Breach of Restrictive Covenants

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26 October, 2021

Michael Chambers
Partner and Head of Department

Every business will have information that it considers to be critical to its operations and success.

For those in manufacturing this information is more delicate than other industries, as a key part of growth is core customers and supplier details.

The business will want to prevent this information from falling into the hands of any competitor or used by an unauthorised 3rd party. Naturally more senior members of the business will have access to this type of sensitive and confidential information in order to fulfil their role. The fact that senior employees or self-employed individuals will have access to this information is likely to make them more attractive to a prospective competitor with trade secrets and/ or supplier, employee and customer details and relationships.

In order to protect confidential information, businesses will need to take several protective measures such as Restrictive Covenants within shareholder agreements, employment contracts, service contracts or consultancy agreements.

Restrictive Covenants

Generally, employers look to restrict this by including restrictive covenants which prevent an employee from competing with their employer for a certain period of time, this also prevents employees from dealing with customers of the employer and soliciting these customers or other employees.

It is important that the restrictive covenants included protect a genuine interest of the business and that it extends no further than what is reasonably necessary to protect those interests.

The restrictions must be reasonable and depend on the individual's status within the organisation and the individual should receive some form of consideration for agreeing to enter the restrictions however this is largely dependent upon when the restrictions are imposed i.e at the start of the contract or part way through. It would be difficult to enforce the same restrictions that are placed on directors or senior employees such as production managers if applied to a junior employee such as a warehouse operative.

Garden leave

You may wish to consider periods of garden leave to be included within the shareholder agreement, employment contract, service contract or consultancy agreements.

The benefit of this is that it prevents the individual from taking up employment with a competitor whilst enabling the employer to allow for a period in which it can build relationships with the employees customers or daily operations and protecting any confidential information or alternatively setting up in competition. It is important that there is an express clause within the contract which allows you to place the employee on Garden leave.

Remedies for breach of restrictive covenant.

The most common remedy is to seek an injunction to enforce the terms of the covenant. However, with injunctions, time is of the essence, and it is very important to act quickly if this is the route you intend to go down. A key part of any argument will be that the information is sensitive and could damage the company, therefore if you do not act fast, it is unlikely that the information you are looking to protect is as sensitive as you have portrayed, and it may be that delay can lead to the injunction not being successful. Injunctions are costly and complex, so make sure you take legal advice first.

Damages (or compensation) is a financial remedy available to a claimant in a breach of restrictive covenant claim providing that loss has been suffered. Further, seeking an order requiring the destruction and/or delivery up of any confidential information taken or used is also a common remedy.

In certain circumstances, it may also be possible to pursue the new employer if that party has been involved in encouraging a breach.

It is usually good practice to consider writing to your outgoing employee or contractor when they serve notice of resignation to remind them of their restrictive covenants and request that they disclose them to their new employer.

Other options which may be available are to require undertakings and this can be considered in a number of ways such as via the courts or between the parties themselves.

For more information contact Michael Chambers in our Business Dispute Resolution department via email or phone on 0333 207 0740. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

Learn more about our Business Dispute Resolution department here

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