Restrictive Covenants

Checking Restrictive Covenants

Nowadays it is unusual for companies to ignore breaches of restrictive covenants by former employees, particularly where there is likely to be a substantial adverse impact to their client base or to the supply of goods and services.

It will be a significant oversight, therefore, for employees leaving paid employment (with a view to either setting up a competing business or joining a competitor) to ignore any restrictive covenants or, in the case of employee shareholders, covenants contained in any shareholders’ agreement.

Threats of Proceedings

Employees who plan to try and circumvent restrictive covenants are likely to find themselves on the receiving end of some pretty aggressive solicitors’ letters. Amongst other things there will be demands for undertakings to be given not to persist with any breach or face the prospect of a High Court injunction. Employees will have to respond within a very short time frame and it is therefore very easy to become overawed by events.

To even the calmest of individuals the threat of injunctive proceedings can be extremely stressful as previously made plans suddenly become in danger of being scuppered. For example, the individual may have already accepted an offer of employment with a competitor, or invested substantial sums in setting up a competing business.

For senior employees and directors there are likely to be further allegations concerning breaches of fiduciary duties and/or confidentiality, all of which are designed to apply even more pressure. Furthermore, if the prospective employer is also targeted with the threat of proceedings for inducing a breach of contract then there is the risk of a job offer being rescinded.

Decisions

Employees usually have a choice. They can challenge the validity of the restrictive covenants and stand their ground (gambling on the fact that their former employer is bluffing and will not take matters further); alternatively they can offer the appropriate undertakings which, of course, may affect their ability to either commence employment for a new employer or start trading any new business venture.

The legal doctrine of restraint of trade is an incredibly difficult and one which is both extremely fact sensitive and case law driven.

Specialist legal advice together with guidance on how to respond to letters before action, requests for undertakings and importantly, how tactically to try and defuse the situation is imperative. Whilst one still occasionally sees poorly drafted restrictive covenants which will be unenforceable, it is more likely that they will be well drafted, or sufficiently clear in order to create a risk of being upheld by a Court if injunctive proceedings were issued.

A reasonably well drafted restrictive covenant may not be the final answer however. An individual will need to consider whether or not he can argue a repudiatory breach of contract by the employer, thereby rendering the restrictive covenants unenforceable. Failing that, offering to provide qualified undertakings; trying to negotiate a “quid pro-quo” where there is perhaps scope to argue over enforceability; or refusing to provide undertakings on the basis that the employer might have difficulty in establishing any loss thereby making the prospects of legal proceedings more futile.



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