Legal column: the pitfalls of restrictive covenants
Restrictive covenants are a common feature in employment contracts and are used to protect employers from the actions of their employees once they leave, writes Simon Lockley, dispute management partner at Lupton Fawcett.
This is done by imposing constraints which the employee agrees not to breach.
Such constraints include preventing the departing employee from poaching clients, suppliers or fellow colleagues and using confidential information to benefit a competitor or setting up a rival company.
Without restrictive covenants, commercially sensitive information could be used against the company and cause damage to its business and reputation.
Because of the rules regarding restraint of trade, great care has to be taken when drafting restrictive covenants, as any ambiguity could impact on the enforceability of the restriction.
In a recent case the Supreme Court was asked to consider whether the unreasonable part of a restriction could be severed, leaving the 'good part' intact and enforceable.
In this case, the employee had a non-compete clause in her contract which prevented her, for six months from termination, from being "directly or indirectly engaged or concerned or interested in any business carried on in competition with any of the businesses of the Company".
When she left the company and started working with a competitor the employer sought an injunction for an alleged breach of her non-compete clause.
The employee argued that being "interested in any business carried on in competition" was wider than reasonably required, as it prevented her from holding even a minor investment shareholding in a competitor company.
The High Court concluded the restriction was valid and granted an injunction however the Court of Appeal overturned this.
The key points for employers are the importance of having properly drafted restrictive covenants in place to protect their business and taking quick action as soon as it comes to light that a possible breach has occurred.
The case also emphasises the importance of keeping contracts of employment under regular review and updating when necessary, particularly if an employee's role changes.
For employees, especially those in senior positions, consideration should be given to exactly what restrictions they are agreeing to and legal advice should be sought before signing up to potentially onerous contractual terms. Lupton Fawcett LLP ha extensive experience of acting on behalf of both parties in cases involving breaches of restrictive covenants