Emissions Control: Clearing the air on NDAs, Non-Compete Clauses, and solicitors’ undertakings

18 October 2021

Harcus Sinclair LLP and Anor v. Your Lawyers Ltd [2021] UKSC 32

Summary

The UK Supreme Court has clarified that when assessing the legitimate interests of the beneficiary of the restraint, the Court can take into account both the terms of the contract and the parties' objectives, intentions, or contemplation of their future relationship at the time when the contract was made.

This case also has significant implications for the legal profession as the court authoritatively discussed the nature and enforceability of solicitors' undertakings and set out certain obiter observations on issues such as its inherent supervisory jurisdiction over law firms and incorporated bodies (such as LLPs) offering legal services, and on public policy in relation to contracts and solicitor’s undertakings.

Facts

The disputes arose from group litigation initiated against the Volkswagen Group ("VW") in relation to the allegation that it had installed “defeat devices” to manipulate the results of tests for emissions standards, referred to by the UKSC as the “Volkswagen emissions scandal”.

In January 2016, the appellant Your Lawyers ("Your Lawyers") issued a claim against VW with the intention to apply for a Group Litigation Order ("GLO"). Your Lawyers, reached out to Harcus Sinclair LLP ("Harcus Sinclair") for collaboration and sent a draft non-disclosure agreement ("NDA") to Mr Parker (“P”), a solicitor at Harcus Sinclair. The NDA contained a non-compete clause stating that Harcus Sinclair undertook “not to accept instructions for or to act on behalf of any other group of Claimants in the contemplated Group Action” without the express permission of Your Lawyers. P signed the NDA "for and on behalf” of Harcus Sinclair, and without reading it. Your Lawyers then started sharing confidential information with Harcus Sinclair, but no formal collaboration agreement was ever reached.

Harcus Sinclair later recruited a group of VW emissions claimants without the knowledge of Your Lawyers. It also shared confidential information, and agreed to collaborate, with another law firm. Your Lawyers claimed that Harcus Sinclair had breached the non-compete undertaking, and that such was a solicitor’s undertaking. Subsequently, Your Lawyers sought an injunction against Harcus Sinclair.

At first instance, the High Court found that Harcus Sinclair was in breach of contract and imposed an injunction requiring them to cease acting in the emissions litigation for six years. The Court of Appeal reversed the decision and discharged the injunctions, holding that the non-compete undertaking was unenforceable as an unreasonable restraint of trade. Your Lawyers appealed to the Supreme Court.

The Supreme Court unanimously allowed the appeal. Lord Briggs, Lord Hamblen and Lord Burrows jointly gave the sole judgment, with which Lord Lloyd-Jones and Lady Arden agreed.

Did the non-compete undertaking constitute an unreasonable restraint of trade?

It was clear and undisputed that the non-compete clause engaged the doctrine of restraint of trade. The question was whether the restraint of trade was reasonable. To determine that issue, two legal principles had to be applied:

(1) The promisee (Your Lawyers) had to establish that the non-compete undertaking was reasonable as between the parties by showing that (i) the undertaking protected its legitimate interests; (ii) it went no further than was reasonably necessary to protect those interests; and (iii) the restriction was commensurate with the benefits secured to the promisor under the contract.

(2) If so, the promisor (Harcus Sinclair) would have to establish that the non-compete undertaking was unreasonable as being contrary to the public interest.

When considering reasonableness, the critical question was whether Your Lawyers' legitimate interest was limited to the NDA provision. The Court, having considered various authorities including the “most important cases” of Allan Janes LLP v. Johal [2006] EWHC 286 (Ch.); [2006] ICR 742 and Egon Zehnder Ltd v. Tillman [2017] EWHC 1278 (Ch.), held that the courts could also take into account the parties' non-contractual intentions, or what they contemplated would occur as a consequence of entering into the contract at the time the contract was made.

In the present case, Your Lawyers had legitimate interests to protect through the non-compete undertaking, which flowed from the intended informal collaboration. Hence, it was logical and necessary for the non-compete undertaking to last for 6 years (which would roughly equate to the limitation period for claims in the emissions litigation), and the restriction was commensurate with the benefits to Harcus Sinclair secured under the contract, and was reasonable between the parties. Their Lordships also recognised the force in Your Lawyers’ submission that a non-compete undertaking might be needed even if one were just protecting confidential information, since that undertaking might usefully protect confidential information without the need to prove what is confidential information, and the misuse of such, through litigation.

The court hence reversed the Court of Appeal's decision and concluded that clause was not unreasonable as being contrary to the public interest. In passing, their Lordships also observed that while there is some similarity between the principles governing contracts in restraint of trade and those governing contracts affected by illegality as laid down in Patel v. Mirza [2017] AC 467, it is preferable to treat the former as separate from the latter as the former are well-established, mostly self-contained and already reflect the type of flexibility that Patel v. Mirza had brought to the law on contracts affected by illegality. However, Hong Kong practitioners will be aware that the question of whether the approach in Patel v. Mirza applies in Hong Kong has been said to be a matter for review by the Court of Final Appeal.[1]

Was the non-compete undertaking a solicitor’s undertaking?

The mere fact that the undertaking was given by a solicitor did not make it a solicitor's undertaking, for the test was whether the undertaking was given by the solicitor in his or her "capacity as a solicitor". It was the fact that the undertaking was given professionally that would engage the court's supervisory jurisdiction.

To determine whether an undertaking was given in the solicitor’s "capacity as a solicitor", relevant factors would include whether it was given in connection with a transaction involving a client, whether it was given to the court or a third-party, whether the solicitor was acting on instructions, and whether the solicitor was acting in a personal or business capacity, rather than in a professional capacity. The court then held, as a matter of further guidance, that in answering the question it would be helpful to consider two questions:

(1) the subject matter of the undertaking, and whether what the undertaking required the solicitor to do was something which solicitors regularly carry out (or refrain from doing) as part of their ordinary professional practice; and

(2) the reason for the giving of the undertaking, and the extent to which the cause or matter to which it relates involves the sort of work which solicitors regularly carry out as part of their ordinary professional practice.

If both questions were answered affirmatively, then the undertaking would likely be a solicitor's undertaking.

Their Lordships then held that the non-compete undertaking was not a solicitor’s undertaking. Rather, it was a business arrangement, being an undertaking given by Harcus Sinclair in a business, rather than a professional, capacity, as the subject matter of the undertaking was a promise not to compete with another law firm, which did not involve the sort of work that solicitors undertake not to do as part of their ordinary professional practice (as solicitors are in practice to carry out work, and as it was difficult to conceive of circumstances where a non-compete undertaking could ever be given on behalf of a client). Moreover, the undertaking was given to further the parties’ business interests, rather than those of any client.

Did the court's supervisory jurisdiction over solicitors apply to Harcus Sinclair or to Mr Parker, if the non-compete undertaking was a solicitor's undertaking?

Given their Lordships’ conclusion on the first issue above, it was unnecessary for the court to discuss whether the undertaking could have been enforced against Harcus Sinclair or Mr Parker. However, the court addressed the question as it was one of general public importance given the significant structural role played by solicitors' undertakings in the smooth and efficient transaction of legal business, particularly litigation and transactions.

The court suggested that the correct question to be asked was not merely whether its inherent supervisory jurisdiction applied, but whether such jurisdiction should be extended to cover all or some of the incorporated bodies (such as LLPs, of which Harcus Sinclair was one) which were authorised to provide solicitor services.

While the court confirmed that its inherent jurisdiction applied to solicitors because of their status as officers of the court (pursuant to Assaubayev v Michael Wilson & Partners Ltd [2014] EWCA Civ 1491; [2015] PNLR 8), it also reluctantly decided that it was not an appropriate occasion to decide whether that jurisdiction should be extended to incorporated law firms given that any views expressed would only have the force of obiter dicta, the lack of submissions from professional or regulatory bodies with a legitimate interest (such as the Law Society and the Solicitors' Regulation Authority), and as in their view the question was better addressed by legislation.

As matters stood, the Supreme Court agreed that the non-compete undertaking would not have been enforceable against Harcus Sinclair even if it had been in the nature of a solicitor’s undertaking, as Harcus Sinclair was not an officer of the court. Similarly, the non-compete undertaking would not have been enforceable against Mr Parker as he gave it on behalf of Harcus Sinclair, instead of in his own personal capacity. For, unlike an undertaking given by a solicitor expressly on behalf of an ordinary unincorporated partnership, an undertaking given on behalf of a solicitors’ LLP would result in the solicitor dropping “out of the picture” due to the LLP’s separate legal personality, and limited liability.

The Court also made some obiter observations on the operation of public policy in relation to non-compete clauses, whether contained in a contract or in a solicitors’ undertaking.

Key takeaways

Practitioners should be aware that:

- It is possible to enforce a restrictive covenant contained in an NDA. Furthermore, a non-compete undertaking may usefully protect confidential information, with the potential added benefit of avoiding litigation on the need to prove what information is confidential, and whether such has been misused.

- In determining the legitimate interests of the promisee, one can take into account what the parties objectively intended or contemplated, consequent on the contract, at the time the contract was made as well as the contract terms.[1] However, it remains to be seen to what extent the Hong Kong Courts will follow this, given the UKSC’s favourable comparison of the law on restrictive covenants with the flexible approach in Patel v. Mirza (which has yet to be adopted in Hong Kong).

- The considerations in determining whether a non-compete agreement is a solicitor’s undertaking include the subject matter of the undertaking, the reason it was given, and its relation and requirements when compared to a solicitors’ ordinary professional practice.

- As the court's inherent supervisory jurisdiction (see s. 3 Legal Practitioners Ordinance) does not extend to cover incorporated bodies authorised to provide legal services (such as LLPs), practitioners should (at least until the legislature is updated) consider seeking personal undertakings from individual solicitors, as well as, or in the alternative to, the LLP for which he or she acts.

- There is obiter which suggests that solicitors’ undertakings, although not contractually binding, are generally subject to the rules of public policy in relation to contract law.

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[1] See inter alia Arrows Ecs Norway AS [2018] HKCFI 975 [28] per Chow J. (as he then was) and related cases as discussed in the 3rd Edition (2018) of A Word of Counsel in Back for good? Can it be said that all forms of illegality are sufficient to defeat the Change of Position Defence to Unjust Enrichment Claims? by Anson Wong S.C. and Connie Lee and in the 2nd Edition (2018) of A Word of Counsel in A change of direction by the Court in favour of filial piety? by Yang-Wahn Hew, John Hui and Alvin Tsang.

[2] This approach is consistent with the decision in Egon Zehnder Ltd v. Tillman, in which Mann J said "one has to go further and look at what was in the contemplation of both parties". Our Case Report on the subsequent appeal to the UKSC was published in the 3rd Edition (2019) 7th Issue of A Word of Counsel in When will severance pay? Exploring the limits of the blue-pencil doctrine.

 

Yang-Wahn Hew, Sharon Yuen, and Howse Williams’ Patricia Yeung co-authored this Case Report.

  

 

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