Splitting Hairs - High Court considers the interpretation of restrictive covenants in a share purchase agreement

The English High Court has recently applied commercial common sense when interpreting a case concerning restrictive covenants in a Share Purchase Agreement ("the SPA").

Background

In 2008, the Claimant, Rush Hair Limited, entered into a franchise agreement with Hair (Windsor) Ltd, a company owned by Hayley Gibson-Forbes ("the First Defendant") to operate a Rush hairdressing salon. In 2015, the First Defendant sold all the shares in Hair (Windsor) Ltd and Hair Maidenhead Ltd ("the Companies") to the Claimant.

In the SPA, the First Defendant undertook that, for a period of 2 years from completion, she would not:

• canvass, solicit, entice or employ several named employees (the "Employee Covenant"); or
• directly or indirectly be engaged, concerned, employed or interested in any capacity in a business competing with the "RUSH business" within a two mile radius of any of the Companies' existing salons (the "Non-Compete Covenant").

The First Defendant formed a new company to operate a salon on the same street as one of the company's existing salons. The new company employed two of the named employees and engaged a third one as a consultant.

The Claimant raised an action against the First Defendant for alleged breach of the Employee Covenant and Non-Compete Covenant.

Consideration

Employee Covenant

An argument that was considered by the Court was whether the Employee Covenant could be breached where the actions complained of were carried out by the company set up by the First Defendant rather than by the First Defendant herself.

The Court considered that the Employee Covenant was capable of two readings.On one reading, it would only prevent the First Defendant from employing the named employees on her own behalf -it would, however,not prevent her from doing so as an agent for another i.e. her new company. In the alternative, it could be read as preventing the First Defendant from soliciting the named employees both on her own behalf and as agent for another i.e.the new company.

Having found that the clause was capable of having two meanings, the judge was permitted, as a matter of contractual construction, to give it a "commercially sensible" meaning. The Court held that the only way to construe the clause, in a commercially sensible way, was as prohibiting the First Defendant from canvassing, soliciting, enticing or employing any of the named employees both on her own behalf and as agent for the company.

The Court found it was necessary to read the language used in that clause in the context of the SPA as a whole, giving such weight as was appropriate, in the circumstances, to the factual matrix known to the parties when the SPAwas concluded. Given that the First Defendant customarily ran her salons through the medium of a limited company and that the parties would have understood that, they would also have understood that a covenant which was only binding on the First Defendant in respect of acts done on her own behalf would have been "toothless".

Non-Compete Covenant

In relation to the Non-Compete Covenant, an argument was advanced that because there was no definition of the "RUSH business" (with which the First Defendant was not allowed to compete) it was too wide to be enforceable. The Court rejected this argument saying it was clear from the SPA that this meant the Claimant's hairdressing business and rejected the arguments on behalf of the First Defendantthatit could be interpreted as meaning the use, sale and promotion of hair products alone.

Other rejected arguments

Piercing the corporate veil

The Claimant argued that the First Defendant had used a newly-incorporated company as a device to get round the restrictive covenants and that this justified "piercing the corporate veil".

Applying the principles in Petrodel v Prest [2013] 2 AC 415 theCourt heldthat there was no evidence that the First Defendant had interposed a company so that its separate legal personality would defeat a legal right or frustrate its enforcement. Nor was the use of a company a cloak or sham designed to conceal the identity of the "true" actors. The Claimant's argument that the corporate veil should be pierced was rejected.

Unenforceability of the restrictions on grounds of public policy

The Court considered the law relating to the enforceability of restrictive covenants in the context of SPAs and concluded that the covenants in question went no further than were reasonably necessary to protect a legitimate business interest and were, in principle, enforceable.

Conclusion

The High Court held that the First Defendant had breached both covenants. It inferred that her new company had in relevant part acted through her.

Practical implications

As an English High Court decision this decision is not binding in Scotland, it may however be persuasive.

In this case the Court preferred a commercial common sense approach when interpreting the SPA over one that led to "apparent absurdity". However, this approach was only available where the language of the provision was "truly ambiguous".

Courts have generally been reluctant to open up bargains between parties after they have been entered into and will only interfere where there is real ambiguity. The recent Supreme Court decision of Arnold v Britton [2015] UKSC 36 has cemented the principle that Court will notre-write bad bargains. In light of Arnold v Britton,it will be interesting to see how sympathetic the Courts will be to parties asking for their agreements to be opened up and for the Court to take a "commercial common sense approach"as to what their intentions were at the time of entering into the agreement.

Rush Hair Limited v Hayley Gibson-Forbes and another [2016] EWHC 2589 (QB).