Employment: Restrictive covenants

30 July 2007

Duties under a restrictive covenant in an employee’s contract may be owed to a subsidiary company even though only expressed to be in favour of the holding company; the holding company may have sufficient ‘business interest’ to make the covenant enforceable.

In Beckett Investment Management Group and others v Hall and others the Court of Appeal considered the wording of a restrictive covenant.

Following the acquisition of a business group by a holding company, the employee was employed by the holding company but was in practice as a financial adviser based at the office of the subsidiary company. The covenant prevented the employee from providing Prohibited Services (defined as the provision of advice in relation to pensions life assurance investments and other advice of the type provided by ‘the Company’ (defined as the holding company) in the ordinary course of its business) to any person with whom the employee had dealt as a Relevant Client of the Company during the twelve months prior to termination of his contract. ‘Relevant Client’ was defined to include any individual with whom the employee dealt as an officer, employee or representative of a client organisation even if they were to seek advice in a personal capacity.

In the High Court, the Judge decided that the covenant’s wording should be interpreted strictly. The holding company ‘did not provide advice about anything to anybody’ which made the wording futile. The Judge also thought that the restricted period of one year post-termination was arbitrary and that the definition of Relevant Client (which precluded individuals to whom the employee had sold financial services in their business capacity in the year prior to termination from obtaining such services from him in a personal capacity as well) was too widely drawn to be enforceable.

The Court of Appeal has now disagreed on all three issues.

  • It considered that the covenant should be construed with reference to the object sought to be obtained. The law had regard to the realities of big business and took the group to be one concern under one supreme control. The holding company had a legitimate business interest to protect.

  • The Judge’s idea that three months would have been a reasonable restricted period on the basis that that was a period long enough for the employer to make contact with its clients to persuade them to continue to do business with it was wrong. He had not considered the nature of the business and the fact that these were not run-of-the- mill employees. The employer would have had to recruit specialists to replace them. The industry standard was 12 months and that was a reasonable period for the covenant to last.

  • As for the definition of Relevant Client the Court should have simply deleted the extended definition to leave only the primary wording, thus preventing the employee from dealing only with businesses who had been the employer’s clients in the year prior to termination.

Points to note:

  • In this case the Court of Appeal goes even further than it has done in other recent cases to uphold a restrictive covenant. In the past, it has interpreted covenant wording extremely strictly. Although it is good to see the Court of Appeal stressing that business sense matters more than niceties of wording, the Court still has the last word in deciding whether any particular covenant is enforceable or not. Specialist advice is always necessary to ensure that any particular covenant is worded to stand the best chance of finding favour with the Courts.

  • The wording of any restrictive covenant remains critical. On a business sale or merger, key employees’ contracts should be reviewed. Wording may need to be updated to ensure that the covenant continues to protect real and current business interests that have not been superseded by business developments since the employee joined the business and the contract was entered into. We shall be happy to advise.

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