Restrictive covenants – strengthening ENR businesses?

Article

Posted by on

Summary: Restrictive covenants in employment contracts are essential armour for businesses operating in the ENR sector where attracting the right talent is crucial, competition is fierce and reputation is paramount. But in reality, how sharp are their teeth? A sequence of cases has demonstrated that the courts are giving employers more clout.

Restrictive covenants in employment contracts are essential armour for businesses operating in the ENR sector where attracting the right talent is crucial, competition is fierce and reputation is paramount. But in reality, how sharp are their teeth?

A sequence of cases has demonstrated that the courts are giving employers more clout. In Safetynet Security Ltd v Coppage and another the court enforced a non-solicitation provision which prevented a director from soliciting all clients, not just clients whom he had personally dealt with, for six months after leaving the business. Previous decisions tended not to uphold covenants so wide in scope. However, here, the court found the clause to be reasonable by looking at the surrounding context such as the director's seniority and the small size of the business.

Similarly, in Croesus Financial Services Ltd v Bradshaw & Anor the court also enforced a 12 month non-solicitation covenant preventing the employee from soliciting clients he had contact with during the last two years of his job. Again, the court examined the surrounding context, looking to the industry standard to find that such a clause was reasonable in the circumstances.

This common-sense interpretation has evolved as cases involve more sophisticated employees who have more equality of bargaining power. In Merlin Financial Consultants Ltd v Cooper the court upheld a non-compete restriction. It maintained that paying an employee for goodwill in his client-base was analogous to a business sale agreement which parties enter into with equal bargaining power. The court also suggested that this interpretation is not limited to the finance industry and may be applied where there is an exceptionally strong relationship between employees and their clients, such as traders and brokers in the ENR sector.

However, recently in Prophet Plc v Huggett, the Court of Appeal bucked the trend when it overturned a High Court judgment hailed by employers. The High Court enforced a covenant by reading words into a contract to produce “a commercially sensible result”. The Court of Appeal disagreed and refused to remedy the drafting error which rendered the covenant unenforceable.

Prophet is a cautionary tale for employers. Whilst courts are more willing to look at the surrounding context of covenants, they will have little patience for sloppy drafting. The message is clear: employers operating in a competitive market such as ENR must take care in drafting tightly tailored covenants with razor sharp teeth, if they wish to protect precious clients and trade secrets.

Stay informed

Sign up to receive email alerts from our award winning Expert Insights team

Sign up now

See more insights by category

This site uses cookies to help us improve our services and your browsing experience. For further information about cookies, including about how to change your browser settings to no longer accept cookies, please view our privacy policy.