Restrictive Covenants, Settlement Agreements & Injunctions
What is a restrictive covenant?
Restrictive covenants, injunctions & settlement agreements are explained in this article. Restrictive covenants are a common feature in contracts of employment and to a lesser extent consultancy contracts, and these operate to restrict you from doing certain things after the termination of your employment.
As a result, restrictive covenants often feature in settlement agreements, whereby your employer will ask you to reaffirm the restrictions which already apply to you (or they may even try to insert new ones at this late stage in the employment relationship) The types of restrictive covenant tend to relate to ‘poaching’ whereby you are prevented from taking the following with you when you leave:
2. Suppliers; and
TOP 3 TIPS
- If more than 6 months, may be invalid
- Clauses stopping you from working in the industry tend to be invalid
- Restrictions on dealing with clients and suppliers are standard – check your contract
Believe it or not, the common law position, that is the position which would exist if your contract was completely silent as to restrictive covenants, is that you are allowed to take clients, suppliers and colleagues with you. This is not what large corporations would have you believe, but in fact we live in a free market economy whereby the individual is perfectly entitled to take business away from other companies – such choice is good for the consumer.
During the course of your employment itself however you are prevented from doing the above activities by the common law, which implies a duty of loyalty into the employment contract, also known as a duty of trust and confidence. Once the employment contract is over (ie. if you quit or are fired) then these duties fall away, and that is why any restrictive covenants will operate after the effective termination date (‘EDT’).
There are also helpful rules from Brussels which cement the notion that anti-competitive practices should be very carefully considered prior to penalising anyone from offering more choice to the consumer. Restraint of trade itself is generally illegitimate, and needs to be carefully crafted by the law.
Restrictive Covenants which are ‘too wide’
As a result of the above, restrictive covenants which are too wide will tend to be viewed as unenforceable by the courts and tribunals. The definition of ‘too wide’ varies from case to case but here are a few pointers:
Industry-wide restrictions: any clause which seeks to prevent you from working in the same industry is highly likely to be unenforceable. Employers can only really get away with doing this for a couple of weeks and even then it would have to be localised to just a couple of postcodes. The exception to this rule could be if you are a very highly paid executive.
Length of time of restrictions: generally 3 to 6 months would be acceptable restrictions (assuming that the other criteria listed here are met) and anything over a year would be too much. A year would be quite a long time and may be unenforceable.
Your own contacts: companies often restrict you regarding people you have met whilst working for them. If however it was your own contact prior to working for them, then they can’t really restrict you from dealing with that person so easily.
Confidential information: this is generally retained by the company whether there is a restrictive covenant in the contract of employment or not. There are some grey areas however, for example the contact numbers stored in your phone. Also if someone contacts you then you can’t be said to have used confidential information to get hold of them. Other examples of confidential information include:
- Lists of clients
- Prices lists
- Business plans.
Restrictive Covenants & High Court Injunctions
Sometimes when employees, or teams of employees, leave their employer to join a competitor, the ex employer doesn’t like it. If there are restrictive covenants in the contract of employment, the ex employer may apply for a restrictive covenant High Court injunction. This is scary stuff for you because you will recieve a letter essentially threatening you to stand down, failing which you will be sued to kingdom come and back again, and all within a very swift timeframe.
If this happens to you, then you need to contact us immediately, because in the world of High Court injunctions, things happen very quickly. Here is the process set out for you, with some example timings (actual timings may vary):
You leave your job and join a competitor or start your own business
Your ex employer writes to you and sets out how, in its opinion, you have breached the restrictive covenants in your contract of employment. This is normally by taking either clients, colleagues, or lists of data (see above).
You instruct Monaco Solicitors to write to your employer. Often this has the effect of ending the matter, because we would point out the ways in which you are not in breach of your restrictive covenants and/or ways in which the restrictive covenant clauses themselves are drafted too vaguely or too widely so as to be unenforceable or not applicable. However if this doesn’t work then the matter moves to the next stage.
You give ‘undertakings’ to the other side assuring that you won’t take any action with the alleged property (client lists etc) until an interim injunction hearing.
The interim injunction hearing takes place in the High Court. At this hearing a judge will decide whether or not to impose restrictions on you pending the full hearing of the matter.
6 months later:
The full hearing takes place at the High Court. This will decide whether to release you from the restrictions imposed or to keep them. In practice, by this time the actual restrictions themselves will probably have worn off because they were only stated to last 6 months in the first place. So a lot of the point of this hearing is determine, with hindsight, who was right at the interim hearing 6 months previously. If you were right then your ex employer will have to compensate you for the money you lost by having the restrictions placed on you. If you lose then you will now have to pay the (normally excessive) legal fees of your opponent. Of course if you win then they will have to pay your (normally much more reasonable) fees.
At any time:
Restrictive covenant injunctions cases can settle at any time during the above process. The negotiations themselves take place throughout the process, in the background, and are normally concluded by signing a settlement agreement document.