Précis In CEF Holdings Ltd v Mundey , the High Court has refused an application by CEF Holdings Ltd for an order to enforce restrictive covenants against a group of its former employees.
What? A covenant restricting former employees (the “Defendants”) of CEF Holding Ltd (‘the Company’) from soliciting employees of the Company was held to be unenforceable for various reasons, including being drafted too broadly.
So what? This case is a useful reminder that restrictive covenants need to be drafted very carefully. They will be construed strictly and they must not go any further than is reasonably necessary to protect a legitimate business interest.
A covenant restricting former employees (the “Defendants”) of CEF Holding Ltd (the “Company”) from soliciting employees of the Company was held to be unenforceable because:
- It applied to soliciting any employee of the Company, irrespective of where that individual worked or whether the Defendant was even aware of that individual’s existence (To put this into context, the Company employed 3,000 or so employees.);
- Because of this, the Defendants would not know if they might be acting in breach of the covenant;
- Even if it were possible to identify the individuals who could not be solicited, the covenant would be unreasonably wide as it would preclude the solicitation of people with whom the Defendants would have had no contact during their employment, about whose work they knew little and to whom no loyalty was due. Therefore the Company had no legitimate interest in protecting those individuals from being solicited;
- The contracts of employment of more senior employees did not contain restrictive covenants, which undermined the argument that the Company had a legitimate interest to protect;
- The Defendants only had to give one week’s notice to leave their employment, which again undermined the legitimate interest argument; and
- Adequate protection could have been afforded to the Company by means of a much more limited covenant.
A non-compete covenant was also unenforceable, because:
- There was also a covenant against soliciting customers, which protected the Company’s interests;
- The Company had argued that the non-compete covenant was needed to prevent a competitor from gaining “[not only] whole teams and reporting lines, but also […] the close connections between the employees and their shared skill and experience”. That was not regarded by the court as a protectable interest, as this is part of the connections and skill that employees are entitled to use when they move jobs;
- The covenant was so widely drafted that it prevented the Defendants from having any interest in a competing company, which would cover, for example, owning one share in a publicly quoted company;
- Again, equivalent covenants were not imposed on more senior employees;
- It was unclear what would constitute a competing business for the purpose of the covenant.
This case is a useful reminder that restrictive covenants need to be drafted very carefully. They will be construed strictly and they must not go any further than is reasonably necessary to protect a legitimate business interest.