In two recent cases, the courts have been prepared to uphold a 12 month post termination non-compete restrictive covenant.

The Prophet plc v Huggett case involved a business developing, selling, and updating computer software for use in the fresh produce industry and their sales manager, Mr Huggett. Mr Huggett resigned to join K3, a rival software business providing Enterprise Resource Planning software, in order to help them market a module for the fresh produce sector. Prophet wanted to stop the move and relied on a restrictive covenant in Mr Huggett’s employment contract. The court had to revise the clause by adding words in order to give it meaning as, on the face of it, the restriction offered the employer no protection at all due to a drafting error. Somewhat surprisingly, the court did so. They revised the clause on the normal basis that it has to be clear what correction is necessary, in other words what a reasonable person would have understood the parties to have meant by their use of the language. The court then went on to apply the normal tests to see if the clause was reasonably necessary to protect Prophet’s business interests, concluded that it was and so Mr Huggett was prevented from joining K3 for a 12 month period.

Merlin Financial Consultants Ltd v Cooper involved a financial consultant who had over 20 years in the industry before joining Merlin. He signed a Goodwill Agreement on joining under which Merlin purchased the goodwill in, and the right to receive future income from, Mr Cooper's client base. The Goodwill Agreement contained the 12 month non-compete clause. The Judge set out a number of principles to apply when assessing restrictive covenants:

  • The party seeking to enforce a restrictive covenant must establish that it is reasonable both between the parties and in the public interest.
  • The question of whether the restraint is reasonable or not must be assessed as at the date of the agreement. That includes, though, what is in the reasonable future contemplation of the parties at the time.
  • The restraint will not be reasonable between the parties if it provides the party in whose favour it is imposed with more protection than is justified in the circumstances.
  • The nature of the relationship between the parties is an important factor in deciding whether or not the restraint is reasonable. There is more freedom to negotiate in business sale agreements than between employer and employee.
  • Where the parties are of equal bargaining power, the court is slow to intervene to prevent the enforceability of what they have freely agreed, as they are the best judges of what is reasonable as between themselves, but if the restraint goes further than is reasonably necessary to protect a legitimate business interest, it will be held unenforceable.

In this case the Court treated the situation more like a business arrangement than an employment one. The conclusion was that the Goodwill Agreement was a bargain, fairly entered into, between parties who were of comparable bargaining power and the term was enforceable.