Deacons v. Robin M Bridge

CACV000028/1983

Civil Appeal
No. 28 of 1983

Headnote

Restraint of trade - a covenant in a partnership agreement between solicitors to the effect that a retiring partner will not act for a period of five years for clients of the partnership at the time of retirement (or clients during the previous three years) is enforceable because it is reasonable in that it goes no further than affording adequate protection for the legitimate interests of the firm.

BETWEEN

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Coram: Leonard, V.-P., Cans and Fuad, J.J.A.

Dates of hearing: 18, 19 and 20 April 1983

Date of Judgment: 3 May 1983

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JUDGMENT

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Fund, J. A.

1. This appeal concerns the validity of a restrictive covenant in a partnership agreement entered into between the partners of a leading firm of solicitors in Hong Kong. The controversy is between the Plaintiff firm, Deacons, and the Defendant, Mr. Robin Bridge, one of the partners who has retired. We are, of course only to determine the legal rights of the parties but I may be permitted to remark that it is an unhappy case indeed. The facts are to be found in affidavits sworn by Mr. John Wimbush, a joint Senior Partner of Deacons, and by Mr. Bridge. There is no real dispute about the facts which will govern our decision.

2. The practice of Deacons (under different names until 1925) has been in existence in Hong Kong since 1860. In the context of Hong Kong it is a very large firm, now serviced by 27 partners and 49 Assistant Solicitors. It has a wide and substantial practice, with its main office in Swire House, Central, and a small branch in Kowloon. The current Partnership Agreement was drawn up on the 10th June 1968, as varied by a Supplemental Agreement dated the 24th April 1979. All "Capital Partners" are bound by these agreements. Clause 28(a) of the main agreement is in these terms -

"Except on dissolution, no partner ceasing to be a partner for any reason whatsoever shall for a period of 5 years thereafter act as a solicitor, notary, trade mark or patent agent or in any similar capacity in the Colony of Hong Kong whether as principal, clerk or assistant for any person, firm or company who was at the time of his ceasing to be a partner or had during the period Of 3 years prior thereto been a client of the partnership Provided however that this Clause shall not apply to a partner acting in any such capacity in the course of employment with Government or any public body or with any company or organisation which is not itself engaged in professional practice in any of the above fields.

3. Mr. Bridge joined Deacons as an Assistant Solicitor on the 1st May 1967. He had been articled in England and had not previously practised in Hong Kong. He rose to become a salaried Partner on the 1st July 1973 and a Capital Partner on the let April 1974. He was then aged about 31. He retired from the Partnership, in circumstances which need not detain us, effectively from the 31st December 1982, and received the sums of money to which he was entitled under the terms of the Partnership Agreement upon his retirement.

4. Not long after Mr. Bridge joined the firm, he developed an increasing interest' in Intellectual and Industrial La and the Law relating to Trademarks. This area of Deacons' practice had been growing during the 1960s and 1970s. The invitation to Mr. Bridge to join the firm as a Salaried Partner was partly prompted b, the expectation that during the next year (1974) the partner to whom he had been working would become Senior Partner and Mr. Bridge would then take over responsibility for the Intellectual and Industrial Property area of the firm's practice, "which", says Mr. Wimbush, "by then either had been, or was about to be, recognised as a department in its own right".  Mr. Wimbush acknowledges that under Mr. Bridge's guidance, the Plaintiff's Practice in the Intellectual and Industrial Property field had become the Largest practice of any firm in Hong Kong".

5. In July 1981 Mr. Bridge's Department moved into a separate suite of offices on a different floor in Swire House and at the time of his withdrawal from the partnership, the Department comprised five Assistant" Solicitors, two Legal Executives, nine clerks, eight secretaries, and other ancillary junior staff.

6. Disputes arose between the parties (particularly in relation to Mr. Bridge's obligations under the Partnership Agreement) and Deacons tool out a writ against him on the 4th February 1983 seeking various injunctions and claiming damages. This was followed by an application by Deacons for interlocutory relief. The Summons came before Hunter J. who delivered a considered judgment on the 1st March finding in favour of Deacons.  The Order, made on the usual undertakings, was very substantially in the form sought by the application and was expressed to take effect on the 3rd March. It was in these terms -

7. When the appeal was opened, Counsel informed us that since the institution of the appeal an agreement had been reached between the parties which is to the following effect, that:

8. Certain issues which could present difficulties in cases such as the present can be got out of the may quite quickly, for it is common ground that -

9. The leading case, I think it can fairly be said, on the issues that are before this court is Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd. [1968] A C. 269. What I might call the test of reasonableness pronounced by lord Macnaughten in Nordenfelt v. Maxim Nordenfelt Co. [1894] A. C. 535, at p.565 was expressly approved by the House of Lords, and cited by three of their Lordships. This is what lord Macnaughten said -

"All interference with individual liberty of Action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it in the only justification, if the restriction is reasonable - reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no nay injurious to the public."

10. In the Esso Petroleum case Lord Hodson, at p.319, referred to the authoritative statement in Herbert Morris Ltd. v. Saxelby [1916] 1 A. C. 688 that the onus of establishing that an agreement is reasonable as between the parties is upon the person who seeks to rely on the agreement, while the onus of establishing that it is contrary to the public interest although it is reasonable between the parties, is on the party so alleging, but commented "The reason for the distinction may be obscure but it will seldom arise since once the agreement is before the Court it is open to the scrutiny of the court in all its surrounding circumstances as a question of law". On this point, lord Pearce said this, at P.323-

"The onus is on the party asserting the contract to show the reasonableness of the restraint. That rule was laid down in the Nordenfelt case and in Herbert Morris Ltd. v. Saxelby." When the court sees its way clearly, no question of onus arises. In a doubtful case here the court does not see its way clearly and the question of onus does arise, there may be a danger in preferring the guidance of a general rule, founded on grounds of public policy many generations ago, to the guidance given by free and competent parties contracting at arm's length in the management of their own affairs. Therefore, when free and competent parties agree and the background provides some commercial  justification on both sides for their bargain, and there is no injury to the community, I think that the onus should be easily discharged. Public policy, like other unruly horses, is apt to change its stance; and public policy is the ultimate basis of the courts' reluctance to enforce restraints. Although the decided cases are almost invariably based on unreasonableness between the parties, it is ultimately on the ground of public policy that the court will decline to enforce a restraint as being unreasonable between the parties. And a doctrine based on the general commercial good must always bear in mind the changing face of commerce. There is not, as some cases seem to suggest, separation between what is reasonable on grounds of public policy and what is reasonable as between the parties. There is one broad question: is it in the interests of the community that this restraint should, as between the parties, be held to be reasonable and enforceable?"

11. And at p.340, Lord Wilberforce had this to say -

"The second observation I would make is this: the case has been fought exclusively on the first limb of the Nordenfelt test of reasonableness (in reference to the interest of the parties) the respondent explicitly disclaiming any reliance on the second limb (in reference to the interests of the public). The first limb itself rests on considerations of public policy: it must do so in order to justify releasing the parties from obligations they have voluntarily accepted. But in relation to many agreements containing restrictions, there may well be wider issues affecting the interests of the public than those which relate merely to the interests of the parties; these may have been the subject of inquiry as in this case under statutory powers (Monopolies and Restrictive Practices (Inquiry and Control) Act, 1948) or the subject of a finding by another court (Restrictive Trade Practices Act, 1956) or nay be investigated by the court itself. In the present case no separate considerations in this wider field have emerged which are inconsistent with the validity of the Mustow Green solus agreement - on the contrary such as have appeared tend to support it, but I venture to think it important that the vitality of the second limb, or as I would prefer to put it of the wider aspects of a single public policy rule, should continue to be recognised."

As both Counsel appearing before us agree, the following passage from the speech of Lord Reid (at p.301) is of particular importance:

"Again, whether or not a restraint is in the personal interests of the parties, it is I think well established that the court will not enforce a restraint which goes further than affording adequate protection to the legitimate interests of the party in whose favour it is granted. This must I think be because too wide a restraint is against the public interest.  It has often been said that person is not entitled to be protected against mere competition. I do not find that very helpful in a case like the present. I think it better to ascertain what were the legitimate interests of the appellants which they were entitled to protect and then to see whether these restraints were more than adequate for that purpose.

12. The cases certainly show that most of the decisions reached by the courts over the years in this area of the law were on the basis of reasonableness between the parties, and it seems to me that the House of Lords in the Esso Petroleum case must be understood to have stressed the importance of the public interest consideration and placed it in its proper context.

13. Before I turn to the submissions made by Mr. Grabiner on behalf of Mr. Bridge, I will make two preliminary observations. Firstly, whether the Covenant can be said to fall within a particular category, or whether, being a covenant in a partnership agreement, it is sui generis, since the relationship of employer and employee is not involved, the cases which merely show the application of the relevant principles where such a relationship was the foundation of the agreement cannot be regarded as of great assistance. I say this because the law is well settled; difficulties arise in its application to particular circumstances, as the many cases cited to us show. Secondly (as I think was common ground) the duty of the court is to examine the Covenant at the date when Mr. Bridge agreed to be bound by it, against the background of the circumstances then subsisting and horn the parties reasonably expected matters to develop, and what happened thereafter is not relevant. It is all too easy during the course of a hearing for this principle to become obscured. It must surely be that a covenant that is valid when it was entered into cannot be rendered invalid on account of the subsequent turn of events.

14. Mr. Grabiner submitted that the test in the Esso Petroleum case applied to the facts, required Deacons to identify and prove a legitimate proprietary interest deserving of the protection afforded by the Covenant. It could be no wider in scope (on a reasonable interpretation) than was reasonably necessary properly to protect that interest. Mr. Bridge was prepared to concede that Deacons did have an interest that it could legitimately protect that interest was those clients of their Intellectual Property Department for whom he had acted in the relevant period or, at most, all clients of that Department including those for whom he did not personally act. The vast majority of Deacons' clients had never utilized the Department. On the evidence there were well in excess of 40,000 client files of which only 4,400 were in the Trade Mark field or were "current" under Mr. Bridge. In 1981 the total of delivered bills of Deacons to clients was HK$132,000,000 of which only some HK$6,000,000 was attributable to the Intellectual Property Department - i.e. about 4.5%.

15. It was also contended that the court, in deciding the question of law involved, had to bear in mind that this was a case of a solicitor becoming a member of an established partnership. Assuming that the original parties to the 1968 Agreement had negotiated on an equal bargaining footing, when Mr. Bridge acceded to the partnership he had been presented with the terms of the Partnership Agreement which were not the subject of any re-negotiation. He had been given 5% of the equity at a time when 74% was held by four of the Partners and 90% was hed by six of the Partners. As is pointed cut in LINDLEY ON PARTNERSHIP (14th Edition) at p. 212 "...although technically amounting to a partnership, the absence of an equity share in the partnership and the absence of significant decision-making power, may exceptionally place a partner substantially in the category of an employee vis-a-vis his co-partners for the present purposes. In cases however, where a restraint has been entered into between partners upon equal terms at the inception of the partnership it would seem that this is an argument for the restraint being upheld". I think it would be wrong to approach this case on the footing that Mr. Bridge was joining a big and well-established firm and buying only a 5% interest. He was a solicitor who had been with the firm (albeit in different capacities) for some seven years before he acceded to the partnership agreement. I see much force in Mr. Hoffman's point that the mutuality of the covenant is the most important consideration. Mr. Bridge was very much equal there. It was as much in his interests at the time be joined the firm to have such a covenant binding all his partners.  If any of the senior partners had left soon thereafter and set up in competition with him they might well have been able to attract many more clients away from the firm than could Mr. Bridge, and his interest would thereby have been substantially diminished. I do rot think it can fairly be suggested that the firm was taking any advantage at all of Mr. Bridge when he became a partner. Although the parties might be said not to have had equal bargaining pourer, he was an experienced professional man dealing with his future partners at arm's length.

16. It was urged upon us on behalf of Mr. Bridge that although he took away with him some $3.5m which was his due on retiring from the Partnership, the trivial sum of $59,000 represented the goodwill he had sold and this could not be regarded as a sale of goodwill that would entitle the firm to protect itself from competition from Mr. Bridge on the principles of the vendor/ purchaser cases. This was not a case (of which Ronbar Enterprises Ltd. v. Green [1954] 2 All E. R. was an example) where the court would recognise that the parties were entitled to enter into a restrictive agreement regarding competition designed to give efficacy to the transaction, to the extent that it was reasonably necessary to enable the purchaser to reap the benefit of what he had bought; "restrictions of that kind are regarded as necessary, not only in the interests of the purchaser, but in the interests of the vendor also, for they not only preserve the value of that which he buys, but also enable the vendor to realise a satisfactory price. It is obvious that in many types of business the goodwill will be well-nigh unsaleable if it was unlawful for the vendor to enter into an adequate covenant against competition" (per Harman J. at p.270).

17. It must be accepted that a covenant which governs the sale of a share in a partnership of this kind is very different from one which affects the run of the mill sale of a business to a successor in a trade. The essential difference here, of course, is the element of mutuality in the Covenant. When a person became bound by it no one could know who might at any given time be the vendor and who the purchaser. However, I do not think that it can be right to focus only upon the amount of $59,000 expressed to be in respect of the goodwill sold in accordance with clause 23 of the main Agreement, and from there successfully maintain that the broad principle which justifies reasonable restrictions upon mere competition in vendor and purchaser cases is not here applicable. In my view Mr. Hoffman was right to ask us to look at the entire picture.  Clause 23  is long and I will not read it out but I have no difficulty in holding that it was not a mere colourable sale of Mr. Bridge's share in the partnership interest. When one bears in mind what a complicated and costly exercise it would be each time a partner retired to value his share in all the assets and goodwill of the partnership it seems to me entirely reasonable that the agreement should fix a notional sum in respect of the figure for work in progress and the goodwill, (including the library, office equipment etc., called in the agreement "the agreed value of the office assets"). Indeed I cannot see how in practice, it could be done in any other way. It has to be noted that Mr. Bridge was also a party to the Supplemental Agreement dated the 24th April 1979 by which, inter alia, the 1968 figures of $500,000 for "work in progress" and $400,000 for the "office assets" were raised respectively to $5m and $lm. Mr. Bridge cannot now be heard to say that the amount he received on withdrawing from the partnership was not a genuine sale of his entire interest in the firm so that he is entitled to some special indulgence on that account. It is well settled that "The court no longer weighs the adequacy of the consideration in any particular case" (per Lord Parker of Waddington in Herbert Morris v. Saxelby, at p.707.)

18. It was a substantial plank in Mr. Grabiner's argument that the size of Deacons and the great number of their clients made an important difference. He suggested that for this reason Deacons might have to bird their Partners by more limited restriction clauses, and the scope of their legitimate interest had been revealed by what Mr. Wimbush had said in his affidavit - the clients connected with Mr. Bridge's specialised work - and to Mr. Bridge at a meeting held on the 10th September 1982: "You can injure Deacons in the area of Trademark work". He also submitted that Deacons had made no effort to produce evidence filling the gap between the clients of Mr. Bridge's Department and those of the firm's other Departments. The absence of this critical evidence was fatal to their case. On this point he relied heavily on a passage from the speech of lord Shaw of Dunfermline in Herbert Morris v. Saxelby, at p.715 -

"My Lords, the question is, can such a voluntary restraint be enforced by law? Observe its scope. In time, it is for seven years of a man's working life. In space, it is over the entire United Kingdom. In subject-matter, it is directly or indirectly and it is wholly, for that time and in that space, subversive of the way of life to which the servant's past special training has led up

This question is legitimate, and it is legitimately so put. For in my view, my Lords, when such an agreed restraint is made the basis of a claim for injunction (1.) it is not enough to table the agreement; (2.) facts and circumstances must be set forth which would warrant the law being invoked, and the statement of these facts and circumstances must set out the specialties affecting the relations of parties, or the particular necessities of the case, so as to overcome the presumption which the law makes in favour of the free disposal of one's own labour; (3.) if such facts and circumstances be relevantly set forth, the onus of proof is upon the party averring them to satisfy the Court of their sufficiency to overcome the presumption; while (4.) as the time of restriction lengthens, or the space of its operation extends, the weight of that onus grows. Subject to these conditions and within these limits, a case may be made out for restraining that general freedom of trade to which the public interest leans in favour of the particular freedom of contract which it may be 'established it was not inconsistent with the general interest to maintain."

19. With respect, about the principle embodied in that passage there can be no doubt. If there are special circumstances which are put forward to justify a particular restriction or its width, evidence is both admissible and necessary but surely Deacon's case cannot fall to the ground because the affidavit evidence filed on their behalf does not expressly say that they were interested in keeping their clients, and explain why. One wonders what could have been said to advance their case in this respects. As Mr. Hoffman has suggested, the fact that Mr. Wimbush identified the firm's main area of concern in a case such as the present does not mean that they cannot rely on a wider self-evident interest. It is difficult to conceive of any professional partnership which is to continue not being anxious to retain their existing clients. The matter it seems to me cannot be approached upon principles applicable to "area" covenants or "master and servant" covenants.

20. As regards the duration of the restriction, Mr. Grabiner submitted that five years was excessive. Deacons had never sought to justify that period (i.e. in terms of client behaviour or the solicitor/client relationship). Deacons had to show that five years was necessary for the legitimate purposes of their business. Five years had no more logic to it than, say, three years except that it heavily favoured Deacons in protecting them against competition for a long time. I am unable to accept this position. I can find no basis for holding that the period agreed to by the Partners was excessive in all the circumstances, and if the Covenant is otherwise valid in my judgment it should not be struck doom on account of its duration. I have not, of course, considered this particular question in isolation but find it convenient to dispose of it at this stage.

21. On what might be called the public interest aspect of the case, Mr. Grabiner accepted that it was desirable that the public should be served by large firms of solicitors such as Deacons, with many specialised departments. It was also desirable that the public should have access to the services of Mr. Bridge because he was one of the very few specialists in Hong Kong in the field of Intellectual Property Law. Accordingly Deacons' legitimate interest in protecting its client connection in the Intellectual Property Department had to be balanced against that public interest. If drawn too widely (as was the case) the Covenant operated substantially as a covenant against competition. This had a particularly striking effect where the covenantee already occupied a predominant position in the market place in Hong Kong for solicitors because it had a substantial number of important local and multi-national clients. This argument was especially significant in relation to Hong Kong where competition should wherever possible be encouraged by the Courts. During the course of his submission Mr. Grabiner also suggested that the position might have been different if Deacons had been a small firm. All the facts and circumstances of a case must, of course, be taken into account, but I am bound to say I can see no justification for applying different criteria to covenants of this kind between solicitors, depending on their prestige and the number of their clients. The effect upon a small and a large firm of the loss of clients must, in proportion, be the same.

22. Mr. Grabiner very properly drew our attention to an unreported decision of the Court of Appeal in England to the effect that an injunction should not be granted so as to prevent a solicitor from acting for a client who wished him to act, on the grounds that the fiduciary relationship between a solicitor and the client makes it contrary to public policy to prevent a person from retaining the solicitor of his choice. This was Oswald Hickson collier & Co. v. Carter-Ruck (20th January 1982). I do not think it necessary to discuss the facts of that case or how Hunter J. dealt with it in the instant case and Walton J. dealt with it in the unreported case of Edwards and Others v. Worboys (18th March 1983). In the unreported judgment of the Court of Appeal, on appeal from Walton J. (25th March 1983). Dillon L.J. said, inter alia -

23. And Sir John Donaldson's short concurring judgment was as follows -

"I agree, and would only add that I regard the decision of this court in Oswald Hickson Collier & Co. v. Carter-Ruck as no more than a decision that there is a serious issue of law concerning the enforceability on grounds of public policy of a covenant which prevents a solicitor from continuing to act for an existing client if and when that client dishes him to act. I do not, and could not, express any view on how that issue should be resolved without hearing full argument of a type which would be quite inappropriate to interlocutory proceedings."

24. With great respect, I do not think that much more can usefully be said about the Oswald Hickson case. It is fair to Mr. Grabiner to note that he acknowledged that it might well now be for the House of Lords or the Privy Council to consider whether the ordinary principles applied to this class of case, laid doom by a long line of authorities, should be modified by a new rule of law regarding covenants in restraint of trade by solicitors and other professional people who have a fiduciary relationship with their clients. Speaking for myself, and leaving the matter open, I am by no means persuaded that the authorities by which this court is bound would permit one to apply such a rule. I respectfully agree with Hunter J. in Hong Kong, and Walton J. in England, that in particular the decision of the House of lords in Fitch v. Dewes [1921] 2 A. C. 158 would seem to present a formidable hurdle. And I may be permitted to ask myself, as did Walton J. what of other professional men and women? Could it be that the public interest could prevent a solicitor from entering into a covenant such as the one before us, and yet allow a doctor to do so? Some might feel that their health is more important than their legal affairs. If the work of solicitors (not in their partnerships but in their individual capacities) is so vital to the public interest it is perhaps surprising that the Law Societies of the Commonwealth have not stepped in to safeguard that interest by prohibiting such covenants.  It might also be remarked that during the last 20 years or so the legislature has greatly reduced the significance of common law rules on restraint of trade to stifle competition by manufacturers and distributors of goods, but has kept out of this area of the law.

25. Both Hunter J. and Walton J. remarked that a solicitor was not bound to accept a particular client. For the present I would say that I see considerable force in this point. It seems to me perfectly proper for a solicitor to refuse to act for a client, and in a case such as this to say "I am sorry I cannot act for you [any more] because I made a solemn promise to my former partners that I would not do so .".

26. As to the actual form of the covenant, I feel that Mr. Hoffman is right to make the point that when anew partner becomes subject to it, it is difficult, if not impossible, to predict how his interests and scope of work will develop. Mr. Bridge clearly demonstrated his particular area of interest and expertise and it is true that it was in relation to this that he was taken on as a full partner, but who could tell what the position might have been if Mr. Bridge had decided, say, to stay on until retiring age, over a quarter of a century later? This mutual covenant had to apply to those who might attract away a large number of clients. I see no merit in the contention that different partners might reasonably have different covenants depending on their particular connections. Whatever their individual ages, abilities, interests, diligence or stature in the community, the essential fact was that they were all partners in a solicitors firm although (as was only to be expected) with different shares. It is against this background that the Covenant must be judged.

27. I have reached the conclusion that Deacons have amply established that the restraint contained in the Covenant go no further than affording adequate protection to their legitimate interests, for these legitimate interests seem to me plainly to extend to keeping all their clients, and not just those who happened to deal with Mr. Bridge, if they can. Mr. Bridge sold out his share in those interests when he left the firm and received a fair price for it. Deacons cannot prevent any of their clients going to any other of the numerous firms (some 180, the latest list published by the law Society tells us) practising in Hong Kong. And Mr. Bridge has a very wide pool of potential clients to draw from. No doubt he has great skill and experience in his chosen field of the law but 1 cannot accept that the former clients of Deacons can only have their legal matters adequately dealt with by coming to him. I can find nothing to justify striking down the Covenant on considerations of the public interest.

28. In my judgment the Covenant can resist all the attacks made upon it and on the authorities it should be upheld. Before I take leave of this case I would mention one matter which caused Mr. Grabiner some concern and that was the risk Mr. Bridge might run in being condemned in contempt of court proceedings by inadvertently breaching the injunction I would in effect uphold. I am bound to say that I am confident that Deacons will do all it can to ensure that Mr. Bridge has all the information he needs to comply with the injunction, where his own knowledge is insufficient. I cannot envisage a real" possibility that a sensible arrangement cannot and will not be worked out.

29. I would dismiss this appeal.

Leonard, V. P. :

30. I agree and have nothing to add.

Cons, J. A.  :

31. I am in full agreement with the judgment Fuad, J. A. has just delivered.

Representation:

Mr. Anthony Grabiner, Q.C., with Mr. Robert Kotewall (Herbert Smith and Co.) for the Appellant.

Mr. Leonard Hoffman, Q.C., Mr. Henry Litton, Q.C., with Mr. Ronny Wong (Lovell, White and King) for the Respondent.