Restrictive covenants; how to protect your business
Following on from our earlier dental bulletin there have been some developments in recent case law regarding the enforceability of restrictive covenants in employment contracts.
What is a Restrictive Covenant – why is it used?
A restrictive covenant is a clause found in most employment contracts for senior employees, or employees that deal directly with a company’s clients. They are incorporated to prevent employees from competing with, or soliciting clients or employees from the business after the employment relationship ends. The period of restriction can range from three months to two years, depending on the employee’s seniority. The restriction can also prohibit the employee from finding alternative employment in a particular area, or close to their previous employer.
Legal update on Restrictive Covenant
Over the years, there have been many arguments over the contents of restrictive covenant clauses and whether they are in fact enforceable, or too widely drafted. If a court does rule them unenforceable due to being too restrictive, this can invalidate the entire clause, leaving the business’ goodwill completely unprotected.
The Court of Appeal recently considered the enforceability of a restrictive covenant in the case of Boydell v NZP Pharma Limited, giving valuable guidance to how to ensure these clauses can be used.
Dr Boydell was an employee of NZP Pharma Limited. In his contract of employment there was a restrictive covenant which stated that, upon the termination of his employment he would be restricted from working for any competitor of NZP or any company within the group.
In October 2022 Dr Boydell handed in his notice and informed his now ex-employer that he would be working for another company, which happened to be a direct competitor. In January 2023, NZP applied for an injunction, which was granted. In order to make the clause enforceable, and therefore grant the interim injunction, the Judge removed various words from the restrictive covenant, namely those relating to the restriction of Dr Boydell working for any competitor of any group company of NZP.
Dr Boydell appealed the Judge’s actions and argued that the Judge could not use severance to significantly change the effect of the overall restrictions.
Was the clause drafted too wide?
The appeal judges held that the whole burden of the restrictive covenant clause was directed to protect the specialist activities of NZP, which it listed at some length. Accordingly, the judge who was dealing with the injunction was entitled, at least at the interim injunction stage, to sever the words from the clause and grant an injunction on a more limited basis.
The court of appeal was guided by the previous case of Home Counties Dairies Ltd v Skilton  1 WLR 526. It was held;
“If a clause is valid in all ordinary circumstances which can have been contemplated by the parties, it is equally valid, notwithstanding that it might cover circumstances which are so “extravagant”, “fantastical”, “unlikely or improbable” that they must have been entirely outside the contemplation of the parties.”
In this case, as the clause was so broad and covered various scenarios, the court could rely on the parts of the clause that would be deemed valid/reasonable and severe the unenforceable parts. Therefore, the judge dealing with the injunction had not significantly changed the overall effect of the clause. Consequently, it was still considered valid. However, they severed the wording which referred to competitors of the appellant’s group companies as the wording went “beyond what is reasonably necessary to protect the Claimants’ legitimate interests” or, in words, taken from Skilton “fantastical”.
Whilst this case is an example of a judge severing a widely drafted non-compete clause where some wording was consider the extra or ‘fantastical’, this was in circumstances where the body of the clause already accommodated the needs of the company. As such this should not be seen as a way to drafted overly wide non-compete clauses, in the hope a judge will rectify any errors. Properly drafted non-compete clauses will help deter employees from breaching them and will prevent costly claims at court.
Future Updates to look out for
Restrictive covenants have also recently made headlines, as the Government has announced that it intends to introduce new legislation to restrict the duration of non-compete clauses to three months. This will be a relief for many employees; being out of a job for many months could be costly. For some, the restricted period can be as long as 12 to 24 months.
The update is clear that employers will still be able to protect their business interests; the new legislation will not affect employers ability to restrict activities during (paid) garden leave or notice periods and confidentiality clauses. Nor will any new law apply to non-solicitation clauses – the three-month limit will apply only to non-compete covenants. The press release made no mention of the effect of this new potential legislation on non-dealing clauses.
The government has yet to indicate when they will begin deliberating this new legislation; we will have to watch this space.
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Please note that the information contained in this article was correct at the time of writing. There may have been updates to the law since the article was written which may affect the information and advice given therein.