not subject to an immutable category-based test. Where the covenant forms part of a share participation arrangement for a senior employee, enforcement is assessed under the principles applicable to employment covenants, although the shareholding remains an important factor. A serious issue may arise where the employer has legitimate interests in protecting goodwill, confidential information, customer relationships and workforce stability. Damages may be inadequate for the employer where confidential information is at risk, while damages may adequately compensate the employee.

The applicants sought an interim injunction restraining Mr Herbert from breaching an 18-month non-compete covenant in a shareholders’ agreement pending arbitration. Mr Herbert had been a senior executive and participant in the group’s share scheme. After his employment ended, he joined a competitor.

He argued that a settlement agreement had released him from the covenant and that the covenant was unreasonable, particularly because it extended to passive shareholdings, the whole group’s business and an 18-month period. The issues were whether the covenant remained binding, whether there was a serious issue as to its enforceability, and where the balance of convenience lay.

1. Interim relief. The principles in American Cyanamid v Ethicon Ltd (No 1) [1975] AC 396 applied. The court had to consider whether there was a serious issue to be tried and whether the balance of convenience favoured relief. A question of construction may in an appropriate case be finally determined on an interim application.
2. Settlement agreement. The settlement agreement did not waive the covenant. It was signed expressly for the operating company, did not refer to the shareholders’ agreement, and did not satisfy the requirement that a waiver be in writing and signed by or on behalf of the person granting it.
3. Construction and enforceability. Restrictive covenants in shareholder agreements are not automatically governed by a separate category-based test. The covenant was to be judged by the principles applicable to employment covenants, although the respondent’s shareholding was a weighty factor. His senior position, customer relationships, confidential information and close working relationships provided a serious issue as to legitimate interests requiring protection.
4. The covenant’s territorial and temporal scope could not at this stage be said to be incapable of enforcement. The 18-month period was not, on its face, unreasonable. The construction had to take account of the factual background available when the agreement was made.
5. Balance of convenience. Damages were unlikely to be adequate for the applicants because of the risk associated with confidential information, business strategy and product development. Damages were likely to be adequate for Mr Herbert, notwithstanding the possibility that his loss would extend beyond immediate salary. The lowest risk of injustice lay in granting the injunction.

An interim injunction was granted pending determination in arbitration.