Injunctions to enforce restrictive covenants – some pitfalls

Tue, 08 Sep 2020

If you are looking to enforce a restrictive covenant in a business protection case, the High Court’s recent decision in Peltrade Ltd v Scanlan [2020] 9 WLUK 34 is a timely reminder of how not to do things:

The decision in Peltrade Ltd

Peltrade Ltd sought an interim injunction to enforce a 12-month non-compete clause against its ex-employee, Mr Scanlan. On leaving Peltrade he had openly declared his intention to join a competitor. Several months into his new employment, Peltrade applied without notice for an interim injunction to enforce the covenant. It succeeded. On the return date, however, things unravelled for the employer:

The Court criticised Peltrade for its delay in making the application: in the view of Saini J, the delay was fatal. The Court also criticised the employer for failing to disclose adverse evidence (Whatsapp messages), which showed that it had arguably released the employee from his covenant. The employer’s delay and its material non-disclosure were enough on their own to warrant a discharge of the injunction.

The Court also re-examined the enforceability of the covenant. Usually, a party seeking an interim injunction need only clear a low hurdle: it is enough to show its claim discloses a “triable issue” (the first stage in American Cyanamid). However, in Peltrade the Court took a more nuanced approach in line with another recent decision, P14 Medical Ltd v Mahon [2020] EWHC 1823 (QB). Where a covenant is time-limited, it is relevant to ask: will the covenant have substantially expired by the time of any future trial? If so, the Court will scrutinise the merits more closely and will generally require far greater convincing before it grants an injunction. On a second, closer, examination Saini J held that the employer’s covenant was too wide to be enforceable (and, therefore, a restraint of trade).

Practical lessons

The decision in Peltrade offers some useful reminders when applying for interim injunctions:

  1. Think fast, act fast. If a party is serious about obtaining an injunction, it must act swiftly. Interim injunctions are appropriate to address urgent problems that cannot wait until trial. Of course, some thinking time and preparation time are necessary before launching proceedings. However, coming to court months after the alleged breach has started will undermine the applicant’s own case on “urgency”. In Peltrade a 5-month delay by the employer was fatal. Understandably, the Court was reluctant to intervene and break up a new employment relationship which was already taking root.
  2. Give notice and fight fair. Unless the case is exceptional, do not be tempted to skip the requirement to give notice. An applicant might well obtain a cheap victory at an ex parte hearing, but this is always liable to be ruled off-side on the return date. Moreover, a party who applies without notice puts itself under a heightened duty to disclose points adverse to its own case (the duty to give “full and frank” disclosure). Unless it is scrupulously fair, it is simply setting itself up to fail when, inevitably, the respondent argues on the return date that there was material non-disclosure. Applying without notice is a double-edged sword.
  3. Be prepared for a stricter merits test in some cases. Where restrictive covenants are nearing their expiry date, the Court will examine their enforceability more robustly. Do not be complacent. Simply showing a “triable issue” will not be enough – the examination is more rigorous. As Peltrade shows, two judges applying different standards of review may very well take different views on enforceability. It is essential to seek focussed advice on the issue of enforceability before going to Court.

Changez Khan is a member of the Employment and Business & Property groups at No5 Barristers’ Chambers. He is experienced in cross-over employment/ commercial work including in business protection cases.

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