Forsham and others v Archcraft Ltd

Forshaw and others v Archcraft Limited
Refusal to sign unreasonable restrictive covenant is not a fair reason for dismissal

Archcraft employed 13 employees, all highly skilled and trained. Archcraft’s production director and its sales director decided to set up in direct competition with the company.

They resigned and announced that some of their colleagues would be following them to their new, competing company. To stave off the risk of other employees leaving to join the competing company, Archcraft asked the claimants (Forshaw and two others) to sign new contracts of employment containing a new nationwide restrictive covenant preventing them from competing with the company for 12 months following the termination of their employment. The claimants refused to sign the new contract and were dismissed.

The tribunal found that, considering that the company was such a small firm, its decision to dismiss was fair for ‘some other substantial reason’ and the dismissals fell within the range of reasonable responses. Although the restrictive covenant was viewed by the tribunal as being wider than necessary, it concluded that it was not unreasonable for the company to wish to protect its interests in this way.

On appeal, the EAT said the tribunal’s decision was wrong, as an employer cannot fairly dismiss an employee for refusing to sign unreasonable terms of employment. Had the restrictive covenant been reasonable in scope, the dismissals would have potentially been fair.

Key points

Dismissing an employee for refusing to accept a reasonable restrictive covenant is a potentially fair dismissal. However, it will not be fair to dismiss an employee on the grounds that they have refused to sign a new contract of employment containing an unreasonable term.
A restrictive covenant will be void as a restraint on trade to the extent that it goes beyond what is necessary to protect the company’s legitimate business interests.

What you should do

  • Take care when drafting restrictive covenants to ensure they are no wider than absolutely necessary and that they are tailored to the particular employees and the role the employee performs
  • Provided you are able to show that there is a ‘sound good business reason’ to change terms and conditions, this will be sufficient to establish some other substantial reason for dismissing an employee who refuses to accept those changes (Hollister v National Farmers’ Union).

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