When is a post-employment restriction not reasonable? ‘When you previously signed your employee up to a less restrictive covenant’ is one answer.
That perhaps oversimplifies the issues facing Dexter Dias KC, Deputy High Court Judge, in Sparta Global Ltd & Anor v Hayes & Anor [2024] EWHC 100 (KB). Not least because the judge was not making a final determination, dealing instead with the interim injunction sought by the claimants ahead of a speedy trial. However, trying to rely upon restrictions arising from one agreement is going to face some problems when there are less restrictive covenants in another agreement also in force between the parties.
Mr Hayes was previously the Sales Director, Financial Services Division of Sparta (the company, not the famously warlike Greek city-state) before leaving to join a competitor, Kubrik Group Limited, the Second Defendant. Crucially, Mr Hayes was entirely willing to abide by his employment contract’s restrictive covenants and gave an undertaking only to fill a different role for Kubrik (the company, not the famously successful film director) from the one he had done at Sparta. Reader, I can understand your confusion at this point. A company wants to enforce its restrictive covenants post-employment and the ex-employee agrees so what, then, is there to argue about?
Well, here is the issue. Mr Hayes had also signed an investment agreement (“IA”), which also included post-employment covenants but was wider in scope than the ones in his employment contract. The IA restrictions lasted longer, 12 months rather than the six months in the employment contract, and most crucially did not include the ‘different role’ exception for working for a competitor. Sparta, or rather a linked company joined as Second Claimant, Condor Topco Limited, sought to enforce the more restrictive terms of the IA at the interim stage. Condor (the company, not the largest living land bird) being the other party to the IA which the Claimant had signed.
When dealing with an interim injunction, the starting point is, of course, American Cyanamid Co v Ethicon Ltd [1975] 1 All ER 504, requiring consideration of 1) a Serious issue to be tried; 2) damages as an adequate remedy either way; 3) balance of convenience. When looking at employment contract related injunctions, “where it will not be possible to hold a trial until the period of the covenant has expired, or substantially expired, it is permissible for the judge to form at least a preliminary view of the claimant’s prospects of success, and to factor that in at the ‘balance of convenience’ stage of the analysis.” per Bean LJ Boydell v NZP Ltd [2023] EWCA Civ 273 at [14]referring to Lansing Linde Ltd v Kerr [1991] IRLR 80.
Having determined that there was a serious issue to be tried and that damages would not be an adequate remedy either way, the judge turned to the balance of convenience, which would include ‘some assessment’ of the merits. Whilst considering this question, the judge addressed various aspects of the case, such as the overall features of the IA’s restrictions, the restriction period compared to the notice period, the way the IA was entered into, including that Mr Hayes had never received a copy of it, the value of the shareholding together with the percentage of ownership it gave rise to and the relative bargaining power of the parties when entering into the IA. Ultimately, in the judge’s view, the IA was “more akin to a contract of employment and intricately connected to Mr Hayes’s employment rather than a business sale case” (at [50]) and that the “protection sought through the employment contract… is a clear example of how the claimant [Sparta] originally understood the level of protection it required to safeguard its interests” (at [51]). Accordingly, the judge held, “As a preliminary view, I find that the claimant is unlikely to persuade the trial judge that the IA covenants are reasonable and enforceable against the defendant. The covenants are likely to be held to be too broad and beyond the bounds of reasonableness” at [55].
Having assessed all that, perhaps entirely unsurprisingly, the judge overall held that “I am quite satisfied that the covenants in the employment contract, about which full undertakings have been given, do provide sufficient protection of Sparta’s legitimate business interests….[72] Sparta has all the relief it originally sought and continually fails to explain despite repeated enquiry from the defendant and the court why such protection is no longer sufficient [74].”
It must be remembered that injunctions are fact sensitive matters, so the lessons to be taken from this single case have their limits. However, what the case does demonstrate is that where employers have chosen one set of restrictions, they will need to set out a case with some conviction as to why wider restrictions are, in fact, needed. Perhaps this can be seen as a case where the famous Spartan fighting spirit has been taken too far and I would not be surprised if Sparta finds the costs are more than 300 (£) as a result.
Alex Mellis is an Employment Barrister at No5 Barristers’ Chambers.
