Just another Manic Monday

Friday 30 November 2012

A term in an employment contract which restricts the employee’s activities after termination will be void for being in restraint of trade and against public policy. However, such a term will be enforceable where the employer can show that they have a legitimate interest to protect and that the protection which they are seeking is reasonable.

In the first of two articles considering the enforceability of restrictive covenants, we look at the case of CEF Holdings Ltd -v- Mundey and Others (2012) where a number of employees of CEF, a manufacturer of electrical components, joined Yesss, a business set up to compete with CEF.

The first two Defendants were general managers of CEF and did not have any covenants in their contracts limiting their activities post-termination. CEF sought a springboard injunction (an injunction used to prevent a former employee who has used confidential information to their own advantage from gaining a head-start in competition with their former employer) against them.

The injunction sought was to be for a period of not more than six months preventing the Defendants from work with Yesss in competition with CEF.

The Court refused the injunction. In order to obtain springboard relief, a Claimant is required to prove the precise nature and period of the competitive advantage. It was relevant that these particular employees had given proper notice as required by the terms of their contract and there was no evidence to suggest that they had used CEF’s confidential information.

The remaining 17 Defendants had express restrictive covenants in their employment contracts restricting them for a period of six months from soliciting former colleagues and competing with CEF.

The Court held that the restrictions were invalid. The Court took the view that the restrictions were unreasonably wide and also took into account the lack of comparable restrictions imposed on the employees’ managers and the fact that the employees were required to give only one week’s notice. These factors undermined the argument that CEF had a legitimate interest to protect.

The fact that the restrictions were found to be unreasonably wide was a result of poor drafting. By way of example, the covenant prevented the solicitation of any employee of the company irrespective of where they worked or even whether the Defendants would be aware of their existence. The company employed over 3,000 employees, so the Defendants may not even be aware they were acting in breach of the covenant. The covenant also prevented the Defendants from having any interest in a competing company, regardless of how small that interest may be. The Court considered that the company could have been adequately protected by having a much more limited covenant.

This case provides a salutary reminder of the importance of drafting restrictive covenants carefully. Any covenants will not be permitted where they go beyond what is reasonably necessary to protect a legitimate business interest.