Enforcing restrictive covenants - a practical example

Many companies rely on restrictions, or ‘restrictive covenants’, in employment contracts to try to limit the damage caused when employees move to a competing business. They may, for example, seek to restrict an employee’s ability to work for a competitor, to work with certain customers or to solicit former colleagues or customers.

Given the prevalence and importance of restrictive covenants, as well as some of the intricacies of the law involved, they are a regular focus for commercial disputes. We are seeing an increasing number of such disputes, often involving parties seeking urgent injunctions to prevent behaviour alleged to breach restrictive covenants and, inevitably, significant legal costs. It is therefore vital that companies are diligent in drafting and applying clauses that may later be the focus of such litigation.  

For the court to enforce a restriction, which often it can be reluctant to do, the clause must go no further than is reasonably necessary to protect the legitimate business interests of the party relying on it.  

This requirement can be met by limiting the scope of the clause. This can be by reference, for example, to one or more of the following: 

• time; 
• an individual’s knowledge or their dealings or contact with customers or prospective customers; 
• the supply of specific goods or services; 
• the nature of the relationship with an individual, customer or prospective customer; and 
• a specific territory.

In deciding whether a clause satisfies the above test, the court will conduct a detailed analysis of the restriction and its effect, by reference to the specific circumstances of the individual and their previous role, as well as the new role alleged to breach the restrictions.

In a recent case, we acted for a party who successfully opposed an application for an injunction to enforce restrictive covenants. At the hearing where the Judge was to decide whether or not to grant an injunction against our client, he expressed concerns about whether it could be said that the key restriction, which related to the ability of our client to compete, went no further than was necessary.

In broad terms, the restriction sought to prevent our client from working for another company which competed with the previous employer’s business in the sector within which our client had worked. 

If the restriction was engaged, our client would have been prevented from working for her new employer in any sector, and in any role, irrespective of whether it related to her role at the previous company. Effectively, this meant that simply by moving to a business that competed with our client’s previous employer, they were prevented from working for the new employer in any capacity.

The Judge accepted that there was a ‘serious question to be tried’ in relation to the clause, the first stage of the legal test at the injunction stage (a lower bar than had the case gone to trial), but did not grant an injunction as the ‘balance of convenience’, the final stage of the test for an injunction, was in favour of our client.  

The Judge noted that the employer had only just passed the first test given the nature of the clause. The key issue, of which employers should take serious note when drafting such covenants, was the Judge’s concern that the clause focussed on the nature of the new employer’s business rather than our client’s specific role within it. He thought there must be serious doubt whether the non-compete clause could be said to go no further than was reasonably necessary.  

Conclusion

The Judge’s comments are a helpful reminder to consider each aspect of a restriction to test whether it goes no further than is reasonably necessary, by reference to the specific circumstances of the particular individual and the activities they are involved in. Whilst the first limb of the restriction in question linked back to the employee’s role, the restriction would bite if a new employer competed, irrespective of our client’s role within the business. The problem was that the clause did not link the restriction to the individual’s specific role and the activity which they undertook, but rather to the general nature of the business of the company.  

Such a case demonstrated that it is well worth revisiting restrictions on a regular basis to ask whether they comply with the court’s test and to limit their scope to what is reasonably necessary, linked to the specifics of the individual and their role.

For further advice on restrictive covenants please contact Duncan Hope and Dan Taylor