Restrictive covenants in employment contracts – the difference between solicitation and dealing clauses confirmed

There’s a big difference between solicitation and dealing: both terms are used elsewhere in the law but remain very significant in restrictive covenants in employment contracts and agreements for business sales as confirmed in a recent case.

In the case of Towry EJ Limited the company went to court to prevent the loss of customers to a business employing a number of former Towry employees. In a massive 900-paragraph judgment the conclusion was that where the clause relied on only prevents the solicitation of customers it is for the party trying to enforce it to prove that there has been some positive action in breach of the clause. Customers just feeling loyalty to individuals with whom they have dealt and established a relationship would not be enough and while in the event of what the court described as a “tidal wave” of customers all moving the same way at the same time might suggest something causing it, it would not usually be enough just to demonstrate the outcome and ask the Court to infer the rest.

A no-dealing clause is a different and more formidable obstacle than a non-solicitation clause. Where a no-dealing clause is effective the reaon for the customer’s attempt to move is irrelevant because the party subject to the clause must turn the customer down or go into breach of the contract.

Restrictive covenants of any type, especially in employment contracts, must be set up properly and not go too far if they are to work. English law classically assumes they are invalid as restrint of a peson’s ability to earn a living unless the party relying on the clause can show that it is reasonable and propertionate in the circumstances, in effect that it can justify why the restriction should be upheld. Different types of restrictive covenant are available and they must be tailored to the particular situation to give them a chance of surviving a legal challenge.

Towry lost the customers and also the costs of case making this a very expensive exercise in wordplay which a different type of clause could have avoided.

The Employment Law Team and Business Law Team at Forbes can assist with the drafting ansd reviewing of restrictive covenants and the Dispute Resolution Team has experience of being on both sides if the argument turns nasty.

Contact us if we can help with reviewing existing or proposed terms or any current problems with former employees or business owners.

Daniel Milnes

About Daniel Milnes

Dan is a Partner and Head of Contracts & Projects. Dan’s blogs cover the areas in which his specialities lie in commercial, regulatory and governance law which cover a broad range of matters dealing with contracts, projects, corporate and group structures, funding and compliance with a range of legal regimes including data protection. This also involves writing and advising on various forms of commercial contracts including joint ventures, development and construction agreements and intellectual property contracts including IT agreements, sponsorships and other rights licensing arrangements.
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