The Court of Appeal, overturning the High Court (covered in our May e-bulletin click here www.herbertsmith.com/NR/rdonlyres/4C90EDEE-BB87-4161-8E9E-7A10ED90E1C4/3993/Emp_May07.htm), took a pragmatic approach to construction and held that a non-dealing clause should be interpreted as restraining two financial advisers from providing services in competition with their employer (the parent company) and the subsidiaries. Although there were other covenants which were drafted expressly to include both the parent company and its subsidiaries, the CA considered that to construe the covenant as only applying to the business of the holding company would deprive it of any practical utility (as the parent company did not carry on any business).
The CA considered that the covenant was carefully drafted to protect a legitimate trade interest. The period of the restraint, twelve months, was considered reasonable for the protection of the employer's legitimate business interests and enforceable. The CA judge had specific regard to the departing employees' "seniority and importance", "the evidence about business patterns, the logistics of replacing them, and the uncontradicted evidence of an industry standard of 12 months".
The CA seemed to play down the importance of the impact that upholding the restraint would have on third parties, which may, as a result of the covenant, be prevented from doing business with their person of choice. Although the HC had placed considerable weight on the fact that upholding the covenant would prevent a client from doing business with someone in whom he had confidence, the CA (following previous authority) held that "a non dealing clause may be valid notwithstanding the potential interference with the client's choice".
The CA's approach to the extent to which it was permitted to sever an offending part of an otherwise enforceable clause will reassure employers. The judge at first instance had found the unsevered provision to be an unreasonable restraint of trade partly because of the 12 month period and also because of the extended definition of "Relevant Client". However, the CA considered that the offending provision was severable, thereby making the remaining provision enforceable. Severability may only be permitted where the severed parts are independent of one another and severance can occur without affecting the meaning of the remaining part. Here, the definitions were almost drafted as separate provisions. Severance was permissible where it could be carried out without the addition or alteration of a word. (Beckett Investments Management Group Limited v Hall).
Legal practitioners and companies should consider the following points when drafting non-dealing covenants:
1- Will the employee be dealing with clients of other group companies in the business to that named as the employer?
2- Does the covenant only seek to protect the business actually carried out by the employer or is it intended to also cover subsidiaries?
3- Does the covenant cover only customers or potential customers over whom the employee has influence or about whom he has confidential information?
4- Is that influence or confidential information current?
5- Is the duration of the covenant reasonable?