Restrictive Covenants

17th February 2014

Enforceable or just a waste of paper?

The general position in respect of any restriction on trade is that it will be unenforceable.

However, in employment and commercial law, there is an exception to this rule. In certain circumstances clauses restricting a person’s or a company’s actions following the end of a contract may be enforceable. However, in order to obtain the benefit of such a restriction, it must:

a) Be a genuine attempt to protect a legitimate business interest, and;

b) Must go no further than is necessary to obtain that end.

Unfortunately, there is no definitive rule as to what is enforceable and what is not, and each case will turn on its own facts; what is reasonable for the managing director will not necessarily be the same for say the cleaner or a person on the shop floor.

 

What does this mean in Employment Law terms? In practice it means that restrictions that are limited in their scope and duration are much more likely to be enforceable than those that are widely drafted. However, consideration should be given as to what exactly it is that the employer is seeking to protect in each case and the best way to go about doing it. Restrictions should consider:

• Being for a short specific period of time, i.e. 3 or 6 months
• Being geographically restricted to a small vulnerable area
• Being restricted only to those customers who the employee has dealt with in the last 6 or 12 months
• Whether they wish to stop the employee soliciting its clients business, or prevent them dealing with them at all
• Who or what the employee actually wants to protect: if it only wants to protect its workforce then a non-deal clause is unlikely to be helpful.

 

In the recent case of Coppage and another v Safetynet Security Ltd [2013] EWCA Civ 1176 the Court of Appeal has upheld that a non-solicitation covenant on a director who was prevented from dealing with any customers of his former employer for a period of 6 months. The enforceability was challenged on the basis that it related to all clients of the Company which he had worked with, and not simply those he had contact with in a prescribed period. The Court rejected that appeal, and upheld the covenant despite its wide drafting. In the circumstances it was appropriate given the individual’s seniority in the business.

 

In some instances, whilst restrictions may be wide, some employers will still include them as a deterrent to employees seeking to damage their business after they have left. However, even if this is the case care should be taken to ensure that they appear like they may be reasonable if they are to have any effect.

 

Therefore careful consideration should be given as to whether and what level of restrictions should be included in any contract. It is an ideal opportunity to protect your business and its assets, and if they are specific and well drafted then they are more likely to be enforceable, allowing an employer to sue for damages, or to obtain an injunction against further action by an employee where they are breached. However, an overly wide, poorly drafted restriction is unlikely to be enforceable.

 

In the event that you are drafting employment contracts, thinking of reviewing contracts for employees, or you are a senior employee subject to a restrictive covenant and thinking about leaving your employment then it is worth taking advice upon your position as soon as possible with a view to adequately understanding and protecting your position.