Are restrictive covenants enforceable?
Some recent developments have put the enforceability of restrictive covenants within contracts back in the spotlight.
What is a “restrictive covenant”?
A restrictive covenant is a tool used in a contract to protect a party’s commercial interests. This is usually during the life of a contract and for a period of time after it has come to an end.
They are frequently found in employment contracts, franchise agreements, director service agreements, and shareholder agreements.
As the name suggests, it will restrict a party’s right to do something. For example, to restrict doing business in competition with another, similar company, in a fixed geographical area, for a fixed period of time. Alternatively, to restrict association with your company’s client base after they have left for a period of time.
Are restrictive covenants always enforceable in court?
Although it is assumed that parties to a contract will have freely agreed to impose the restriction by signing up to it, there is a growing body of law from the court in recent years which has put them under greater and greater scrutiny.
Restrictive covenants that are deemed to be an unreasonable restraint on a party’s trade, or too widely drafted, or too vague, will nowadays likely be found to be unenforceable by a Judge, who will put a line through it.
The recent case of Dwyer v Fredbar [2022] put these issues under the spotlight. In that case, the Court of Appeal raised two potential criteria that could be considered in order to assess the enforceability of a restrictive covenant.
- The first relates to the relative bargaining strength of the parties at the time they entered into the contract. The more equal the bargaining strength, the more likely that the covenant will be enforceable.
- The second relates to whether the contract takes into consideration situations that could lead to a restrictive covenant being disproportionate when protecting a party’s commercial interest. An example of this is early termination of the contact. This was looked at in Dwyer v Fredbar, where the Court was critical of the party enforcing the covenant for not drawing a distinction between what would happen in the event of early termination, rather than if the franchise ran for all or most of its 10-year period.
What do I need to consider when seeking to rely on restrictive covenants?
There is no “hard and fast rule” as to whether a restrictive covenant will be enforceable. This will be determined on a case-by-case basis. However, as a minimum, any restrictive covenant should be unambiguous, and proportionate when seeking to protect commercial interests by limiting a party’s rights in some way. There is a balance to be struck between protecting commercial interests, without unduly restricting an individual’s ability to earn a livelihood.
The court is keen for parties to tailor their clauses to the specific circumstances of the parties and are not likely to look kindly upon “standard” or “blanket” clauses. If you are subjecting your support staff to the exact same blanket restrictions as the management, then you will need to ask serious questions about whether these are fair and reasonable and, important for our discussion here, enforceable.
As we have seen, in light of recent developments, it would seem that the balance has tipped even further in favour of the restricted party when deciding if a covenant is enforceable.
It may therefore be time to review your restrictive covenants, to see whether or not they are at risk of being unenforceable. If so, GA Solicitors in Plymouth can help.
GA’s specialist employment law team can offer advice on drafting your clauses within your contracts of employment. They can ensure they are fair, reasonable and protect your business as much as possible.
If you believe an ex-employee has broken their restrictive covenants, or you as an individual need professional legal advice in this area, then GA Solicitors’ dispute resolution team is on your side.
GA’s business disputes team has considerable experience advising in these circumstances, winning compensation and obtaining orders restraining former personnel from joining competitors, revealing trade secrets or poaching customers or staff. We have also won cases against the new employers.
Call the team today on 01752 203500 or email me directly via ieuan.jones@GAsolicitors.com.
You can read another article on this topic here.
All content on this website (inclusive of guides, blogs and imagery) is strictly copyrighted by Gill Akaster LLP, trading as GA Solicitors. It is not to be used by any third party without prior contact and permission. Any requests for content should be sent to katy.mckenna@GAsolicitors.com.