RESTRAINT OF TRADE law and procedure after Woolf

Transcription

1 RESTRAINT OF TRADE law and procedure after Woolf 1 2 Melanie Tether and Jeremy McMullen QC Old Square Chambers 1 Vice-president, Industrial Law Society 2 Assistant Recorder; Employment Tribunal Chairman

2 Restraint of trade Legitimate business Interests Reasonableness Garden leave Post-termination restrictions Non-competition covenants (1) Non-competition covenants for protection of business secrets Ambit of non-competition covenants (business secrets) Geographical scope of non-competition covenants (business secrets) Duration of non-competition covenants (business secrets) (2) Non-competition covenants for protection of goodwill Geographical scope of non-competition covenants (goodwill) Duration of non-competition covenants (goodwill) Non-solicitation/dealing covenants Ambit of non solicitation/dealing covenants Geographical scope of non-solicitation/dealing covenants Duration of non-solicitation/dealing covenants Covenants against solicitation and employment of fellow employees The court s approach to restrictive covenants Relationships giving rise to protectable interests Protection of group companies The test of reasonableness Canons of construction The rules on severance Saving clauses Imposition and discharge of restrictive covenants Effect of repudiation by the employer Remedies A serious issue to be tried

3 Are damages an adequate remedy? The balance of convenience Procedure Other remedies Resisting interim injunctions Declarations Summary Judgment

4 RESTRAINT OF TRADE 1 The doctrine of restraint of trade applies to any term in a contract whereby a person agrees to restrict their freedom to trade or freedom to work in the business or occupation of their choosing. Such a term is void and unenforceable unless it can be shown to be reasonable. 2 In order to pass the reasonableness test, a restraint must be: (a) reasonable in the interests of the contracting parties; and (b) not injurious to the public interest - see Nordenfelt v Maxim Nordenfelt Guns and Ammunition Company Limited [1894] AC 535. The burden of showing that a covenant is in the interests of the parties lies with the employer. The onus of proving that it is contrary to the public interest lies with the employee: Kores Manufacturing Company Limited v Kolok Manufacturing Company Limited [1959] (CA) Ch D A restraint will not be reasonable as between the parties unless: (a) it protects a legitimate business interest of the person for whose benefit it is imposed; (b) it is reasonably necessary for the protection of the interest in question. -1-

5 LEGITIMATE BUSINESS INTERESTS 4 An employer is not entitled to protect itself against the use of the skill and knowledge which the employee acquired during his or her employment. Those belong to the employee, who must be free to exploit them in the market place. Neither can an employer seek protection from competition per se, since it is against the public interest that employees should be deprived of the opportunity to earn their living or to use their personal skills to the ultimate benefit of the community as a whole: Herbert Morris Limited v Saxelby [1916] AC Instead the employer must demonstrate that the covenant protects a legitimate business interest. In the Herbert Morris case, Lord Parker defined this as "some proprietary right, whether in the nature of a trade connection or in the nature of trade secrets, for the protection of which such a restraint is reasonably necessary". 6 The concept was further developed by Lord Wilberforce in Stenhouse Australia Limited v Phillips [1974] 1 All ER 117, who said: "The employer's claim for protection must be based on the identification of some advantage or asset inherent in the business which can properly be regarded as, in a general sense, his property, and which it would be unjust to allow the employee to appropriate for his own purposes, even though he (the employee) may have contributed to its creation". In other words, the employer is entitled to prevent the employee taking unfair advantage of confidential information and business connections to which he had access in the course of his/her employment. -2-

6 7 The business interests recognised as legitimate by the law include: (a) trade secrets; (b) customer connections; (c) relationships with suppliers; (d) senior employees. REASONABLENESS 8 In order to show that a restraint is reasonably necessary, the employer must show that it goes no further than is necessary for the protection of the interest to which it is directed: Mason v Provident Clothing and Supply Company Limited [1913] AC 724. This means that each aspect of the restraint must be justified in relation to the legitimate business interest which it is designed to protect. 9 The Court should not weigh up the advantages accruing to the employee against the disadvantages imposed on him/her by the restraint; nor should it consider the adequacy of the consideration granted to the employee. If it is reasonable that an employer should ask for a restraint, it is equally reasonable that the employee should subject him/herself to it: per Lord Parker in Herbert Morris v Saxelby. 10 The reasonableness of a particular restraint depends on all the facts of the case: Dairy Crest v Pigott [1989] ICR 92. However, factors which are likely to be relevant in every case include the nature of the business or interest for which the employer seeks protection and the status or position of the employee. 11 In general, the reasonableness of a restraint may be considered under three headings: -3-

7 (a) the nature of the activities to which it applies; (b) its geographical extent; (c) its duration. GARDEN LEAVE 12 If an employee purports to resign without giving the notice required by the contract of employment, it is open to the employer to refuse to accept the employee's wrongful resignation and to keep the contract on foot during all or part of the notice period. The employer cannot insist on the employee carrying out his/her duties during this period but it will be a breach of the duty of fidelity for the employee to work for a competitor. 13 Although the Courts will not grant specific performance of the positive obligations in a contract of employment (such as the obligation to work), they are prepared to enforce negative stipulations in the contract, including the obligation not to work for a competitor. The Court may be prepared to grant an injunction restraining an employee from working for a competitor during a period of "garden leave" where : (a) the employer is not in breach; (b) the employer continues to pay the employee's salary and maintains his/her other contractual benefits; (c) the employer undertakes not to claim damages from the employee if s/he elects not to work; (d) the employer will suffer serious and unquantifiable damage if the employee is not so restrained. -4-

8 See Evening Standard Company Limited v. Henderson [1987] IRLR 64 and Provident Financial Group Plc v. Hayward [1989] IRLR A "garden leave" injunction may be granted regardless of whether the contract expressly prohibits competitive activities during the employment, since in the absence of an express provision the employer can invoke the implied duty of fidelity: Provident (supra). 15 Is the employer obliged to provide the employee with the opportunity to work during a period of garden leave? The answer depends on whether the employee has a right to work under the terms of his contract of employment. 16 Where such a right exists, a refusal on the part of the employer to allow the employee to carry out his duties will amount to a repudiatory breach of the contract of employment, which the employee will be entitled to accept by resigning with immediate effect. 17 Whether there is a right to work in any individual case is a question which must be resolved by construing the particular contract in the light of its surrounding circumstances: see William Hill Organisation Ltd v Tucker [1998] IRLR 313. In that case the Court of Appeal deprecated the suggestion that a right to work is a necessary feature of every employment relationship but nevertheless went on to point out that, as social conditions have changed, the courts have increasingly recognised the importance to employees of being able to exercise their skills. 18 The Court decided on the facts of the case that the Defendant, who was a senior dealer with the Claimant bookmakers, did have a contractual right to be provided with work. The factors which it took into account in reaching that conclusion were the following: -5-

9 (a) the post of senior dealer was a specific and unique post; (b) an employee holding that position would need to exercise the skills which it required on a regular and continuing basis in order to enhance and preserve them; (c) the existence of a right to work was consistent with the express terms of the contract, and in particular the following: (i) the definition of the employee s normal working hours, which filled the normal working week; (ii) an additional obligation on the employee to work such hours as were necessary to carry out his duties in a proper and professional manner; (iii) a declaration in the Staff Handbook that the employer would invest in training and development to ensure that staff would have every opportunity to develop their skills; (iv) the existence of an express power to suspend which was limited to cases where time was required to investigate disciplinary allegations. 19 Similar arguments could be advanced in the case of most senior employees. It will therefore be imperative to ensure that the contracts of all senior staff include an express garden leave clause. Where such a provision is included, denial of the opportunity to work can not be regarded as a breach of contract by the employer: see Provident. 20 The period for which a garden leave injunction is granted should be no greater than is absolutely necessary to protect the employer - see GFI Group Inc v Eaglestone -6-

10 [1994] IRLR 123. In that case an injunction was granted for 13 weeks even though the employee was subject to a notice period of 20 weeks. This was because two other employees of the Claimant who had been part of the same team and whose contracts only provided for four weeks' notice had already joined the competitor firm. As a result, the reality of the situation was that the damage had to a certain extent already been done so that the Claimant did not need the additional seven weeks' protection. 21 Note, however, that the Court reached this conclusion "with some reluctance". Holland J said: "... if there is a current impression that these periods in these contracts negotiated with these highly paid, highly skilled employees do not have the meaning that they purport to have, then the sooner that is corrected the better." 22 This dictum was approved by the Court of Appeal in Cantor Fitzgerald International v George and others (unreported) 17th January In that case Peter Gibson LJ observed that "those who are in a trade in which their word is their bond should keep to their word in relation to their own employment contracts". 23 But a somewhat different approach seems to be foreshadowed by the judgment of Morritt LJ in the William Hill case. He said:... there appears to be a trend towards increasing reliance on garden leave provisions in preference to conventional restrictive covenants, no doubt because hitherto the courts have treated the former with greater flexibility than the latter, as explained by Neill LJ in Credit Suisse Asset Management Ltd v Armstrong [1996] IRLR 450. But the reported cases dealing with the court s approach to the grant of injunctions show that if injunctive relief is sought, then it has to be justified on similar grounds to those necessary to the validity of an employee s covenant in restraint of trade. It seems to me that the court should be careful not to grant interim relief to enforce a garden leave clause to any greater extent than would be covered by a -7-

11 justifiable covenant in restraint of trade previously entered into by an employee. 24 In Credit Suisse Asset Management Ltd v Armstrong [1996] ICR 882, the Court of Appeal held that where a restrictive covenant is valid, the employer is entitled to have it enforced even though the employee has already been required to undertake a period of garden leave. According to the Court, there is no juridical basis on which the court "could allow some kind of set off" against a period of garden leave. However, Neill LJ added that "the existence of a garden leave clause may be a factor to be taken into account in determining the validity of a restrictive covenant as at the date of the contract". 25 In Credit Suisse First Boston (Europe) Ltd v Padiachy [1998] IRLR 504, Longmore J said that it may be legitimate to ask whether an anti-competition covenant is justified in a case where the employee is also subject to a garden leave provision. POST-TERMINATION RESTRICTIONS 26 The three most common types of covenant are: (a) non-competition; (b) non-solicitation of/dealing with clients or customers; (c) non-solicitation/employment of staff. 27 Some cases involve an indirect restraint, such as a financial incentive not to compete. The doctrine of restraint of trade also applies to such restrictions: Wyatt v Kreglinger and Fernau [1933] 1KB 793. As the Court of Appeal pointed out in Wyatt, there is no relevant difference between a contract that a person will not carry on a particular trade and a contract that if he does not do so he will receive some benefit to which he would not otherwise have been entitled. -8-

12 28 For practical examples see: (a) Wyatt (employer agreed to pay employee pension if he refrained from competing in the wool trade); (b) Bull v Pitney Bowes Ltd [1967] 1 WLR 273 (rules of pension scheme, which were incorporated in employee's contract of employment, gave the employer the right to cancel rights and benefits if the employee competed after termination of employment); (c) Stenhouse Australia Limited v Phillips [1974] 1 All ER 117 (insurance broker required to share commission earned from business transacted with clients of his former employer); (d) Sadler v Imperial Life Assurance Co. of Canada Ltd. [1988] IRLR 388 (salesman agreed that if he continued to work in the insurance industry after termination of his employment he would forfeit his entitlement to commission on policies sold but not paid before he left); (e) Electronic Data Systems Ltd v Hubble (Lexis) 20th November 1987 CA (employer entitled to recoup from the employee the cost of certain training courses if the employee left within a specified time after the training commenced); (f) Marshall v N M Financial Management Ltd. [1997] IRLR 449 (selfemployed agent only entitled to commission accruing after the termination of the relationship if he did not compete). NON-COMPETITION COVENANTS -9-

13 29 A covenant which prohibits a former employee from carrying on or being employed in a particular business is the most difficult type of covenant to justify, since it amounts to a covenant against competition - see Office Angels Limited v Rainer-Thomas and another [1991] IRLR 214. The employer must therefore be able to show that some lesser form of protection would not have been adequate. 30 A non-competition covenant may be directed either to the protection of business secrets or to safeguarding the employer's goodwill and trade connections. 31 In the Office Angels case, the Court of Appeal held that where a covenant does not specify the interest which it is intended to protect, the court should look at the wording and the surrounding circumstances in order to ascertain the parties' intention. The corollary is that where the employer chooses specifically to state the interest which the covenant is designed to protect, he is not entitled thereafter to seek to justify the covenant by reference to some separate and additional interest which has not been specified - see the judgment of Sir Christopher Slade at paragraphs 39 to The covenant under scrutiny in Office Angels was preceded by a recital which referred to the employee's dealings with the clients of the Claimant (an employment agency) and went on to say that the purpose of the covenant was to protect the employer's goodwill. The Court held that it was not in those circumstances open to the employer to assert that the covenant was also designed to protect its connections with its pool of temporary workers. (1) NON-COMPETITION COVENANTS FOR PROTECTION OF BUSINESS SECRETS 33 Where an employee is in possession of trade secrets or other information of equivalent confidentiality, the Court may be sympathetic to the contention that a covenant against disclosing secret information will not provide an adequate -10-

14 safeguard. In Littlewoods Organisation Limited v Harris [1978] 1 All ER 1026, Lord Denning said: "Experience has shown that it is not satisfactory to have simply a covenant against disclosing confidential information. The reason is because it is so difficult to draw the line between information which is confidential and information which is not; and it is very difficult to prove a breach when the information is of such a character that a servant can carry it away in his head. The difficulties are such that the only practicable solution is to take a covenant from the servant by which he is not to go to work for a rival in trade. Such a covenant may well be held to be reasonable if it is limited to a short period." Dicta to the same effect are to be found in the decision of Cross J. in Printers and Finishers Ltd. v Holloway [1964] 3 All ER Cases in which the courts have concluded that the employer's need to protect confidential information was in principle capable of justifying a prohibition on working in a competing business include: (a) Commercial Plastics Limited v Vincent [1965] 1 QB 623 (key technical employee with knowledge of the employer's production and design secrets); (b) Lansing Linde Ltd v Kerr [1991] 1 All ER 418 (senior executive with confidential information regarding the employer's product development plans and marketing strategy); (c) Poly Lina Ltd v Finch and another [1995] FSR 751. In this case the Defendant was a marketing controller who had access to technical and scientific product specifications, detailed information on costings, customer accounts, profit margins, actual and hoped for sales and development plans. His offer to give an undertaking or submit to an injunction not to pass on confidential information to his new employer did not dissuade the Court -11-

15 from enforcing a non-competition covenant. The judge held that it would be extremely difficult, if not impossible, for him not to pass on such information, whether knowingly or otherwise. Given the large number of categories of information in the case and the variety of that information, this was the only effective way to protect the Claimant's interest; (d) Scully UK Ltd v Lee [1998] IRLR 259 (general manager in possession of technical information about the employer s products and knowledge of its product development plans). 35 In Faccenda Chicken v Fowler [1986] IRLR 69, the Court of Appeal held that an employer cannot impose a restrictive covenant to protect confidential information unless the information in question constitutes a trade secret or its equivalent. 36 Reservations were subsequently expressed about this view, most notably by Scott J. in Balston v Headline Filters [1987] FSR 330 and Harman J. in Systems Reliability Holdings v Smith [1990] IRLR 377. However, in Lansing Linde, the Court of Appeal described the problem as "one of definition". It held that, so long as trade secrets are widely defined to include any information (including nontechnical information) which would, if it got into the hands of a competitor, cause significant harm to the employer, it is right to say that a covenant against competition can only be justified by the protection of trade secrets. If, however, trade secrets are more narrowly defined, the class of information which can justify a restriction is wider. AMBIT OF NON-COMPETITION COVENANTS (BUSINESS SECRETS) 37 A non-competition covenant will not be upheld if it prevents the employee from being involved in businesses which do not compete with the business of the employer. This principle is illustrated by the following cases: -12-

16 (a) Scully UK Ltd v Lee [1998] IRLR 259, in which it was held that a covenant which prevented competition in the field of overspill prevention and tank gauging equipment was unreasonably wide, since the employer s business was confined to overspill and tank gauging equipment for use in the petrochemical field; (b) Commercial Plastics, in which the Court of Appeal refused to enforce a "home-made covenant" which prevented the employee from taking any employment in the "PVC calendaring field" on the grounds that the employer's trade secrets were limited to the special field of PVC calendared sheeting for adhesive tape. 38 These cases may be contrasted with Kerchiss v Colora Printing Inks Limited and another [1960] RPC 235, where an employee was restrained from entering into the employment of a manufacturer of any type of printing ink even though his employer manufactured only flexographic ink. The Court accepted that if he was free to enter the service of any company manufacturing any kind of printing ink, the confidential information which he had gained from his employers might be used by that company to start the manufacture of flexographic ink. 39 An employer may be entitled to claim protection not only for those kinds of business which it was carrying on when the employee left but also for other kinds of business which were in an advanced state of preparation at that time - see Dawnay Day & Co Ltd v De Braconier d'alphen [1997] IRLR 442. But it is not sufficient to show that the employer might at some time in the future wish to expand its business into other areas - see Scully. 40 The non-competition covenant in Scully was also held to be too wide because it prohibited the employee from taking a minority shareholding in a competing company. The relevant clause was in the following terms: -13-

17 The employee shall not... carry on, assist in carrying on or be engaged or otherwise interested in, whether as a shareholder, director, consultant, employee or self-employed person or in any other capacity, within the United Kingdom, any business involving... The Court of Appeal held that the restriction on holding shares in a competing company could not be severed, because it was not an independent part of the clause. GEOGRAPHICAL SCOPE OF NON-COMPETITION COVENANTS (BUSINESS SECRETS) 41 Where a non-competition covenant contains no geographical limitation, it will be construed as applying throughout the world: see Commercial Plastics v Vincent. In that case, it was held that a home-made covenant which prevented the employee from seeking employment with any of our competitors in the PVC calendaring field was unenforceable because Commercial Plastics activities were confined to the UK. 42 At first sight the Court of Appeal's decision in Littlewoods Organisation Limited v Harris (above) appears to represent a departure from this principle. In that case, the Court was willing to imply a geographical limitation into a covenant which prohibited the employee from working for a specified competitor. But in Greer v Sketchley Limited [1979] IRLR 445, the Court of Appeal said that Littlewoods must be regarded as "a very special case". Lord Denning M.R. said: "There the restraint was in relation to a specified competitor and not in reference to a geographical area. The implication that the restraint was intended to apply only within the geographical area where the employer and the competitor both operated within the same commercial field was comparatively easy to imply." 43 In Greer itself, the Court of Appeal refused to enforce a covenant covering the whole of the UK on the grounds that the employer's operations were confined to the Midlands and the South of England. See also Lansing Linde Ltd v Kerr (above) and J A Mont (UK) Ltd. v Mills [1993] IRLR

18 44 A worldwide restriction will not be justified unless the employer has a worldwide market. In Norbrook Laboratories Limited v Smyth [1986] Lexis, the Northern Ireland Court of Appeal held that, in order to justify a worldwide restraint, it is not essential for the employer to prove that the product is manufactured or marketed in every country in the world. It is sufficient to show production and/or sales in widespread areas throughout the commercial world. If, however, the employer has no business interests in substantial tracts of the commercial world, a worldwide restraint will not be justified - see Lansing Linde Ltd v Kerr (above). 45 In Scully UK Ltd v Lee [1998] IRLR 259 the Court of Appeal accepted that a worldwide restriction was in principle justifiable. Aldous LJ said: The fact that the clause is not limited to the United Kingdom does not, in my view, make it unreasonable. Business is becoming increasingly international and covenant is to protect dissemination of confidential information. That is not constrained by national boundaries. DURATION OF NON-COMPETITION COVENANTS (BUSINESS SECRETS) 46 If the covenant is not limited as to time, it will be construed as applying indefinitely and will almost certainly be unenforceable. There can be no hard and fast rule as to the length of time in which it is reasonable for a non-compete clause to apply. In the case of a covenant directed to the protection of business secrets, the Court will look at the pace of change in the industry and the period of time in which trade secrets known to the employee are likely to lose their value to a competitor. As a general rule, a covenant extending beyond 12 months is unlikely to be upheld, but each case depends on its facts. In D v M [1996] IRLR 192, the High Court struck down a covenant which prevented the managing director of a company involved in the distribution of bar-coding equipment from competing with his former employers for a period of three years. Laws J. held that this period was unreasonably long. -15-

19 47 In Credit Suisse Asset Management Ltd v Armstrong [1996] ICR 882, the Court of Appeal held that where a restrictive covenant is valid, the employer is entitled to have it enforced even though the employee has already been required to undertake a period of garden leave. According to the Court, there is no juridical basis on which the court "could allow some kind of set off" against a period of garden leave. However, Neill LJ added that "the existence of a garden leave clause may be a factor to be taken into account in determining the validity of a restrictive covenant as at the date of the contract". (2) NON-COMPETITION COVENANTS FOR PROTECTION OF GOODWILL 48 An employer can justify the imposition of a non-competition covenant by reference to its trade connections if it can show three things, namely that: (a) it has trade connections which are to an extent special to it; (b) the employee is in a position to take advantage of those connections; and (c) a lesser form of restriction will not provide adequate protection. 49 To establish a protectable customer connection, the employer will need to show that there are customers who are likely to contract with it on a recurring basis. It is not necessary for the employer to prove that the customers are exclusive to it. However, the more widely dispersed the loyalty of customers, the less likely it is that the employer can show a sufficient connection. 50 In order to demonstrate that the employee is in a position to take advantage of the employer's customer connection, the employer has to show that there is a special element in the contact between the employee and customers which creates a reasonable risk that the employee will be able to take them with him/her when s/he -16-

20 leaves. Mere contact with customers will not be sufficient if the nature of the contact does not allow the employee to establish a personal relationship with them. This is illustrated by Strange (SW) Limited v Mann [1965] 1 All ER 1069, in which the High Court refused to enforce a covenant which prevented the manager of a betting shop from carrying on the business of a bookmaker within a radius of 12 miles. Stamp J. said that the nature of the relationship between the manager and the customers did not make it likely that they would seek him out after he left, especially since the business was conducted mainly by telephone and involved little personal contact. 51 Essentially what must be shown is that the employee has the opportunity to acquire influence over customers or to endear him/herself to them by their personality or skill. In those circumstances the personal contact between the employee and the customers constitutes part of the goodwill of the employer's business which the employer is fully entitled to protect: Marion White Limited v Francis [1972] 3 All ER 857 (a case involving a hairdresser) and Home Counties Dairies Limited v Skilton [1970] 1 All ER 1227 (a milk delivery person). 52 The case for protection will be even stronger where the customers rely on the employee to such an extent that they regard him/her as the business rather than the employer. For an example, see Scorer v Seymour-Johns [1966] 3 All ER 347, in which the Court of Appeal upheld a covenant which prevented an estate agent's clerk from competing with his former employer. The Court noted that the clerk had sole responsibility for running the Claimant's Kingsbridge office. Indeed, so far as the clients were concerned "he was the Kingsbridge office". 53 The authorities cited above may be contrasted with Cantor Fitzgerald (UK) Limited v Wallace and others [1992] IRLR 215, in which the High Court refused to enforce a covenant preventing Eurobond dealers from working for a competitor, on the grounds that, where the customer connection is no more than an emanation of the -17-

21 qualities of the individual employee, the goodwill which has been established with customers attaches to the employee rather than to the employer. 54 This decision was described as "surprising" in Dawnay, Day & Co Ltd v de Braconier d'alphen [1997] IRLR 286 HC, where it was held that the customer connection established by the Defendant Eurobond brokers was a proprietary interest protectable by means of a non-competition clause. The judge noted in particular that the Claimant had incurred considerable expense in establishing and fostering the Defendants' relationships with customers. 55 A non-competition covenant will not be enforced if the employer could obtain adequate protection from a non-solicitation/dealing covenant: Office Angels Limited v Rainer-Thomas and another (above) and Marshall v N M Financial Management Ltd. [1996] IRLR However, a prohibition on competition may be upheld if: (a) the customers cannot readily be identified e.g. the clients of a hairdresser; (b) the employer can show that it would be impracticable to monitor compliance with a non-solicitation/dealing covenant: see Fitch v Dewes [1921] 2 AC 158 and Scorer v Seymour-Johns (above). 57 Non-competition covenants for the protection of goodwill are subject to the usual requirement that they be reasonable with regard to subject matter, geographical area and duration. GEOGRAPHICAL SCOPE OF NON-COMPETITION COVENANTS (GOODWILL) -18-

22 58 A territorial restriction will be unenforceable if it is not an effective means of protecting the employer's customer base, e.g. because it does not matter to customers where their supplier is located. This is illustrated by the Office Angels case, in which the Court of Appeal refused to uphold a covenant which prevented former employees of an employment agency situated in the City from operating a competing office within a one kilometre circle. The Court said that a covenant in these terms would not prevent the defecting employees from attracting the custom of the employer's clients, since the latter placed their orders over the phone and would not care whether the office was inside or outside the proscribed area. The fire of the covenant had therefore "missed its target". 59 In the same case the Court of Appeal said that, even if the employer can demonstrate that a territorial restriction is justified in principle, it must be able to show there is "a real functional correspondence" between the area circumscribed by the covenant and the area with which the employee's duties are concerned. The requisite correspondence was not established on the facts of the Office Angels case since half of the restricted circle covered areas which had never been allocated to the branch where the Defendants had worked (the Bow Street Branch). Moreover, whilst 75% of the clients with whom the Defendants had dealt were based within the kilometre circle, many of them were as it happened based outside the area which was formally the responsibility of the branch. Accordingly, it could not be said that there was a "real functional correspondence between the area circumscribed by the restriction and the area particularly associated with the Bow Street Branch". 60 For a further illustration of an area restriction which was too wide to be enforceable, see Spencer v Marchington [1988] IRLR 392 (another employment agency case in which a 25 mile covenant was struck down because all but one of the Defendant's existing clients were within a radius of 20 miles). DURATION OF NON-COMPETITION COVENANTS (GOODWILL) -19-

23 61 In deciding what constitutes a reasonable duration for a non-competition covenant which is designed to protect trade connections, the Court will take into account the time it will take for staff who replace the departing employee to establish relationships with the customers for whom he was responsible. 62 See also the comments above on the relationship between garden leave clauses and the duration of non-competition covenants. -20-

24 NON-SOLICITATION/DEALING COVENANTS 63 In the absence of an express covenant, a term prohibiting solicitation of customers will not be implied - see Wallace Bogan & Co v. Cove and others [1997] IRLR A non-solicitation/dealing covenant will be justified if it is necessary to prevent the employee from using the personal influence over his employer's customers and the knowledge of their requirements which he acquired during the course of his employment to entice them away from the employer: Stenhouse Australia v Phillips [1974] 1 All ER A non-dealing covenant goes further than a non-solicitation covenant, because it prevents the employee from accepting business from his/her former employer's customers, even if they come of their own accord. 66 A non-dealing covenant will be upheld if: (a) the personal nature of the business means that a natural gravitation of clients is likely to take place: London and Solent Limited v Brooks [1988] Lexis; or (b) it would be impossible to police a non-solicitation covenant: see PR Consultants Scotland Limited v Mann [1996] IRLR 190 and the decision at first instance in Office Angels v Rainer-Thomas [1990] Lexis. 67 In PR v Mann, the Court of Session upheld a covenant which prevented a former accounts director of a firm of public relations consultants from soliciting or dealing with the employer's clients. Commenting on the justification for a non-dealing covenant, Lord Caplan said: "... if a former employee is transacting with [the pursuers'] customers shortly after leaving the pursuers' employment it is difficult for the pursuers to know -21-

25 or even to establish just what mischief to their legitimate interests is occurring. This is illustrated by the present case where the pursuers understandably claim that they can have only extreme suspicion of the defender but cannot be expected to know precisely what has happened between himself, his present employers and Bell's [one of the pursuers' customers]. Thus in many cases the only practical protection, and one which is not unreasonable, is that for a period there should be no commercial contact between the ex-employee and the former employer's customers." 68 A non solicitation/dealing covenant may be enforced in relation to a particular customer even if the evidence shows that the customer in question would have taken its business away from the employer in any event - see the decision of the Court of Appeal in John Michael Design Plc v Cooke and Foley [1987] ICR 445. Nicholls L.J. said: "With a non-dealing covenant, in practice the Claimant will often only need protection when a customer of his has decided to change horses and go with the Defendant. To regard this change of allegiance by a customer as per se a sufficient reason for refusing an injunction would be tantamount to refusing the court's assistance in giving the Claimant protection in precisely the circumstances where that assistance is needed and for which the covenant was designed." AMBIT OF NON SOLICITATION/DEALING COVENANTS 69 A failure to define the term "customer" will not invalidate a covenant, at any rate where there could not have been any reasonable doubt in the minds of the parties as to the class of persons the term was intended to connote. It will be otherwise if, in the particular circumstances of the employer's business, the meaning of the term is unclear: Reed Executive plc and another v Somers and another [1986] Lexis. 70 A non-solicitation covenant is most likely to be upheld if it is limited to customers with whom the employee had dealings during a reasonable period prior to termination: Home County Dairies Limited v Skilton [1970] 1 All ER

26 71 There is authority that an employer can legitimately restrain an employee from soliciting all persons who were customers during his employment irrespective of whether he actually came into contact with them: see the judgment of the Court of Appeal in G.W. Plowman v Ash [1964] 3 All ER 10. However, this decision was distinguished by the Court of Appeal in Marley Tile Company Limited v Johnson [1982] IRLR 75. The Court pointed out that the business of the Claimant company in Plowman was small and it was therefore reasonable to suppose that the employee might get to know all the customers. It went on to hold that, where the employee cannot reasonably be expected to come into contact with all the employer's customers during his employment, a covenant which protects the whole of the employer's customer base will be unreasonably wide. 72 See also Office Angels Limited v Rainer-Thomas [1991] IRLR 214, in which a nonsolicitation covenant which covered 6,000-7,000 clients compared with perhaps 100 known to the employee was held to be unenforceable. 73 In Hanover Insurance Brokers Ltd v Schapiro [1994] IRLR 82, the Court of Appeal, having reviewed Plowman and Marley, concluded that there was no inconsistency between them. According to the Court, those decisions simply demonstrate that every case depends on its facts, including the nature of the business and the status of the employee. 74 The Court of Appeal's decision in Plowman is also authority for the proposition that it is legitimate to restrain an employee from soliciting all those persons who were customers during the period of the employee's employment even if they had ceased to be customers at the date of termination. The Court justified this view by saying that an employer has a legitimate interest in retaining the opportunity of doing business with former customers as well as maintaining his trade connection with existing customers. -23-

27 75 This reasoning was endorsed by the Court of Appeal in Home County Dairies v Skilton [1970] 1 All ER 1227, although the covenant in the latter case was actually limited to persons who had been customers during the last six months of the employee's employment. See also Business Seating (Renovations) Ltd. v Broad [1989] ICR 729, in which a covenant which prevented a former salesman from soliciting persons who had been customers within a period of 12 months prior to the termination of employment was held to be valid notwithstanding the fact that it would apply to customers who had discontinued their custom during that period. 76 In Dentmaster (UK) Ltd v Kent [1997] IRLR 636, the Court of Appeal was asked to consider a six month prohibition on soliciting the business of anyone who had been a customer of the employer s dent repair business during the last six months of the employee s employment and with whom he had dealt at any time during the course of his employment. The Court held that the absence of a backward temporal limit on the employee s dealings with customers did not render the covenant invalid. In reaching this conclusion, the Court took into account the brevity of the restraint period and the fact that it was limited to those who had been customers during the last six months preceding termination. 77 It is, however, clear that a covenant will be unenforceable if it covers: (a) customers who ceased to do business with the employer before the commencement of the employee's employment: Hinton and Higgs (UK) Limited v Murphy [1989] IRLR 519; (b) customers who only became such after the termination of the employee's employment: Aramark Plc v Somerville [1995] SLT If the expression "customers" is not limited in time, it is likely to be interpreted as a reference to persons who are customers of the employer at the time of the -24-

28 solicitation. Since this may include persons who only became customers after the termination of the employee's employment, the clause will be unenforceable: Aramark Plc v Somerville (above). 79 Potential customers can probably be included in the restriction if the employee had dealings with them with a view to securing their custom: Gledhow Autoparts Limited v Delaney [1965] 3 All ER 288. It is, however, imperative that the clause should indicate how potential customers are to be identified: Aramark Plc v Somerville (above). 80 If the employee brings a substantial following of customers, a covenant which prevents him/her soliciting customers who constitute his/her personal customer connection may be unreasonable - see M & S Drapers v Reynolds [1956] 3 All ER 814, in which a covenant imposed on a travelling salesman was held to be unenforceable because it prevented him from soliciting customers who he had brought with him from previous employments. Contrast with Hanover Insurance Brokers Ltd v Schapiro [1994] IRLR 82, in which the Court of Appeal enforced a covenant prohibiting a former chairman of the Claimant from soliciting its customers notwithstanding the fact that the restriction extended to customers whom he had introduced to the company. The Court distinguished the chairman's situation from that of the travelling salesman in M & S Drapers on the ground that he was, in view of his status, much better able to look after his own interests. 81 A non-solicitation/dealing covenant may be struck down if it extends to goods and services in which the employer has no interest: Marley Tile Company Limited v Johnson (above). However, where a covenant is silent as to the kind of goods to which it applies, the Court may in some circumstances be prepared to construe it as limited to those with which the employer's business is concerned: Plowman v Ash (above) and Business Seating (Renovations) Limited v Broad (above). See also Hanover Insurance Brokers Ltd v Schapiro (above), in which the Court of Appeal -25-

29 held that a covenant which simply prevented solicitation of clients should be read as confined to solicitation in relation to insurance brokerage (the business of the employers). GEOGRAPHICAL SCOPE OF NON-SOLICITATION/DEALING COVENANTS 82 Provided a non-solicitation/dealing covenant is limited to customers with whom the employee had dealings, a geographical restriction will not normally be necessary. The position may be different if the customers include particular divisions or administrative units of an enterprise which has other divisions or administrative units located outside the area in which the employer's business operates or, if different, the area for which the employee is responsible: Hinton and Higgs (UK) Limited v Murphy [1989] IRLR 519. DURATION OF NON-SOLICITATION/DEALING COVENANTS 83 In deciding whether the duration of a non-solicitation/dealing covenant is reasonable, the Court will have regard to the extent of the employee's influence over the employer's customers. A more senior employee may be subject to a longer period of restraint than a junior employee: Rex Stewart Jeffries Parker Ginsberg Ltd. v Parker [1988] IRLR 483. In that case the Court of Appeal upheld a covenant which prevented the managing director of an advertising agency from soliciting clients for a period of eighteen months after termination of employment. Compare with D v M [1996] IRLR 192, in which a three year restriction on solicitation by the managing director of a company which distributed bar-coding equipment was held to be excessively long, and Scully UK Ltd v Lee [1998] IRLR 259, in which the Court of Appeal refused to interfere with the finding that a two year prohibition on solicitation of customers was too long. -26-

30 84 In the case of a senior employee, it may be legitimate to restrain solicitation of customers who have dealings with the staff under his or her supervision: Spafax Limited v Harrison and Taylor [1980] IRLR

31 COVENANTS AGAINST SOLICITATION AND EMPLOYMENT OF FELLOW EMPLOYEES 85 In the absence of some express prohibition in the contract of employment, there is nothing to prevent an ex-employee from persuading former colleagues to leave their employment, provided he does not thereby induce a breach of contract. Such conduct is not a breach of any implied obligation to the employer: Horcal v Gatland [1983] IRLR 459. Moreover, information concerning the aptitudes, characters and fields of specialisation of staff can not normally be regarded as information akin to trade secret: G.D. Searle & Co. Limited v Celltech Limited [1982] FSR There was until recently conflicting authority on whether a covenant which restrains an ex-employee from soliciting former colleagues could ever be enforced - see: (a) Hanover Insurance Brokers Ltd v Schapiro [1994] IRLR 82, in which the Court of Appeal held that employees are "not an asset of the company like apples or pears or other stock in trade"; (b) Kores Manufacturing Company Limited v Kolok Manufacturing Company Limited [1959] (CA) Ch D 109, in which it was suggested that an employer's interest in preserving the stability of his workforce might not constitute a proprietary interest in the requisite sense; (c) Ingham v ABC Contract Services Ltd (unreported) 12th November 1993, in which the Court of Appeal held that the Claimant employer "had a legitimate interest in maintaining a stable trained workforce in what is acknowledged to be a highly competitive business" (the Claimant was a recruitment agency); (d) Alliance Paper Group plc v Prestwich [1996] IRLR 25, in which the High Court (Judge Levy QC) upheld a covenant restraining the managing director -28-

32 of a paper company from endeavouring to entice away any person who had been employed by his former employer "in a senior capacity" during the six months preceding the termination of his employment. 87 The issue has now been resolved by the Court of Appeal in Dawnay, Day & Co Ltd v de Braconier d'alphen [1997] IRLR 442. In that case the Court upheld a covenant in the Defendants' service agreements which prevented them from soliciting or enticing away any director or senior employee for a year after the termination of their employment. 88 The Court said: "... an employer's interest in maintaining a stable, trained workforce is one which he can properly protect within the limits of reasonableness.... The employer's need for protection arises because the ex-employee may seek to exploit the knowledge which he has gained of their particular qualifications, rates of remuneration and so on..." 89 The Court also rejected the submission that the reference to "senior employee" was so uncertain as to render the covenant unenforceable. 90 The judge at first instance ([1997] IRLR 285) had struck down a separate clause in a shareholders agreement which prohibited the Defendants from soliciting or enticing away "any person who is for the time being a director, officer, employee or other servant of the company". The judge said that this provision was unreasonably wide, extending as it did to employees of all sorts, even the most junior. 91 See also TSC Europe Ltd v Massey [1999] IRLR 22, in which a three year prohibition against soliciting any employee of the company was held to be unreasonably wide, first because it extended to all the company s employees regardless of their degree of importance in the business and secondly because it -29-

33 would apply to employees who joined the company during the prohibited period, including persons joining after the Defendant s employment had ended. 92 Dicta of the Court of Appeal in Dawnay Day suggest that the Court would have looked unfavourably on a clause which prohibited employment, as opposed to solicitation, of staff - see paragraph 47 of the judgment. -30-

34 THE COURTS' APPROACH TO RESTRICTIVE COVENANTS Restraint of Trade: law and procedure after Woolf RELATIONSHIPS GIVING RISE TO PROTECTABLE INTERESTS 93 The categories of persons who may have a legitimate interest which justifies protection by means of a restrictive covenant include employers, the vendors of businesses, partners and joint venturers. The principle that covenants in favour of a joint venturer may be enforced was upheld by the Court of Appeal in Dawnay, Day & Co Ltd v de Braconier d'alphen [1997] IRLR 442. PROTECTION OF GROUP COMPANIES 94 The Courts have recognised that an employer may have a legitimate interest in protecting the trade secrets and goodwill of other companies in the same group. Where the requisite identity of interest is established, the Courts will take no account of the doctrine of privity: Stenhouse Australia Limited v Phillips [1974] 1 All ER A non-solicitation covenant which prevents an employee from soliciting customers of an associated employer with whom he had no dealings during his employment will not be upheld: Business Seating (Renovations) Limited v Broad [1989] ICR 729. Moreover, if the protection afforded to associated employers is not in a severable form, the covenant in favour of the principal employer may be rendered unenforceable: see Hinton and Higgs (UK) Limited v Murphy [1989] IRLR 519, in which it was held that a covenant which prevented the employee from working for clients of any company in the group of companies to which the employer belonged was unreasonably wide. Since it was not possible to separate the protection given to the employer from that provided to the other group companies, the Court refused to grant an injunction. -31-

35 THE TEST OF REASONABLENESS 96 The approach which the courts take in determining whether a restrictive covenant is reasonable depends on the context in which the covenant appears. 97 The test of reasonableness which is applied to covenants between employer and employee is more stringent than that applied to covenants between the vendor and purchaser of a business. In the case of employer/employee covenants, the courts are astute to ensure that the employer does not take advantage of its unequal bargaining power to prevent the employee using the skill and knowledge he acquired during his employment for his own benefit and for the ultimate benefit of the community as a whole. 98 By contrast, the courts approach covenants between the vendor and the purchaser of a business on the basis that both parties are of equal bargaining power and that they have a mutual interest in the effective disposal of the goodwill of the business, which can only be fulfilled if the vendor is precluded from entering into competition with the purchaser. Thus the courts recognise that: (a) the vendor has an interest in selling his business for the best possible price; and (b) the purchaser has an interest in ensuring that the purchaser does not take advantage of his former association with the business to undermine or depreciate the value of the goodwill which he is acquiring. 99 For a fuller explanation of these principles, see Herbert Morris Limited v Saxelby [1916] AC 688, Bridge v Deacons [1984] AC 705, Allied Dunbar (Frank Weisinger) Ltd. v Weisinger [1988] IRLR 60 and Alliance Paper Group plc v Prestwich [1996] IRLR

36 100 In Alliance Paper Group, the High Court was asked to consider covenants contained in the service agreement of a managing director who was a former owner of the business. The service agreement had been concluded immediately after he negotiated a sale of his majority shareholding in the business. The Court held that covenants entered into in those circumstances could be construed on the more stringent basis applicable to covenants between the vendor and the purchaser of a business. 101 See also Systems Reliability Holdings Plc v Smith [1990] IRLR 377, in which it was held that the more stringent test should be applied where a restrictive covenant is imposed on an employee because he has acquired a shareholding in the employer. 102 In TSC Europe Ltd v Massey [1999] IRLR 22, the High Court considered the approach to be taken in considering the validity of a restrictive covenant which was agreed as part of a transaction involving both the sale of a business and the relationship of employer and employee. It held that the validity of the covenant had to be considered in the context of the overall commercial bargain between the parties. 103 On the facts, a three year prohibition against soliciting any employee of the company was unreasonably wide, first because it extended to all the company s employees regardless of their degree of importance in the business and secondly because it would apply to employees who joined the company during the prohibited period, including persons joining after the Defendant s employment had ended. CANONS OF CONSTRUCTION 104 Where a covenant is excessively wide, it will be struck down by the court. In Mason v Provident Clothing and Supply Company Ltd [1913] AC 472, Lord Moulton stated: -33-

37 "It would in my opinion be pessimi exempli if, when an employer had exacted a covenant deliberately framed in unreasonably wide terms, the courts were to come to his assistance and, by applying their ingenuity and knowledge of the law, carve out of this void covenant the maximum of what he might validly have required. It must be remembered that the real sanction at the back of these covenants is the terror and expense of litigation, in which the servant is usually at a great disadvantage, in view of the long purse of his master.... the hardship imposed by unreasonable covenants by employers would be greatly increased if they could continue the practice with the expectation that, having exposed the servant to the anxiety and expense of litigation, the court would in the end enable them to obtain everything which they could have obtained by acting reasonably." 105 It follows that where a restrictive covenant is ex facie too wide to be enforceable, the courts should not strive too hard to find within it some implicit limitation which would justify its imposition - see J. A. Mont (UK) Ltd v Mills [1993] IRLR 172. Moreover, where a covenant is ambiguous, the ambiguity will be construed contra proferentes, i.e. against the employer. 106 On the other hand, a restriction will not be held to be unreasonable merely because it might work unfairly in certain exceptional situations beyond the range of the protection intended by the parties: Home County Dairies Limited v Skilton [1970] 1 All ER 1227 and Littlewoods Organisation Limited v Harris [1978] 1 All ER For a recent application of this principle, see PR Consultants Scotland Ltd v Mann [1996] IRLR 188, in which the Court of Session upheld a covenant which prohibited a former accounts director of a public relations firm from being employed or engaged by a client for a period following termination. The Court refused to accept the objection that the covenant was excessively wide because it prevented the Defendant from taking employment in a capacity which had nothing to do with the employer's business. It would, the Court said, be wrong to construe the clause "in a vacuum". It had to be considered in the light of the fact that the Defendant was an experienced public relations executive and that customers of the employers would -34-

38 essentially be interested in public relations services from him. Given the context in which the clause was imposed, it was "unlikely that the parties had any contemplation that the defender should be prevented from seeking a relationship with a former customer in the capacity of an office boy or doorman". 108 Reasonableness has to be considered at the time when the contract was made, taking into account the parties' legitimate expectations regarding the future: Commercial Plastics Limited v Vincent [1965] 1 QB 623. Supervening events which the parties could not reasonably have foreseen will not render an initially reasonable covenant unenforceable: Gledhow Autoparts v Delaney [1965] 3 All ER 288. The court may nevertheless take such events into account in exercising its discretion whether to grant an injunction to enforce the covenant - see Scotcoast Limited v Halliday and others (unreported) Court of Session (Outer House) 10/1/ Where a restriction is agreed on the termination of employment, the Court will be slow to find that it is unreasonable in the interests of the parties. By contrast with parties who enter into a covenant at the beginning of an employment relationship (who have to make a pre-estimate of what protection will be required in circumstances which they cannot precisely foresee), parties who agree a covenant on termination are faced with an actual situation and, unless the covenant is clearly excessive, they will be regarded as having imposed a realistic restriction: Stenhouse Australia Limited v Phillips [1974] 1 All ER To take advantage of this principle, the covenants must be contained in a new freestanding agreement. An affirmation of covenants in the employment contract will not suffice. 111 It is doubtful if a provision which states that the employer may consent to waive a restriction and that such consent will not be unreasonably withheld can redeem a covenant which is otherwise bad. However, in Kerchiss v Colora Printing Inks -35-

39 Limited [1960] RPC 235, Dankwerts J. held that such a provision was relevant to reasonableness. 112 Will an employer's prospects of enforcing a restrictive covenant be enhanced if it promises to pay the employee during the period of restriction? There is little authority on the point. It arose in Kerchiss (above), where the Claimant company had promised to pay the Defendant director a salary equivalent to 65% of the average salary and bonus received by him during the last three years of his employment. Mr Justice Dankwerts held that the existence of this promise was a factor which could be taken into account in determining the purpose of the covenant i.e. whether it was designed to protect the employer's confidential information or whether, as the Defendant alleged, it was merely designed to suppress competition. But the judge does not appear to have considered the guarantee of remuneration relevant in determining whether the scope of the restraint was reasonable. 113 See also TSC Europe Ltd v Massey [1999] IRLR 22. It was held that an unreasonable prohibition on solicitation of employees was not converted into a reasonable prohibition by the inclusion of a provision requiring the employer to make post-termination payments to the Defendant during the period covered by the covenant. THE RULES ON SEVERANCE 114 The Court will not be prepared to re-write a covenant which is unreasonably wide. However, where certain conditions are met, the Court may sever the offending restriction and enforce the remainder In Attwood v Lamont [1920] All ER 55 Sterndale LJ said that a contract can be severed "if the severed parts are independent of one another and can be severed without the severance affecting the meaning of the part remaining". Lord Justice Younger said that severance was permissible where "where the covenant is not really a single covenant but in effect a combination -36-

40 of several distinct covenants." These principles are sometimes referred to as the "blue pencil" test. 115 The Courts will readily accept that a clause which covers more than one geographical area is to be construed as imposing a number of separate covenants each relating to a different geographical area -see Goldsoll v Goldman [1915] Ch 292 and Scorer v Seymour-Johns [1966] 3 All ER In Lucas & Co Ltd v Mitchell [1974] 1 Ch 129, the Court of Appeal held that a restraint against "soliciting or dealing" could be regarded as imposing two separate obligations. It proceeded to enforce the restriction on solicitation and to strike down the prohibition in relation to dealing. 117 For other examples of severance, see Business Seating (Renovations) Ltd v Broad [1989] ICR 729 (severance of covenant relating to customers of an associated company) and Rex Stewart Jeffries Parker Ginsberg Limited v Parker [1988] IRLR 483 (severance of clause prohibiting solicitation of persons who became customers after the employment ended from clause concerned with customers up to the date of termination). For an illustration of a case where the Court was unwilling to sever see Scully UK Ltd v Lee [1998] IRLR The severance of an invalid restraint will only affect the enforceability of the remaining terms of the contract if the restraint formed the real or main consideration for the contract - see Marshall v N M Financial Management Ltd [1997] IRLR 451. In that case the employee's entitlement to receive certain commission payments following the termination of his employment was conditional upon his refraining from competition with the employer. The Court struck down the restriction on competition but nevertheless allowed the employee to enforce the right to commission i.e. it allowed the clause to stand without the proviso. This was on the -37-

41 ground that the employee's service prior to the termination of his employment was the main consideration for payment of commissions. SAVING CLAUSES 119 An employer has nothing to lose by including in the contract a clause which gives contractual authority to the Court's inherent power to delete unreasonable parts of the contract. The Court will give effect to a provision of this kind: Hinton and Higgs (UK) Limited v Murphy [1989] IRLR 519. By contrast, a clause which specifies that, if a restriction is held to be invalid or unenforceable, a lesser restriction will operate is at best unlikely to have any effect and at worst may render the entire covenant void for uncertainty (although the latter seems unlikely). 120 Overlapping or "multiple choice" restraints e.g. "You will not compete in the UK, England and Wales and the Greater London Area" may be regarded as too uncertain to be enforceable - see Linhoff v Petela and others (unreported) High Court 10th February The prudent draftsman will also bear in mind the words of Lord Wilberforce in Stenhouse Australia v Phillips (above): "The presence of one restraint diminishes the need for others, or at least increases the burden of those who must justify others." IMPOSITION AND DISCHARGE OF RESTRICTIVE COVENANTS 122 Restrictive covenants cannot be incorporated unilaterally in an employee's contract of employment: the employee must agree to them either expressly or impliedly. Agreement cannot necessarily be inferred simply from the fact that the employee continues to work after the unilateral imposition of covenants, since his continued -38-

42 performance of his duties would be consistent with adherence to the unamended contract. 123 In James C Watson & Co Ltd v Jacobson (unreported) Court of Session (Outer House) 12/1/95, the pursuer argued that its former employee had impliedly consented to the introduction of a covenant by continuing to work on without protest for a month after it was introduced into his written terms of employment. The Court rejected this contention. Applying the principle adumbrated in Jones v Associated Tunnelling Co Ltd [1981] IRLR 477, it held that where a purported variation has no immediate practical impact on the employee, it is unrealistic to treat his failure to protest as indicating that he has affirmed the contract. 124 See also D v M [1996] IRLR 196, in which the High Court held that the mere fact that the Defendant had continued as managing director for 15 months after receiving a draft service agreement containing restrictive covenants was not capable, on its own, of constituting proof of a concluded contract. 125 These decisions may be contrasted with Credit Suisse Asset Management Ltd v Armstrong [1996] ICR 882. In that case the employers issued a new staff handbook to the Defendants which made some alterations to the restrictive covenants in the existing handbook. The handbook was accompanied by a memorandum which said that it was largely an update and did not draw the Defendants' attention to the new covenants. The Defendants were asked to sign the memorandum to confirm their receipt of the new handbook but were not asked to confirm their agreement to its contents. The Court of Appeal (without finally deciding the question) thought it likely that the Claimant would succeed at trial in showing that the covenants were incorporated in the Defendants' contracts of employment. The Defendants were, according to Neill LJ, "men of experience and sophistication who are used to looking at complex documents". -39-

43 126 Where an employee whose contract did not previously include restrictive covenants expressly or impliedly agrees to them, the employer's continued willingness to employ the employee is sufficient consideration to support the agreement to vary the contract: Norbrook Laboratories v Smyth Ch D [1986] Lexis. 127 If an employee whose contract of employment contains restrictive covenants is promoted without being given a new contract, the Court will normally assume that the covenants continue to apply, unless something is said to the contrary: Marley Tile Company Limited v Johnson [1982] IRLR A refusal by an employee to accept restrictive covenants which are necessary for the protection of the employer's business may constitute some other substantial reason justifying his dismissal for the purposes of section 98(1)(b) of the Employment Rights Act 1996: R.S. Components Limited v Irwin [1973] ICR 535. EFFECT OF REPUDIATION BY THE EMPLOYER 129 An employee who is wrongfully dismissed is not bound by post-termination restrictions in his employment contract, since the employer's repudiation relieves the employee of any further obligation to comply with the contract: General Billposting v Atkinson [1909] AC 118. This principle was recently re-iterated by the Court of Appeal in Rock Refrigeration Ltd v Jones and Seward Refrigeration Ltd [1996] IRLR If the contract provides for pay in lieu of notice, an employer who terminates by giving pay in lieu will not breach the contract and can rely on any post-termination restrictions: Rex Stewart Jeffries Parker Ginsberg Limited v Parker [1988] IRLR 483. Arguably, giving pay in lieu of notice will save the restrictive covenants even if there is no express power in the contract to do so since although, in the absence of such a power, termination with pay in lieu would be regarded as a breach, it is -40-

44 questionable whether it would be treated as a repudiatory breach capable of extinguishing all the employee's obligations under the contract. 131 A controversial question is whether an employer can circumvent the General Billposting problem by including in a restrictive covenant a provision which states that it will survive the wrongful termination of the employment by the employer. Dicta in Photo Productions Limited v Securicor Transport Limited [1980] 1 All ER suggest that such a provision could be effective. 132 In Rock Refrigeration (above), the Court of Appeal held that since a repudiatory breach of contract releases the employee from all his obligations under the contract, it necessarily follows that a restrictive covenant which is stated to apply following the employer's own breach can have no effect in that situation. However, Phillips LJ suggested that the rule in General Billposting "accords neither with current legal principle nor with the requirements of business efficacy". According to his Lordship "it is at least arguable that... not every restrictive covenant will be discharged upon a repudiatory termination of the employment". 133 What is now clear is that a covenant which purports to operate even where the termination has been brought about by the employer's own breach is not necessarily void from the beginning as an unreasonable restraint of trade - see Rock Refrigeration overruling D v M [1996] IRLR 192 and other cases to the same effect. REMEDIES 134 In the vast majority of cases, the employer will require speedy relief. An interim injunction may serve to nip the employee's activities in the bud (CPR r25.1). -41-

45 135 The jurisdiction to grant injunctive relief is conferred by section 37 Supreme Court Act 1981, which provides that the Court may grant an injunction in all cases in which it appears to be just and convenient to do so. 136 The guidelines which the Court should apply to applications for interim injunctions are laid down in American Cyanamid v Ethicon Limited [1975] AC 396. They are: (a) is there a serious issue to be tried? (b) are damages an adequate remedy (for either party)? (c) where does the balance of convenience lie? 137 In Jack Allen (Sales and Service) Ltd v Smith [1999] IRLR 19, the Court of Session, Outer House, held that the Court should not grant an injunction to enforce a restrictive covenant unless there is evidence to show that breach of the covenant will cause the employer real harm. Lord Johnston said:... when an interim interdict is sought in this context, not only must the employer satisfy the general test of reasonableness but he must also point to the existence of a perceived actual or potential harm which is real and not fanciful, which would justify interim restraint to avoid such harm being inflicted. A SERIOUS ISSUE TO BE TRIED 138 It is important to appreciate that the Claimant does not have to show a prima facie case i.e. he does not have to persuade the court that he is more likely than not to obtain an injunction at trial. But the Court is equally not precluded from considering the respective strength of the parties cases in deciding whether to grant injunctive relief. The amount of weight to be given to the merits will vary according to the circumstances. -42-

46 139 An important factor is whether the action can be tried before the period of the restraint has expired or has run a large part of its course. If a trial can be held within this period, it may be wrong for the Court to consider whether the Claimant is likely to succeed at the trial: Lawrence David Limited v Ashton [1989] IRLR 22. But where it will not be possible to hold a trial before the restraint has expired, or substantially expired, justice requires some consideration of the Claimant's ultimate prospects of success. Where such an assessment is required, it is for the judge to control its extent: Lansing Linde Limited v Kerr [1991] ICR See also Series 5 Software Ltd v Clarke and others [1996] 1 All ER 853, in which the relevant principles were comprehensively considered by Mr Justice Laddie. The judge held that when deciding whether to grant an application for interim relief, the court should rarely attempt to resolve difficult issues of fact or law. But where it is apparent from the affidavit evidence and any exhibited contemporary documents that one party s case is much stronger than the other s, it will be appropriate for the court to take that into account when exercising its discretion. 141 The approach laid down in American Cyanamid must also be qualified where the grant or refusal of an injunction will effectively dispose of the action finally in favour of whichever party is successful in the application - see NWL Ltd v Woods [1979] ICR 867 and Lansing Linde. In the latter case it was held that, having regard to the earliest projected date of trial, the grant of an injunction would have the practical effect of putting an end to the action. Although the Defendant had the support of his new employers for the purpose of resisting an injunction, that support would not be available for a five day trial designed to secure damages for himself and give him freedom for the last 2 or 3 months of a 12 month restriction. ARE DAMAGES AN ADEQUATE REMEDY? -43-

47 142 It is usually relatively easy for an employer to show that damages will not be an adequate remedy. The potential damage to the employer's business will normally be difficult or impossible to quantify. In addition, the employee may be unable to pay a substantial award of damages. 143 Damages may also be an inadequate remedy for the employee, especially where he has a unique opportunity to advance his career. "There are, the poet reminds us, tides in the affairs of men that have to be taken at the turn": per Vinelott J. in 3 Specialist Recruiters International Limited v Taylor [1989] unreported. See also Series 5 Software Ltd v Clarke and others [1996] 1 All ER 853, in which Laddie J was influenced by the prospect that an injunction would deprive the Defendants of the means of earning a living and strangle their new venture near birth. This case is of doubtful authority on other points once thought significant, as the two principal CA authorities were not cited to the judge. THE BALANCE OF CONVENIENCE 144 Deciding where the balance of convenience lies is a question of the lesser evil: will it do less harm to grant an injunction which subsequently turns out to be unjustified or to refuse one if it subsequently turns out that an injunction should have been granted: per Staughton L.J. in Lansing Linde Limited v Kerr (above). 145 If the Court is minded to grant an injunction, the employer will be required to give a cross-undertaking in damages (CPR 25 Practice Direction, paragraph 5). PROCEDURE 3 Slightly misquoting from Julius Caesar: There is a tide in the affairs of men which, taken at the flood, leads on to fortune

48 146. The procedure for applying for an interim injunction is set out in CPR Part 25, and the accompanying Practice Direction. The application notice for an interim injunction must state the order sought as well as the date, time and place of the hearing (PD 25, 2.1). Applications for interim injunctions must be supported by evidence set out in one of the following forms: (a) a witness statement; (b) a statement of case provided that it is verified by a statement of truth; or (c) the application itself provided that it is verified by a statement of truth; unless the court, or a rule or practice direction requires evidence by affidavit The evidence must set out the facts upon which the applicant relies in support of the claim, including all material facts of which the court should be made aware. The application notice and supporting evidence must be served as soon as practicable after issue, and in any event not less than 3 days before the court is to hear the application (PD 25, 2.2) Where urgent applications are made for an interim injunction after the claim form has been issued, the application notice and evidence in support should be filed with the court 2 hours before the hearing if possible (PD 25, 4.3(2)). In circumstances where an application is made before the application notice has been issued, a draft order should be provided at the hearing, with an application notice and evidence in support filed later on the same day or on the following day (PD 25, 4.3(2)). The applicant should take steps to notify the respondent informally of the application, save where secrecy is essential (PD 25, 4.3(3). -45-

49 149. Where an applicant applies for an interim injunction without giving notice, CPR r25.3(3) provides that the evidence in support must state the reasons why notice has not been given Where an application is made before the issue of a claim form, additionally, the applicant must undertake to issue a claim form immediately unless the court orders otherwise. The court also has the power to give directions for the commencement of the claim (PD 25, 4.4). OTHER REMEDIES 151. At the full trial, the employer may seek a permanent injunction (limited to the period of the restraint), together with damages and/or an account of profits Where documents are missing, the employer may be able to obtain: (a) an order for delivery up (CPR r25.1(1)(e)); (b) a Search Order (CPR r25.1(1)(h)). The latter will not be granted unless there is a real possibility that the employee will not comply with an order for delivery up. The fact that an employee has removed confidential information does not necessarily mean that he will disobey an order of the Court: Lock International plc v Beswick (above). RESISTING INTERIM INJUNCTIONS 153. An employee who is anxious to avoid the costs and anxiety of defending an application for an injunction from his former employer may pursue two possible avenues. -46-

50 DECLARATIONS 154. An employee may apply to the Court for a declaration that a covenant to which s/he is subject is invalid and unenforceable (CPR r25.1(1)(b)). The Court may be prepared to grant a speedy trial where an application of this kind is made: Greer v Sketchley Limited (above). Declarations can be granted on an interim basis after April CPR Respondent 25.1(1)(b) overruling Riverside Mental Health Trust v Fox FLR 614 CA. SUMMARY JUDGMENT 155. Any party can seek to have an issue decided without a trial. (CPR, Part 24). Notably, an employee can apply for summary judgment against the Claimant employer on the basis that the claim has no real prospect of success. This has some potential to make it easier for employees to resist claims for injunctive relief, as previously summary judgment was available only to Plaintiffs. It might be called reverse Order 14 which has existed in other common law jurisdictions for some time. OLD SQUARE CHAMBERS GRAY'S INN MELANIE TETHER JEREMY MCMULLEN QC LONDON WC1R 5LQ 10 NOVEMBER