Restrictive Covenants: Beware Restraint of Trade
Restrictive covenants within commercial agreements are standard, but they can become the subject of dispute when the parties’ business relationship ends. One issue that can arise relates to whether a restrictive covenant is so wide as to amount to a restraint of trade.
Business organisations would do well to note a recent decision of the High Court1 that the scope of the covenants in question were so wide they breached the law on restraint of trade.
The authorities confirm that the type of work a defendant is doing is directly relevant to the consideration of the scope of restriction a claimant argues is necessary to protect its interests.
What’s the background?
Literacy Capital plc (L), an investment company, held controlling shareholdings in other companies which had purchased a successful medical centre. The centre was co-founded by defendant Vanessa Webb (VW) and she stayed on as a director. The company provided SARC services (services to sexual assault referral centres).
Around three years later VW resigned and formed a new company with her business partner. Its activities were unconnected with L’s businesses for the first year – but the company then started to provide SARC service.
L accused VW of breach of restrictive covenants within the agreements signed when she resigned, and applied for an interim injunction against her. VW claimed the covenants were void and unenforceable. The key elements of the restrictive covenants were:
· They lasted for 10 years post agreement
· The restrictions went far wider than the services delivered by the company while VW had worked there, encompassing consultancy, supplying the courts with administrative staff and mental health services
· Geographically, the covenants covered the whole of the UK and Channel Islands
The court said the point of time at which the agreements should be considered was the time at which they were made.
The judge found that L not put forward any evidence justifying a 10-year covenant; or for imposing a nationwide restrictive covenant. He concluded that the scope of the restrictive covenants went far beyond the core of the businesses’ services. They also reached far beyond any legitimate protectable interest.
Furthermore, the restrictions amounted to restraint of trade. On the evidence, it was unarguable that the restrictive covenants arose from VW’s status as an employee and as a founder and grower of the business and as the seller of the business.
This was “a clear case of restrictive covenants being drafted so widely and of such long duration that they were plainly void and unenforceable at common law for breaching the public policy against restraint of trade”. They sought to go far beyond protecting L’s legitimate
interests in buying VW’s business and protecting the goodwill received – seeking to ban her from working in her chosen field until her retirement age.
Unsurprisingly, an interim injunction was refused.
Key takeaway
Any business seeking to rely on restrictive covenants in their commercial agreements in order to protect their business interests should do so reasonably. Their scope and intended reach should not risk amounting to a restraint of trade.
Restrictive covenants should be reasonably necessary, otherwise they may well be enforceable. If in doubt, check your agreements with experienced commercial lawyers.
1Literacy Capital plc v Webb [2024] EWHC 2026
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