Wells & Anor v Cathay Investments 2 Ltd & Anor

A contractual “material breach” is not necessarily a repudiatory breach. Its seriousness must be assessed in the context of the contract, the breach, its consequences and the consequences of enforcing the agreed contractual machinery. Gross misconduct in an employment contract means conduct sufficiently serious to justify summary dismissal and amounts to repudiatory breach. Subsequent facts may justify a dismissal or contractual termination unless the agreement provides otherwise.

Where shareholders who are also employees deliberately disclose confidential information to a former owner in order to conceal or align financial information, that conduct may constitute both material breach and gross misconduct. Restrictive covenants are assessed when agreed and may be severed under the blue-pencil test where removal does not require rewriting the covenant or materially alter its overall effect.

The claimants were senior employees and minority shareholders in a transport and logistics company. Following the defendant’s acquisition of the business, they retained shares subject to put and call options and entered into employment and shareholders’ agreements.

After the claimants exercised put options, the defendants dismissed them for gross misconduct and treated them as defaulting shareholders, entitling the defendants to acquire their shares at nominal value rather than fair value. The claimants alleged wrongful dismissal, material breach of contract, an improper attempt to avoid paying fair value, and unenforceable restrictive covenants.

The central issues were whether the claimants had committed material breaches and gross misconduct, whether later-discovered breaches could be relied upon, and whether the restrictive covenants were enforceable.

1. Material breach and gross misconduct. A material breach is distinct from a repudiatory breach, but must be sufficiently serious to justify the contractual consequence. The assessment includes the terms and duration of the agreement, the nature and consequences of the breach, the commercial context, and the consequences of treating the contract as terminated. Gross misconduct is conduct sufficiently serious to justify summary dismissal and therefore amounts to repudiatory breach.
2. The claimants deliberately disclosed confidential board and financial information to the former owner, participated in preparing a budget by working backwards from a target EBITDA, and acted against the interests of their employer. This was a serious breach going to the heart of the employment relationship. It was both a material breach under the shareholders’ agreement and gross misconduct amounting to repudiatory breach.
3. The transfer of confidential information to a personal email account and the second claimant’s workplace viewing of pornography and gambling material amounted to serious misconduct, but neither was sufficiently serious, on the facts, to constitute a material breach or gross misconduct. The WhatsApp evidence established a breach of duty, but did not prove continuation of the offensive material after the relevant date and was insufficient to establish material breach or gross misconduct.
4. The defendants were entitled to rely on breaches existing when the notices were served, even if those breaches were not identified in the notices. This followed the principle in