Difficulties of enforcing restrictive covenants in employment contracts
A recent High Court case highlighted some of the difficulties employers can face in trying to enforce restrictive covenants in employment contracts.
In the case - CEF Holdings Ltd v Mundey and others - the application to restrict a group of individuals from competing with their former employer was refused by the court.
Any contractual term restricting a worker’s activities after termination is void for being a restriction on trade unless the employer can show that it is reasonable and necessary to protect a legitimate business interest.
In this case, a number of CEF’s staff, including two managers, joined a business that had been set up in competition. Although the managers had no restrictive covenants in their employment contracts, CEF argued that they were in breach of the duties they owed to CEF and also, had sought to entice CEF’s staff to join the competitor. The remaining defendants did have express restrictions in their employment contracts.
CEF also applied for a ‘springboard injunction’ - a mechanism to prevent the managers gaining an unfair early advantage in the marketplace by using contacts they had made while with CEF.
The express employee restrictions were invalid because their terms were unreasonably wide. In reaching this decision, the court took into account the absence of comparable restrictions for the managers and also the fact the employees only had to give a week’s notice. Both these facts undermined CEF’s argument that they had a legitimate business interest to protect.
The court rejected the application for a springboard injunction because of the absence of post-termination restrictions in the managers’ contracts and since they owed no fiduciary duty to the company.
Restrictive covenants need to be expertly and carefully drafted. Whether or not they are enforceable is at the discretion of the court and the effect of any given restrictive covenant will be dependent on the facts of each case. Just because they are written down in a contract does not necessarily mean they are enforceable.
From an employer’s viewpoint, the CEF case shows that covenants and length of notice periods in colleague’s contracts are clearly now taken into account by the courts when deciding whether the restrictions are reasonable or not.