Restrictive covenants in employment contracts are anti-competitive, restrictive on trade and against public policy. A court will only enforce a restrictive covenant if it protects a legitimate business interest (trade secret or confidential information, client base, key employees or supplier relationships) and if it extends no further than is reasonably necessary to protect that interest (Herbert Morris Ltd v Saxelby [1916] AC 688 (HL)). In addition recent case law highlights emerging trends in the court’s approach and other factors taken into consideration.

The restrictive covenant must be drafted specifically to protect the identified legitimate business interest using means that are reasonably necessary, especially relating to the duration, scope and nature and effect of the restriction. In Wincanton Ltd v Cranny and SDM European Transport Ltd [2000] IRLR 716,CA the failed covenant was a general clause for inclusion in all employment contracts.

Restrictive covenants generally restrict the employee from working for a competitor or in a certain location (Non-competition and Area Covenants), prevent the employee from dealing with or soliciting clients, prevent the poaching of employees or prevent the use of confidential information. Identifying the most appropriate type of covenant to protect the relevant business interest will assist in ensuring that the covenant is reasonable and enforceable.

Changes To The Court’s Approach

The court has increasingly taken a purposive approach, looking at the intention of the clause and not just the literal interpretation. In Beckett Investment Management Group Ltd & Ors v Hall & Ors [2007] IRLR 293 the Court of Appeal had regard to business realities when ruling that the covenant was effective in relation to the clients of the employer’s subsidiaries although the subsidiaries were not referred to in the covenant. In TFS Derivatives Ltd v Morgan [2004] EWHC 3181 (QB) Mrs Justice Cox said the first thing to look at when considering a restrictive covenant is what it means when it is properly interpreted.

The court will not re-write unreasonable restrictive covenants, but it may "sever" parts of them to make them enforceable. In TFS Derivatives the restrictive covenant referred to "any business which is either competitive with or similar to" the High Court held that the deletion of the words "or similar to" created an enforceable covenant. In Beckett the court considered whether part of the covenant could be severed and considered the three stage test from Sadler v Imperial Life Assurance Co of Canada Ltd [1988] IRLR 388 namely:

  1. can the offending wording be removed without adding to or altering the remaining wording?
  2. is there sufficient consideration to support the remaining clause?
  3. is the character of the contract altered by the deletion?

Historically courts have not looked favourably on non-competition and area covenants but in TFS Derivatives and Thomas v Farr Plc [2007] IRLR 419 (CA) both employees were deemed to be privy to confidential information and both courts ruled that a non-competition or area covenant was an appropriate way of protecting confidential information.

Factors The Courts Have Considered In Recent Cases:

  1. Circumstances at date of contract – In Allan Janes LLP v Johal [2006] IRLR 599 a 12 month anti-poaching covenant relating to all clients was enforced (though a 6 mile anti-competition covenant was not) because at the date of the contract there was an expectation between the parties that this would lead to partnership which would have exposed Johal to the firm’s entire client base.
  2. Seniority of the employee – in Beckett a 12 month restrictive covenant was reasonable due to the seniority of the employee, a director, who had intimate knowledge of the company.
  3. Garden Leave - the High Court ruled in TFS Derivatives that a garden leave clause in an employment contract does not prevent a restrictive covenant from being effective.
  4. Legal Advice - Intercall Conferencing Services Limited v Steer [2007] EWHC 519 (QB) took into account the fact that independent legal advice was not received by the employee prior to entering into the contract nor was seeking it advised by the employer but the covenant was still found to be enforceable.

Drafting Points

When drafting a restrictive covenant the following should be considered:

  1. What legitimate interest are you trying to protect?
  2. What is the best type of covenant to use to protect it?
  3. Ensure the covenant is only as wide as is necessary to protect it.
  4. Make sure any provisions are severable to leave the remainder of the clause functional.
  5. Use clear English
  6. Draft the covenant to meet the facts about the specific employee and their role.
  7. Bear in mind that recent trends can change!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.