The recent case of East England Schools CIC v Palmer is a further example of the factors that the courts will take into account when interpreting restrictive covenants and a reminder of the powers that they have to amend these in certain circumstances.
Background
The claimant worked as a recruitment agent under the terms of a contract which contained restrictive covenants in which she had agreed not to compete or to solicit or deal with clients or candidates for six months following the termination of her employment. In the usual way, the restrictions applied whether she acted directly or indirectly, alone or with others and “whether on her account or as principal, partner, shareholder, director, employee, consultant or in any other capacity whatsoever”.
The claimant argued that the non-solicitation covenant was unreasonably strict (and therefore should be struck out in its entirety) on the basis that she could find herself in breach even if she had only a small minority shareholding in another business which solicited or dealt with clients or candidates of the former employer. She argued that this would be unfair in circumstances in which she might still play no active part in the business of that company; for this was an unreasonably wide restraint. The High Court considered that argument in relation to both the non-solicitation and non-dealing covenants.
The court’s decision in relation to the effect of the covenants
When considering the interpretation of the non-solicitation covenant the court took the view that since breach of this would involve a positive act of canvassing or soliciting by the claimant, it would not be infringed simply as a result of her owning a minority shareholding. On the other hand when interpreting the non-dealing covenant the clause stated that the claimant could not “be concerned with the supply” of services to any of the restricted clients and/or candidates and, on the face of it, the mere fact that she was a minority shareholder in a competing business which dealt with those clients or candidates would infringe the covenant even if she played no active part in the business. Therefore, if the covenant had remained unaltered the court would have been required to strike it out.
Amending the offending covenant
However, the court exercised its power to use the “blue pencil test” in order to see if the covenant could be amended by striking out (blue-pencilling) the offending words which would otherwise make the covenant too wide. The court decided that by making certain deletions from the wording of the covenant it could render it reasonable in its effect, and, therefore enforceable.
Summary
The case illustrates that, when reviewing the potential enforceability of restrictive covenants, there are a several factors to take into account and that it can be dangerous to assume that a restrictive covenant is too wide (and therefore unenforceable) bearing in mind that the court has power to strike out any offending words within the covenants if it believes that it can do so in order to render the covenant enforceable.