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Restrictive covenants and working capacity

Lack of precision in restrictive covenants can affect their enforceability: a real danger for the businesses looking to impose them.

As a general rule, a restrictive covenant — in essence an anti-competition clause — should be no wider than necessary to protect the legitimate interests of the party seeking to rely upon it.

This of course is why there is usually such focus on duration and territory, and also on the actual specified conduct.

For example, a distributor of widgets might seek to stop a departing employee from setting up as a distributor of widgets for a six-month period within a 50-mile radius, but the distributor would have no interest in preventing them from setting up as, say, a plumbing contractor.

These are usually the points for argument, and so in drafting restrictive covenants parties are mindful of defining three things: duration; geography; restricted business.

However, focus on this should not rule out consideration of other trip hazards that go right to the root of the sought-after protection such clauses should provide.

Informa UK Limited (Petitioner) v Fraser McDougall

Cue Informa UK Limited (Petitioner) v Fraser McDougall, and the opinion of Lady Clark of Calton published in December.

In 2013 under a share purchase agreement, a business called Phillips McDougall (a partnership) had been bought by the petitioner at substantial cost, and the partners Matthew Phillips and John McDougall transferred all their shares at an agreed price.

Existing staff were transferred to the employment of the petitioner, including Allister Phillips and Fraser McDougall, sons of the Phillips McDougall founders.

They were promoted in December 2015, and at that time both signed what the petitioner called “the standard BI anti-compete clause” which was added to their existing terms and conditions of employment.

This read as follows:-

1. Obligations following termination.... The Employee agrees that for a period of six months following employment with the Company they will not – whether on their own behalf or in conjunction with or on behalf of any person, company, business entity or other organisation and whether as an employee, director, principal, agent, consultant or in any other capacity directly or indirectly:

  • 1.1 (a) solicit, or (b) assist in soliciting, or (c) accept, or (d) facilitate acceptance of, or (e) deal with, in competition with the Company, any customer of the Company with whom the Employee had personal contact or dealings on behalf of the Company during the 6 months immediately preceding termination of employment.
  • 1.2 (a) induce, or (b) solicit, or (c) entice, or (d) procure, any person who is a company employee (other than secretarial, clerical or junior employees) to leave the Company’s employment where that person was employed by the Company at the date of termination of the employee’s own employment.
  • 1.3 (a) induce, or (b) solicit, or (c) entice, or (d) procure, any person or business with whom the employee had personally dealt during the twelve months prior to termination, and who provided professional advice or services to the Company. Non-exhaustive examples include authorise, speakers, trainers, producers and journalists.
  • 1.4 Be employed [my emphasis] by any direct competitor, or any subsidiary of a direct competitor. The purpose of this post-termination clause 1.4 is to protect the legitimate commercial interests of the Company...”

In 2017, Fraser McDougall and Allister Phillips resigned to take up positions with Phil Mac Associates, a partnership formed under Scots law.

Their letters of resignation said they would be joining a competitor, although the petitioner was later advised that both been assumed as partners of this new business.

The petitioner sought an interim interdict to prevent breach of clause 1.4, which said neither would “be employed by any direct competitor, or any subsidiary of a direct competitor.”

But did the petitioner have a prima facie case, with the balance of convenience favouring an interim interdict?

Lady Clark thought not.

Whereas the petitioner sought the term "be employed" to be given an extended meaning of "being engaged with,” there was a strong argument that the words "be employed" are words being used with their most obvious meaning.

What’s more, as Lady Clark noted, "whatever clause 1.4 may mean, it does not appear to prohibit a former employee himself setting up as a sole trader and direct competitor.”

It might be thought that the extended meaning argued by the petitioner would not in fact achieve much in the way of additional protection, given the wide terms of clauses 1.1 to 1.3.

Surely, as partners (principals in a partnership), McDougall and Phillips would be prohibited from competing with the petitioner.

However, the problem identified by the petitioner was said to be that clauses 1.1 to 1.3 are not sufficient because it would be impossible to establish whether or not information that could be used for a competitive advantage has been used by the ex-employees in the new partnership. Whatever that means.

It was, in any event, not enough to persuade Lady Clark to grant interim interdict.

But the take-away is that in drafting restrictive covenants it's not all about duration, geography and restricted business. Don't forget capacity!

We imagine Informa's "standard BI anti-compete clause" has now been duly updated.

Jody Mitchell

Aberdeen-based partner Jody Mitchell regularly advises clients on corporate, commercial and financial transactions.

Posted, 15 January 2018 by Jody Mitchell
Categories: Corporate | Employment