Charles Anthony Joseph Steel v Spencer Road LLP

A contractual bonus or commission scheme which requires an employee to remain in employment for a specified period, but does not restrict where or for whom the employee may work after leaving, is not ordinarily a restraint of trade. The fact that repayment operates as a financial disincentive to resignation does not alter that conclusion.

Whether an agreement is a restraint of trade is assessed cumulatively by reference to its practical effect at the time of contracting. The first-stage question is distinct from the later question whether an established restraint is reasonable, although the two stages may overlap in some cases.

Mr Steel appealed against the dismissal by ICC Judge Mullen of his application to set aside a statutory demand issued by his former employer, Spencer Road LLP. The demand sought repayment of a discretionary bonus paid shortly before Mr Steel resigned, together with enforcement costs.

The contractual scheme made payment conditional on continued employment for three months and repayment was required if notice was given during that period. Mr Steel argued that the clawback provisions were restraints of trade and penalty clauses. The penalty-clause issue was not appealed. The central issue was whether the bonus clawback provisions engaged the restraint of trade doctrine.

1. Appeal dismissed. The bonus clawback provisions were not restraints of trade, and the statutory demand was therefore not liable to be set aside on that basis.
2. The restraint of trade doctrine involves two stages. The court first asks whether the provision is a restraint of trade. If so, it asks whether the restraint is reasonable with reference to the interests of the parties and the public. This appeal concerned only the first stage.
3. The assessment is fact-sensitive and cumulative. The court must examine the practical effect of the provision in hampering freedom to trade, looking at substance rather than form and at the position when the contract was made. Analogies may assist but are not determinative.
4. A bonus or commission conditional on continuing employment for a specified period is not a restraint of trade merely because it creates a disincentive to resign. The relevant distinction is whether the employee remains free, after leaving, to work for another employer or in another field. The provisions in Tullett Prebon and the reasoning in Sweeney were directly applicable.
5. Hubble did not determine the first-stage question because that issue had effectively been conceded. 20:20 London concerned a different contractual provision and did not undermine the applicable line of authority.
6. The three-month clawback period, the contractual notice period and separate post-termination restrictive covenants did not convert the bonus provisions into restraints of trade. The other covenants were not challenged and did not affect the interpretation of the clawback provisions.
7. The existence of developing applications of the doctrine in new contexts did not require a trial. The issue could properly be decided on the evidence and involved the application of established authority.

• High Court, Chancery Appeals: Mrs Justice Bacon dismissed the appeal from ICC Judge Mullen’s order dated 30 March 2023.
• ICC Judge Mullen: The application to set aside the statutory demand was dismissed.