Gilford Motor Company, Limited v. Horne(1933) Ch. 935 : [1933] All Er Rep. 109(CA)

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Case Summary

Full Case Details

The plaintiff company bought the various parts of motor vehicles from manufacturers,
assembled the parts on the company’s premises and sold the products under the name of
Gilford Motor Vehicles. They also sold separate parts which were handed over to the buyers
for cash. By an agreement dated May 30, 1929, the defendant was appointed managing
director of the plaintiff company for a term of six years from September 1, 1928. Clause 9 of
the agreement provided that: “The managing director shall not at any time while he shall hold
the office of a managing director or afterwards solicit, interfere with or endeavour to entice
away from the company any person, firm, or company who at any time during or at the date
of the determination of the employment of the managing director were customers of or in the
habit of dealing with the company.” The employment of the defendant as managing director
was determined in November 1931, by an agreement between the parties under which the
defendant was to receive a fixed sum payable in instalments. Shortly afterwards the defendant
opened a business for the sale of spare parts of Gilford vehicles. In an action by the plaintiff
company to enforce the covenant:
Held (by Farwell J.), that persons buying spare parts from the plaintiff company, paying
for them in cash and taking them away, would be included in the covenant; that the defendant,
as managing director, would not come into contact with those customers and would not know
them or their names and addresses and that, therefore, the covenant was too wide.
Held, by the Court of Appeal (reversing the decision of Farwell J.), that in the
circumstances the covenant was not wider than was reasonably necessary for the protection of
the plaintiff company’s trade and was therefore enforceable by injunction.
For the defendants. The covenant is too wide to be enforceable. The plaintiffs sell spare
parts to strangers, who pay cash for and take the spare parts away with them. Any strangers
who bought spare parts in this way several times would come within the meaning of persons
“in the habit of dealing with the company”. The defendant, as managing director, would not
come into contact with customers of that class and would not know them, and might therefore
quite innocently solicit their customers. That renders the prohibition unreasonable and makes
the whole covenant bad. The tendency of the Courts is to be strict in their consideration of
these restrictive covenants and to enforce only those which are formed for the protection of
employers and are not unreasonable or too wide.
LORD HANWORTH, M.R. – In this case a business was carried on by the Gilford Motor
Company, Ltd., which had a registered office in Holloway Road, London, and a
manufacturing place in Green Lanes, High Wycombe. The business that was carried on was
this: they sold motors which were assembled by them, but they were not in fact the actual
manufacturers of the whole of the motors thus sold; it was rather that they assembled and then
completed the motors that they sold and were able to supply spare parts for these Gilford
motor-cars. The defendant, Edward Bert Horne, in May, 1929, was of primary importance in
the business, and on that date the company made an agreement with him whereby he was
appointed a managing director, with a right to hold that office for a term of six years from
September 1, 1928; that is to say, the span for which he was engaged terminated on

September 1, 1934. There were the usual clauses in that agreement. The managing director
was to devote his whole time and attention and abilities during business hours to the company
and the business of the company; he was entitled to certain holidays; he was entitled to a
remuneration of £1,250 a year and to a certain percentage on the profits; and during that time
he was not to be, directly or indirectly, in any capacity except as a shareholder, interested in
any business or company other than the Gilford Company. Then it was provided by clause 9
in terms as follows: “The managing director shall not at any time while he shall hold the
office of a managing director or afterwards solicit, interfere with or endeavour to entice away
from the company any person, firm, or company who at any time during or at the date of the
determination of the employment of the managing director were customers of or in the habit
of dealing with the company, and also will not at any time within five years from the
determination of this agreement, either solely or jointly with or as agent for any other person,
firm or company, be engaged, directly or indirectly in any business similar to that of the
company within a radius of three miles from any premises wherein the business of the
company shall for the time being be carried on.” Now it is the interpretation to be given to
that clause 9, which has to be decided between the parties in this action, and it is the first part
of that clause, of which I have read both limbs, which is in question. What happened was this.
Difficulties arose between the company and Mr.Horne, and letters passed on November 17,
1931, that is approximately some three years before the termination of the span for which the
managing director was employed. The letters that passed were to this effect, that Mr. Horne
tendered his resignation as a director and joint managing director of the company “on terms as
arranged with you today”, and those terms are set out, that there is to be a total of £1,500.;
paid to Mr. Horme by instalments of three separate sums of £500.; and he concludes the
letter: “I agree to accept in full discharge of all sums due to me by the company including
compensation for cancellation of my joint managing director’s agreement.” The reply of the
same date was an acknowledgment of the letter tendering the resignation and stating the
Board had accepted the resignation to operate “from to-day”, and it is recorded in a minute of
that same day that the Board resolved to accept the resignation as a director and joint
managing director of the company on terms as arranged in accordance with the letter handed
in and signed by Mr. E.B. Horne. After that resignation took effect Mr. E.B. Horne
established a business and carried it on at his own home, 170, Hornsey Lane, Highgate, and
the business he had was one carried on by “E.B. Horne”, and there is no doubt that his
business was one of supplying spare parts and service for all models of the Gilford vehicles.
Having established himself, or attempted to establish himself, in that way as “E.B. Horne”, he
became anxious as to whether or not what he was doing was in contravention of the
agreement which he had entered into and to which I have referred, and so it was that on
March 29, 1932, his solicitor wrote this letter to the Gilford Motor Company: “Dear Sirs, I am
acting for Mr. E.B. Horne, the late joint managing director of your company, and I understand
that he entered into certain agreements with your company as to service and for sale. As I am
desirous of advising him upon the terms of these agreements, I shall be glad if you will be
good enough to forward copies to me, and accept this letter as my undertaking to pay your
reasonable charges for such copies. Yours faithfully, J.R. Cort Bathurst.” The reply on March
30 was: “We are in receipt of your letter of yesterday’s date, and in reply would inform you
that Mr. E.B. Horne’s copy of the original service agreement with this company was left with

the writer for safe custody; therefore we have pleasure in enclosing it herewith.” Thus the
solicitor was on March 30 placed in possession of the agreement of which I have read some
and indicated other portions of the terms. Following upon that reply of March 30, 1932, on
April 8 a limited company under the title of “J.M. Horne” was incorporated. It was
incorporated as a private company. The paper which had been previously “E.B. Horne” was
altered by blacking out the initials of Mr. E.B. Horne, “E.B.”, and inserting at the
commencement “J.M.” and adding “and Co. Ltd. ” Now it so happens that “J.M.” are the
initials of the wife of Mr. Horne. That company is a private company, as I have already said;
its primary objects are to carry on the business of factors’ agents and distributors and vendors
and buyers of accessories and spare parts of all classes of vehicles, and so on and for
charabancs, motor-cars, taxis, and so on. The registered office is at the private address of Mr.
Horne, 170 Hornsey Lane; the directors are Jessie May Horne, the wife of Mr. E.B. Horne,
and Mr. Albert Victor Howard, a person who had been, as I understand, originally in the
employ of Gilford Motors, but who was at that time associated with Mr. E.B. Horne in the
business which he carried on after November, 1931. The nominal capital was £500 divided
into 500 shares of £1 each, and the allotments that were made on April 12 were, as to 101
shares, to Mrs. J.M. Horne, and 101 shares to Mr. A.V. Howard. The solicitor of the company
was the writer of that letter of March 29 which I have already read.
Farwell J. heard the evidence about that company and had these documents before him.
He says this:
“The defendant company is a company which, on the evidence before me, is
obviously carried on wholly by the defendant Horne. Mrs. Horne, one of the
directors, is not, so far as any evidence I have had before me, taking any part in the
business or the management of the business. The son, whose initials are ‘J.M.’, is
engaged in a subordinate position in that company, and the other director, Howard, is
an employee of the company. As one of the witnesses said in the witness-box, in all
dealings which he had had with the defendant company, the ‘boss’ or the ‘guvnor’,
whichever term is the appropriate one, was the defendant Horne, and I have not any
doubt on the evidence I have had before me that the defendant company was the
channel through which the defendant Horne was carrying on his business. Of course,
in law the defendant company is a separate entity from the defendant Horne, but I
cannot help feeling quite convinced that at any rate one of the reasons for the creation
of that company was the fear of Mr. Horne that he might commit breaches of the
covenant in carrying on the business, as, for instance, in sending out circulars as he
was doing, and that he might possibly avoid that liability if he did it through the
defendant company. There is no doubt that the defendant company has sent out
circulars to persons who were at the crucial time customers of the plaintiff company.”
Now I have recalled that portion of the judgment of Farwell J., and I wish in clear terms
to say that I agree with every word of it. I am quite satisfied that this company was formed as
a device, a stratagem, in order to mask the effective carrying on of a business of Mr. E.B.
Horne. The purpose of it was to try to enable him, under what is a cloak or a sham, to engage
in business which, on consideration of the agreement which had been sent to him just about

seven days before the company was incorporated, was a business in respect of which he had a
fear that the plaintiffs might intervene and object.
Now this action is brought by the plaintiffs, the Gilford Motor Company, Ltd., to enforce
the terms of clause 9 of the agreement of May 30, 1929, on the ground that the defendant
Horne, and the company, as his agent and under his direction, have committed breaches of the
covenant which I have read. Admission has been made quite frankly and candidly in this
Court, as it was made below, that there have been circulars sent out to the customers of the
Gilford Motor Company. The statement is made in the evidence in these terms: “It is
admitted now, I gather – although my learned friend says it is small, that does not seem to me
to matter, with respect – that persons were solicited by Mr. Horne, both before and after the
formation of the company, who were customers of the plaintiff company at the time he was in
its service. That is right, is it not?” and Sir Walter Greaves–Lord says: “That is right.” So
that the learned judge was on sure ground when he said there was a clear admission that these
two defendants were soliciting the customers of Gilford Motors; and, as Farwell J., puts it:
“Admittedly the defendant Horne sent out circulars to various persons in which it was stated
that the defendant was ready and in a position to supply spare parts for Gilford vehicles; and,
in fact, he did supply spare parts and at prices which were, I gather, considerably lower that
those charged by the plaintiff company, so that in a sense he was what is known as
undercutting the plaintiff company.” In other words, there is no defence at all to the claim
made in this action unless the conduct of the two defendants can be excused on one of two
grounds: firstly, that the covenant is unenforceable in law by reason of the width of its terms,
or, secondly, that it has ceased to be operative by reason of the terms which were arranged
between the company for the discharge or the release of the managing director from that
position on November 17, 1931.
I, therefore, proceed now to consider those two points in order, and, first: Is the covenant
unenforceable as being bad in law? I accept the proposition that a covenant in restraint of
trade is prima facie one which the law will not enforce, but to that broad proposition there
have been many exceptions over a very long period of time, and the famous case of Mitchel
v. Reynolds [1 P. Wms. 181] has decided, by a judgment delivered by Lord Macclesfield,
within what limits and terms the Court will enforce such agreements. The old rule was
undoubtedly that it must be partial in space or partial in time, but we have to bear in mind that
the nature of these agreements has been expounded in the light of later considerations which
have gradually arisen as there has been an evolution or development of business transactions.
As Rigby L.J. points out in Dubowski & Sons v. Goldstein [(1896) 1 Q.B. 478, 484]: “We
have now gone far beyond what was supposed to be the law in the time of Tindal, C.J. and
Lord Denman C.J. I am not surprised that at that time they expressed the opinions they did.
Lord Watson has pointed out in the case of Nordenfelt v. Maxim Nordenfelt Guns and
Ammunition Co. [(1894) A.C. 535], that the opinion of the judges of this age as to matters of
public policy may differ very much from that of judges of a bygone age when the
circumstances of the world were different. The only test of the validity of an agreement in
restraint of trade now is whether or not such an agreement is reasonably necessary for the
protection of the person with whom it is made”, and, as pointed out on p. 475 of the first
volume of Smith’s Leading cases, dealing with the Nordenfelt Co. case, which went to the

House of Lords, the true view is “that any restraint, whether general or partial, is prima facie
invalid, but may be good if the circumstances of the case show it to be reasonable.” We have,
therefore, to consider: Were the terms of this covenant in clause 9 reasonable? Let me just
add one further passage from Mason v. Provident Clothing and Supply Co. [(1913) A.C.
724, 741]. Lord Shaw, in dealing with a case where the activities of a canvasser were in
question, says: “A very reasonable restriction of a canvasser in such circumstances as are here
disclosed might no doubt have been that he should not canvass his old customers or in the
limited locality of his former labour. This the law would naturally and properly enforce, and
would look upon as a reasonable protection of the employer”; and in Dubowski case: “This
agreement, like all others, must be construed with regard to the surrounding circumstances. It
has been objected to as being too wide in two respects: first in respect of space; secondly, in
respect of time”, and he holds that the objection fails in respect of those persons who were
customers of the late employers at the time when the employee was in their employ.
Now I turn to this agreement. What is its purpose? It is to protect the business, the profits
which are to be earned by the company with the persons, firms, or companies who at that time

• the time of the employment of the defendant Horne – were customers of the company, and
  from whom, in the business they did with them, the company derived profit. I repudiate
  altogether the suggestion that you can, by reason of taking one or two words such as “the
  habit of dealing with the company”, impute a meaning to this covenant that it deals with or
  covers the case of a person from whom the Gilford Motor Company buy, and in respect of
  whose dealings there can be no profit at all arising to the Gilford Motor Company. It is
  intended to deal with persons who are upon their books, or with whom they deal and, in the
  course of dealing, earn a profit.
  Now objection is taken that these words are too wide, and Farwell J., has said that it may
  be that by reason of the fact that the customers are not defined, or the persons who were in the
  habit of dealing with the company are not particularized, a danger might accrue to this man
  from an innocent sale to one of such persons, and he might have been imperilled during all
  time, long after his employment has ceased, by the nature of such transactions. I cannot agree
  that such is a fair test to apply to the covenant. It appears to me that this covenant was, as in
  the many scores of cases in which such covenants have been upheld in these Courts,
  necessary for the protection of the plaintiff company’s business; it operated after the
  determination of the employment and in respect of persons of whom the defendant himself
  would have the best knowledge, for he was the managing director of the company, and what it
  means is that he is not to solicit, to interfere with or endeavour to entice away for his
  advantage, customers or persons who are in the habit of dealing with the company for the
  company’s advantage. Objection is taken that these words “customers of or in the habit of
  dealing with the company” either have no meaning or are tautological. I do not agree with
  that. It appears to me that a customer is a person who frequents a place of business for the
  purpose of making purchases, and those persons may be determined in a particular way by,
  for instance, having their names recorded in the books of the company, or they may be upon a
  list, but there may be other persons who are in the habit of dealing with the company but
  whose names have not yet been inscribed upon any register of customers, and I see no reason
  at all to object to the employment of both those terms by reason of the fact that one or other of

them might have covered persons who are to be found in the alternative category. Now, if
that be so, it appears to me that this is a covenant which was required for the purpose of
reasonably protecting the company’s business. It does not go so far as to cover customers
who become customers after the managing director has left, and it was a covenant entered into
by him with full knowledge of what he was doing, and with full knowledge of who were the
persons included in that phrase, and it is in respect of them that he is debarred from
solicitation, interference or enticing away. The covenant is definite in date; it is not uncertain,
because you have the time at which you are to look for the customers or persons in the habit
of dealing, and you have got therefore a covenant which is reasonable in the sense of being
necessary for the protection of the plaintiff company’s business.
The defendant has, by his own admission, solicited persons who come within the ambit of
the covenant. What is the justification? It appears to me that this is an agreement which must
be upheld by the Court, and the plaintiff company are entitled to the protection of the Court,
and the injunction must be granted. The question whether in any particular case some casual
purchaser from the defendant may cause the defendant to be in danger of further action by the
Court is quite a different question. I do not quite understand the meaning of what is called a
“casual customer”. I think the two words are mutually antagonistic: I think a “customer” is a
person who, as I said, frequents the shop; a casual purchaser seems to be a different person.
But, however that may be, we have to say that the plaintiffs are entitled in this action to have
this covenant upheld, and an injunction is the proper mode of enforcing that as against these
defendants.
The other ground of defence is that there has been an agreement whereby the defendant
was released from the restrictive covenant. It will be observed that as the matter went before
the Court the defence relied upon an oral agreement to release him, and now suggestion is
made that if you look to the letters of November 17 there is a cancellation of the agreement,
and the cancellation means a release from clause 9. I do not so read the letters or the entry in
the minute book. It appears to me that the defendant rightly stated that there was an oral
agreement, and although some of the terms which have been agreed between the parties,
particularly the one under which the defendant was to receive compensation, may have been
recorded in the letters, in the absence of any specific term dealing with this protective clause
9, I agree with the learned judge and do not accept the view that there has been any release of
the clause. Mr. Collier strenuously argued that, inasmuch as there was a new agreement,
there was a release of this clause, but that, of course, will depend upon whether or not the new
agreement covered the same area that the previous agreement had done. It appears to me that
the purpose of the second agreement was to deal with the question of the shortening of the
term of the employment, and the compensation to be paid in consequence of that shortening,
and was not intended to deal with or release the defendant from the restrictive covenant.
In these circumstances the appeal must be allowed, and for the reasons which I have
already stated I think the injunction must go against the company. Sir Walter Greaves-Lord
admitted that if the company were such as is indicated by Lindley L.J. in Smith v. Hancock
[(1894) 2 Ch. 377, 385], it would not be possible to object to the injunction going against the
company. Lindley, L.J., indicated the rule which ought to be followed by the Court: “If the
evidence admitted of the conclusion that what was being done was a mere cloak or sham and

that in truth the business was being carried on by the wife and Kerr for the defendant, or by
the defendant through his wife for Kerr, I certainly should not hesitate to draw that
conclusion, and to grant the plaintiff relief accordingly.” I do draw that conclusion; I do hold
that the company was “a mere cloak or sham”; I do hold that it was a mere device for
enabling Mr. E.B. Horne to continue to commit breaches of clause 9, and under those
circumstances the injunction must go against both defendants, the appeal must be allowed
with costs here and below, and the injunction will be in the terms asked in the prayer in the
statement of claim.