Court of Appeal allows an appeal challenging the enforceability of a non-disclosure agreement. The court says the agreement is unenforceable as being unreasonable in its restraint of trade, and discharges an injunction granted by the High Court.
The question for the Court of Appeal to decide was whether a restriction preventing a party ever acting for other claimants in the emissions litigation (inserted into a Non-Disclosure Agreement) could be reasonably necessary to protect the other party’s legitimate interests.
A contract which restrains trade is one in which a party (A) agrees with any other party (B) to restrict his freedom to carry on trade with others not party to the contract.
The general rule is that any agreement in restraint of trade will only be enforceable if it is reasonable by reference to the interests of the parties affected by it and those of the public. A restraint must usually protect a legitimate business interest, should not be wider than reasonably necessary to protect that interest and should not be contrary to the public interest. It is worth nothing that the validity of a covenant in restraint of trade is assessed at the date it was entered into, and not with the benefit of hindsight.
Harcus Sinclair LLP v Your Lawyers Limited
A relatively small company offering legal services (YLL) saw an opportunity to bring a group action in respect of the Volkswagen diesel emissions scandal, once it came into the public domain during 2015. It sought a collaboration with a larger firm of solicitors which had more experience of financing and undertaking major group actions (HSLLP).
The first move by YLL was to require HSLLP to sign a non-disclosure agreement which included a ‘non-compete’ clause which precluded HSLLP from accepting instructions from or acting on behalf of any other group of Claimants in the contemplated Group Action. This was referred to in the judgment as ‘the Restriction’.
After signature of the non-disclosure agreement HSLLP recruited its own claimants and the parties acted in collaboration on an informal basis. There had been discussions of a proposed collaboration but no agreement was ever formalised and YLL continued in reliance upon the Restriction in the non-disclosure agreement. It did not become apparent to YLL until August 2016 that funding would not be advanced without HSLLP in control as the lead solicitor.
HSLLP issued a claim form during October 2016 and this was subsequently reported to YLL.
YLL brought litigation against HSLLP, and the judge at first instance held that HSLLP had acted in breach of the non-disclosure agreement. The trial judge granted an injunction preventing HSLLP from acting on behalf of claimants in any of those claims for six years.
The decision of the trial judge was appealed, however, and the Court of Appeal took the view that the non-disclosure agreement was just that and, not in any sense, a collaboration agreement. The Restriction was held by the Court of Appeal to be a single provision in an agreement that, otherwise, was concerned entirely with protecting confidential information. It was not a Restriction given in exchange for a collaborative opportunity.
Sir Geoffrey Vos ruled that ‘a broad restriction preventing [HSLLP] ever acting for other claimants in the emissions litigation, inserted into an otherwise unobjectionable NDA, cannot possibly be reasonably necessary to protect [YLL]’s legitimate interests.’ The view of the court may well have been different had the parties entered into any construction of collaboration agreement. In the circumstances, the judge had been wrong to conclude that the non-disclosure agreement allowed for a period of informal collaboration.
It was held that in this case, the judge ought to have asked himself whether the restriction was reasonably necessary to protect YLL’s legitimate interests. The Court of Appeal took the view that YLL’s only legitimate interest under the non-disclosure agreement was the protection of the confidential information that it would disclose to HSLLP for the purpose of obtaining legal advice.