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Enforcing restrictive covenants: Lessons learnt from recent case law

A restrictive covenant that restricts an employee’s activities after termination is void, unless the employer can show that it has a legitimate interest to protect. Failing that the restriction will be void for being a restraint of trade and contrary to public policy. This article considers recent case law and gives practical tips on the enforceability of restrictive covenants.

Generic contract

 

Check the wording of your restrictive covenants – do they cover what you intended them to?

In Prophet Plc v Huggett  it was found that the Court will only interpret restrictive covenants where the wording of the covenants is so unclear that one interpretation is illogical and one is commercially sensible.

Here, the restrictive covenant prevented the employee from engaging in any business which was similar to or competed with the employer for 12 months. On its own, this would be void for being an unreasonable restraint of trade.

 

However, the covenant only prevented the employee from working with products he worked on whilst employed but these products were sold by no other company, giving the employer no protection. The Court held that the wording was not unclear and as a result the employer had no protection.

Do you have a legitimate business reason for enforcing the covenants? Are they for a period which is necessary to protect legitimate business interests?

In JM Finn & Co v Holliday, an employee resigned and was placed on garden leave for their 12 month notice period. The employee left and alleged that the employer was in breach of contract by preventing the employee from receiving daily summaries of industry information which were sent to employees to save time researching the market. The Court held that to enforce the restrictive covenants, the employer had to show a legitimate business interest to protect. The Court found the employee had built up strong relationships whilst employed and that 12 months was the minimum period to protect the employer from damage to its customer interest.

If both parties are in breach of contract, can the covenants still be enforced?

Where there has been a breach of contract, the two options available are: (1) accept the breach bringing the contract to an end or (2) affirm the contract, keeping it alive. In Sunrise Brokers LLP v Rodgers the employer affirmed the contract to prevent the employee from working for a competitor. The Court held that this was a legitimate and sensible reason for confirming the contract.

The Court also considered enforcement where both parties were in breach of contract. The employee handed in his notice and wanted to leave immediately. The employer disagreed but the employee left and did not return so the employer withheld payment. The Court held that the employer had not lost the right to affirm the contract by failing to make payment. Work and wages were mutual obligations for both employer and employee and non-performance did not automatically end the contract.

Practical Points

Review your restrictive covenants. Check that they do not impose an unreasonable restraint of trade (see above for an example of this). If they do, they will be unenforceable. Draft your covenants no wider than necessary to protect your business interests. Tailor the covenants to the employee’s specific role and consider the threats which your business may suffer if that employee left.

 

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Other blogs of interest:

Restrictive covenants: how can employers protect themselves in the digital age?

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Legal news, views, trends and tools for HR Professionals. Stay ahead. Go further