A restrictive covenant may take the form of:
a.) A non-competition covenant – where the employee agrees not to take employment with a competitor (or to trade) within a defined geographical area for a defined period of time.
b.) A non-solicitation covenant – where the employee agrees, for a defined period, not to solicit business from customers he has had contact with (say, in the last year) whilst working for his current employer.
c.) A non-dealing covenant – similar to a non-solicitation covenant but wider in that it prohibits dealing even if it is the customer rather than the ex-employee who initiates contact.
d.) A non-poaching covenant – where the employee agrees, for a defined period of time, not to poach other employees with whom he has had a defined level of contact (e.g. colleagues) during a defined period of time prior to his leaving.
e.) A non-employment covenant – similar to a non-poaching covenant but wider in that it prohibits employment of the affected employees even if those employees seek employment of their own volition and are not approached.
f.) Confidentiality covenants – where the employee agrees not to disclose or use, after employment has ended, information which is regarded as commercially confidential (as distinct from the employee’s skills and know-how).
(In addition to protection by express covenant, if information amounts to a “trade secret” – such as a secret manufacturing process – there is be an implied duty of confidentiality after employment has ended even if there is no express covenant.)
As well as restrictive covenants between employers and employees, restrictive covenants may be found in certain commercial relationships such as where a business is sold and the seller agrees not to compete with the buyer for a period of time and/or in a geographical area/market sector so that the "goodwill" sold with the business is protected. This article concentrates on restrictive covenants in employment contracts but the general approach of the courts to restrictive covenants in other contracts is broadly comparable.
The starting point is that it is not in the public interest for anyone to prevented from, or restricted in, offering his services in competition with existing providers including his former employer. Full competition and the utilisation of the skills of all who wish to enter the market is for the common good.
From that starting point the law allows restrictive covenants if:
Protection from competition as such is not considered to be a legitimate interest but a restriction of competition, limited by area and time, might be considered reasonably necessary to protect trade connection and goodwill if, for example, a non-dealing covenant would be difficult to police.
The reasonableness of the covenant is assessed by the court on the basis of whether it mets the two tests above at the time that the contract containing the covenant was made. If it is held to be unreasonable then it will (subject to the limited possibility of severance) be completely void. For example if there is a non-competition covenant lasting for 2 years after the end of employment and the court holds that to be unreasonably long, the entire covenant will be void – i.e. the court cannot substitute and uphold a shorter period.
Because of the great difficulty in establishing how much profit may have been lost due to breach by a former employee of a restrictive covenant, the remedy of choice is an injunction to prevent breach rather than simply a claim for damages. An injunction is an equitable remedy which the court may grant at its discretion and in deciding whether to grant the injunction the court will consider whether it is reasonable to enforce the restrictive covenant by injunction. This is an additional hurdle to the requirement that the covenant was reasonable at the time it was entered into (for example if there are changes in the company’s business, operations, and customer base, not only must the covenant be reasonable when entered into, but its enforcement many years later under changed circumstances must also be reasonable in those changed circumstances).
In practice an interim injunction will be sought (the employer does not want to wait many months for a trial and a permanent injunction) and in order to obtain the interim injunction the employer will have to give an undertaking in damages – i.e. an undertaking to pay damages to the employee if the employee loses money as a result of the injunction and it is later found at trial that the interim injunction out not to have been granted.
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This page was lasted updated in September 2016 Disclaimer