Restrictive Covenants

Restrictive covenants are designed to protect a business from unfair competition after an employee’s departure. They serve to prevent former employees from soliciting clients, poaching colleagues, interfering with suppliers, or joining competitors for a defined period of time. While these covenants are essential for safeguarding legitimate business interests, their enforceability and application often lead to disputes that can escalate into expensive and quite tricky litigation.

Unlike standard employment contracts, senior executive service agreements typically include restrictive covenants due to the heightened bargaining power of both parties. Employers seek to protect sensitive information, business relationships, and proprietary knowledge, while employees want to negotiate the terms to balance their future career prospects. Common restrictions include:

  • Non-compete clauses: preventing the employee from working for a competitor within a specific geographical area and timeframe;
  • Non-solicitation clauses: restricting the solicitation of former clients, customers, or suppliers;
  • Non-dealing clauses: prohibiting business dealings with clients or customers, even if they initiate contact; and
  • Non-poaching clauses: preventing the recruitment of former colleagues to join a new employer.

Disputes tend to arise over the scope and enforceability of these clauses.

For a restrictive covenant to be enforceable, it must strike a balance between protecting the employer’s legitimate business interests and allowing the employee to earn a living. Courts carefully analyse whether a clause is reasonable, which often depends on factors such as:

  • Duration: the restriction must not last longer than necessary to protect the employer’s interests;
  • Scope of activities: the covenant should only restrict activities directly linked to the former employee’s role;
  • Geographical area: restrictions must be proportionate to the business’s operational reach and the employee’s influence within the area; and
  • Legitimate interests: these include protecting client relationships, confidential information, and the stability of the workforce.

If a clause is deemed too broad, courts may refuse to enforce it. Employers are therefore advised to tailor restrictive covenants to individual employees rather than using standardised terms. Each employee and their role within the business needs to be assessed on a case-by-case basis in order to ascertain the potential threat to the business should the employee leave.

When an employer suspects a breach, the typical first step involves sending a solicitor’s letter to the former employee, outlining the alleged breach and demanding undertakings to cease the behaviour. If the letter fails to resolve the issue, the employer may escalate the matter by seeking an interim injunction.

An interim injunction is a speedy temporary court order designed to preserve the status quo until a full trial can determine the merits of the case. To secure an injunction, the employer must demonstrate:

  1. A serious issue to be tried: the claim must have substance and not be frivolous or vexatious;
  2. Inadequacy of damages: the employer must show that monetary compensation alone would not sufficiently address the harm caused by the breach; and
  3. Balance of convenience: the court assesses which party would suffer greater harm if the injunction were granted or denied. For example, if the employee has not yet started working for a competitor, the balance may favour the employer.

If the court grants an interim injunction, the employer usually provides a cross-undertaking in damages, ensuring compensation for the employee or third parties if the injunction is later found to be unjustified.

Employers seeking to enforce restrictive covenants have several remedies available including injunctions, damages and claims against third parties (i.e. the new employer).

Tactically, employers should act promptly to enforce restrictive covenants. Delays can weaken their case, as courts may view the urgency as diminished. Gathering and preserving evidence of the breach, such as communications or business activities, is also critical to success.

For employees, receiving a solicitor’s letter or facing an injunction can be stressful. Legal advice is essential to assess the enforceability of the restrictive covenants and explore potential defences. Common defences include:

  • Unreasonable scope: arguing that the restrictions are broader than necessary to protect the employer’s interests;
  • Public interest considerations: demonstrating that the enforcement would unfairly hinder competition or innovation; and
  • Defective Drafting: it is surprising how common it is to find a covenant has been so poorly drafted that a Court will not enforce it.


Registered Office

2 Thorn Park
Spreyton
Devon
EX17 5AG

Tel: 01647 231475
Fax: 03330 160628

Directions

Exeter Office

Queensgate House
48 Queens Street
Exeter EX4 3SR

Tel: 01392 539347
Fax: 03330 160628

Directions