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The difficulties of enforcing restrictive covenants

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Posted by Susan Hopcraft on 06 March 2012

Susan Hopcraft Partner

A recent case in which we successfully defended a client faced with a claim for over £500,000 for two alleged, employment-related breaches illustrates the difficulty of enforcing restrictive covenants (which seek to restrict an employee’s ability to trade after leaving the employer) and the interpretation of a duty of fidelity.

Generally speaking, courts take a dim view of attempts by employers to hinder the ability of ex-employees to earn a living and poorly drafted contracts of employment and restrictive covenants are prime targets for attracting the disapproval of the judge. 

Duty of Fidelity

In this particular case, our client was accused of a breach of duty of fidelity as well as a subsequent breach of a restrictive covenant. The duty of fidelity is an employee’s obligation of loyalty to their employer which requires an employee not to act against the employer’s best interests. This is not an obligation which will necessarily be included in a contract of employment but an implied term which will bind all employees. 

Our client had received a call on his own phone from a former client of the claimant, with whom no work had been done for approximately one year, and asked if he wanted to work as a contractor for the former client. He declined but offered to see whether the claimant could carry out the work. The former client was not keen and asked him to recommend someone else so our client gave the name of a former employee. It was alleged that our client should have told the claimant’s management team about the phone call so that attempts could have been made to re-kindle the relationship with the former client.

The court held that our client had not breached his duty. He had been aware that the relationship with the former client had broken down in acrimonious circumstances and his suggestion that his employer could carry out the work had been declined. Accordingly, the court held that he had correctly decided that there was no benefit in passing on details of his discussion and was not in breach of his duty of fidelity 

Restrictive Covenants

Subsequently, our client left his employment and joined a business which had been set up by another, former employee. His new employer immediately sent him to work at a company which happened to be customer of his former employer, although he was carrying out a completely different role to that in his previous employment. 

On learning of this development, his former employer sued him for breach of his restrictive covenant which sought to prevent him from (i) working (directly or indirectly) for a client, or former client, of the claimant with whom he had had personal involvement for 12 months after he had left and (ii) competing with the claimant for 9 months after he had left. Restrictive covenants are designed to protect employers after the termination of an employee’s contract. They must protect a legitimate business interest, otherwise they will be found to be unenforceable. Employers need to ensure that they do not draft the clauses too widely as enforceability will depend on the balance between protecting the employer’s legitimate business interest against the risk that the employee will be prevented from working in his trade for too long a period or over too wide an area.

Fortunately, we were able to argue that the covenants were unenforceable on two points: there were no time limits specified within which our client could have contact with a former customer; and the covenant was not limited to a particular role. For example, our client would still been caught by the restriction if he had only done a day’s work for a customer 10 years previously! Because both issues were unreasonable, the covenant was unenforceable as was the clause against non-competition which was found to be a straightforward restraint of trade and not protecting a legitimate business interest. 

Summary

In this case, the claimant employer had drafted its own restrictive covenants without taking legal advice. Because restrictive covenants will be closely scrutinised if they ever come before a court, it is crucial to show that they have been drafted solely to protect a legitimate business interest. In practical terms they need to be as narrowly focussed as possible and any ambiguity will go against the employer. 

When an employee leaves a business, it is important that both the employee and employer are fully aware of any covenants that might apply. Employers need to protect legitimate business interests and employees should have a clear understanding of the extent that any restrictive covenants will bite in their new employment. This is not an area of law for the faint-hearted; if in doubt – whether you are an employer or an employee - seek legal advice! 

About the author

Susan is a disputes and professional negligence lawyer, mainly in the financial services sector.

Susan Hopcraft

Susan is a disputes and professional negligence lawyer, mainly in the financial services sector.

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