Restrictive covenant in a 19 year-old employment contract was unenforceable


Posted by Matthew Smith, 26th April 2016

This article was first published in People Management in April 2016.

Employers will often include post-termination restrictions in their contracts of employment and typically these can prevent employees from misusing confidential information or prohibit employees from working for a competitor or soliciting clients.

In order for such restrictions to be enforceable, the employer will need to show that the restriction protects a legitimate business interest and goes no further than is reasonably necessary to protect that legitimate interest.

In the recent case of Bartholomews Agri Food Ltd v Thornton, the High Court held that the restrictive covenant in Mr Thornton’s contract was unenforceable and refused Bartholomews’ application for an interim injunction.

Facts

Mr Thornton started working for Bartholomews in 1997 as a trainee agronomist and provided advice to its customers on such issues as crop planting, seed choice and soil condition.

Clause 10.2 of his contract stated that for a period of 6 months following the termination of his employment, he would not engage in work or supply goods and services “of a similar nature”  to Bartholomews’ customers or its competitors. The covenant also included an unusual provision whereby Mr Thornton would continue to be paid for the 6 months if he complied with the restrictions even if he started working elsewhere during that time.

Mr Thornton resigned on 21 December 2015 and intended to start work for Pro Cam UK Ltd on or about 22 March 2016, once his notice period had expired. Pro Cam is a retailer that supplies its customers with seed from multiple seed producers.

Bartholomews made an application for an interim injunction to enforce the terms of the restrictive covenant.

High Court decision

The issue for the High Court was whether or not Bartholmews could show that it had a legitimate business interest that needed protecting and that clause 10.2 was no wider than was reasonably necessary to protect that business interest. The Court observed at the outset that “these provisions have not been well drafted.” There were no definitions and no clarification of what was meant by the words “of a similar nature.”  Indeed, Mr Thornton argued that he would be taking on a national technical role at Pro Cam and although he would carry out some agronomy advisory work, his role would be different to the role he had at Bartholomews.

The High Court held that clause 10.2 was not enforceable and was wider than necessary to protect Bartholomews’ business interest.

To begin with, the clause was imposed back in 1997 when Mr Thornton was a trainee agronomist with no experience and no customer contacts and it was “manifestly inappropriate for such a junior employee”.  As the clause would have been unenforceable at the time it was entered into, it remained unenforceable even though Mr Thornton’s status and role had changed in the intervening years to a point when the clause might have been regarded as reasonable.

In addition, the clause was wider than was reasonably necessary. It applied to all customers regardless of whether Mr Thornton had knowledge of them or ever carried out work for them. Further, the evidence showed that Mr Thornton’s customers contributed to just over 1% of Bartholomews’ turnover. Put another way, more than 98% of Bartholomews’ turnover was generated by customers that Mr Thornton did not deal with directly.

Finally, the High Court held that the provision to pay Mr Thornton for the 6 months’ restriction period (if he complied with the restrictions) was contrary to public policy as in effect it would permit Bartholomews to purchase a restraint of trade.

Comment

The decision illustrates the need to draft restrictive covenants carefully at the start of an employee’s employment to ensure that they are suitable for the specific role the employee has. The use of template wording is commonplace, but, if it is to be enforceable, it is likely to need to be tailored to the particular employee and their role. The decision is also a useful reminder to keep restrictive covenants under review to ensure that they continue to be appropriate as an employee progresses through the organisation or gains promotion to another role.

Finally, don’t forget that the employer has to identify the legitimate interest which justifies the restriction and that the restriction must go no further than is reasonably necessary to protect that interest. This requires careful consideration of the legitimate interest being relied on and (in particular) the geographical scope and duration of the covenant necessary to address the risk of damage to the employer if the employee leaves.

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