Alerts

Enforceability of Restrictive Covenants

Was it unreasonable for an employment law firm to prevent a director/shareholder from joining a competitor for a 12 month period post-termination?

Law by Design Limited v Ali

Ms Ali was employed by LBD from 2013. In 2016 she accepted a small shareholding in LBD, entering into a shareholders’ agreement containing certain restrictive covenants. In 2018 she then became a director in LBD, ultimately signing a new service agreement early in 2021 after taking on increasing responsibilities. Again, the service agreement contained restrictive covenants.

Ms Ali gave 6 months’ notice in May 2021 and planned to join Weightmans, a competing law firm.

The High Court found that Ms Ali had produced a business plan which, although not naming clients, planned to transition LBD clients to Weightmans with her, which she estimated would have brought approximately £252,000 worth of revenue to Weightmans. That represented over a third of LBD’s turnover.

In the last 12 months of her employment with LBD, Ms Ali was working almost exclusively for NHS clients. It was held that only £7,000 of the proposed £252,000 which she sold herself to Weightmans on in her business plan, was due to come from non-NHS clients.

Ms Ali argued that the restrictive covenants, contained within the shareholders’ agreement and service agreement, were not enforceable. In particular, the service agreement contained a “non-compete” restriction, preventing Ms Ali from being involved with a competing business for a period of 12 months.

In this case, the Court concluded that LBD were “entitled to seek to protect the customer connections built up by LBD employees providing legal services to NHS clients’.

In reaching the decision, the Court applied the 4 stage test from the case of TFS Derivatives Ltd v Morgan (2005), and held that the correct approach to the question of assessing reasonableness of restrictive covenants is as follows:

1. The court must decide what the covenant means when properly construed;

2. The court will consider whether the former employers have shown on the evidence that they have legitimate business interests requiring protection in relation to the employee’s employment;

3. Once the existence of legitimate protectable interests has been established, the covenant must be shown to be no wider than is reasonably necessary for the protection of those interests. Reasonable necessity is to be assessed from the perspective of reasonable persons in the position of the parties as at the date of the contract, having regard to the contractual provisions as a whole and to the factual matrix to which the contract would then realistically have been expected to apply; and

4. Even if the covenant is held to be reasonable, the court will then finally decide whether, as a matter of discretion, the injunctive relief sought should in all the circumstances be granted, having regard, amongst other things, to its reasonableness as at the time of trial.

It was held that LBD had provided sufficient evidence to show that they had legitimate interests to protect and therefore the judge held that the covenant is no wider than is reasonably necessary for the protection of the Company’s legitimate business interests and was enforceable and an injunction was granted.  Whilst not fatal given the findings on the covenant in the service agreement, the restrictive covenants in the shareholders’ agreement were held to be too wide and not enforceable.

Comment

This case highlights how employers need to give careful consideration to how they frame any restrictive covenants they wish to include within a contract to ensure that they go no further than reasonably necessary to protect legitimate business interests.

The case also serves as a good example to those wishing to pursue a former employee (or one who is in their notice period but threatening to breach their covenants) that litigation can bear fruit. In this case the business plan prepared by the Claimant for Weightmans, which was damaging to her case, was unknown to LBD and only provided as part of disclosure for the case. Whilst a case must never be advanced without merit, if an employer has strong suspicions that an employee is planning to compete/steal clients, initiating, or at least threatening proceedings unless undertakings are provided, can lead to incriminating evidence coming to light.

If you have any queries in relation to enforcing or drafting restrictive covenants, contracts or have any other queries, please contact our employment team on 01228 552600 or 01524 548494.

 

This alert does not provide a full statement of the law and readers are advised to take legal advice before taking any action based on the information contained herein.

 

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