Restrictive Covenant (restraint of trade)




Literally a "restrictive covenant" is any agreement whereby one of the parties agrees to refrain from doing something, but the words tend to be used in two contexts in particular: (1) covenants restricting what can be done on a piece of land, and (2) covenants in restraint of trade restricting what a  franchisee or worker can do particularly, the case case of a worker, what they can do after they leave the employment of the current organisation. This article is about the latter - covenants in restraint of trade specifically as they apply to workers.

Historically covenants in restraint of trade often had a land, or at least a geographical, context. A public house may be sold or let to a publican on condition that only beer from a particular brewery is sold, and the contract of employment of a hairdresser may prohibit them from being in the business of, or being employed in a business of, hairdressing, operating from a shop within a particular radius. But as both travel and electronic communication have become easier, restrictions on workers which are not defined by geography have become more common than geographical restrictions.     


Types of Covenants in Restraint of Trade

 A restrictive covenant may take the form of:

a.)  A non-competition covenant – where a worker 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 a worker agrees, for a defined period, not to solicit business from customers they have had contact with (say, in the last year) whilst working for their 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 worker who initiates contact.    

 

d.)    A non-poaching covenant – where a worker agrees, for a defined period of time, not to poach other workers/employees with whom they had a defined level of contact (e.g. colleagues) during a defined period of time prior to the worker 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 a worker agrees not to disclose or use, after employment has ended, information which is regarded as commercially confidential (as distinct from the worker’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 can be an implied duty of confidentiality after employment has ended even if there is no express covenant.)

    

Is the covenant enforceable? 

The starting point is that it is not in the public interest for anyone to prevented from, or restricted in, offering their services in competition with existing providers including their 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:

 

  • They are designed to protect a legitimate interest of the employer (such as trade connection and goodwill, business secrets or stability of the workforce), and

 

  • They extend no further than is reasonably necessary to protect that interest

 

Protection from competition as such is not considered to be a legitimate interest but a restriction of competition, limited by area and/or 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 met the two tests above at the time that the contract containing the covenant was made. If it is held to have been 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 have been unreasonably long, the entire covenant will be void – i.e. the court will not substitute and uphold a shorter period.

 

Enforcing covenants in restraint of trade

Because of the great difficulty in establishing how much profit may have been lost due to breach, by a former worker, 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 at the time when the injunction is sought. This is an additional hurdle to the requirement that the covenant must be 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 if an injunction is to be granted).

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 worker if the worker loses money as a result of the injunction and it is later found at trial that the interim injunction ought not to have been granted.

  

Disclaimer

The above explanation of the law is only an overview and in order to be reasonably concise I have had to leave some details out - details which are likely to affect what the law would say about your own situation. So please do not rely on the above but Contact me for advice         

This page was lasted updated in April 2020          Disclaimer