The Latest Guidance On The Enforceability Of Restrictive Covenants

Wed, 17 Sep 2014

Mugni Islam-Choudhury reports on the latest developments on restrictive covenants following the cases of Merlin Financial Consultants Ltd v Cooper [2014] IRLR 610, QB and Prophet plc v Huggett [2014] EWCA Civ 1013 (CA).

Some General Guidance

In Cooper, the issue related to a 12-month non-competition clause for the whole of the UK for a financial advisor. He had worked for a company whose clients were predominantly in London and the South East. After leaving his employer, he started working in competition, arguing that the restriction was invalid, because it was too wide geographically, and unnecessarily long in duration. The High Court granted an injunction, finding that the restrictions was valid on the basis of the specific facts found in the case.  

In coming to his decision, Judge Peter Hughes QC reviewed the authorities, and in paragraph 62 of his judgment summarised a number of principles derive from case law as follows:

1.     The party seeking to enforce a restrictive covenant must establish that it is reasonable both between the parties and in the public interest.

2.     The question of whether the restraint is reasonable or not must be assessed as at the date of the agreement. That includes, though, what is in the reasonable future contemplation of the parties at the time.

3.     The restraint will not be reasonable between the parties if it provides the party in whose favour it is imposed with more protection than is justified in the circumstances. 

4.     The nature of the relationship between the parties is an important factor in deciding whether or not the restraint is reasonable. There is more freedom to negotiate in business sale agreements than between employer and employee. 

5.     Where the parties are of equal bargaining power, the court is slow to intervene to prevent the enforceability of what they have freely agreed, as they are the best judges of what is reasonable as between themselves, but if the restraint goes further than is reasonably necessary to protect a legitimate business interest, it will be held unenforceable.

In Cooper, the issue turned on two relevant findings. Firstly, the geographic limit was not unreasonable, given today’s business environment of the financial services market being a single geographic market across the UK, made more so by electronic communication. Secondly, and specific to Mr Cooper, Mr Cooper had an important asset which Merlin was keen to acquire and secure for itself when he joined the company; namely, his existing bank of clients and the income stream generated by their funds under management. This enabled him to seek more advantageous terms than Merlin generally offered employees under their standard contract of employment. In return for the capital payment to acquire his client base they wanted protection were he to leave and try to take his clients with him.  In other words, when the bargaining power was more equal, as in the present case, the court would be slow to interfere with what the parties had agreed between themselves.

Poorly Drafted Restrictions

The Huggett case concerns the thorny issue of interpretation of badly drafted restrictions and the extent to which the Court is allowed to alter the wording or use licence to give it a sensible (and enforceable) reading. Usually these cases relate to restrictions being too widely drafted but in the present case, due to a drafting error, the restriction was too narrow, so as to render it useless.

In the case, a professionally drafted clause restrained the employee from being involved in the future with the sale of the company's products that he had been involved with. The problem was that those products could only be sold by the company itself, not any future employer. What was intended by the company was that the restriction applied to any products similar to its products. The judge at first instance agreed and granted an injunction based on such similar products.

However, the Court of Appeal overturned the decision and discharged the injunction. It held that the power to intervene was restricted to cases of genuine ambiguity, where a clause could be interpreted in different ways, and where a court could decide to accept a version achieving the desired result. Where, however, what is involved is basically a mistake in the drafting, then “the employer has made his bed and must lie on it”, ending up if necessary with a commercially meaningless clause.  As the wording of the clause was genuinely unambiguous, albeit commercially useless, commercial intent was irrelevant as to its interpretation, and the Court would not alter the clause to give the employer the desired result.

Comment

These cases do not break any new ground in the law of enforceability of restrictive covenants. However, what they do highlight is that the use of “blanket” restrictions, where there is no genuine thought given as to their reasonableness and the legitimate business interests that they seek to protect, will risk the clauses being deemed unenforceable. And, of course, when drafting clauses, there is no escape from the maxim – “Check your work”…  

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