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IN THE SUPREME COURT OF JUDICATURE CHANF 95/1466/B

(MR JONATHAN SUMPTION QC - SITTING AS A DEPUTY JUDGE OF THE HIGH COURT )

Royal Courts of Justice

Strand

London WC2

Thursday, 13 March 1997

B e f o r e:

LORD JUSTICE BUTLER-SLOSS

LORD JUSTICE MILLETT

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NM FINANCIAL MANAGEMENT LIMITED

Defendant/Appellant

- v -

ANTHONY ARTHUR MARSHALL

Plaintiff/Respondent

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(Computer Aided Transcript of the Palantype Notes of

Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 831 3183

Official Shorthand Writers to the Court)

- - - - - -

MARK CRAN QC & NEIL CALVER (Instructed by Sweetlands, Surrey, RH4 1TP) appeared on behalf of the Appellant

MARK BARNES QC & ANDREW LENON (Instructed by Messrs Taylor Joynson & Garrett, Blackfriars, EC3Y ODX) appeared on behalf of the Respondent

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J U D G M E N T

(As approved by the Court )

- - - - - -

©Crown Copyright

LORD JUSTICE BUTLER-SLOSS: I will ask Millett LJ to give the first judgment.

LORD JUSTICE MILLETT: This is an appeal by the Plaintiff, N.M. Financial Services Management Ltd. ("the Company") from an Order of Mr Sumption QC, sitting as a Deputy Judge of the Chancery Division on 16 June 1995.

The question in the appeal is whether the Respondent, Mr Marshall, is entitled to Renewal Commission under Clause 10(g) of his agency agreement with the Company even though he has not satisfied the conditions on which such Commission is payable contained in paragraphs (i) and (ii) of that Clause. The Deputy Judge held that he is.

The facts can be shortly stated. For nearly 12 years Mr Marshall worked as a self-employed sales agent of the Company selling life assurance, pensions and similar financial products. He did not receive a salary. He was paid entirely by commission generated on business which he introduced to the Company.

Two kinds of commission were involved: initial commission and renewal commission. Both were calculated as a percentage of premiums paid by investors on business introduced by Mr Marshall. Initial commission was payable at the rate of 25% on premiums paid during the initial period of each policy, which could last for as long as 48 months. Mr Marshall's entitlement to initial commission arose as and when each premium was received, but ceased on the termination of the agency agreement. Thereafter no further initial commission was payable in respect of business which had been introduced by Mr Marshall during the continuance of the agency agreement. Renewal commission was paid at a much lower rate (2.5%) on premiums received after the initial period. The present appeal is concerned only with renewal commission, and the question is whether Mr Marshall is entitled to receive it after the termination of the agency agreement.

The agency agreement is dated 1 July 1988. Clause 2 is concerned with Mr Marshall's appointment. Paragraph (a) reads:

"The Company hereby appoints the Agent and the Agent agrees to act as an agent of the Company upon the terms and conditions contained in this Agreement."

The rest of the Clause sets out the agent's duties and responsibilities; paragraph (c) prohibits the agent from procuring or endeavouring to procure any person to enter into an Investment Agreement with any person other than the Company or its associates. The Clause does not impose upon Mr Marshall any positive obligation to do anything, his right to commission being sufficient incentive to ensure that he should attempt to procure business for the Company. Clause 8 is concerned with commission; paragraph (a) of that Clause provides:

"The Company shall pay Commission to the Agent for Investment Business which he obtains in accordance with this Agreement. Commission shall be calculated at the rates and in accordance with the provisions contained in the Commission Schedule."

Clause 10 is concerned with the termination of the agreement which is terminable by either party by written notice to the other at any time. Paragraph (f) and (g) provide:

"(f) Subject as provided in sub-clauses 10(g) and 10(h) following termination of this Agreement no sums (and without prejudice to the generality of the foregoing no Commission other than Commission to which entitlement shall have arisen pursuant to the Commission Schedule) which shall not at the date of such termination have become due and payable shall be payable to [the agent].

(g) If at the date of termination of this Agreement ... the Agent has for a period of not less than five years been continuously an Agent of the Company and either

(i) within the period of one year after the date of such termination the Agent does not become an Independent Intermediary or become employed by or represent or become an Appointed Representative of any Company or organisation which may directly or indirectly be in competition with the Company; or

(ii) at the date of termination the Agent (if an individual) has attained the age of 65 years

then the Company shall pay to the Agent Renewal Commission arising up to his death (in the event that the Agent is an individual) or its liquidation (in the event that the Agent is a limited Company) in respect of any Investment Agreements which result from applications submitted by the Agent prior to such termination at the rates and upon and subject to the terms and conditions set out in the Commission Schedule."

Paragraph (h) provides for discretionary payment of Renewal Commission to the agent if he dies during the continuance of the agency agreement, although curiously not if he dies after its termination but after having complied with proviso (i).

The Commission Schedule is concerned with the details of the commissions payable. In the schedule the word "Commission" is defined as meaning "Initial Commission and Renewal Commission". Clause 2(a) of the Schedule provides:

"The Company shall ... pay Commission to the Agent ... "

Clause 2(b) provides:

"Entitlement to Commission in respect of an Investment Agreement submitted by the Agent shall arise upon receipt by the Company of any appropriate payment ..."

And 2(e):

"Entitlement to Commission in respect of an Investment Agreement shall cease to arise in the following circumstances:-

(i) upon termination of this Agreement (subject to any rights to Commission under clauses 10(g) and 10(h))"

These provisions can be summarised for present purposes as follows: (i) Commission (both initial and renewal) is payable on receipt of the relevant premium.

(ii) Entitlement to such commission ceases on termination of the agency agreement; but

(iii) This is subject to a right to renewal commission under Clause 10(g)(h).

In relation to renewal commission the Deputy Judge held:

(1) Clause 10(g)(i) is in unreasonable restraint of trade and is void. There is no appeal from this ruling.

(2) Since no one suggested that the whole agency agreement was avoided as a result, the question was: how much should be excised? (3) Provisos (ii) and (iii) are not cumulative but alternative. The intention is not to limit the right to post-termination renewal commission to agents aged 65 or more, but to limit it to agents who have not competed with the Company during the first year after termination unless they are aged 65 or more. Proviso (iii) is in reality a proviso to proviso (ii). To excise proviso (i) alone would radically distort the effect of Clause 10(g). Accordingly both provisos must be excised. There is no appeal from this ruling.

(4) The remaining question was whether the excision of both provisos means that Clause 10(g) should be deleted in toto; or whether Clause 10(g) should stand shorn of the offending provisos. (5) Clause 10(g) should stand without the provisos, because in substance the consideration for the payment of post-termination renewal commission is not the acceptance by Mr Marshall of the invalid restraint of trade but his services in introducing business to the Company prior to the termination of the agency agreement.

The Company appeals from this last ruling and submits that the whole of Clause 10(g) should be struck out, leaving Mr Marshall with no entitlement to post-termination renewal commission. It is to be observed that, if correct, this means that Mr Marshall and other agents engaged on similar terms are not entitled to post-termination renewal commission even if they have complied with condition (i) by refraining from competing with the Company at all.

Both parties pointed to passages in the Company's evidence as seemingly supporting their respective arguments. In an affidavit sworn by the Development and Sales Support Manager of the parent company of the Company the deponent deposed that the effect of Clauses 10(g) and 10(h) was that the Company

"... agrees in certain specified circumstances to relax the general rule that once the agent ceases to work for [the Company], he is no longer entitled to commission in respect of [the Company's] clients who were serviced by the agent prior to the termination of his agency. By competing in breach of clause 10(g), the agent is not losing something to which he would otherwise be entitled; rather, by not competing for one year (or by retiring) he is gaining something to which he would not otherwise be entitled.

Entitlement to renewal commission is a reward for long and loyal service (and not an entitlement to all agents) in respect of which an agent may only qualify if (inter alia) he has been with the company continuously for a 5 year period."

The Company relies upon the first of those two paragraphs and the word "loyal" in the second and Mr Marshall relies on the second paragraph.

Although the question is described as one of severance it is important to bear in mind that we are not concerned to decide how much of an offending restriction should be struck down. In such a case the question is to what extent can the party who imposed the restriction enforce those parts of it which are not in unreasonable restraint of trade. We are concerned with a very different question, namely, whether the party who has been freed from an invalid restraint of trade can enforce the remainder of the contract without it.

It is obvious that where the invalid restraint of trade provides the only consideration for the promise, the promisee cannot enforce it. He has given no (valid) consideration for the promise which he seeks to enforce. Shorn of the "adventitious trappings" of the contract, this was the position in Vancouver Malt and Sake Brewing Co. Ltd. v. Vancouver Breweries Ltd. [1934] AC 181. It was also the position in Wyatt v Kreglinger and Fernau [1933] 1 KB 793 where on the eve of his retirement an employee who otherwise had no entitlement to a pension was granted an ex gratia pension conditional on his not competing with his former employer. The condition was held to be void and the pension not payable. At the other extreme are cases where the invalid restraint is merely an incident of a larger transaction which could "survive without difficulty the elimination" of the invalid restraint: see Romer LJ in Goodinson v Goodinson [1954] 2 QB 118 at p. 126. This was the position in Re. Prudential Assurance Company;s Trust Deed [1934] Ch. 338 and Bull v. Pitney-Bowes Ltd. [1967] 1 WLR 273. In both cases a contract of employment entitled the employee to a pension with a proviso that upon retirement after the qualifying period of service the employee would not compete with his former employer. In both cases the pension would continue to be payable even though the proviso was void.

Most cases fall in between these two extremes. The invalid restraint is only part of the consideration for the promise, but it is an important part, for without it the promise would probably not have been given.

The Company submits that this is sufficient to prevent the promise from being enforced. It relies on a passage in the speech of Lord Cross in Amoco Australia (Pty) Ltd. v. Rocca Bros Ltd. [1975] AC 561 at p. 578. That case was concerned with a lease and lease-back of a petrol-filling station, the underlease being at a nominal rent but including a petrol tie. In the course of his speech at page 578G Lord Cross said:

"... whatever test be applied the answer must, their Lordships think, be the same in this case. It is inconceivable that any petrol company would grant a deal a lease at a nominal rent of a site on which it had spent a substantial sum in installing pumps and other equipment without imposing on the dealer any obligation to buy petrol from it or even to carry on the business of a petrol station on the demised premises. Clauses 3 (g), (h) and (i) [those were the tie] were the heart and soul of the underlease."

But it is often and perhaps usually the case that the promise would not have been given but for the invalid restraint; yet this does not prevent the contract from being enforced without the invalid provision: see Alec Lobb Ltd. v. Total Oil G.B. Ltd. [1985] 1 All ER 303 CA at p. 311 per Dillon LJ. In a not dissimilar case of a petrol station and a tie he said:

"The contract is of course changed by the excision of the tie, and obviously Total would not have granted a lease-back which did not contain such a tie. But I do not think that is good enough to prevent severance and lead to the conclusion that the whole of the lease and lease- back is void. A mortgage to a petrol company containing a tie would, in my judgment, remain in all other respects valid despite the invalidity of the tie as an unreasonable restraint of trade, although the petrol company would not have contemplated making any advance on mortgage to a dealer without a tie."

The true explanation of the Amoco case, in my opinion, is that given by Dillon LJ earlier on the same page, that is to say that in the Amoco case the invalid tie was the sole object or subject matter of the contract, which would have made no commercial sense without it.

The test has been variously described in the cases. The contract will be upheld unless the invalid restraint forms "the real consideration", or "the main consideration", or "the whole or substantially the whole consideration" for the promise: for the last formulation see Bennett v Bennett [1952] 1 KB 249 at p. 261 per Denning LJ.

I doubt that there is any real difference between these different formulations, so long as it is recognised (i) that the avoidance of the contract is not limited to the case where the only consideration for the promise, apart from the invalid restraint, is a technical or nominal consideration; (ii) that the Court does not attempt to assess the relative values of the various considerations for the promise. But for my own part I prefer the formulation expressed by Denning LJ, since it appears to me to put the point of balance in the right place. The contract will be upheld even if the consideration for the promise of the promisee includes an invalid restraint. It will be struck down in its entirety only if, in substance, and regardless of its form, it is an agreement for an invalid restraint.

This is a question of substance not form. It is rightly submitted on behalf of the Company that the substance of the contract is to be ascertained from its words; and that the parties are at liberty to allocate different considerations to different promises. The structure and language of the contract are therefore of prime importance. I agree that this is so, provided that the parties do not attempt to disguise their true intentions by artificial stratagems. It is to be observed that in the Amoco case the House of Lords struck down both the lease and underlease, even though the invalid tie was contained in the underlease only, and the lease itself contained express statements to the effect that the lease and underlease were separate and independent transactions. These statements were rejected as simply untrue: see [1975] AC at p. 580.

I turn to Clause 10(g) of the agency agreement. The restraint is imposed in the form of a condition. It is settled law that there is no difference in this context between a contract by a person that he will not carry on a particular trade (which if valid would be enforceable against him) and a contract that if he does not do so he will receive a benefit to which he would not otherwise be entitled (which if valid would not prevent him from carrying on the trade but merely result in the loss of the benefit in question): see Wyatt v. Kreglinger and Fernau [1933] 1 KB 793.

On behalf of the Company reliance is placed on the conditional structure of Clause 10(g) for a different purpose. It is submitted that the agent is entitled to renewal commission if, but only if, he fulfils two conditions: (i) that at the date of the termination of the agency agreement he has been continuously an agent of the Company for a period of not less than five years and (ii) that unless he is over the age of 65 at the date of the termination of the agency agreement he does not compete with the Company within the first year thereafter. Mr Marshall did not promise to fulfil either condition. The two conditions were, therefore, pure conditions to be fulfilled or not as the case might be. Neither was enforceable and neither constituted consideration for the payment of renewal commission but they were conditions precedent to Mr. Marshall's entitlement to renewal commission. He could not claim payment unless he fulfilled both.

I cannot accept this analysis. It is true that Mr Marshall did not promise to perform either condition, so that Clause 10(g) considered on its own is not a bilateral or synallagmatic contract, as Lord Diplock would have described it. But it is a unilateral or "if" contract. In such a case the performance of the condition by the offeree not only constitutes his acceptance of the offer but provides the consideration necessary to enforce it.

The Company places great reliance on the fact that Clause 10(g) provides the sole basis for Mr Marshall's right to renewal commission after termination of the agency agreement. Accordingly, it insists, Clause 10(g) alone constitutes the relevant contract for present purposes. On this footing, it is submitted, either there is no consideration for the renewal commission, or the invalid restraint provides the only consideration for it. I have already given my reasons for rejecting this argument. Even if Clause 10(g) is considered on its own, the consideration for the renewal commission consists in the performance by Mr. Marshall of the two conditions on which it is made payable, one of which (the restraint) is invalid, and the other (at least five years service) is not. Accordingly, if Clause 10(g) were considered on its own, I would hold it valid, since I would regard the renewal commission as payable partly in consideration for the five years service, and not exclusively for the invalid restraint. But I do not regard it as correct to consider Clause 10(g) in isolation. It formed part of the total package of remuneration offered to Mr Marshall to induce him to enter into the Company's service as a self-employed agent.

I have already read the relevant provisions of the agency agreement, and in particular Clauses 2 and 8, which demonstrate, what would in any event be obvious, that Mr. Marshall was appointed the Company's agent upon the terms and conditions of the agreement (which included Clause 10(g)) and that he should be paid commission (which included renewal commission) in accordance with the agreement. Clause 10(g) was the sole source of his right to renewal commission after termination of the agency agreement, and it was very limited; for example, it was payable only if he had served for at least five years before termination and then only until he died. But these limited rights were earned by his service before termination and that is not less the case because these limited rights were accompanied by an invalid inducement for him not to compete in the first year after the termination of the agency agreement.

I would respectfully adopt the reasoning of the Deputy Judge at page 12 of his judgment where he said this:

"... in substance the consideration for the payment of Renewal Commission is not the acceptance by Mr. Marshall of the proviso, but his services in procuring business before his resignation ... Mr Marshall would have been entitled to receive Renewal Commission had he continued to act as [the company's] agent, and in that event it would have been perfectly clear that his provision of his services was the consideration by which that commission was earned. If after the termination of his agency he had complied with proviso (i) of Clause 10(g), he would have continued to be entitled to receive Renewal Commission. Yet it does not seem to me, on this hypothesis, that the change in Mr Marshall's situation would mean that his entitlement to commission was no longer earned by his procuring of business, but must from the moment of termination be treated as the consideration for something else. The reality is that Clause 10(g) simply introduces new conditions, operative from the termination of the agency, to the Agent's right [to] be paid Renewal Commission by reason of the business which he has introduced."

I cannot improve upon that passage, which in my judgment was entirely correct.

I would dismiss the appeal.

LORD JUSTICE THORPE: I agree.

LORD JUSTICE BUTLER-SLOSS: I also agree.

Order: Appeal dismissed with costs; application for leave to appeal to the House of Lords refused.