CASE OF THE WEEK: Dunedin Independent v Kenneth Welsh
Dunedin employed Mr Welsh as an independent financial adviser. Welsh’s employment contract contained non-dealing and non-solicitation restrictions, which applied for 12 months after the termination of employment. The parties agreed a compromise confirming the terms of the employment contract and a termination date.
Dunedin later claimed that Welsh had contacted a number of its clients and induced them to transfer their business. Dunedin argued it had suffered financial losses as a result and should be compensated as otherwise it would have retained the business.
Welsh denied that any contact amounted to solicitation, and argued that the non-dealing clause was unenforceable.
The non-solicitation clause was valid, but the court considered that no breach had taken place because there was insufficient evidence of active enticement by Welsh.
As for the enforceability of the non-dealing clause, the court applied the general principle that it would be void unless Dunedin could show that it went no further than was reasonably necessary to protect a legitimate business interest. While there was a legitimate interest in Dunedin protecting its client base, the clause prohibited Welsh from all ‘business dealings’ with his former clients, not just in relation to their financial interests, and therefore the court decided the clause was unreasonably wide and therefore unenforceable.
So, if Dunedin had managed to prove a breach could it have claimed compensation? The court decided that even if the clients had not been contacted at all, they would have left Dunedin shortly after Welsh’s departure equally if Welsh had declined to act, they would still not have remained with Dunedin. No loss or damage could therefore be shown.
The court confirmed that the proper method of assessing loss was not what Welsh might have gained, but the loss of profit suffered by Dunedin.
The interpretation of restrictive covenants is often unclear as so few cases go to trial. This Scottish case highlights what to bear in mind when drafting restrictions and what to expect when claiming compensation.
The difficulties in recovering compensation highlight the value of well-drafted restrictions, supported if necessary by injunction proceedings. Prevention is better than cure.
Non-solicitation provisions, while generally valid, are difficult to enforce due to the requirement of proving enticement by the ex-employee. Such evidence usually depends upon involving an employer’s clients, which is either impractical or unappealing.
In contrast, with no such evidential hurdle, non-dealing provisions are very effective, but only if the words do not give rise to a meaning that is unreasonably restrictive. A court cannot amend the clause to reflect what the employer perhaps truly intended.
By Jonathan Grigg, associate, dispute resolution, Shoosmiths