The long and the short of it – applying restrictive covenants Image

The long and the short of it – applying restrictive covenants

Posted: 21/05/2015

The last two years have seen several cases in which lengthy client contact restrictive covenants on termination of employment have been upheld by the courts. It has been said that covenants are currently “employer friendly” and 12 months can be applied with confidence.

This would be a dangerous assumption to make. Going back to the basics of covenant law, a restrictive covenant is void for restraint of trade unless it provides no more than reasonable protection for a legitimate interest. This was famously stated in the 2005 case of TFS v Morgan [2005] IRLR 246. It is a hasty practitioner who applies template covenants to an employment contract without considering the nature of the employee’s activities, client contact and seniority.

Covenants upheld

In each one of these recent cases, there has been clear justification for the period of restraint:

Coppage v Safetynet Security Limited [2013] EWCA Civ 117 - The former employee had been the “face of the business” to customers and his ability to influence them justified a covenant of “only six months”. Importantly he sought to mislead his employer about the nature of his new business. There were also suggestions that active preparations for trading with clients had been made prior to the resignation.

Baker Tilly v Clough [2013] EWHC 3616 (QB) - As “client services executives”, the former employees had close relationships with clients. They had previously entered into undertakings with the employer and were held to periods of 12 months including garden leave.

Croesus Financial Services Limited v Bradshaw [2013] 3628 - The employees were financial advisors. Most clients were only contacted on an annual basis and client relationships took time to build up. Further, there had been breaches of confidentiality. The court held that a 12 month period was reasonable.

Le Puy Limited v Christopher Potter [2015] EWHC 193 (QB) - A senior employee, “the face of [the business]”, left a recruitment agency where he had close face-to-face meetings with the client base.  When he left the clients did not know other people to contact. He also misled his employer by incorrectly saying the reason for his resignation was illness.

What some of these cases demonstrate is that if a former employee has misbehaved, a court will be sympathetic to the employer. For example, in Coppage the judge took against the departing employee, describing as a boast his comment that some of his former employer’s client base was as a result of his “pizzazz”. The key factor was that if client connections take a long time to establish and there are infrequent dealings, a 12 month covenant will be upheld. But don’t fall into a false sense of security.

Unenforceable covenants

In the 2011 case of Customer Systems Plc v Jeremy Ranson & Others [2011] EWHC 3304 (QB) the court reminded us of Lord Wilberforce’s ruling in Stenhouse Limited v Phillips [1974] AC 391 that the period of restraint should last no longer than is necessary for the employer to re-establish its client contacts following the employee’s departure. In Ranson the employer could not justify why a 12 month period was needed in relation to dealings with the customers. The judge found that in the IT industry client contact was regular and that 12 months was “pushing the limit”. The covenant was not upheld.  

In Associated Exchange Limited v Abbassi [2010] EWHC 1178 (CH) the court decided that in the foreign exchange market, clients moved from business to business searching for the best deal. The client base was fluid and the confidential information really related only to rates which very soon lost their confidentiality. A 12 month period was held to be too long, particularly for a junior employee. 

In East England Schools v Luci Palmer & Sugarman Group Plc [2013] EWHC 4138 (QB) a six month clause was upheld, but perhaps only just. The departing employee was quickly replaced. In the field of education recruitment a long period of restraint was not needed. The traditional idea of a client relationship based on face-to-face meetings and regular contact had been replaced by one in which both schools and candidates looked for the best deal, often on the internet. However there was still a legitimate interest to protect and the fact that client contact was interrupted by school holidays meant that a six month covenant was justified.  

Last year, in the case of Re-Use Collections Limited v Keith Sendell [2014] EWHC 3852 (QB) it was held that anything longer than three months, even for the face of the business, was void because a “replacement team” could easily be in place within that time: “It is not, however, a case where there is detailed confidential information which would justify a lengthy restriction. Reuse is entitled in my judgment to no more time than would be reasonably necessary to put another employee into Keith Sendall’s position who would have sufficient time to develop a relationship with the suppliers, so as to gain a knowledge of their requirements and the prices charged or accepted, before having to face competition from Keith Sendall acting for another competitive business as the previous “face” of Reuse. Reuse has failed to adduce any positive evidence as to how long would reasonably be necessary for this to be achieved…” 

In summary, where an employee does not intend to steal confidential information and is open with their employer about their departure, do not assume that a 12, or possibly even a six month covenant will protect a company. This is particularly true if the business is one where the internet and competitive quotes play a major role instead of more traditional face-to-face meetings in client retainers. The requirements of the client will be classed as confidential information but always bear in mind Lord Wilberforce’s comment that a covenant should last no longer than is required to re-establish the client relationship.  

This article was published in New Law Journal in May 2015.

Arrow GIFReturn to news headlines

Penningtons Manches Cooper LLP

Penningtons Manches Cooper LLP is a limited liability partnership registered in England and Wales with registered number OC311575 and is authorised and regulated by the Solicitors Regulation Authority under number 419867.

Penningtons Manches Cooper LLP