Restrictive Covenants

Checking Restrictive Covenants

It is unusual for employers to ignore breaches of restrictive covenants by former employees, particularly where there is likely to be an attack either on their client base, or on key employees.

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 restrictive covenants or, in the case of employee shareholders, covenants contained in shareholders agreements.

Threats of Proceedings

Employees who plan to circumvent restrictive covenants are likely to find themselves on the receiving end of some aggressive solicitors’ letters. There will be demands for undertakings 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.

For even the calmest of individuals the threat of injunctive proceedings can be extremely stressful as previously made job plans suddenly become in danger of being scuppered. For example, the individual may have 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 more pressure. Furthermore, if the prospective new 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targeted with the threat of proceedings for inducing a breach of contract then there is the risk of a job offer being rescinded.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 for Employees

Employees usually have a choice. They can challenge the validity of the restrictive covenants by standing their ground (betting that their former employer is bluffing and will not take matters further); alternatively, they can offer the appropriate undertakings. Undertakings may affect their ability to commence employment for a new employer, or to start actively 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 about how to respond to letters of claim, or requests for undertakings and how to defuse the situation is important. While one can still come across poorly drafted restrictive covenants which will be unenforceable, it is more likely that they will be well drafted, or sufficiently clear to create a real risk of being upheld by a Court if injunctive proceedings are issued.

A reasonably well drafted restrictive covenant may not be the last word, however. An individual needs to also consider whether he can allege a legitimate 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 some covenants are released or reduced in duration; or refusing to provide undertakings on the basis the employer will have difficulty in establishing any loss thereby making the prospects of legal proceedings more futile.