English High Court considers 'balance of convenience' in Sparta damages ruling

The High Court in its recent decision in Sparta Global Ltd & Anor v Ben Hayes & Anor found that restrictions in an investment agreement were arguably enforceable but, nonetheless, it refused to grant an interim injunction in considering the ''balance of convenience''.

Non-compete restriction

Ben Hayes had a contract of employment with Sparta Global that included a non-compete restriction of six months. This restriction contained a carve-out, which allowed Mr Hayes to work for a competitor in a different role than the one he undertook at Sparta.

Mr Hayes had also agreed to restrictions contained in an investment agreement, which was entered into when Mr Hayes became a minority shareholder in Sparta. The wider non-compete in the investment agreement lasted for 12 months and prohibited Mr Hayes from working for a competitor in any capacity.

When Mr Hayes resigned in late 2023, he joined one of Sparta's competitors, in breach of those restrictions.

The High Court was tasked with deciding whether to grant an interim injunction to enforce the longer non-compete clause stated in the investment agreement, as the parties had reached an agreement on the employment contract restriction.

Injunction considerations

The court was satisfied that Mr Hayes was bound by the investment agreement, such that Mr Hayes was in, in principle, in breach of his restrictions. However, in order to determine whether to grant an injunction, it needed to consider the following issues:

• Whether the application evidenced a ''serious issue to be tried".
• Whether damages would be an adequate remedy if the injunction was not granted.
• Where the ''balance of convenience'' lay?

Since the relief sought by Sparta would be in place for a substantial part of the 12-month operational period by the time of the expedited trial in March, it was accepted by both parties that the court should carry out ''some assessment'' of the merits in determining the interim application in accordance with the Lansing Linde principle.

Was there a serious issue to be tried?

In resolving this question, the court had to decide if it was reasonably arguable that the restrictions in the investment agreement were enforceable. The court agreed with Sparta, concluding that: ''there is plainly an issue to be determined that has a reasonable prospect of success. This judgment proceeds on the basis that it is reasonably arguable that the IA covenants will be enforceable, that is that they are overall reasonable.''

However, the court went on to make some interim observations on what it expected the ultimate decision at trial to be, while making it clear that these were ''preliminary'' and that this interim stage ''it does not, and cannot, definitively rule on the status of the agreement.''

Would damages be an adequate remedy?

Mr Hayes accepted that damages would not be an adequate remedy for Sparta if the injunction was not granted.

Having made this determination, the court was required to consider whether Mr Hayes would be adequately compensated by Sparta's cross-undertaking in damages if the injunction was granted.

Perhaps surprisingly, the court decided that Mr Hayes would not be adequately compensated because the industry in question was a highly technical field.

Where did the 'balance of convenience' lie?

Having decided that damages would not be an adequate remedy for either party, the court was required to consider the question of ''balance of convenience''.

The court considered a range of factors (including alleged equality of bargaining position, Mr Hayes' seniority, the nature of the investment agreement and undertakings offered by Mr Hayes) in making its determination.

In doing so, it held that there was ''no doubt that the defendant was and remains privy to confidential and commercially sensitive information''.

Nonetheless, there was – at this interim stage – no evidence that Mr Hayes had misused that confidential information. While ''the evidence at trial may be different following full disclosure'', the court emphasised that only judge the evidence before it

The court was unable to resolve the question of Mr Hayes' seniority, but on the evidence before it and in the absence of full disclosure, it was unable to judge that Mr Hayes should be subject to more onerous restrictions by virtue of his shareholding and seniority.

Continuing with its analysis, the court concluded that the risk to Sparta had been sufficiently alleviated at the interim stage by undertakings that Mr Hayes had given to the court to trial. It also found that the less onerous restrictions in the employment contract would provide sufficient protection to Sparta through to an expedited trial in March 2024.

It concluded that the balance of convenience lay against granting the interim injunction.

In doing so, however, it emphasised that ''this is not a final decision, but the taking of a "preliminary view" on the basis of the evidence presently before the Court. It determines nothing for trial and simply is a factor affecting the balance of convenience.''

Osborne Clarke comment

The decision that damages would not be an adequate remedy for Mr Hayes is surprising in the context of him only having commenced employment recently and in circumstances where an expedited trial had been listed for March 2024.

Mr Hayes' damages would presumably only be his loss of wages for the period in which he was kept from employment, which is easy to quantify and would be capable of being enforced against the cross-undertaking in damages which a claimant or applicant is required to provide. While the industry is niche, Mr Hayes' background primarily lay in a different industry, such that he was a relevant newcomer to the industry in any event.

The decision in Sparta v Hayes also emphasises the difficulties that can arise in providing evidence in support of an application at the interim stage.

The judge found on the evidence available that there was ''clear inequality of bargaining power" when Mr Hayes entered into the investment agreement and that there was no evidence of misuse of confidential information.

Although the High Court emphasised that these findings were ''preliminary'', the Court of Appeal in Forse v Secarma has made clear that such a merits assessment can ''only be done where there is no credible dispute that the strength of one party's case is disproportionate to that of the other party. Where the material factors appear to be evenly balanced, the prudent course would be to take such measures as are calculated to preserve the status quo.''

Having found that there was a serious issue to be tried and that Sparta could not adequately be compensated in damages, one might have expected the High Court to reach an alternative decision. However, the decision demonstrates again that disputes about restrictive covenants are highly fact-sensitive and evidence based.

It is also a further reminder of the benefit to a respondent of offering sensible undertakings through to an expedited trial as a possible way to mitigate against the order of an interim injunction.