12-month non-compete restrictions can be valid: Thomas v Farr plc and Hanover Park Commercial Limited, Court of Appeal

Mr Thomas was employed as managing director at Farr plc, an insurance broker specialising in providing services for providers of social housing. His contract contained a non-compete clause restricting him from competing for a period of 12 months post-termination. The contract also contained non-solicitation and confidentiality clauses.






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Thomas issued proceedings against Farr claiming damages for breach of contract, constructive dismissal, and that the non-compete clause in his contract was an unreasonable restraint of trade, and therefore unenforceable. The restrictive covenants issue was dealt with as a preliminary point by the High Court, which held that the 12-month non-compete clause was enforceable. Thomas appealed to the Court of Appeal.



Decision


The Court of Appeal upheld the decision that the 12-month non-compete clause was enforceable. Despite Thomas’ protestations to the contrary, the fact that he was the managing director of the company with overall responsibility for running the business, and was privy to all major strategic and operational decisions, meant that he was exposed to confidential information that Farr had a legitimate business interest to protect.


Even though Thomas was also subject to non-solicitation and confidentiality restrictions, these were not sufficient to protect Farr’s business interests, not least because of the difficulty of actually policing such clauses. In reality, Thomas would probably not solicit clients himself, but would direct others to do so, and there would be practical problems in enforcing those restrictions.


Turning to the terms of the non-compete clause itself, it was not too wide. It did not restrict Thomas from acting as an insurance broker in any sector other than social housing, nor would it prevent him from acting for insurers in that sector, as long as he did so in a way that was not in competition with Farr.


The limitations were therefore reasonable in scope. Finally, the court held that, since most housing association insurance policies were for periods longer than 12 months, the 12-month period in the non-compete clause was reasonable.


Key implications 


Non-compete clauses are notoriously difficult to enforce. This case will therefore be welcomed by employers as it illustrates that, in the right circumstances, such clauses can be effective, provided there is a legitimate business interest to protect (as there was in this case) and the clause goes no further than is necessary.


The case also highlights that the courts are prepared to enforce non-compete clauses even where the contract also includes valid non-solicitation and confidentiality clauses, if these latter provisions do not go far enough to protect the employer’s legitimate business interests. A 12-month restriction is considered to be the upper limit of what is acceptable for a restrictive covenant, but can be found to be appropriate in the right circumstances, as in this case.



By Laura Green, an assistant solicitor in Lovells’ employment group