Employees who are exiting a business are in possession of confidential information from their previous employer that they could use in a new role should they go to work for a competitor.
As a result, businesses will often require employees in senior or client facing roles to enter into restrictive covenants as part of their employment contracts which limit what they may do after their employment terminates. For example, an employee may be restricted from working for a competing business or contacting clients/customers for a period of 6 months post employment.
We strongly advise employers have such restrictions in place to protect its business however, in some instances post-termination restrictions can be difficult to get right. The position at common law is that all restrictions are unlawful, unless an employer can demonstrate that the restrictions are only as wide as necessary to protect their legitimate business interests. If post-termination restrictions are drafted too widely, they may be considered unreasonable and therefore unenforceable as an unlawful restraint of trade, i.e. they unlawfully interfere with an individual following their trade and using their skills freely.
Where an employee is subject to post-termination restrictions and they leave their employment to go and work for a competitor, the previous employer will be eager to ensure that the employee does not breach any of their restrictions as this may damage their business. Where the previous employer suspects the previous employee has or is likely to breach their restrictions, it may try to prevent the employee from working for a competitor by sending the employee concerned a clear reminder of their contractual obligations and the consequences of breaching them. However in situations where potential or actual damage to the business is a reality that could cause significant damage, an employer may need to consider taking more robust action by applying for an injunction from the High Court or by bringing tort claims to protect its legitimate business interests.
The recent case of Allen t/a David Allen Chartered Accountants v Dodd & Co is a good example of seeking to enforce post termination restrictions. In this case, Mr Pollock was employed by David Allen Chartered Accountants (‘the Claimant’) and was subject to post-termination restrictions which applied for 12 months after termination of his employment. He resigned to join Dodd & Co (‘the Respondent’), which was a competitor of the Claimant’s. Before Mr Pollock had started his new role, the Respondent had sought legal advice on the strength of Mr Pollock’s restrictions and whether they would be enforceable or not. This legal advice confirmed that the covenants were unlikely to be enforceable because they were too long in duration and were not supported by consideration, i.e. Mr Pollock received no benefit for having entered into them. The Claimant brought claims against Mr Pollock for breach of contract and the Respondent for inducing that breach.
The High Court found that, contrary to the legal advice received by the Respondent, the restrictions were enforceable, subject to some parts which could be ‘severed’. However, the judge dismissed the claim against the Respondent on the basis that the Respondent was entitled to form the view that it was more likely than not that the restrictions would be unenforceable and that it had honestly relied on the legal advice sought. The Claimant appealed to the Court of Appeal.
The Court of Appeal dismissed the appeal, as it concluded that to be liable for inducing a breach of contract, a contract has to be binding and enforceable. The Respondent had known there might have been a contract in place, but it had been advised that the agreement was likely unenforceable. The Court confirmed that a person had to know that they were inducing a breach and that their actions would have the effect of breaching the employee’s contract.
This will be a welcome decision for employers, as the Court of Appeal’s judgment supports the view that where a business responsibly seeks legal advice, it should be entitled to act on that advice even where the court believes the advice provided was incorrect.
Should you require any advice or assistance in drafting or enforcing post termination restrictions, please do not hesitate to contact me at jane.sinnamon@collingwoodlegal.com or on 0191 282 2884.
