Enforcing restrictive covenants

A recent case illustrates the difficulties employers can face when trying to enforce restrictive covenants in employment contracts.

In CEF Holdings Ltd v Mundey and others, the court refused to restrict a group of individuals from competing with their former employer.

A term restricting a former employee’s activities is void for being a restriction on trade unless the employer can show that such a term is reasonable and necessary to protect an interest.

In this case, a number of CEF’s employees, including two managers, joined Yesss Electrical, a business set up to compete with CEF. The managers had no restrictive covenants in their contracts. However, their former employer argued that they were in breach of their duties owed to CEF and also that they had sought to entice former colleagues to join Yesss. All the remaining defendants had express restrictions in their contracts. CEF also applied for a ‘springboard injunction’, a mechanism to prevent the managers gaining an unfair early advantage by using contacts they had made while with CEF.

The court found that the express employee restrictions were invalid because they were unreasonably wide. They also took account of the absence of comparable restrictions for the managers and the fact that the employees only had to give a week’s notice – both of which undermined CEF’s argument that they had a legitimate and vital interest to protect. The application for a springboard injunction was also rejected because of the absence of post-termination restrictions in the managers’ contracts and the fact that they did not owe any fiduciary duty to CEF.

Restrictive covenants are a grey area of the law: just because they are written down does not mean they are automatically enforceable. Clearly when deciding if restrictions are reasonable, the courts now take account of comparable covenants and length of notice periods in fellow employees’ contracts, so this is an area where employers must tread carefully.

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