The reasonableness of restrictive covenants in employment contracts

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Judgment has been handed down by Judge Simon Brown QC in the case of Safetynet Security Ltd v Coppage and another [2012] EWHC B11 enforcing a restrictive covenant covering the entire customer base of the claimant.

Facts

A company was set up by Mr Hadley the day after the First Defendant, Mr Coppage, left the employment of the claimant, Safetynet Security Limited. Five of the claimant's customers terminated their contracts within the following two weeks.

There was a non-solicitation clause in Mr Coppage's employment contract, which stated:

“For a period of six months immediately following termination of your employment for any reason whatsoever, you will not, whether directly or indirectly as principal, agent, employee, director, partner or otherwise howsoever approach any individual or organisation who has during your period of employment been a customer of ours, if the purpose of such an approach is to solicit business which could have been undertaken by us”

The claimant alleged that Mr Coppage had solicited five customers in breach of this restrictive covenant. Mr Coppage denied this and counterclaimed that the redundancy process he had undergone was unfair.

The Court found Mr Coppage liable for damages having acted contrary to the non-solicitation clause in his employment contract and having breached his duties as a director.

Reasonableness

The guiding principle in the evaluation of a restrictive covenant is that of reasonableness. Judge Brown confirmed that the court must:

  • consider the construction of the clause for its pure meaning;
  • consider the object of the restraint (here, being the protection of the Claimant's customer base and goodwill established therein); and
  • construe the clause in context and have regard to the factual matrix at the date at which the contract was made.

The Court found this solicitation clause to be reasonable and thus enforceable. It was considered to be well drafted and unambiguous in its meaning.

It also struck the right balance by providing appropriate protection for the claimant and its customer base whilst allowing for limits so that Mr Coppage was able to continue earning a living.

Both the duration of the restriction (6 months) and, at first glance more surprisingly, the class of customer to whom it related - customers of the claimant during the entire period of Mr Coppage's employment - were considered to be appropriately confined.

The Court confirmed that there was no obligation on the claimant to limit the customers to those who Mr Coppage had dealt with in the last 12 months of his employment and, indeed, said that this would not have provided the claimant with sufficient protection in these circumstances.

Although this may seem unexpected, it was relevant that the claimant was a small company, with just 94 customers, and that Mr Coppage held a high level of responsibility.

The relevant factual matrix taken into consideration by the Court included that Mr Coppage had had contact with all of the claimant's customers since taking on the role of Operational Director in May 2010, had been marketed as "the face" of the claimant and was readily identifiable with the goodwill built up within the claimant's customer base.

Breach of fiduciary duty

Even if the non-solicitation clause had been unenforceable, Judge Brown confirmed that Mr Coppage would still be bound by his duties as a director of the claimant.

In particular, Mr Coppage had breached the duty to avoid conflicts of interests under s175 of the Companies Act 2006. Importantly, s170(2) states that the duty to avoid conflicts in s175 continues after person ceases to be a director "as regards the exploitation of any property, information or opportunity of which he became aware at the time when he was director”. In Mr Coppage's situation this would include the entire customer base of the claimant.

Comment

The most interesting aspect of this decision is that the Court enforced a solicitation clause with such a large restriction on customers - being every customer that the claimant had had throughout the employee's entire employment period.

Not only did the Court say that this restriction was enforceable (meaning it was considered reasonable) but that it was necessary in these circumstances for proper protection of the claimant.

This decision confirms that the enforceability of each restrictive covenant will turn on the specific facts of the case, which will inevitably include looking at the wording of the clause alongside the nature of the alleged breach and all other relevant circumstances.

In this case it was relevant that the claimant was a small company and that Mr Coppage had been marketed as the "face" of the company, being intrinsically linked with its goodwill and dealing with all of its customers during his employment. It is highly unlikely that such a clause would have been found enforceable on different facts such as a situation where Mr Coppage had not dealt with the entire customer base of the claimant.

The Court's view of the witnesses may also have affected the judgement as Mr Coppage was considered to have "sought to deliberately mislead the court", providing oral evidence that was "unhelpful and closed".

In contrast, Mr Hanley, the sole shareholder and Chief Executive of the claimant, gave evidence that was considered to be open and straightforward and that was found to be borne out by the evidence provided.