A RECENT decision in the Court of Session has struck another blow
against employers who seek to stop ex-employees from being involved in a
competing business after termination of their employment.
It is common practice for companies to include provisions in senior
employees' employment contracts, designed to stop them from competing
with their ex-employer, from poaching customers and staff, and from
making use of confidential information.
On the face of it, such restrictions are in restraint of trade. To be
enforceable the restrictions must be drafted so as to go no further than
is necessary to protect the legitimate business interests of the
employer. If the restrictions go further than this they will be held
to be unreasonable and unenforceable.
The desire to show that the restrictions are reasonable has resulted
in restrictive covenants becoming increasingly complex in an effort to
pinpoint precisely which part of the employer's business is being
protected, how long the restrictions last for, and in what geographical
area they apply. All these efforts might now be in vain.
Recently, Living Design brought a petition in the Court of Session
seeking an interdict to prevent one of its ex-employees, Sandra
Davidson, from working with C R Smith, a competitor. The petition was
based on restrictive covenants accepted by Davidson.
She was paid #5000 for agreeing to the restrictions, which prohibited
her for a period of six months after termination of her employment from
being engaged in a competing business operating in Scotland or the North
of England. She also accepted restrictions preventing her from
soliciting employees or making use of confidential information.
She acknowledged that she had taken legal advice in relation to the
restrictions, and considered them to be reasonable.
The interdict sought would have required Davidson to abide by these
restrictions. Davidson did not contest the interdict in so far as it
related to soliciting employees or making use of confidential
information, but maintained that the restriction prohibiting her from
being involved in a competing business was unenforceable.
The restrictions were to apply for six months after the termination of
her employment ''however that comes about and whether lawful or not''.
Thus, in terms of the contract, even if Davidson had been wrongly
dismissed, the restrictions would still bite. Davidson argued that she
had been wrongly dismissed, which was denied by Living Design.
The court did not consider whether Davidson had been wrongly
dismissed, but held the restrictive covenant to be unenforceable on the
basis that a restriction which operates on termination of employment,
however that comes about, was ''manifestly wholly unreasonable''.
The court did not consider the enforceability of the other
restrictions (requiring Davidson not to poach employees or make use of
confidential information) as Davidson did not contest their
enforceability. As these restrictions also applied after termination of
their employment, whether lawfully or not, it seems likely that had the
restrictions been contested they would have been held to be
unenforceable.
Living Design's other hope was that the court would strike the
offending words from the contract so that what was left would be
considered to be reasonable. The contract specifically provided that if
the restrictions were unenforceable they would apply ''with such
modification as may be necessary to make them valid and enforceable''.
The court accepted that it could sever the unreasonable part of the
restriction if it was possible to do so simply by deleting the offending
words without having to re-write the contract or alter its scope. It
would have been possible to delete the offending words so that the
restrictions came into force on ''termination of (Davidson's)
employment''.
The court refused to take this step.
The decision is of fundamental importance. Living Design did not
encounter problems because it had a zealous lawyer -- stating that the
restrictions apply irrespective of how the employment is terminated is
perfectly normal.
Any employer checking his senior employees' service contracts is
likely to find similar wording. On the basis of this decision the
restrictions will now be unenforceable. Remember that the court did not
decide that Davidson had been wrongly dismissed: it simply took the view
that it would be unreasonable for the restrictions to apply if she had
been wrongly dismissed.
There seems no need for the court to have taken this view as, if
Davidson had actually been wrongly dismissed, Living Design would have
been in breach of her employment contract and thus unable to enforce the
restrictions anyway.
Davidson was paid #5000 to accept the restrictions. She agreed they
were reasonable. She agreed to abide by whatever modifications were
necessary to make them enforceable. She confirmed that she had taken
legal advice.
None of this helped the employer's position. In this area the tide
turned in favour of the employee some time ago. It would seem that the
high-water mark has now been reached. Whether the tide will turn again
remains to be seen.
In the meantime employers should take legal advice on how to amend
their service contracts so as to ensure that the Living Design decision
does not strike down their restrictive covenants. If they do not, the
costs to their business in real terms could be enormous.
A legal briefing has been prepared on this topic. For a copy please
contact Richard Masters, Corporate Finance Unit, or Craig Connal,
Employment Law Unit, Corporate Finance Group at McGrigor Donald.
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