Update: Interpreting Restrictive Covenants

Article

06 February, 2015

It is well established case law that employers using Restrictive Covenants in employment contracts, must ensure that they are drafted reasonable; in the interests of the parties and offer no more protection to the employer than required.

But what is reasonable in the circumstances and how far will the courts go? In the recent case of The Underwriting Exchange Ltd -v- Newall & Others [2015] the Court was not prepared to intervene in the interpretation of a Restrictive Covenant clause of its insurance brokers' employment contract, where if the Court had intervened, the clause would have been held reasonable and applicable.

The case involved the Court examining 2 elements of the Restrictive Covenant:

  1. The timeframe for the Restrictive Covenant - 13 months in this case
  2. The wording of the Non-Solicitation and Non-Competition element of the Restrictive Covenant

The case itself involved the employer taking injunctive proceedings to prevent the employees for setting up and working within a competitor's business, however, the Court expressed the view:

  1. As the employer's business included the sale of professional indemnity insurance on an annual basis, a 13 month restriction could be reasonable to prevent competition for one renewal cycle
  2. However, the wording of the Non-Solicitation and Non-Competition element of the clause was so wide that it would cover the employee's working for a competitor business in any capacity whatsoever

It was open for the Court to imply an interpretation of the clause to limit the Non-Solicitation and Non-Competition clause to the area of employment covered by the employees so as to render the clause enforceable. The Court did not do this. Instead the Court took a hard line and said that it would look at what words were used and take their meaning at face value as to determine what was intended between the parties. It is not the court's function to imply an interpretation that would give the clause meaning to enable it to have effect.

As a result the Non-Competition Clause was held unenforceable as it was too wide.

There was nothing to stop the more junior employees from working as insurance brokers provided they did not breach the Non-Solicitation clause or the remainder of the Restrictive Covenant and as they were prepared to give undertakings to the employer, the Court was not asked to make an Injunction Order.

It is however important that specialist legal advice is sought on the enforceability of such Restrictive Covenants, before emergency injunctive proceedings are considered by any employer against its departing employee.

Manisha Modasia specialises in Emergency Litigation and can be contacted on 01254 222 324 or email Manisha Modasia

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