Breach of Confidence and Injunctions

The High Court of England and Wales has recently decided a case where the dispute related to negative covenants, or agreements, entered into by the defendants upon selling their business. One commitment was not to compete with the purchasers of their business. Another related to not using confidential information related to the purchased business in circumstances where one of the sellers stayed on as a director and employee.[1] Given the alleged breaches of those commitments, a question arose as to whether an injunction was the appropriate remedy pending trial of the substantive action. Although the High Court said no, based on issues specific to the case, the Court of Appeal disagreed. It confirmed that injunctions normally represent the appropriate relief in order to hold parties to what they have agreed.

Background

A husband and wife (two of the defendants) built up a successful company providing aesthetic services, such as Botox injections. They sold the business to the second claimant for £15,500,000 plus share options in March 2023. As part of the arrangement reached, the husband was to stay on as a director and employee. In addition, the couple agreed not to compete for two years and not to use the business’ confidential information relating to:

• Clients
• Suppliers
• Opportunities, and
• Know-how

However, the claimants suspected that the husband was diverting business to himself and was using confidential information in order to do so. This led to him being suspended in May 2023 pending an investigation. The husband then resigned as a director and employee in June 2023, claiming constructive dismissal. The defendants also argued that since some of the earn-out part of the consideration had not been paid, they were no longer responsible for any obligations.

High Court proceedings

In circumstances where the husband refused to give undertakings not to continue the alleged breaches, the claimants sought an ex parte, one side only being heard, injunction to protect their position. This was granted on an interim basis by Mr Justice Constable in June 2023. He made an order restraining the husband from competing and using confidential information, amongst other things. The judge was satisfied that there was a strong case that the husband had been using confidential information for his own gain, in breach of the Sale and Purchase Agreement. The judge was also satisfied that damages would not be an adequate remedy and, in light of the evidence of serious wrongdoing, he felt that the appropriate relief was to grant the interim injunctions sought.

The defendants applied to set aside the order, in certain regards at least. Following an unsuccessful mediation, the hearing of that application was determined on an interlocutory basis with both sides heard by Mr Justice Bourne in October 2023. Mr Justice Bourne concluded that the order should be dismissed due to four ‘significant failures’ by the claimants to bring matters to the attention of Mr Justice Constable during the ex parte hearing. Mr Justice Bourne also came to the view that he should not order any new injunctive relief. This was because the husband had ‘gone on record’ in saying he would not breach his obligations. In addition, since the husband was a person of means arising from the sale of the business, he would be in a position to pay any damages awarded.

Court of Appeal

The claimants appealed Mr Justice Bourne’s ruling to the Court of Appeal. As part of their appeal, they claimed that he was wrong to find they had been guilty of any serious or culpable breach of their duty to bring all relevant matters to the attention of Mr Justice Constable. They also maintained Mr Justice Bourne was wrong to set aside the orders made by Mr Justice Constable and that he should have continued the non-compete and confidential information orders. In the Court of Appeal, Lord Justice Males noted at the outset that, because this was an appeal against discretionary decisions made by a judge, the appellants had a high hurdle to meet. He noted that an appeal court will generally only interfere where the judge has:

• Taken into account immaterial factors
• Failed to consider material factors, or
• Come to a conclusion which is not open to him

Here, however, he prefaced his analysis by outlining his conclusion that Mr Justice Bourne's decision could not be supported.

Lord Justice Males first addressed the issue of full and frank disclosure. He reviewed the law regarding the obligation on a party making an ex parte application to be candid in their dealings with the court.[2] He then considered each of the supposed failures of disclosure to which Mr Justice Bourne took exception – namely the failures to disclose:

1. That there was no good reason for applying without notice for the non-competition and confidential information orders
2. The suspension letter
3. That the definition of 'Confidential Information' was too broad, and
4. The non-payment of the final instalment of the first earn-out payment

Of the four claimed failures, Lord Justice Males found that Mr Justice Bourne was wrong to characterise the first two of them as a failure of full and frank disclosure, let alone significant or culpable failures. Of the third, he accepted there was a failure of full and frank disclosure, but it was not deliberate and, it was of relatively limited significance. The final one was a culpable, albeit not deliberate, failure of disclosure.

Ultimately, however, the Court of Appeal concluded the injunction should not have been set aside. There was evidence of significant breaches. As a result, an injunction was clearly appropriate, and not offset by the failures of disclosure which were not deliberate and relatively insubstantial when viewed in the round.

The Court of Appeal also felt it was wrong of Mr Justice Bourne not to grant a fresh injunction and objected to his reasoning. Rather, the husband’s statement that he would comply with his obligation was of little value where there was strong evidence of his dishonesty, not least as he had already given a similar assurance previously. Although there is no rule of law that damages can never be an adequate remedy in such cases, it is generally recognised that they usually will not be. The rationale for this included:

• The difficulties in assessing the loss suffered
• The difficulties in proving causation, and
• The length of the period attributable to the breach

The Court of Appeal went on to state that "fundamentally, an injunction will generally be the appropriate remedy to enforce a lawful negative covenant on the straightforward basis that this is what the parties have bargained for.” In the specific context here, Lord Justice Males went on to note that "it nevertheless remains the case that what an employer, or in the present case the purchaser of a business, has bargained for is not an uncertain and evidentially difficult remedy in damages, but the opportunity to develop its business free of competition from the defendant during the currency of the non-compete obligation.” In failing to consider this, the decision under appeal was flawed.

Conclusion

Although here the High Court determined there should be no injunction and damages were an adequate remedy, the Court of Appeal disagreed. The decision in this case was that, like most similar cases, damages can be difficult to quantify and prove. More importantly, however and notwithstanding that difficulty, it confirmed that in the circumstance of a business purchaser, they are entitled to expect a seller to honour their bargain which will generally be enforced by the courts by way of injunction. The Court of Appeal decision usefully confirms that in breach of covenant cases, especially those relating to misuse of confidential information in the context of business purchases, injunctions will usually be an appropriate remedy, especially where future breaches are a realistic prospect.

For more information and expert advice on commercial disputes, contact a member of our Commercial Disputes team.

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[1]Derma Med Ltd & Peal Athena Ltd v Zack Ally, Zackally Ltd & Sanah Qasemzahi [2024] EWCA Civ 175.

[2] Citing extensively from Tugushev v. Orlov [2019] EWHC 2031 (Comm).