Restrictive Covenants: Good News for Employers?

Restrictive covenants have long been a tricky area for employers wanting to protect their business from damage that may be caused by outgoing employees, whether in relation to protecting customer contacts, price sensitive confidential information or simply trying to prevent competitive activity altogether.  The well established legal position is that restrictive covenants will be void and unenforceable as restraint of trade except where they go no further than is reasonably necessary to protect an employer’s legitimate business interests. Historically, enforcement has been difficult for employers, with the Courts seemingly ready and willing to construe any ambiguities or potential weaknesses in the restrictions against the employer (and refusing to enforce the covenants on this basis).   

Whilst there have been a few recent cases where the Courts appear to be willing to take a more “employer friendly” approach to interpreting and enforcing post termination restrictions (which is no doubt encouraging for employers), the case of Prophet Plc -v- Huggett (which we also report on in this month’s newsletter) should serve as a salutary tale for employers who thought the tide was turning in their direction.

In one recent case, Croesus Financial Services Limited -v- Bradshaw and Another, the High Court agreed to uphold a 12 month non-solicitation covenant.  This covenant applied to a Financial Adviser and purported to impose a 12 month restriction preventing him from soliciting clients or prospective clients with whom he had personal contact in the course of his duties in the last two years of his employment.  The covenant was drafted to last for a period of 12 months after the termination of his employment.  The employee tried to argue that the covenant was too wide to be enforceable.  However, the Court said that the 12 month restriction was a reasonable one as it reflected an “industry standard”.  They also noted that 12 months was, in their view, a reasonable period for such a restriction because it reflected the period that an ex-employer would need to spend building up the relationships between its clients and a new adviser.

In Coppage and Another -v- Safetynet Security Limited, the Courts looked at a covenant that tried to prevent an employee from soliciting customers for six months after the termination of his employment.  In this case, the covenant was challenged on the basis that it was not limited to customers with whom the employee had dealt during their employment (which is a fairly standard limitation commonly included in such covenants).  In previous cases, similar covenants have been found to be unenforceable on the basis that they were too wide in scope because they were not specifically limited to customers that the employee had personal dealings with.  However, in this case, the Court upheld the covenant on the basis that the employee was senior, and the business was small, so limiting the covenant to those customers that he had actually dealt with during the last 12 months of his employment would have not given the Company sufficient protection for its legitimate business interests.  In addition, the Court found that the fact the covenant was for a relatively short period was an additional powerful factor in concluding that the covenant was reasonable.

However, in the case of Huggett, the Court of Appeal overturned a decision by the High Court to enforce a 12 month non-compete covenant by rectifying a “drafting error” and inserting additional wording. The Court of Appeal ruled that it had to interpret the covenant as drafted, which effectively rendered it useless for the employer.

Whilst some of these cases are helpful, Huggett reinforces the underlying message that there can be no substitute for well drafted bespoke covenants that take into account the specific nature of the business and the specific risks posed by an exiting employee (based on their particular role, seniority etc).  We would therefore strongly recommend that covenants should be specifically tailored for new senior employees and, importantly, updated whenever employees change roles within the business.  

Please contact Gareth Roberts if you would like to discuss protecting your business in more detail.