In 2016 we successfully defended a claim for £10m brought against five ex-Affinity IFAs for alleged breach of 12 month covenants. The claim was withdrawn part way through trial and we recovered indemnity costs for our clients.
Earlier this year we successfully overturned an injunction sought by a client’s employer to enforce a restrictive covenant in her contract of employment. These examples are among several cases where attempts to enforce restrictive covenants have failed. The courts have traditionally taken a dim view of employers who try and stop employees from moving to another company – indeed it is a long standing principle of English law that that no person can be restrained from earning a living and one that the courts are generally careful to uphold.
The exception is for those who have signed a restrictive covenant when joining an employer, agreeing to post-employment restrictions that are strictly no wider than absolutely necessary to protect that employer’s legitimate business interests. Employment contracts often contain these types of clause, particularly for more senior staff and in professional services. The question then becomes: are they enforceable? This was addressed in a recent case, Egon Zehnder v. Tillman, of which more later.
What types of restriction might there be?
The usual types of restrictions include those that try to stop you from working for a competitor (‘non-compete’), working for clients that you dealt with at the previous employer (‘non-deal’), and / or even trying to contact those clients you worked for (‘non-solicit’).
An employer will justify restrictions as it will consider it has invested in developing the employee’s skills, and its client base, and will want to protect the return on that investment. By contrast, a professional employee will often consider that the client base belongs to them, particularly if they brought their clients with them to their ex-employer. This is a particular issue in the IFA world for example
If you have spent your entire career in a specific role, most of the companies you are likely to work for will probably be competitors (for example law firms, IFAs, and accountants). Therefore, if you are prevented from working for a competitor you could be left without a salary for a considerable period. Courts have to balance the unfairness of that with the business’s wish to protect its interests.
Courts will generally only consider a restriction to be reasonable if it lasts for a relatively short period - twelve months is at the dubious end of the scale, although it might be upheld for a very senior employee.
Employers have to strike a balance between a covenant drafted so widely that it becomes unenforceable, and one drafted so narrowly it no longer protects their interests. This balance must be considered before a contract is entered into, rather than when it is being enforced. As an employee’s career develops, it is possible that an onerous covenant entered into when they first joined the company as a junior would have been unenforceable at the time but, as the employee becomes more senior, those covenants start to look more reasonable (assuming the contract of employment has not been updated in the interim). However, a court would still find the covenants void because they were unreasonable and hence unenforceable, at the time of signing, despite the employee now being more senior and in a more commercially sensitive role.
Non-compete clauses: a real example
In a recent case, the judge ruled that a restrictive covenant imposed on an employee when she was first employed by Egon Zehnder, a recruitment consultancy, in 2004 was both valid and proportionate, and upheld the six-month non-compete clause in her contract when she resigned in 2017 and was put on garden leave. This was in spite of the fact that her contract had never been updated at any point even after several promotions. When Ms Tillman resigned in 2017 to join a competitor before the six-month period expired, Egon Zehnder successfully sought to invoke her non-compete clause. The court ruled that, as Ms Tillman had been fairly senior when she joined the firm, it was correct to uphold the restrictive clause in her contract. She appealed and the Court of Appeal ruled that the clause was, in fact impermissibly wide and in restraint of trade. The case went to the Supreme Court which handed down its judgment in July 2019. It agreed with the appeal judges’ decision but, in a surprise ruling, considered that if specific wording within the clause was removed without affecting the overall contract, the covenant would be valid and enforceable.
Retrospective amendment helps enforceability
Employers will be encouraged by this outcome as the Supreme Court has opened the door for the retrospective amendment of clauses containing unreasonable wording that sit within otherwise reasonable covenants. Nonetheless, our advice remains the same: if you want to rely on a covenant, make sure it is as narrow as possible. The Supreme Court noted that ‘the courts must continue to adopt a cautious approach to the severance of post-employment restraints’ indicating that each case will continue to be assessed on its individual merits and this ruling does not pave the way for wholesale revision.