Legal opinion: When are restrictive covenants enforceable?

Barrister Paras Gorasia looks at how employers can improve the chances of a restrictive covenant being enforceable.

When and whether or not restrictive covenants are enforceable in an employment contract is an issue that continues to be legally contentious. While it is understandably of deep concern to employers when senior members of staff decide to set up in direct competition after leaving the company, care must be taken to consider industry norms and draft a clause that extends only for as long as is absolutely necessary.

When is a restrictive covenant too restrictive?

Historically, the courts have not viewed unfairly strict covenants with great sympathy. Many such contracts were simply deemed invalid in the civil courts and employers were left wondering what it would take to protect their interests in a manner that would stand up to scrutiny.

Thankfully, ongoing case law is providing some guidance regarding the validity of restrictive covenants. Take Romero Insurance Brokers Ltd v Templeton & Anor [2013], for example. Here, the High Court distilled the key issues regarding enforceability of restrictive covenants, notably that there must be a clearly defined protectable interest and that any restraint on ex-employees must be reasonable and necessary. The burden of proof in this matter lies firmly with the employer.

Context is the key

Mr Templeton resigned from his job with Romero in October 2012 and contended that he was constructively dismissed. The company had originally hired him due to his impressive network of contacts in the Halifax market. But when results did not materialise as expected, Romero placed Templeton at risk of redundancy. The working relationship deteriorated and Templeton resigned. Soon after, the company became aware that their former employee was approaching its clients for business and so it applied for an interim injunction to the High Court – relying upon a restrictive covenant that prohibited Templeton from seeking to do business with clients that he had dealt with in the last six months of his employment. The restriction was drafted to last for 12 months from the date of termination.

Crucial in this case, and others like it, is how the courts continue to stress the importance of the individual facts and the context of the claim before deciding if a restriction is valid and reasonable. In the insurance industry, for example, the majority of contracts last for 12 months. As such, the 12-month restriction in Templeton’s contract was considered to be reasonable. This does not mean that 12 months will be considered fair in a different case from a different industry.

Identifying the interests in need of protection

Before drafting restrictive covenants, employers must be able to clearly identify which specific interests need protection and reference all relevant factors relating to timescales, including industry norms. It is always better to ensure that restrictive covenants reflect the individual circumstances of the business as opposed to using templates or precedents that may not apply to the particular circumstances affecting the business.

Off-the-shelf clauses will simply not do the job. The length of any restriction needs to be carefully considered and never be any longer than necessary. Otherwise, the courts are still likely to consider it invalid. The longer the period of any restriction, the more cogent the explanation will have to be to satisfy a court that it should be enforced, and the more difficult it will be for an employer to argue in its favour. Accordingly, it may be sensible to err on the side of caution and veer towards a shorter period of restriction if you want it to stand up in court.

Paras Gorasia is a barrister at Kings Chambers

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