Weekly dilemma: restrictive covenants

Q I am the director of a popular advertising agency. According to company policy, all of our senior staff have a restrictive covenant in their contract, forbidding them from joining a competitor until 12 months after resignation or redundancy. It has recently emerged that a former account manager has joined a rival agency. What are our options?

A To enforce the covenant, you would have to apply to the court for an injunction to prevent the former employee from continuing to work for the rival agency. Alternatively, you could bring court proceedings for compensation in respect of the breach of contract. You may be awarded compensation in respect of the loss of profit suffered by the business.

While breach of a restrictive covenant is essentially a breach of contract, unlike other legal proceedings where there has been a breach, you will have to convince the court that the restrictive covenant is valid. The starting point for the court is that contractual terms restricting employees’ post-employment activities are unenforceable. The principle behind this is that the term is void for being a restraint of trade in that it prevents an individual from earning a living.

The presumption of unenforceability can be overcome if you are able to demonstrate that the clause does no more than is necessary to protect legitimate business interests.

The non-competition-type restrictive covenant has traditionally been harder to enforce than other types, such as non-solicitation. This is because it may be so wide that it is seen as likely to prevent the employee from being able to work. However, the courts have, in recent years, given some encouragement to businesses to use them.

Most notably in Thomas v Farr plc and Hanover Park Commercial Limited 2007. The background was that the managing director, Mr Thomas, secured a job with a competitor and then sought a declaration that the non-competition clause was an unreasonable restraint of trade and unenforceable. The employer was able to show that Thomas was privy to sensitive, confidential information that would allow him to devise a strategy for the competitor to undercut them. It was submitted that the competition restraint was the only effective means of protecting the business from that risk. The High Court and Court of Appeal both upheld that the 12-month non-compete restriction was reasonable and enforceable.

However, you may still face problems if the restriction is drafted so widely as to cover the whole advertising sector. In the Farr case, the covenant was qualified insofar as it covered only the particular part of the industry that the ex-employee had been involved in. If there had been no limitation, the clause may have been found to be excessive regardless of the risk posed by the employee on his departure.

Kerstie Skeaping, partner, Halliwells

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