PERSONNEL - 31.05.2011

The (un)enforcable restrictive covenant

The nuts and bolts

Companies like to place restrictive covenants in directors’ contracts and also in those of senior staff (see The next step). These contractual clauses dictate what they can (and can’t) do if they leave your employment. Most commonly they’re designed to prevent individuals from working for a competitor, and/or setting up in competition near your business, for a set period of time.

It must expire at some point

Unfortunately, a restrictive covenant can’t run on indefinitely; the courts have been quite clear that any attempt on your part to do this would be unreasonable. However, they do recognise that companies have the legitimate right to protect their business interests - so providing this type of clause is reasonable in its scope and duration, they are perfectly acceptable.

Totally (un)reasonable

But if a restrictive covenant appears reasonable - and even if both parties have previously agreed to it - the court can still strike one from a contract where it’s deemed “too excessive in the restraint of trade” (judges don’t like this behaviour). As a consequence, where this happens, the clause is void and the company has no protection.

Setting up in competition

This happened in a recent case. Mr Robertson (R) was employed as a senior estate agent by Russ & Co (RC). His contract of employment contained a detailed restrictive covenant. It said that for twelve months post-termination he could not:

• approach any of RC’s customers for work
• set up, or work in a business, within five miles of the branch where he had worked; and
• approach any of RC’s employees to offer them employment.

Post-termination trade

In January 2011 R resigned. Shortly afterwards it came to RC’s attention that he had opened an estate agency 1.7 miles from where he had worked. Unhappy about this, it sought to enforce the restrictive covenant through the courts. But it came unstuck. Whilst the judge sympathised with its position, he felt that R’s work for RC wasn’t of a “recurring nature”. In other words, clients generally only used its services once to sell their houses; they didn’t do this on a repetitive basis.

The moral of the story

He ruled that the restrictive covenant RC had used was, therefore, “too wide in its scope” and “excessive in the restraint of trade”. So even though R had previously agreed to it, he was free to operate in competition as he wished.

Tip. An off-the-shelf restrictive covenant is a good starting point, but it can’t protect every business. The only way to do this is by taking legal advice and, if necessary, have a solicitor draft it for you. This might seem like an unnecessary step, but it could make all the difference between the success and failure of this type of clause.

For a free sample restrictive covenant, visit http://companydirector.indicator.co.uk(CD 12.17.02).