Restrictive Covenants

09 Jun 2015

The slow return of corporate confidence and the unexpected clarity of the colour of our new government have brought restrictive covenants back to the fore.  I am currently creating restrictions for one client and trying to avoid covenant litigation for three others. 

The starting point is the Treaty of Rome which, at the risk of over simplification, brands restrictive covenants anti-competitive, in restraint of free movement and unlawful.  Predictably English courts will have none of this certainty. They nuance it with the great tradition of English Common Law. The name of the game is enforceability and that begins with context so we have to ask:

– is there a legitimate business interest?  If so

-what is it? Then

-is that interest capable of protection? If so

-what's reasonable protection (reasonable meaning "merely adequate" by reference to the protected interest)?

Those criteria indicate a careful analytical approach but too many employers opt for the ease and speed of generic restrictions drawn from their favourite template.  Bad mistake!

I often see clauses which set out a complete ban on competition. These rarely work though one may obtain some protection from competition if that's the only way of protecting genuinely sensitive information, and it's clear the text is designed to protect information not to prevent competition. I also see restrictions on approaching and dealing with former customers and potential customers which generate reams of definitions, sub-definitions and meandering sentences which loose the plot before they reach a denouement. No amount of post-termination posturing about alleged fiduciary duties, implied trade secrets or blue pencils will save you if everyone's lost the thread because the context is wrong.

Blue pencils? A judge may delete text if doing so produces something viable and coherent but he may not add text. Blue pencil because the judge who devised it is reputed to have used a blue pencil when he did so – though some prefer a different story; in the olden days pencils with a blue core were the preferred tool of newspaper sub-editors, because when they struck out copy in blue it wasn't picked up by the printing processes of the day.

The guidance is clear; take a long hard critical look at your restrictions. Are they what they seem?