ENFORCABILITY OF RESTRICTIVE COVENANT
The difficulties involved with enforcing restrictive covenants contained in contracts of employment have been illustrated in two recent cases. The first of these, (Customer Systems PLC –v- Ranson and others [2001] EWHC 3304(QB)) illustrates the difficulties that can arise in connection with the interpretation of the restrictive covenant clause itself and as to whether the contractual restrictions are regarded by the Court as reasonable. The second case (Towry E J Limited –v- Bennett and others [2012] EWHC 224) illustrates the practical difficulties with which an employer is faced when seeking to enforce a “non-solicitation” (of existing customers, staff etc) by pursuing a claim for compensation rather than seeking an injunction.
Background
The departure of any employee, particularly one in a key position, can cause substantial damage to a business. If the employee sets up or joins a competing business then there is a real risk that customers or clients that have been dealing with him will transfer to that new business on his departure.
Over the years, employers have developed an arsenal of weapons to deal with these situations and the courts have been asked to consider whether these weapons are legal. There is a healthy commercial tension between the right of an employer to protect its legitimate business interests (on the one hand) and the right of an individual to practice his living (on the other).
The techniques used by an employer will include the enforcement of garden leave and the use of a variety of contractual clauses such as non-dealing or non-solicitation restrictive covenants contained in a written contract of employment signed by the employee. The contract will also contain provisions setting out what might be regarded as confidential information and making it clear that this should not be taken by any employee on departure. In addition, the employer will seek to take practical steps to ensure that no confidential information has been taken when the employee departs.
Will a non-solicitation clause be regarded as reasonable?
In determining whether or not any of these contractual measures is enforceable, the Courts will consider all the circumstances of the case but in particular
- the role that was undertaken by the employee;
- the nature of his involvement with customers or clients; and
- the nature of the business in question.
For these reasons, it can be difficult to draw firm conclusions from recent cases. However, they do provide a framework for considering whether particular clauses might be regarded as reasonable in the future. In the case of Customer Systems –v- Ranson a Senior Sales Manager set up his own company to compete with his previous employer and had persuaded some other employees to join him. These employees were bound by the terms of a restrictive covenant which provided that
“for a period of one year after [the employment ceased] you undertake not to be employed directly or indirectly by any present or past customer of Customer Systems with which you have been personally involved in the course of your employment by Customer Systems”.
Sir Raymond Jack in the High Court determined that the twelve month period was at the limit of what might be regarded as reasonable and on the facts of this particular case found that the covenants themselves were unreasonable when taken with the fact that there was no time limit on the interval between the employee’s involvement with any of the customers in question and the date of his departure. Furthermore there was no qualification relating to the extent (or otherwise) of his involvement with the customers in question. Therefore the covenants were held to be unenforceable.
Practical issues on enforcement
The difficulties faced by the employer in the Towry case also arose from a desire to enforce a non solicitation clause. In that case the evidence was that a “tidal wave” of clients had moved across to the business where the former employee now worked. The question in issue was whether it was possible for the employer to argue that solicitation of the former clients in breach of the non solicitation clause could be inferred ONLY from the fact that so many clients had moved.
Importantly, there was no primary evidence that the employee in question had “requested or persuaded or encouraged” the clients to move across. Consequently it was arguable that they may have moved across simply out of a sense of loyalty to him even though no approach had been made.
Mrs Justice Cox, in the High Court said that whilst in principle there was nothing to prevent an employer seeking to argue that solicitation could be inferred in such circumstances, she found that the claimant had not been able to show that this inference should be drawn on the facts of that particular case. She stressed that the burden of proof rested firmly on the employer to provide evidence of the solicitation for the purposes of such a clause. She stated that the key feature of solicitation could occur face to face, by letter, telephone or email but the employer will need to show that there has been an element of persuasion and it is this element that distinguishes solicitation from mere “dealing”.
Conclusion
It is important for employers to take steps to protect their businesses but it can be difficult to do so. When it appears an employee may be in breach, it is important to take an early view as to the prospects of success before launching into court proceedings.