Introduction

Although this article does not constitute legal advice, it does provide an insight into some of the very important and serious issues which both employers and employees should be wary of. The importance of well-written and thought out contractual restrictions cannot be understated.

Restrictive covenants can be useful legal devices for businesses to protect their legitimate business interests, particularly the outdoor fitness market. I know of at least one, UK-wide, military fitness training provider that suffered from:

1. Not initially utilising restrictive covenants; and
2. Then relying on an off-the-shelf formulaic statement which was not adapted to individual employee circumstances and therefore open to challenge or plainly unenforceable.

As a consequence, this particular business suffered from a raft of departures by employees who then went on to set up rival businesses which the organisation could do nothing about, which affected expansion and the ultimately the bottom line.

Restrictive covenants can be analogised to Goldilocks: not too restrictive that a court would consider them void, not to lax so that they become meaningless, but just right so that the business is protected and the former employee can continue work in their chosen trade or profession without onerous conditions to adhere to.

What is a Restrictive Covenant?

Restrictive covenants (or contracts in restraint of trade as they are alternatively known) are used by one party in a contractual relationship to protect their legitimate business interests from unjustified exploitation or interference by another person. For example, ex-employees who are now employed by business rivals and former employees of the business who are now attempting to set up rival businesses.

Types of Legitimate Business Interests

Legitimate business interests might include the following:

• Trade secrets;
• Designs for new products;
• Manufacturing processes;
• Business expansion plans;
• Investments; and/or
• Customers and other business connections.

These types of contractual terms are restrictive in the sense that they limit the freedom of one of the parties to the contract to do certain things. They are particularly common in contracts of employment and are often inserted at the employer’s insistence. By using them, the employer is attempting to prevent an employee from working for a business rival after their current employment has ended.

However, such contractual terms are potentially abusive and they are usually scrutinised very strictly by the courts. As such, judges tend to display an almost instinctively suspicious attitude when asked to consider contracts in restraint of trade. After all, they are first and foremost anti-competitive agreements. Why should employees be prevented from taking up an offer of alternative employment which is more lucrative and satisfying if they so choose?

If an employer cannot retain the services of a valuable employee then perhaps, as a consequence, the employer deserves their business to suffer. Similarly, why should a person, who has just sold a business at a large profit, be prevented from establishing a new business in the same trade or profession?

Types of Contracts using Restrictive Covenants

Restrictive covenants are contractual terms commonly found in the following types of agreement:

• Employment contracts;
• Contracts involving the sale of a business;
• Solus (exclusive supply) and franchise agreements; and
• Agreements between trade associations and their members.

Free and Fair Competition

The statement that free and fair competition makes for a healthy economy is a self-evident truth. This statement begs the question as to whether restrictive covenants should be tolerated in a free market economy. Surely, employees have an absolute right to work and businesses have an absolute right to trade on terms which promote their interests? However, competition must fair if it is to be effective.

The former employer of a particularly competent employee may have legitimate business reasons for wanting to restrict the employment opportunities of the individual in question. On a similar theme, the new owner of a business may be less than delighted to discover that the person, from whom they have just purchased the concern, has set up a new establishment in the same trade or profession a few hundred yards down the street. Although the motives of those individuals seeking to rely on these types of contractual arrangements may be entirely understandable, it is worth bearing in mind that anti-competitive agreements (no matter how well intentioned) may actually breach provisions of the Competition Act 1998 and European Union competition policy (Articles 81 and 82: Treaty of Rome 1957).

A useful rule of thumb for an individual wishing to enforce a restrictive covenant is to remember not to impose unduly excessive terms on a weaker party and to do nothing more than is absolutely necessary to protect legitimate business interests. Ultimately, however, the courts will determine what is reasonable by carefully examining all the circumstances of the case.

The Judicial Approach to Restrictive Covenants

The role of the courts in all of this is to weigh up the competing interests of the parties and determine whether the party who wishes to rely on the restrictive covenant has a legitimate interest which should be protected. If such an interest is deemed worthy of protection, then the court will issue an interdict to prevent a former employee from taking up alternative employment with a business rival or new owner of a business may win an interdict which prevents the former owner setting up in competition just down the road (or even next door as has occurred on occasion). When relying upon a restriction in the contract, an individual must show that they are taking legitimate measures to protect their position. After all, these restrictions are anti-competitive and the courts are right to treat them with suspicion. Employees should have the right to seek alternative employment and businesses should have the right to compete against one another. The courts are, therefore, placed in a position where they will have to perform a delicate balancing act, weighing up, for example, the employer’s right to protect legitimate business interests such as trade secrets and, on the other hand, the employee’s right to seek profitable work wherever they can find it.

Challenging Contractual Restrictions

A contractual restriction may be challenged in a number of ways:

• The restraint is unreasonable between the parties;
• The length of the restrain is unreasonable;
• The geographical area of the restraint is unreasonable; and/or
• The restraint is not in the public interest.

The Restraint is Unreasonable between the Parties

In other words it is an illegitimate attempt to limit another person’s freedom. The restriction may not be an honest attempt by the party relying on it to protect their legitimate business interests. In short, the clause may be nothing more than a blatant attempt to stifle competition by preventing an employee from seeking alternative employment.

The Length of the Restrain is Unreasonable

The length of the restraint may be unreasonable because it lasts for a period of time which is longer than is absolutely necessary. The new owner of a business may attempt to prevent his predecessor from starting a rival business for a period of ten years. This could be excessive in a situation where a two year restriction would have been more than adequate.

The Geographical Area of the Restraint is Unreasonable

United Kingdom, European or global restrictions may immediately excite suspicion and may be viewed as excessively wide. Excessively wide local restrictions can also be struck down by the courts. It would not be reasonable for someone to impose a term in a contract for the sale of a business which stated that the previous owner could not establish a similar business anywhere within a twenty-five mile radius of Hamilton. If the business was purely local in nature and confined largely to the Hamilton area, the new owner has no right to prevent the previous owner from setting up another business in Edinburgh.

The Restraint is not in the Public Interest

Restrictive business practices clearly do not benefit the public and can restrict consumer choice.

A court, when reaching its decision, may also take into account any other relevant factors such as trade customs and practices, the ease with which an employee will be able to secure new employment and the employee’s need to continue working in order to gain valuable experience and to keep their skills updated. It will be appreciated that trade customs and practices must be reasonable and must be essential for the protection of legitimate business interests.

The Consequences of an Unreasonable Contractual Restriction

A party who wishes to enforce a contractual restriction must realise that if the court regards it as anti-competitive and abusive, it will be struck down. In other words, such a contractual term will be regarded as automatically null and void. The offending clause will be removed or severed from the contract. Furthermore, the court will not redraft the clause in more reasonable terms. This means that the party who sought to enforce the restraint is now left completely unprotected and there is nothing to stop the other party doing pretty much what they please (see Dumbarton Steamboat Co v MacFarlane (1899).

It is worth bearing in mind that a judge’s decision to render a restraint void and unenforceable will not affect the functioning of the other terms of the contract. The court will usually delete only as much of the invalid part of the clause as is strictly necessary, for example, a line or word.

It is not usual judicial practice to treat the whole clause as void unless it has no other option (see Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co [1894]. The remaining contractual terms are very much capable of enforcement by both parties. It is only in very unusual circumstances that the removal of the offensive term from the agreement will completely undermine the operation of the remainder of the contract.

However, as an employer it is best to ‘cover the base’ so to speak. Somewhere within the contract, typically towards the end, an employer could write something similar to:

If any provision of these Terms is held by a court or other competent authority to be invalid or unenforceable in whole or in part, the validity of the other provisions of these Terms and the remainder of the provision in question shall not be affected.

Employment Contracts and Restrictive Covenants

One of the greatest fears that many employers have is that a high-flying or extremely competent employee might be tempted to go and work for a business rival or set up in business on their own account. Generally speaking, however, a court will not prevent an individual from using skills or information gained in the course of previous employment (see Centre for Maritime Industrial Safety Technology Ltd v Crute [2003]. The danger for an employer of failing to insert some sort of restraint in the employment contract becomes all too obvious upon an examination of the following case:

• Faccenda Chicken Ltd v Fowler [1986]: fowler was employed in the position of sales manager with Faccenda Chicken Ltd. He had worked for the company for seven years and had played a very prominent role in the creation and expansion of the company’s refrigerated poultry selling operations. The company operated a fleet of refrigerated vans which travelled around various retailers and wholesellers in the local are selling products directly to these individuals. Fowler set up his own business which competed directly with his ex-employer. Fowler had also persuaded some of his former colleagues at Faccenda to come and work for him at his new business. Not surprisingly, Faccenda was extremely alarmed at this development and attempted to obtain damages from Fowler alleging that he breached his contractual duty not to use confidential information in a way that harmed the interests of his former employer.
• Held: by the English Court of Appeal that Faccenda’s attempt to sue Fowler for damages should be dismissed. The information that the company claimed was confidential (names of customers, delivery routes and times of deliveries) was widely known. By no stretch of the imagination could this information be described as a trade secret. Faccenda had no one to blame but itself for its failure to include restraints in the employment contracts of Fowler and other former employees.

A business rival will obviously be eager to recruit such an individual because of the kind of information that they will possess: knowledge of trade secrets, designs, business expansion plans, lists of customers and other investments. The ex-employee will doubtless have gained invaluable skills and experience in their last job and, furthermore, they may have benefited from a range of training and educational opportunities which were all provided to them courtesy of their ex-employer. All these features, which made the employee so valuable, are now, potentially, at the service of the new employer. It is not uncommon for a business rival to attempt to headhunt highly rated employees from their current employers by offering them much better terms and conditions (and various other incentives). It is not stretching the imagination to suggest that an ex-employee will be only too eager to get off to a flying start in their new job by divulging confidential information (gained in their previous employment) to their new employer and that the ex-employer will have real concerns about this.

In certain trades (for example, information technology, the law, and banking and financial services) the defection of valuable employees is always a very real threat. Faced with the realisation that they are not able to retain the services of such individuals, many employers will have made sure that a damage limitation mechanism is in place. Employers, will, therefore, attempt to restrict the immediate and future employment opportunities of their ex-employees – albeit for a fairly limited period of time. The theory goes that, by the time the ex-employee is ready to take up a new position with a new employer, most of the knowledge gained may be outdated or even redundant. This would clearly make the employee less attractive to prospective employers. There is also the question of how a restraint may harm the ex-employee’s skills – they may work in an industry of profession where continued updating of skills and experience is both necessary and expected. Effectively forcing the ex-employee to pursue an alternative career (even for a relatively short period of time) may do irreparable harm to their long-term career prospects. The age of the employee may also be an important factor for the courts to consider when deciding whether or not to enforce the restraint.

• Bluebell Apparel v Dickinson [1978]: Dickinson was a management trainee who worked for a subsidiary of an American company that was involved in the production of “Wrangler” jeans. As a management trainee, Dickinson had access to trade secrets and information about business connections and customers. There was a term in Dickinson’s employment contract that, if he left the company’s employment, he would not seek employment with any business rival of his employer anywhere in the world for a period of two years. Later, Dickinson left his employment and, in breach of this restriction, he accepted an offer of employment with Levi Strauss & Co who were also involved in the global business of manufacturing denim jeans. Dickinson’s former employers sought and interdict to prevent him from continuing to work for Levi Strauss.
• Held: the restriction was reasonable in terms of time and geography and that Dickinson’s former employer was taking reasonable steps to protect its legitimate business interests. The court granted an interdict to Dickinson’s former employers and he had to give his new job with Levi Strauss.
• Centre for Maritime Industrial Safety technology Ltd v Crute [2003]: Clive Crute, the defender, had worked as a manager for the pursuer, Centre for Maritime Industrial Safety Technology (known as C-MIST). He had commenced employment with the pursuer on 04 April 2002. Crute had previously been employed as a Master Mariner for over 30 years. C-MIST was involved in the provision of a wide range of services relating to health and safety issues in connection with the operation of marine terminals and jetties. Crute was offered new employment with Briggs Marine Contractors Ltd, a client of C-MISTs on 11 November 2002 (with 01 February 2003 envisaged as a starting date). Briggs operated the Coryton Terminal in Essex for British Petroleum. The new post with Briggs was described as Contractors Manager for jetty operations at the Coryton Terminal. On 25 November 2002, Crute submitted a letter of resignation to C-MIST and he explained that he was going to work for Briggs. He was informed by one of C-MISTs directors that he was prevented from working for Briggs due to a restrictive covenant and confidentiality clause in his contract. The restrictive covenant stated that Crute could not provide services (whether paid or unpaid) to clients of C-MIST for a period of 18 months after the termination of his contract. The confidentiality clause stated that Crute was prevented from using skills in his new employment that he had acquired while working for C-MIST. C-MIST was fearful that if Crute was allowed to take up new employment with Briggs it would mean that he would be in a position to establish in-house health and safety training courses so that Briggs would eventually dispense with their services.
• Held: by Lord Mackay of Drumadoon (in the Outer House of the Court of Session) that the restrictive covenant of 18 months was excessive and went far beyond what was required to protect C-MISTs legitimate business interests. His Lordship balanced C-MISTs interests against those of Crute and was strongly of the opinion that the employee would be harmed if the restriction was enforced. A number of factors were taken into account: Crute was 57 and, at his time of life, his future employment prospects might be harmed if he was restrained from working for Briggs or any other prospective employer covered by the restriction in his contract. Furthermore, C-MISTs fears that Crute  would be able to provide in-house health and safety training for Briggs at its expense was completely unfounded. C-MIST and Briggs still had a better part of 2 years of a 3 year contract in relation to the provision of consultancy services. As for the confidentiality clause in Crute’s contract, an employee is permitted to use skills that they have acquired in the service of a new employer. As we shall see, an employee will commit a breach of their implied duty of good faith and fidelity if they divulge confidential information, gained in the course of their previous employment, to their new employer.

An employer would argue very strongly that they have a right to protect their business and very few people would take issue with such an argument. What the courts will not tolerate is a blatant attempt by the employer to ruin the future employment prospects of an ex-employee. Employers, after all, have the right to seek better employment opportunities. This is particularly the case when we remember that the modern UK labour market is characterised in the main by the high dependency shown by employers on short-term, temporary employment contracts. It is little wonder that today many employees have no concept of company loyalty. Given the short-tem nature of many employment contracts, it may now be even more unreasonable for an employer to attempt to impose a lengthy time restriction on the employee. As we have seen in C-MIST case, Lord Mackay of Drumadoon was strongly of the view that an 18 month restriction went much further than was strictly necessary to protect the interests of the employer.

Restrictive Covenants and Junior Employees

It would be a mistake to assume that these restrictions appear only in the employment contracts of senior executives and highly skilled professionals. In the Scottish Dairy Farmers Company (Glasgow) Ltd v McGhee (1933) and Home Counties Dairies v Skilton [1970] the employees in question were both milkmen who were successfully restrained from approaching the customers of their former employers.

McGhee and Skilton had left their previous employers to go and work for rival diaries. It should be understood that both employees were, therefore, in a very strong position to approach their ex-employers’ customers and persuade them to use the services of their new employers. This practice is often simply referred to as poaching customers. McGhee and Skilton had both set out to commit a deliberate breach of contract by approaching the customers of their former employers in complete defiance of the restriction to which they had voluntarily agreed.

The Inner House of the Court of Session in McGhee and the English Court of Appeal in Skilton found in favour of the employers. Neither restriction was excessive in terms of the time limit (both lasted for a year after termination of the employment), the employers were protecting legitimate business interests (their customer base) and the geographical area of the restrictions was not unreasonable (both milkmen were forbidden from approaching customers that they had previously dealt with who lived in the area of their former rounds).

Furthermore, in Skilton, the English Court of Appeal did not think that the phrase ‘dairy produce’ as it appeared in the milkman’s contract applied to an excessively wide range of products. Dairy produce covered all items that the milkman ordinarily sold to customers as part of his rounds. There was something of a crumb of comfort for the employee in Skilton, as the Court of Appeal did concede that he would be allowed to approach those individuals who had ceased to be customers of his ex-employer in the 6 month period prior to the termination of his employment contract. It had been a condition of the restrictive covenant that he could not approach those individuals who had been customers of his ex-employer during the 6 months before his contract had ended.

The Consequences of Divulging Confidential Information to a New Employer

In PSM International and McKechnie v Whitehouse and Whitehall Automation [1992] the English Court of Appeal has stated that any attempt by a former employee to divulge confidential information acquired in the course of their previous employment should be regarded as a material or extremely serious breach of that contract.

The previous employer may even be able to obtain an interdict in order to prevent the new employer from capitalising on this information if they can show that the ex-employee’s breach of contract has caused them to suffer loss. The effect of this interdict would mean that the new employer would be unable to derive any benefit from the information given to them by their new employee. However, the burden of proof will clearly be placed upon the ex-employer to demonstrate that there is a direct link between the breach of confidence and the losses that they have sustained.

Individuals will not be permitted to use trade secrets or confidential information acquired during the course of their employment for their own benefit. Therefore, a deliberate attempt by an individual to use trade secrets or confidential information in this way can be subject to a legal challenge. It does not matter whether the contract of employment contained a restraint or not.

• Robb v Green [1895]: a manager quite deliberately, and in an extremely calculated fashion, copied the names of his employer’s customers. The manager’s intention was to canvass these customers at a later date with a view to persuading them to use the services of the business that he was setting up.
• Held: by the English Court of Appeal that, although there was no restrictive covenant in the manager’s contract of employment, he owed an implied duty of good faith and fidelity. By acting deliberately in a way that harmed his employer’s interest, the ex-employee had breached an important term of his contract and he was not permitted to approach this group of customers.

It may be recalled in Faccenda Chicken Ltd v Fowler (page X), that the employer attempted to argue (unsuccessfully) that Fowler, its former manager, had breached his duty of confidentiality which he continued to owe to the company despite leaving its employment. Information may be regarded as confidential if it can be regarded as a trade secret and the employer has continually stressed its confidential nature. The information will not be treated as confidential if it was readily available to members of the employer’s staff in the course of their ordinary duties.

There is always the danger for an employer that the employee will build up personal relationships with customers who may wish to follow the employee if they leave their current employment for a new position in a competing business undertaking. An added danger may be that the ex-employee may approach these customers directly in a brazen attempt to secure their business.  This is why it is vital for an employer to include a restrictive covenant in the employee’s contract of employment.

Extended Notice Periods

An employer can always use an alternative approach to the problem of protecting trade secrets and business connections. Some employers, rather than including a restrictive covenant in the employment contract – which can always be challenged on the grounds that it is unreasonable, will insist that an employee has to give an extended period of notice if they wish to terminate their employment.

18 month notice periods are not unknown in some trades and professions where the employee is in a very senior position within the organisation. This gives the employer time to prepare for the employee’s departure by taking precautions to protect trade secrets or business connections. Furthermore, the current employer may actually state that it is not necessary for the employee to turn up for work – they may as well tend their garden (hence the phrase ‘garden leave’). The beauty of these contractual notice periods is that the employee cannot work for any other employer who is competing against the current employer.

This arrangement effectively prevents the employee from gaining access to any trade secrets or having any dealings with customers of the employer. By the time that the extended notice period is at an end, the employee will represent less of a threat to their former employer if they go to work for a rival business. These extended notice periods will not escape examination by the courts. These arrangements can stifle or prevent genuine competition and employers would be well advised to act reasonably when incorporating these types of terms in employment contracts. They can be used to get round some of the problems that restrictive covenants pose, but they are not without their problems. Employees who are affected by these ‘garden leave’ clauses can challenge them by putting forward the argument that it is important that they are allowed to continue to work in their chosen profession in order to keep vital skills updated and current. A software engineer could argue that an 18 month ‘garden leave’ clause was excessive in that it prevented them from developing their skills and gaining valuable work experience in an industry which is notoriously susceptible to rapid changes in technology.

In William Hill Organisation Ltd v Tucker (1998) (discussed below), the English Court of Appeal criticised the growing use by employers of garden leave clauses in employment contracts. The Court was particularly concerned that this was little more than an attempt to get round the strict rules governing the use of restrictive covenants in employment contracts. It was felt that garden leave clauses should be scrutinised carefully and, furthermore, the rules surrounding these types of clauses should be considerably tightened to prevent abuse by employers.

• William Hill Organisation Ltd v Tucker (1998): William Hill, the pursuers and appellants, attempted to prevent Tucker, the defender, from going to work for a business rival, City Index Ltd, during his notice period. The contractual notice period was for six months. The notice period had originally been for one month, but the defender had later agreed to extend it to six months. The defender worked for a subsidiary of the pursuers called William Hill Index Ltd which operated a gambling business known as ‘spread betting’. This type of gambling activity is regulated by the Securities and Futures Authority (SFA) and William Hill Index Ltd was one of only five companies authorised by the SFA to carry on such a business. One of the other four was City Index Ltd. The defender commenced employment with the pursuers in 1995 as the senior dealer. There was a term in the defender’s employment contract that stated:
• ‘Whilst in employment, you must not undertake any other employment, or hold office, which creates a conflict of interest with the Company, or any company within the Group. You should declare to your Manager any interests/connections with existing/potential suppliers or customers of the Company. If so directed, you will sever the interest/connection immediately or render yourself liable to disciplinary action.’
• On 02 February 1998, the defender decided to leave his employment with the pursuers and go and work for City Index Ltd – rival of the pursuers. The defender gave one month’s notice despite the fact that he had agreed to extend it to six months in return for an enhancement to his conditions of employment. The defender argued that the pursuers had not made good on the promises made to him and that they should not stand in the way of his attempt to further his career with another employer. The pursuers attempted to obtain an interdict to prevent the defender from doing this, claiming that they were concerned that the defender would divulge confidential information to his new employer. It was also confirmed by the pursuers that the defender did not have to turn up to work during his extended notice period and that he would continue to enjoy his salary and other benefits during this period. The defender argued that he wanted to continue working in order to develop his skills and, in any case, he no longer possessed confidential information to pass on to his new employer.
• Held: by the English Court of Appeal that the defender’s post of senior dealer was a special and unique one. It was important that the defender continued to develop his skills in this area by being permitted to continue to work in the specialised field of spread betting. The interdicts were, therefore refused.

The Consequences of an Illegal Restrictive Covenant

The offending clause will be removed or severed from the contract. Crucially, the courts will not substitute it with a more reasonable alternative. It is not for the courts to do a party’s job for them in this regard (Dumbarton Steamboat Co v MacFarlane (1899)). It is important to note that the court will usually delete only the invalid part of the clause, for example, a line or word. The court will not generally treat the whole clause as void unless it has no other option (Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co (1894)).

Key Points

1. A restrictive covenant may be used to protect legitimate business interests such as trade secrets, designs for new products, manufacturing processes, business expansion plans, investments and customers and other business connections.
2. Restrictive covenants are commonly found in employment contracts, sales of businesses, solus and franchise agreements and trade association agreements.
3. Anti-competitive agreements (no matter how well intentioned) may actually breach the provisions of the Competition Act 1998 and European Union competition policy (Articles 81 and 82: Treaty of Rome 1957).
4. A restrictive covenant must be reasonable between the parties, in terms of its duration, its geographical area and its enforcement must be in the public interest.
5. If a restrictive covenant is found to be excessive and completely unreasonable in the sense that it goes beyond what is adequate to protect legitimate business interests, it will be automatically void and the party relying on it will be left completely vulnerable as the courts will refuse to replace it with something more reasonable.
6. An employer would be well advised to insert a restrictive covenant in an employee’s contract of employment in order to protect legitimate business interests as failure to do so can often be catastrophic.
7. Restrictive covenants are basically anti-competitive devices and may actually do irreparable harm to an ex-employee’s long term career prospects so the courts will have to be particularly careful when deciding whether or not to enforce such a term of the contract.
8. The decisions in Bluebell Apparel and Centre for Maritime Industrial Safety Technology demonstrate very clearly that the courts examine the time limit in the restrictive covenant very much on its individual merits and what is a reasonable time in one situation may be completely unreasonable in other circumstances.
9. Although restrictive covenants will often be found in the contracts of high-flying and more senior employees, many employers may wish to seek the protection of such a term in relation to more junior employees.
10. Any attempt by a former employee to divulge confidential information acquired in the course of their previous employment should be regarded as a serious breach of that contract. The previous employer may even be able to obtain an interdict in order to prevent the new employer from capitalising on this information.
11. Very often it will be better for an employer to insist on an extremely long notice period (a garden leave clause) whereby the employee is paid but does not have to turn up to work and, during this period, the employer knows that the employee has no access to trade secrets or dealings with customers.

Definitions

• Contract: is a legally enforceable agreement between two or more legally distinct parties, and the main elements of a contract are the offer and acceptance.
• Pursuer: is the person who brings the dispute to the attention of the court by lodging a legal action.
• Defender: is the party against whom the legal action is being brought.
• Interdict: a judicial prohibition or court order preventing someone from doing something. In an emergency, interim interdict can be obtained in the absence of the person against whom the order is sought (i.e. ex parte).
• Damages: a sum of money awarded by a court as compensation for a wrong or injury.

Examples of Contractual Restrictions

Example 01: Other Employment:

It is a condition of your employment that you do not engage in any other employment or engage in any profession, trade or business, directly or indirectly, which has, or could be anticipated to have an adverse effect on the Company, its customers or your ability to carry out your work, nor if it would create a conflict of interests in relation to your responsibilities to the Company.

Example 02: Garden Leave:

The Company reserves the right to make payment in lieu of notice should it so wish or to require you to remain away from work during your notice period, whichever may be appropriate. Any payment in lieu of notice will have PAYE tax and Class 1 National Insurance Contributions deducted at source.

Example 03: Devote Full Time to the Company:

You must devote the whole of your time, attention and abilities during the hours of work for the Company to your duties for the Company and may not in any circumstances, whether directly or indirectly, undertake any other duties of whatever kind during your hours of work for the Company.

You may not, without the prior written consent of the Company, engage, whether directly or indirectly, in any business or employment which is similar to or in any way connected or competitive with the business of the Company outside your hours of work for the Company.

Example 04: Post Termination Restrictions:

You acknowledge and agree that if you were entitled to compete with the Company immediately after the termination of your employment the Company would be at a serious disadvantage and such unfair competition would damage the Company’s legitimate business interests. Therefore you acknowledge that these Restrictions are fair and reasonable in the circumstances.

Example 05: Non-Competition:

You will not for a period of three months after the termination of your employment either personally or by an agent, whether on your own account or for or in association with any other person, firm, company or organisation, engage in business with or be in any way interested in any firm, company or organisation within a 10 mile radius of any Company venue which engages in or carries on the business of military based fitness training.

Example 06: Non-Solicitation:

You will not, for a period of three months after the termination of your employment, either personally or by an agent, whether on your own account or for or in association with any other person, firm, company or organisation, canvass, solicit or endeavour to take away from the Company the business or custom of any customer or client of the Company with whom you personally dealt during the three months immediately preceding the termination of your employment.

Example 07: Non-Poaching:

You will not for a period of three months after the termination of your employment either personally or by an agent, whether on your own account or for or in association with any other person, firm, company or organisation, employ or engage any person who was during the three months before the termination of your employment a senior or key employee of the Company.

You acknowledge that these Restrictions shall operate for the benefit of any business carried out by the Company and shall be enforceable against you by any subsequent owner of the business carried out by the Company.

In the event that any one or more or any part of the Restrictions set out above shall be rendered or judged invalid or unenforceable, such restriction or part shall be deemed to be severed from this agreement and such invalidity or unenforceability shall not in any way affect the validity or enforceability of the remaining restrictions.

Analysis of the Examples

After reading the examples, do you believe that the terms are appropriate? Well it would largely depend on which particular role the contractual restrictions were applied to. Using example 05 ‘Non-competition’ and Glasgow, Scotland (where I reside), would the contractual restriction be deemed proportionate in protecting legitimate business interests.

A majority of military fitness providers operate in leisure centres, parks and other green areas, and within a 10-mile radius of Glasgow there are 91 parks and 17 sports centres (Glasgow City Council, 2010). Research suggests there 30-35, direct and indirect, competitors within a 10-mile radius of Glasgow (Boot Camp & Military Fitness Institute, 2012).

If this contractual restriction was in your employment contract and you decided to leave the company and set up a rival business, would this term be enforceable? Context is an important factor.

Referenced Cases

Dumbarton Steamboat Co v MacFarlane (1899) 1 F 993

Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co [1894] AC 535

Centre for Maritime Industrial Safety Technology v Crute [2003] ScotCS 44 (21 February 2003)

Faccenda Chicken Ltd v Fowler [1986] ALL ER 617

Bluebell Apparel v Dickinson [1978] SC 16

Scottish Diary Farmers Company (Glasgow) Ltd v McGhee (1933) SC 148

Home Counties Diaries v Skilton [1970] 1 ALL ER 1227

PSM International and McKechnie v Whitehouse and Willenhall Automation [1992] IRLR 279

Robb v Green [1895] 2 QB 315

William Hill Organisation Ltd v Tucker [1998] EWCA Civ 615 (2 April, 1998)

References

Boot Camp & Military Fitness Institute. (2012) Glasgow Outdoor Fitness: Competitor Analysis and Market Structure: August 2011 to July 2012. Glasgow: Boot Camp & Military Fitness Institute.

Glasgow City Council (2010) Key Facts. Available from World Wide Web: http://www.glasgow.gov.uk/en/AboutGlasgow/Factsheets/Glasgow/KeyFacts.htm [Accessed: 12 July, 2011].