Restraint of Trade

It is often the case that employers will seek to introduce Restrictive Covenants into employment contracts in order to protect their business should an employee leave, either on their accord or via company procedures, notably termination or redundancy. It is very important that both employers and employees have a clear understanding as to what terms they can introduce as Restrictive Covenants prior to entering into them. If terms are seen as too onerous or go further than is necessary to protect legitimate business interest then they can be a restraint of trade. If clauses are seen as a restraint of trade then they will be void and unenforceable.

Clauses possibly void

This is based on the presumption that an individual should be free to follow his trade without undue interference. So a term seeking to restrict such actions will be void unless it is no wider than reasonably necessary and designed to protect a legitimate business interest.

Whether a clause amounts to a restraint of trade will turn on the facts in particular circumstances. For example, it will be easier to justify a longer Restrictive Covenant for an employee who is more senior and subject, for example, to confidential or sensitive information. The clause will be seen as a restraint of trade if it is purely designed to prevent competition by a former employee, it has to be justified on the grounds highlighted above. In the case of Marshall –v- NM Financial Management Limited a clause stating that an agent was entitled to commission only after the termination of the relation if he did not compete with the company, was seen as restraint of trade and unenforceable.

Reasonableness

An employer will have to show that any restraint of trade clause is reasonable and only goes so far as is necessary to protect a legitimate business interest. The reasonableness of a particular restraint of trade clause will depend on the facts, and the test will be on the expectation of the parties at the time that the contract was entered into, and not at the time when the issues arise post termination.

The Courts will also consider geographical location and duration. For example, a restraint of trade call seeking to enforce a 3 mile radius upon which an employee cannot work, is more likely to be reasonable in a rural location are as opposed to central London.

The Courts have recognised that restraints of trade are appropriate in certain circumstances. They may also be appropriate on business sale. A company will seek to protect the goodwill, trade secrets, client base and staff, so it is right and proper that they have a mechanism in order to do so.

Summary

Employers need to consider this carefully when entering into a contract. Employees also need to consider it before agreeing to contractual terms and should review it again on termination.  It is often the case that employees are simply unaware of the constraints by which they are bound and any breach could mean legal action being taken against them.

Employers can seek to enforce a restraint of trade clause either by taking out an injunction or bringing an action for loss of profit. There has been recent case law in this area, particularly in relation to team moves. If one employee seeks to move to another company and/or set up his own business then he needs to be extremely careful when other employees join him. If he has a restrictive covenant preventing soliciting or enticing away existing staff, then he may be in breach. The key would be whether he has taken proactive steps to encourage existing to move and on the facts based on his working relation and the new company.

The restraint of trade test will also apply to covenants in joint venture agreements as well as employment contracts and business/share acquisition agreement.

From a company’s point of view, if they are seeking enforce a restrictive covenant or restraint of trade then they will need to do so with significant evidence to confirm a breach. It is expensive to bring an injunction and any action must be accompanied by sufficient evidence. A company will always have to taken into account what is at stake and how important it is for them to prevent further damage to their business.

This article courtesy of Ben Jones, Partner and head of employment law at Darlingtons Solicitors.