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Restrictive covenants that can be relied on

20 July 2011

Restrictive covenants in contracts are widely used by businesses in order to prevent the use of privileged information.

They can provide protection for a business, which may have to enforce rights under the contract at a time when it may be most under threat, for example if key members of staff were to up and leave. Typically, contracts with employees will contain provisions against non-solicitation of customers and staff and non-competition with the business. But clauses of this sort are often challenged as being too restrictive.

In some cases, courts may be willing to cut out all or part of a clause they consider unreasonable. They have to apply certain criteria when deciding on this, such as whether a change can be made without having to modify the remaining wording or without materially altering the character of the contract the parties entered into. Generally speaking, however, courts are reluctant to intervene in ‘rewriting’ restrictive covenants to make them more enforceable.

The recent case of Francotyp-Postalia Ltd v Whitehead and others involved ‘restricted area’ covenants as well as ‘non solicitation’ clauses that the company sought to rely on when a franchise agreement came to an end. It provides a useful reminder of the need to give thought to the scope of each restriction in terms of time, space (location) and content. It also highlights the benefit of breaking up the various aspects of the restrictions into self-contained clauses and sub-clauses. In that way, if the restrictions are challenged, the court is better placed to undo the parts it finds unreasonable while allowing the rest to remain.

If your restrictive covenants are to be relied on when needed, it is essential that they are tailored to your specific circumstances, not simply taken off the shelf. Expert advice in this area will provide greater certainty.

These legal devices are the business equivalent of foul weather clothing – as long as it is well-made and watertight, it will give you much better security and confidence when the heavens open!

If you need clear and pragmatic legal advice, we’re here to help so please get in touch.

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Nick Cox LLB (Hons)
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