Failure to keep contracts up to date can cost dear

Standardised restrictive covenants should be periodically reviewed to account for individuals’ changing circumstances.

One size does not fit all, but tailor-made will do the job. That is the latest message from the courts to employers who want to protect their business by restraining their employees’ actions after they leave. The decision of the Court of Appeal in Wincanton v Cranny and SDM European Transport, 2000, IRLR 716 CA, will come as some relief to concerned employers. It is one of the few reported cases last year where the courts have enforced this kind of restriction.

However, all employers would do well to check their contracts of employment to make sure that the restrictive covenants are in line with this latest ruling.

The case concerned Cranny, the European operations manager of Wincanton Distribution, the second-largest haulier in the United Kingdom. His contract of employment included restrictive covenants that for a period of 12 months after termination of his contract he would neither compete with his ex-employers nor attempt to solicit any customer with whom he dealt in the final 12 months of his employment.

After handing in his notice he left Wincanton by agreement on 31 August 1999 and started working for SDM the following day. However, unbeknown to Wincanton, Cranny had actually been a director of SDM since it had been set up in April that year.

This only became apparent during October 1999 when Wincanton found that it had lost a number of former customers to SDM. Wincanton applied to the High Court for an injunction. The deputy High Court judge who heard the case, in tune with the majority of reported cases in 1999, found the restrictions were not enforceable because they went further than necessary to protect Wincanton’s legitimate business interest.

Wincanton took its case to the Court of Appeal. It agreed with the High Court in respect of the non-competition covenant, stating it was clearly intended to apply to a wide range of situations and was not sufficiently focused on the particular field of activity in which the ex-employee had been personally engaged. However, it did not agree with the High Court in respect of the non-solicitation covenant. It considered this was sufficiently tailored to the particular employee so went no further than was necessary to protect Wincanton’s legitimate business interest.

So does case law which arose around restrictive coven-ants give some hope to employers? As yet it is probably too early to know whether recent cases giving encouragement to employers are merely a blip on the horizon.

What the Wincanton case does do, however, is serve as a timely reminder that restrictive covenants which are manufactured in a “one size fits all” package should be revisited for a little tailoring.

Indeed, as it has been found in the past that it is appropriate for the courts to consider what the parties to a contract of employment might reasonably have expected to happen after the contract is signed, restrictive covenants should be kept under constant review.

Failure to do so can result in a situation such as that which the writer came across recently where a 16-year- old apprentice became, 16 years later, a 32-year-old marketing manager at the same company.

Unfortunately, his contract was not updated to take account of his change of status and when he left, and subsequently solicited a number of key clients, the company was in no position to retrieve the situation.

Key points

  • Standard form restrictive covenants should be tailored for individual employees.

  • Restrictive covenants should be kept under constant review and, when an employee’s status changes, consideration should be given to tailoring the covenant to match his new position more closely.

  • Restrictive covenants should not be relied on as the only measure in the employer’s armoury to prevent unfair competition.

By Trevor Gibson, a lawyer at Wragge & Co

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