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Enforcing restrictive covenants in a pandemic

Your business has survived the pandemic, so far. Is there now scope to thrive as restrictions ease? And what threatens that?

While the rate of growth in Scotland lagged behind the UK average in April, recent Royal Bank of Scotland data highlighted the first increase in new business at Scottish private sector firms for eight months.

It added this upturn, the strongest since April 2018, was due to improved client demand, driven in part by the easing of lockdown measures.

And that’s good news for businesses that have come through the last 12 months’ turbulence.

These organisations will, in many cases, still have survival front on mind and may well be identifying areas for growth: looking to carve out a niche where they can add real value to their clients and set themselves apart in an increasingly competitive marketplace.

How big is the risk though if someone leaves your business and shares confidential information that’s central to your success with a third party? Perhaps a new employer you’re in direct competition with?

What if, after moving elsewhere, these former employees approach clients they’ve worked with while you employed them?

If you have restrictive covenants in your employment contracts — and you should — here’s where they come in.

A recent case in the Court of Session in Scotland — Apex Resources Ltd v Macdougall & Ors — highlighted the width and scope the court has to enforce these clauses. The decision could well have implications too for restrictive covenants beyond the pandemic.

What are restrictive covenants?

These are post-termination clauses designed to prevent people from competing with a former employer for a certain period after they have left that organisation.

They can also stop an employee from soliciting or dealing with customers by using knowledge gained while they worked for you.

How are restrictive covenants enforced?

Importantly, and as a rule, a restrictive covenant should be no wider than necessary to protect the legitimate interests of the business seeking to rely on it.

Where there is evidence the employee has broken the terms of this clause, or the employer reasonably anticipates they will, the course of action is usually for the business to seek an interim interdict from the court. This is known as an injunction in England and Wales.

An interim interdict is temporary and stays in effect until the claim is heard. It can be put in place within a matter of days and can be granted without the employee being given notice.

Apex Resources Ltd v Macdougall & Ors

This case involved three former employees who specialised in construction recruitment, a particularly niche area in Scotland.

Their employment contracts contained restrictive covenants precluding them from, amongst other things, being in competition with Apex Resources, or assisting any person or firm in doing so for six months.

Apex Resources had successfully obtained interim interdicts against the three, preventing them from working at their new employer — a rival consultancy — and soliciting Apex’s clients for those six months.

A further interdict was granted against the three as well as their new employer stopping them from using or disclosing any confidential information obtained from Apex while the consultants were employed there.

At the recall hearing, the employees challenged the non-compete clauses as unenforceable, arguing the width of the interdict meant they could easily breach the restrictions by mistake without meaning to.

They also said these non-compete clauses placed severe restrictions on their employment opportunities and effectively rendered them unemployable for a period given the clauses prevented them accepting employment in any other recruitment consultancy or business or organisation or firm within the UK for six months.

On the other hand, Apex Resources argued it had legitimate business interests to protect, which is why the non-compete clauses had been added to people’s contracts in the first place.

It added these were reasonable given the highly competitive nature of the construction recruitment market.

Apex Resources also said it relied on the integrity and stability of its workforce as well as the confidential information it held, adding competitors could easily connect employers with the same candidates if this information was disclosed to them.

Hearing the case, Lady Wolffe ultimately held the non-compete clauses were enforceable and that court orders should remain in place.

She said the former employer had presented a strong case that it had legitimate business interests to protect and — crucially — that the post-termination obligations went no further than reasonably necessary to protect those interests.

She did not accept the restrictive covenants resulted in the defenders being “unemployable”, rather the clauses were confined to the specialist sector of construction recruitment.

Advice for employers

Employers want the widest restrictions possible, yet the law’s default position is that these broad restrictions are not enforceable because they limit employees’ ability to ply their trade. The courts will go no further than protecting legitimate business interests.

That means there’s a lot to consider when drafting these provisions, including how long the restrictions last for, what activities should be prohibited post-termination, the role and seniority of the employee, and how wide the geographical area preventing competition by the ex-employee should be.

Inevitably, a tailored approach is best, the result being clauses that are more likely to be enforced if things come to it.

What will be interesting to see over the coming months is how changing work patterns impact these post-termination restrictions.

For example, how will specifying specific geographical locations work given it looks like more people will be working remotely? Could that make UK-wide restrictions more palatable?

And given how tough the last year has been, will the view of what constitutes a legitimate business interest that needs protecting be heightened?

Time will tell.

Meanwhile, if you’re interested in reading more about restrictive covenants, check out my previous post as well as my colleague Jody Mitchell’s article highlighting the importance of precision in drafting.

Rebecca Walker

Aberdeen senior associate Rebecca specialises in commercial litigation, with a particular focus on both personal and corporate insolvency. She holds a prestigious qualification offered by the Insolvency Practitioners’ Association for those specialising in the insolvency field: a Certificate of Proficiency in Insolvency (CPI).

Posted, 18 May 2021 by Rebecca Walker
Categories: Coronavirus | Coronavirus and employment law | Coronavirus and litigation | Employment | Insights | Litigation