Andreas I. Koumoulis V. Leventis Motors Limited (1973)
LawGlobal-Hub Lead Judgment Report
UDOMA, J.S.C.
In this appeal which is against the judgment of the High Court of Lagos State, two issues fall for decision by this court. The first is: on the facts and circumstances of this case as to whether or not the Covenant contained in Clause 6 of the Agreement of Service dated 19th September, 1967 Exhibit A, in the proceedings between the plaintiffs, now respondents, and the defendants, herein appellants, is too wide and therefore unenforceable in law; and the second is: as to whether or not the amount awarded the respondents as damages in terms of the provisions of Clause 8 of the said Agreement is a penalty and therefore unenforceable in law. By their writ of summons in Suit No. LD/204/70 the respondents claimed against the appellants the sum of 1,000(pounds) as “liquidated damages” for a breach of Agreement of Service. There was also a claim for an injunction.
The facts of the case may be summarised as hereunder appearing as the same are not in dispute, the evidence being all one way, the appellant not having given evidence but had rested his case on the evidence given by the respondents.
The respondents are Automobile Engineers and Merchants dealing in motorcars, lorries and spare parts and have their headquarters at Apapa, Lagos. They sell vehicles for which they have agency and are obliged to store large quantities of spare parts for their maintenance. They have branches in different parts of this country but none in other parts of West Africa.
The appellant, who is a spare parts specialist, was employed by and worked for the respondents as a Spare Parts Sales Manager. His employment was regulated by an Agreement of Service. He was recruited specifically from Cyprus by the respondents to serve them in that capacity for a period of two years from the date of his arrival in this country, at the initial salary of 1,500(pounds) with an additional sum of 100(pounds) per annum, described as a consideration for his acceptance of the Covenant contained in Clause 6 of the Agreement of Service aforesaid; and, in the event of a breach thereof, the appellant agreed to pay to the respondents the sum of 1,000(pounds) described in Clause 8 of the said Agreement as liquidated damages.
Pursuant to the Agreement aforesaid, the appellant arrived in this country and entered into the employment of the respondents on 13th November, 1967 at the agreed salary of 1,500(pounds) per annum; and within a short period of time his salary was increased to 1,750(pounds); and finally by the time the appellant resigned his appointment, he was earning the sum of 2,000(pounds) per annum. In addition, he also regularly received the special annual payment of 100(pounds) in consideration of the Covenant in Clause 6 of the said Agreement. While in the employ of the respondents, the appellant was in full charge of sales operation and had full knowledge of the movement of spare parts. As regards the placing of orders for spare parts overseas on behalf of the respondents for vehicles for which the respondents are agents, the appellant dealt directly with LAFRO organisation, one of the suppliers or sellers of spare parts to the respondents, the other being York Trailer Company Limited of the United Kingdom and Blumhardt Trailer and Spare Parts in West Germany. The appellant was also in possession of the respondents’ trade secrets.
Within 400 yards of the business premises of the respondents at Apapa, there is established another company known as the Nigerian Technical Company Limited, which is also engaged in the same line of business as the respondents. The Nigerian Technical Company Limited deals in motor cars and lorries and, especially for the purpose of this appeal, in spare parts of the make and type of cars of which the respondents are agents. During the time the appellant was in the employ of the respondents, it not infrequently happened that the respondents used to buy spare parts from the Nigerian Technical Company Limited. Now both the respondents and the Nigerian Technical Company Limited are competitors or rival in business, and sometimes compete for agencies from Overseas’ Dealers.
The appellant by notice dated 5th December, 1969 resigned his appointment. The resignation took effect on 31st December, 1969.
The appellant left this country on 7th January, 1970 but within three weeks he was back working for the Nigerian Technical Company Limited, in their premises situate as already stated at about 400 yards away from the business premises of the respondents at Apapa.
In the ordinary course of business, the respondents received from the Nigerian Technical Company Limited Exhibits F and G, both of which were signed by the appellant. Exhibit F is a letter. It is headed, “Re: Original Spare parts for ZF Gear Boxes, AK-6-55.” Attached thereto there is what is described as “A Comprehensive List of Spare Parts in ZF and Mercedes Benz Parts Nos. with our Net Prices.” Exhibit G is also a letter. It is headed “Re: Spare Parts for York Trailer.” It reads:-
“We have been advised by York Trailer Co. Ltd., that you placed your order No. NE/7858 dated 11/8/70 for the items which are available ex our Central Stores Department via your London Office.
2 TB 5 Hook
4 T A 20 Bearing Bolt
2 TA 35 Bearing Nut
We ask you to kindly place your future order direct with us for immediate supply ex stock.
Thanking you for your co-operation.
Yours faithfully,
NIGERIAN TECHNICAL COMPANY LIMITED”
It was the two letters, Exhibits F and G, which alerted the respondents not only as to the presence of the appellant in this country but also that he was in fact working for the Nigerian Technical Company Limited.
The respondents were surprised to receive the letters for two reasons. Firstly, because just at the time when the appellant was about to leave this country, the respondents were negotiating to the knowledge of the appellant with LAFRO for an Agency for ZF transmissions. They were bewildered to find that that agency had been secured by the Nigerian Technical Company Limited.
Secondly, when the appellant was in the employ of the respondents, the respondents used to get their supplies of spare parts from Trailers Overseas directly but now they were being told (which is the purpose of Exhibit G) that thenceforth they were to get their supplies through the Nigerian Technical Company Limited, Apapa. There then followed a series of correspondence between the respondents and the appellant which culminated in the suit, the subject of this appeal.
At the trial before Lambo, J. in the High Court, respondents, as already stated, alone gave evidence. The learned trial judge reviewed the evidence and accepted the case put forward by the respondents on the facts. He then examined the issues of law upon which the appellant had placed much reliance. He rejected the same. He entered judgment for the respondents and awarded them damages in the sum of 1,000 pounds and costs. The claim for injunction was refused on the ground that at the time of the judgment the time stipulated in the Agreement had almost expired. This appeal is against that judgment.
It was submitted by Mr. Bentley, learned counsel for the appellant, that the learned trial judge was wrong in law in failing to hold that the Covenant contained in Clause 6 of the Service Agreement, Exhibit A, is too wide and therefore unenforceable in law; for whereas the appellant had served but in one station the restriction in the Covenant related to any station wherever the respondents are established in West Africa. Learned counsel then contended that the Covenant is unreasonable as it cannot be said to be necessary for the protection of the respondents’ business, there being no specific finding in the judgment appealed against as to the trade secrets which had been acquired by the appellant while in the employ of the respondents; and further that the area of operation covered by the Agreement is West Africa whereas the appellant only served in Lagos, Nigeria. In support of this contention, learned counsel cited and relied upon a number of authorities, some of which we propose to examine in the course of this judgment, as all of them would appear to establish virtually the same principles of law.
The Covenant, the terms whereof are said to be too wide, is contained in an agreement which is in a printed form. The terms are as follows:-
“Upon the determination of his employment for any cause or by any means whatsoever the Employee shall not for a period of one year next thereafter undertake to carry on either alone or in partnership nor be employed or interested directly or indirectly in any capacity whatever in the business of Merchants Engineers or any other business carried on by the Company within a radius of fifty miles from any Trading Station in West Africa which is now or shall at any time during his employment or owned or managed by the Company and will not during the like period and within the same area either personally or by his agent or by letters, circulars, or advertisements whether on his own behalf or any other person, firm or company compete or seek to complete with the Company in any such business as aforesaid nor in any way interfere with any of the Company’s business or affairs or customers of the Company which may have been acquired by him in the course of or as an incident to his employment hereunder for his own benefit or to the detriment of the Company or intended probable detriment.”
The covenant, the particulars whereof are set out above is certainly in restraint of trade and is therefore governed by certain legal principles. Generally all covenants in restraint of trade are prima facie unenforceable in common law. They are enforceable only if they are reasonable with references to the interest of the parties concerned and of the public (See Esso Petroleum Company limited v. Harper’s Garage, (Stockport Ltd.) 1967 2 W.L.R. 871).
In the oft-quoted passage of the judgment of Lord Macnagten in Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Company Limited (1894) A.C. 535, at p. 536-a passage which has been referred to with approval in almost all the cases cited to us by learned counsel, the principle governing the validity or invalidity of a contract in restraint of trade has been stated as follows:-
“The true view at the present time, I think is this: The public have an interest in every person’s carrying on his trade freely: so has the individual. 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 cirumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable-reasonable, that is, in reference to the interest of the parties concerned and reasonable in reference to the interest 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 way injurious to the public.
That, I think, is the fair result of all the authorities.”
In interpreting the above passage of the judgment, Lord Atkinson in Herbert Morris Limited v. Saxelby (1916) A.C. 688 said at page 700 as follows:
“If it be assumed, as I think it must be, that no person has an abstract right to be protected against competition per se in his trade or business, then the meaning of the entire passage would appear to me to be this. If the restraint affords protection to the person in whose favour it is imposed nothing more than reasonable protection against something which he is entitled to be protected against, then as between the parties concerned the restraint is to be held to be reasonable in reference to their respective interests, but notwithstanding this the restraint may still be held to be injurious to the public and therefore void; the onus of establishing to the satisfaction of the judge who tries the case facts and circumstances which show that the restraint is of the reasonable character above mentioned resting upon the person alleging that it is of that character, and the onus of showing that, notwithstanding that it is of that character, it is nevertheless injurious to the public and therefore void, resting, in like manner on the party alleging the latter.”
We think we are right in stating that in relation of master and servant it is a well established principle of law that a covenant in restraint is viewed by the courts with the utmost jealousy. It is therefore the employer who seeks to enforce it against the servant to show that it is designed for the protection of some exceptional proprietary interest of the employer. If the covenant affords adequate protection to the covenantee, the requirement that it must be reasonable in the interest of the parties is satisfied as the court will not enquire into the adequacy of the consideration for the covenant. And depending on how the covenant is framed, an employer can lawfully prohibit the employee from setting up on his own, or accepting a position with one of the employer’s competitors, so as to be likely to destroy the employer’s trade connection by a misuse of his acquaintance with the employer’s customers or clients. (See Commercial Plastics Limited v. Vincent 1965 1 QB 623, 640). The general law relating to a breach of confidence prohibits ex-employees from using information which “can fairly be regarded as a separate part of the employees stock of knowledge which a man of ordinary honesty and intelligence would recognise to be the property of his old employer and not his own to do as he likes with.” (Printers and Finishers Limited v. Halloway (1965) 1 W.L.R. 1.5).
It was argued by learned counsel that there was no definite finding by the court as to the specific trade secrets concerning the respondents’ business which had been acquired by the appellant while employed by the respondents and that, in any case, the area of operation of the respondents being West Africa as provided for in the Agreement, the Covenant was too wide. The short answer to this is that there was uncontradictory evidence that the appellant as a Spare Parts Sales Manager dealt directly on behalf of the respondents and as their agent with customers of the respondents both Overseas and in this country. He was in possession of the respondents trade secrets and soon after his resignation and departure from this country the respondents lost Overseas Agencies for which they were negotiating to their rivals, the Nigerian Technical Company Limited and thereafter they were advised in letters signed by the appellant to deal with their competitor based about 400 yards away, by whom the appellant was then employed. That evidence was accepted by the learned trial judge. Surely, the inference that the appellant had something to do with the sudden change as regards the respondents’ dealers or suppliers is irresistible.
In Commercial Plastics Limited v. Vincent (supra) it was held that even though it was difficult to classify any particular item of information in the (then) plaintiff’s possession as being confidential (other than information contained in document which can be protected by other appropriate legal remedies), the fact that the (then) defendant could probably remember in general in relation to any matter concerning in that case, adhesive tape, what was the problem and what was the solution, what experiments were made and whether the results were positive or negative, meant that the plaintiffs had confidential information capable of being protected by a suitably drafted condition or covenant in restraint of trade.
In Miller, Lim v. Steedman (1915) 84 LJKB 2057-an authority relied upon by the learned trial judge-the agreement therein concerned has spoken of West Africa, but the evidence was that the company involved was only operating in the Gold Coast Colony and Ashanti and that both parties had in their contemplation at the time of executing the contract the Gold Coast Colony and Ashanti, it was held that the covenant was valid and enforceable in law. In the present case, although the Agreement spoke also of West Africa, the undisputed evidence accepted by the court was to the effect that the respondents and the appellant understood as well as contemplated that the Covenant should only operate in this country as the respondents have no branches outside this country.
In order to give effect to it, the Covenant must be read not in isolation but within the con of the Agreement as a whole and in the light of the evidence as to what had been in the contemplation of the parties at the time of the execution of the Agreement and as to the object to be attained by the inclusion of the Covenant in the said Agreement. On the evidence it is not disputed that the appellant was employed as Spare Parts Specialist Manager to work in this country where the respondents operate. It is also common ground that when employed by the Nigerian Technical Company Limited, the appellant was dealing with spare parts and it was in the capacity of someone dealing in spare parts that he addressed Exhibits F and G to the respondents.
In the passage in the judgment of Sir Nathaniel Lindley, M.R., in Haynes v. Doman (1899) 2 Ch. 13. which was quoted with approval by Harman, L.J. in Home Counties Dairies Limited v. Skilton (1970) 1 W.L.R. 526, Sir Nathaniel Lindley had said at p. 25:-
“Agreements in restraint of trade, like other agreements, must be construed with reference to the object sought to be attained by them. In cases such as the one before us, the object is the protection of one of the parties against rivalry in trade. Such agreements cannot be properly held to apply to cases which, although covered by the words of the agreement, cannot be reasonably supposed ever to have been contemplated by the parties, and which on a rational view of the agreement are excluded from its operation by falling, in truth, outside, and not within, its real scope.”
We are of the opinion that none of the authorities cited to us and relied upon by learned counsel on this aspect of the appeal is of assistance to the appellant. In almost all of them there are dicta which support the judgment of the learned trial judge. It is not even clear why Mouflet v. Cole (1872) 8 Exch. 32, which deals with the measurement of distance was ever quoted as in support of the contention of learned counsel, whereas there the covenant was held to be enforceable, the distance therein disputed being measured not as the ‘crow flies’.
In Home Counties Daires Ltd. v. Skilton (supra) a printed agreement made in July, 1965 between dairymen and Skilton, a milk roundsman in their employ, set out the terms of service of the employee and also provided by Clause 15 thereof a covenant in the following terms:-
“The employee expressly agrees not at any time during the period of one year after termination of his employment either on his own or as representative or agent of any person or company, to serve or sell milk or dairy produce to any person who at any time during the last 6 months of his employment shall have been a customer of the employer and served by the employee in the course of his employment. ”
The goodwill of the business was subsequently sold to the Home Counties Dairies Limited, another dairy company, who agreed to employ all the former employees. Under the agreement selling the business, the benefit of all employment agreements with those employees was assigned to the purchasers, Home Counties Dairies Limited. Skilton, however, left the service of his employers (the vendors) and shortly thereafter was employed by another dairy company, engaged in dairy business in the same district. He immediately started to operate a milk round covering the same area as the one in which he had worked while in the employ of his former employers. Home Counties Dairies Limited (as equitable assignees) and his former employer brought an action for an injunction to restrain Skilton from breaking the covenant contained in his service agreement, the terms whereof are set out above, and also to restrain his new employers from procuring the breach of the said covenant. On a motion for the injunction which was treated as a trial of the action, the learned judge held that the covenant, covering as it did the sale and service of “dairy produce”, prevented Skilton from entering the employment of a grocer who sold such produce as butter and cheese and was in consequence beyond the protection of the goodwill of the employer’s business and therefore void. The injunction was refused.
The plaintiff appealed on the ground, inter alia, that the learned judge had misdirected himself in law. At the hearing of the appeal the defendant sought unsucessfully to support the decision of the learned judge on other grounds. The judgment of the learned judge was reversed and the appeal allowed on the grounds, inter alia:-
(1) that the covenant must be read within the con of the whole agreement which, on its true construction, was for the employment of a milk roundsman by dairy men; and so read, its clear intention was to afford the employer protection for the goodwill of his business against the activities of an employee who, after leaving his employment, had engaged in dairy business on his own account or in the employ of another dairy business; and
(2) that the restriction of Skilton from serving customers whom he had himself served during the last six months of his employment with his former employer was plainly intended only to protect the employer’s trade connection, and in the circumstances of the case the restriction was to last no longer than was reasonably necessary for the protection of the employer.
We think that the principles enunciated and applied by the Court of Appeal in England in the above case apply with equal force to the case on appeal under consideration, although as a general rule, each case must be decided on its own facts and the case on appeal concerns a Spare Parts Specialist Manager and not a milk roundsman, and the claim which succeeded was for damages and not for injunction. In either case, however, the defendant, whether as a Spare Parts Manager or a milk roundsman had to deal with customers and the covenant was to operate for only one year. On the facts of the case in hand, we are satisfied and hold that the learned trial judge came to a right conclusion and was justified, on the evidence, when he held that the covenant, the subject matter of complaint in this appeal was reasonably necessary for the protection of the business interest of the respondents and therefore valid and enforceable in law.
The next point argued before us raises the issue of the distinction between liquidated damages and penalty; and it was submitted that the sum of 1,000(pounds) awarded by the learned trial judge to the respondents as damages was in the circumstances of the case such as to be presumed to be a penalty; and that the learned trial judge was in error to have treated the same as liquidated damages. The ground for this submission was that there was no proof of damages suffered; no evidence that it was a pre-estimate of the damages to be suffered in the event of any breach of the covenant; and that since the amount fixed in the agreement is made payable in respect of “an infinite number of events” the presumption must be that it is a penalty, that presumption not having been rebutted. Campagne Francais L’Afrique de Occidentale v. George Leuba 3 N .L.R. 67 was cited as the authority for the proposition that the sum awarded was a penalty.
In our view the case above mentioned is distinguishable from the case on appeal. The covenant concerned in the former case was rightly held by the Full Court to be too wide and unreasonable and therefore void. It was in fact too wide compared with the covenant under examination. According to the covenant in this case, the servant bound himself:
“not to take part under any title (patron, partner, partly interested or clerk) in any commercial or industrial enterprise in West Africa during a period of twelve months from the moment when, for any reason whatever he ceases to be a member of the staff of the company: this interdiction being however limited to the Colony or Colonies, Protectorates and Territories where he may have been employed for account of the Company during the three last years. In case of infringement of this agreement the contracting employee will be liable to the Company for an indemnity equal to twelve times the amount of his last month’s salary in the service of the company.”
This part of the covenant set out above may be contrasted with the relevant part of the covenant in the case on appeal, which reads:-
“The employee shall not for a period of one year next thereafter undertake to carry on either alone or in partnership nor be employed or interested directly or indirectly in any capacity whatever in the business of Merchants, Engineers or any other business carried on by the Company within a radius of fifty miles from any trading station … owned or managed by the company.”
In addition to the differences in the two covenants, both the Divisional Court which tried the case involving the former covenant as well as the Full Court which heard the appeal thereon held that the evidence which was led had no weight at all in that it was most scanty and therefore not of assistance to the court for the purpose of determining the reasonableness of the covenant.
Reference was also made to the Union Trading Company Limited v. Walter Hauri 6 W.A.C.A. 148 but there the ratio decidendi was that there was no consideration for the covenant, the subject matter of complaint.
We agree with Mr. Majekodunmi, learned counsel for the respondents; that Dunlop Pneumatic Tyre Company Limited v. New Garage Motor Company Limited (1915) A.C. 79 wherein most of the authorities dealing with the distinction between liquidated damages and penalty were reviewed by the House of Lords appear to have established principles which are relevant and applicable to the case on appeal. There it was held that where a simple sum is agreed to be paid as liquidated damages on the breach of a number of stipulations of varying importance, and the damage is the same in kind for every possible breach and is incapable of being precisely ascertained, the stipulated sum, provided it is a fair pre-estimate of the probable damage and not unconscionable, will be regarded as liquidated damages and not a penalty.
In dealing with this matter, Lord Dunedin in his judgment said at p. 86: “I shall content myself with stating succinctly the various propositions which I think are deducible from the decisions which rank as authoritative:-
- Though the parties to a contract who use the word ‘penalty’ or ‘liquidated damages’ may prima facie, be supposed to mean what they say, yet the expression used is not conclusive. The court must find out whether the payment stipulated is in truth a penalty or liquidated damages. This doctrine may be said to be found passim in nearly every case.
- The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage, (Clyde Bank Engineering and Ship Building Co. v. Don Jose Ramos Yzquierdo y Castaneda (1905) A. C.6).
- The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract not as at the time of the breach. (Public Works Commissioner v. Hills (1906) A. C. 368; and Webster v. Bosanquet (1919) A. C. 394).
- To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are:
(a) It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach. (Dlustration given by Lord Halsbury in Clydebank Case).
(b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid (Kemble v. Farren 6 Bing 141). This though one of the most ancient instances is truly a corollary to the last test. Whether it had its historical origin in the doctrine of the common law that when A promised to B a sum of money on a certain day and did not do so, B could only recover the sum with, in certain cases, interest, but could never recover further damages for non-timeous payment, or whether it was a survival of the time when equity reformed unconscionable bargains merely because they were unconscionable-a subject which most exercised Jessel M.R. in Wallis v. Smith 21 Ch D. 243-is probably more interesting than material.
(c) There is a presumption (but no more) that it is a penalty when ‘a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage’ (Lord Watson in Lord Elphinstone v. Monkland Iron and Coal Co. 11 App Cass 332).
On the other hand:
(d) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties (Clydebank Case, Lord Halsbury (1905) A.C. at p.11: Webster v. Bosanquet, Lord Mersey (1912) A.C. at p. 398).”
It is obvious that it is only test (d) which is applicable to the circumstances of the case on appeal. We are satisfied that the learned trial judge was right in holding that the amount stipulated in Clause 8 of the Agreement between the appellant and the respondents is liquidated damage and not a penalty. There is not a title of evidence that the sum was fixed in terrorem; or that it was payable in default of the payment of a sum of money; or that it is extravagant or unconscionable.
In all the circumstances of this case all the grounds of appeal argued before us must and do fail. It follows that the appeal also fails. It is dismissed with costs assessed and fixed at N74.00.
SC.250/1971
