In our March client e-bulletin, we covered the case of Thomas v Farr Plc in which we successfully acted for a company in relation to a 12-month non-compete clause. The Court of Appeal upheld the High Court's declaration that the twelve month period was enforceable, with the effect that the ex-employee was not permitted to work for a competitor until its expiry. However, whilst this case provided some comfort for employers, non-compete clauses of this length are not always upheld. Courts are more likely to uphold a non-solicitation or non-dealing clause provided that it goes no further than reasonably necessary to protect the employer's legitimate business interest.
The recent case of Beckett Investment Management Group v Hall and anr concerned a non-dealing clause which purported to restrain two former employees from dealing with past and present clients with whom they had previously dealt and a prohibition on dealing in advice relating to pensions, life assurance, investments and other advice provided by the company in the ordinary course of its business at the date of each employee's termination of employment. The employer's attempt to enforce this covenant at the High Court failed. The High Court considered that a "client" was someone with whom the company had a contractual relationship, past or present and that "to deal" in this context meant to "do business" - it would not encompass any interaction at all with someone.
The key reason for this failure was the fact that the covenant had been poorly drafted so that it prohibited dealing with clients of the parent company, which did not have legitimate business interests requiring protection, and the restraints were not to be construed to apply in respect of the clients and services of the subsidiary. Although counsel for the company sought to persuade the court to interpret the clause broadly to apply also to the subsidiary companies so it made commercial sense, this approach was rejected. As a matter of policy, it was said that courts should not strain to achieve a construction that produces the result that the covenant is enforceable otherwise employers would have no reason ever to impose restraints in appropriately limited terms. This seemed not to take account of earlier decisions stressing the need to customise such provisions to give effect to the parties' intentions. However, in this case, there were other covenants which had been drafted to include both the parent company and its subsidiaries which further detracted from the company's argument that the non-dealing clause was also intended to protect the business of the subsidiaries.
N.B. It would be advisable where there are group companies to obtain the employee's express contractual agreement that the restrictive covenants operate for the benefit of any group company for which the employee has rendered services during the relevant period, for the purposes of the Contracts (Rights of Third Parties) Act 1999.
Although the judge was not bound to consider the reasonableness of the length of the restraint, given that he considered it unenforceable, the judge went on to make some potentially significant but non-binding comments to the effect that the 12 month period appeared to be purely arbitrary and if it had been necessary to rule on the point, he would have decided that 12 months was unreasonably long and that three months would have been sufficient for the employer to identify and contact former clients and seek to persuade them to remain with the company. Any longer period would seem to be contrary to public policy as it would "have the effect that the client, being unimpressed by the possibility of continuing to do business with the company, was prevented from doing business with someone in whom he had confidence. (para 114)". The High Court put considerable weight on the extent of the efforts the company had made to retain its client base and rebuild trust. In this case, there was little evidence presented of the actions which had been taken and the court was unimpressed that all that had been done was that letters had been sent to some clients explaining that the relevant employee had left.
This highlights a useful practical point for future case conduct; namely, that it not only makes commercial sense to re-establish links with existing clients in this situation but could also support a legal case for upholding a restraint of trade. However, it does seem rather odd that emphasis was placed on the period of time it would take to identify and contact former clients and persuade them to stay with the business as opposed to the period of time it would take the company to re-establish a strong client relationship equivalent to that held with the departing employee, which is what has traditionally been understood to be the rationale for the provision.