Employers often seek to prevent employees from competing with their business, after the employment relationship has ended, by incorporating into their employment contracts express clauses restricting certain activities in the event of termination. Such clauses are commonly known as post termination restrictive covenants (“PTRs”)) and the issues which arise in relation to them have assumed significance in sport. However, there is often misunderstanding over the extent to which such clauses are enforceable.
Bird & Bird offers an overview of the legal framework to which PTRs are subject and debunks some of the myths in this area.
A restrictive covenant is a contractual provision designed to prevent an individual from acting freely and thereby competing with a former employer on the termination of employment. Typical restrictions will aim to prevent an individual from:
- Working for a competitor, either completely, or in relation to certain specified activities (the “non compete” covenant);
- Carrying out competitive activities within a particular geographical region (the “area” covenant);
- Soliciting business from the employer’s customers or prospective customers (the “non solicitation”covenant);
- Dealing with the employer’s customers or prospective customers (the “non dealing” covenant); and
- Encouraging other employees to leave the employer (the “non poaching” covenant).
In addition, employees are normally subject to express contractual duties of confidentiality, which will dovetail with the PTRs.
PTRs are regularly derided as being “not worth the paper they are written on”, but the reality is very different. The courts have frequently shown a willingness to enforce well (and some not so well) drafted covenants, provided they respect the overriding principles applicable in this area. Indeed, the recent trend of the courts seems to have been to save and uphold restrictions wherever possible.
The law recognises that there is a broad social interest in every person being able to carry on their trade freely. Consequently, as a matter of general public policy, contractual provisions which act in restraint of trade will be void – and therefore unenforceable. However, this policy is counterbalanced by the legal principle that parties to a bargain should be entitled to rely upon the agreed terms (the doctrine of “freedom of contract”).
The result is that a PTR, which is technically a restraint of trade, may be enforceable provided:
(i) it protects a legitimate business interest of the employer relying upon it; and
(ii) is no wider in scope than is reasonable and necessary to protect the interest in question.
Each of these components will need to be considered in the context of the specific factual matrix that exists in any given case.
What is reasonable?
In practice, disputes over covenants centre on the question of reasonableness.
Unfortunately, as each case will turn on its own particular facts, there are few hard and fast rules which can be applied when assessing whether a restriction is reasonable in any given scenario. However, we do know from a long line of court authorities that:
- The burden of proving reasonableness rests with the employer;
- The reasonableness of a restrictive covenant must be determined by reference to the circumstances of the parties at the time it was agreed, i.e. it should be reasonable from inception;
- The respective bargaining strengths of the parties will likely be a factor in the determination of reasonableness, that is to say, a covenant which is unreasonable for a junior employee may be reasonable for a senior employee;
- The longer the stated period of a restriction, the harder an employer is likely to find justifying the covenant and so restrictions of more than 12 months are generally not enforceable.
The standard remedies for an employer wishing to enforce covenants in response to employee breaches are: injunctions and damages.
In a typical scenario, the employer will be keen to prevent the employee’s offending activity as quickly as possible. The first step will almost always require the employer to write to the employee detailing its concerns and seeking assurances (in the form of undertakings) that the prohibited activity will stop. In the absence of a satisfactory response from the employee, the employer will wish to obtain an interim court injunction to force the employee to cease his activities pending a full trial on the issues.
A court always has discretion to grant or refuse an injunction, even where the covenant is reasonable. Factors the court will take into account include:
(i) whether the injunction will serve a useful purpose,
(ii) the availability or otherwise of evidence the employee is acting (or likely to act) in breach of covenant,
(iii) the time remaining before the duration of the covenant expires,
(iv) any delay by the employer in enforcing the covenant (and the reasons),
(v) the benefit, if any, of maintaining the status quo, and
(vi) whether damages would be an adequate and quantifiable remedy.
Whether you are seeking to enforce a covenant or defend an enforcement action, decisions will generally need to be taken quickly and under pressure.
Once an employer has decided to issue court proceedings, the action will become intense and fast paced; court documents and witness statements will need to be prepared and evidence collated for lodging at court and serving on the opponent in very short timescales. As the parties’ respective cases develop, the sands can often appear to shift at an alarming speed, therefore the parties must allow for some flexibility in their strategies, so they can adapt according to the evolving factual landscape. They should also be realistic about their commercial objectives and what is achievable both legally and in practice.
Parties should expect that the court will hear an application for an interim injunction within 4 or 5 days of it being served. If the injunction is granted, the court will then generally order that the matter proceed to a “speedy trial” (this is a normal full trial, but typically requires preparation to be squeezed into a period of 6 weeks or so).
In reality, most cases at this stage will settle for commercial reasons, given the level of commitment that is required to prepare for a speedy trial. It is also worth bearing in mind that the “loser” of an injunction action will typically have to pay his opponent’s costs in addition to his own.
The issues that arise in connection with restrictive covenants can be complicated. It is an area which involves many different legal facets, high stakes, high emotions and plenty of uncertainty, particularly at the enforcement stage – and the consequences for getting it wrong can be catastrophic. Therefore, whichever side of the fence you sit, it is recommended that legal advice is sought in connection with restrictive covenants at the earliest possible stage, whether that be drafting, negotiating or enforcing them.
To find out more, please contact James Froud of Bird & Bird.
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