Two recent cases have considered post termination restrictions in employment contracts. Whilst they do not create any new law they serve as useful reminders of the principles which the court will consider when deciding whether to uphold restrictions in employment contracts. Restrictive covenant clauses are a restraint of trade and the court is therefore keen to narrow the extent to which they are enforceable whilst balancing the legitimate interests of businesses.
In Landmark Brickwork Ltd v Sutcliffe & others [2011] the court restated that post termination restrictions "must impose no greater restraint than is necessary to protect the protectable interests of the claimant. Those protectable interests are confidential information and customer connection."
It is for the employer to prove that the clause is reasonable rather than for the employee to prove it is unreasonable. The clause must also be carefully drafted because any ambiguity will be interpreted against the person seeking to rely on it – usually the employer.
When determining whether a geographical restriction is reasonable the court will consider whether a narrower covenant, i.e. more restricted in terms of area, could have provided the employer with the protection it seeks. In addition, when considering whether a covenant is wider than necessary the court must be satisfied there is a correspondence between the area set out in the covenant and the area in which the employer actually operates.
One of the orders sought in the Landmark case was to restrict the defendant in an area which was defined as "(separately and severally) Cambridgeshire, Bedfordshire and those parts of the United Kingdom to the south thereof and any other place in which the claimant/applicant operates its business...at the date of termination..."
The court held that the geographical reach of the clause was "inherently uncertain" as was the concept of a place where the claimant "operates its business". Furthermore there was no evidence to establish any sufficient connection between the prohibited areas and those in which the employer operated or to support the reasonableness of seeking to exclude the employee from working in a competing business in that area. The employer was therefore unable to rely on the clause.
In Tim Russ & Co v Robertson [2011] the court considered the position of an estate agent who had left his employer to set up a competing business within a few miles of the branch where he had worked. There were arguments about whether the terms in question had been incorporated but the claimant employer alleged that Robertson, the former employee, was in breach of:-
- a clause preventing him from setting up or working in a business within 5 miles of the branch where he worked for 12 months after termination of his employment;
- a confidentiality clause;
- a non-solicitation clause preventing Robertson from "poaching staff" for a period of 12 months after termination of his employment and preventing him from having contact with Russ & Co's customers for the same period.
The setting up of the new business was, on the face of it, in breach of the non-competition clause and the court found the geographical restriction of 5 miles was reasonable. However, the court decided the clause went beyond what was necessary to protect the legitimate interests of Russ & Co in terms of the length of the period and the work covered. The legitimate interest which Russ & Co sought to protect was its customer goodwill from recurring business. On the evidence the court decided that most of Russ & Co's work did not involve recurring business and so it did not have customer connections worthy of protection. The clause also covered the lettings side of the business which was an area in which Robertson had not worked at Russ & Co. The clause was found to be void and thus unenforceable.
Robertson had taken and used his Outlook diary contact list. The court found that was sufficient to breach the non-solicitation of customers' clause and imposed an injunction on him preventing him from committing further breaches. The court allowed Robertson's business to continue subject to that injunction on the basis that Russ & Co's business interests were adequately protected by the restrictions on use of confidential information and non-solicitation clauses.
Practice Points:
- Review post termination restrictions in employment contracts periodically to ensure that they are no wider than necessary to protect confidential information and customer connections.
- When including geographical restraints in employment contracts consider whether the area included is sufficiently linked to the geographical scope of your business. Would you be able to persuade the court that there is a real functional connection between the area you have defined and the area in which your company operates? If not, the court is unlikely to allow you to rely on the clause.
- Remember that if you wish to seek interim injunctive relief if an ex-employee breaches a post-termination restriction then delay can be fatal to an application. It is therefore vital to act quickly.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.