UK Employment Alert No. 143: Enforceable restrictive covenants
July 17, 2007
Background
A covenant which restricts an employee’s ability to compete with his or her ex-employer after termination is assumed to be in restraint of trade (and is therefore unenforceable) unless it is reasonably necessary to protect the employer’s legitimate business interests (and no more).
In recent years, the Courts have adopted an increasingly stringent approach to interpreting such covenants. This has resulted in a run of cases in which employees have successfully evaded covenants that they have signed up to.
The Court of Appeal, however, in the recent case of Beckett Investment Management Group Ltd v Glyn Hall, approached this issue in a much more “employer-friendly” way.
The facts
Mr Hall and Mr Yadev (H&Y) were employed by Beckett Investment Management Group Limited (BIMG).
BIMG was the parent company of Beckett Financial Services Limited (BFS). Despite being employed by BIMG, H&Y provided their services to the subsidiary company, BFS.
H&Y were key employees. Each had a non-dealing clause in his contract of employment, which was designed to prevent the individual, after his departure, from “dealing” with “Relevant Clients” of BIMG.
H resigned in April 2006 to start his own business. He was later joined by Y. They subsequently “dealt” with “Relevant Clients” of BFS so BIMG sought to enforce the non-dealing covenant.
The Decision
The Court of Appeal held that, in each case, the non-dealing covenant was valid and enforceable as against BFS’ clients because:
- the commercial reality was that BIMG and BFS were part of the same group of companies. It did not, therefore, matter that H&Y were employed by BIMG but provided their services to BFS; and
- BIMG/BFS had a legitimate business interest to protect.
The Court also held that, in these circumstances, 12 months was a reasonable length of time to restrict H&Y from dealing with “Relevant Clients”.
In reaching this conclusion, the Court relied heavily on the following facts :
- H&Y were critical to BIMG/BFS’ business;
- to keep clients, BIMG/BFS would need to recruit, organize and train suitable replacements;
- there was (unchallenged) evidence that 12 months was industry-standard; and
- some clients were only contacted annually.
What this means for employers
This is a helpful case for employers because it is an example of the Courts adopting a more pragmatic and commercial approach towards this difficult issue.
It does not mean that all 12 month covenants will be enforceable, but it does highlight the importance of giving careful thought when drafting such clauses. The more tailored the clause, the more enforceable it is likely to be.
A key factor in this case was the unchallenged evidence that 12 months was “industry-standard”. Prudent employers might therefore consider researching this issue before drafting. In addition, if the employee is not employed by the entity he/she will work for on a daily basis, it is worth ensuring that the covenants expressly extend to the non-employer entity.
