Restrictive Covenants

A Restrictive Covenant is a negative covenant that restricts the way in which a party can act.

They are commonly used in the context of Property (to govern the way in which land may be used), Employment (what an employee cannot do after a period of employment or service) or in a company purchase or sale (in order to preclude the seller from starting up again and competing with the buyer for a certain period of time).

Types of Restrictive Covenants

Non-poaching: It is now reasonably well-accepted that a covenant preventing the solicitation of employees is enforceable, on the basis that it protects the legitimate interest of maintaining stability in the workforce. Consider a situation where a family business is sold. The employees represent one of the Company’s most valuable assets. If the seller decided to re-enter the market, it would be unfair for the seller to be able to poach the most valuable employees without sanction within a short space of time after the sale of the Company.

Non-Solicitation: This covenant seeks to protect trade contacts. In an ex-employee situation, the employer needs to consider how long it will take the employee’s successor to establish relationships with enough of the Company’s key customers or clients to prevent serious loss of business to the ex-employee acting in competition with the company. Some loss is almost always inevitable.

Recently, in Baldwins (Ashby) Ltd v Maidstone [2011] EWHC B12, the High Court held that the seller of an accountancy business had breached a restrictive covenant that prohibited him from canvassing, soliciting or endeavouring to entice away from the business any person who during the two years prior to completion been a client of the business.  Both canvassing and soliciting involved an approach to customers with a view to appropriating the customer’s business or custom, and enticing away had to be interpreted similarly. There had to be an active component and a positive intention, and the approach to the customer had to involve some direct or targeted behaviour.

Non-Dealing: This covenant is difficult to enforce because it can often be argued that a non-solicitation covenant would suffice, unless it can be said that a non-solicitation covenant would be difficult to police. However, it does have evidential advantages because it avoids the need to prove that the director made an approach, which is usually hard in practice.

Non-Competition: Attempts to prevent a Seller of a Company from competing with the Buyer are viewed with caution by the courts because they tend to restrict the ability of third parties to do business with whom they choose, which is seen as anti-competitive and contrary to the public interest. Non-competition restraints will only generally be enforced so far as they seek to protect trade secrets and other sufficiently highly confidential information (because trade connections and a stable workforce can be protected by means of non-solicitation, non-dealing and/or non-poaching covenants). The geographical limit should bear some relation to the geographical extent of the business. It is also important to consider the length of time that the information remains confidential.

In addition, Non-Disclosure or Confidentiality Agreements, which are usually signed prior to the disclosure of confidential information, stipulate that the recipient (e.g. a departing employee) can’t make off with valuable research or proprietary information.

In Practice

Ideally, consider the issue of restrictive covenants sooner rather than later.  When you get that perfect job offer or when you are negotiating the sale of your Company, the last thing you may want to think about is what happens if you chose to leave or you lose the job later, or if you want to re-enter the marketplace.  However, this is the best time to consider these restrictive covenant issues, as you have an employer who wants your services (or a buyer who wants you to sell up) and you are in a good negotiating position.  If you ignore it, you risk being hampered by contract terms restricting your operation in the sector.

For employment-related issues, this is where the advice of your recruitment adviser or an experienced employment lawyer will guide you through the maze.  As a Commercial Solicitor, this is where my advice has on many previous occasions added real value to my client’s deal. I always argue in favour of taking preventative steps, as opposed to the need for drastic action or frustration later.

5 Tips for Negotiating a Non-Compete Agreement

1) Limit The Geography – Employers will try to make their non-competition clauses as broad as possible with respect to geography and time. As an employee, you shouldn’t let them. Reasonable restrictions will vary by industry, of course. Recently, a client who owned a small hairstylist business in North West London sold his stores and the buyers were pushing for him not to be permitted under the contract to work anywhere in the UK for two years. Although, this is unlikely to be enforceable, a similar situation where I advised a pharmaceutical rep on his ex-employers wanting to limit the geography of his non-compete agreement to the M25 for a period of six months after his departure, was more difficult to argue against… Especially given that he was handsomely rewarded for his restriction.

2) Limit The Time Span – As with geography, limit the amount of time you will have to sit on the sidelines between jobs. The standard window for these contracts is six months to a year. Anything more than two years is downright draconian, and probably won’t hold up in court.

3) Explore Other Restrictions – In lieu of a traditional non-compete, try to angle for “non-disclosure” or “non-solicitation” agreements, both of which allow you to keep working immediately after you leave the company. For example, Non-Solicitation agreements prohibit them from going after important clients (with the exception of those they cultivated prior to joining the company).

4) Get Paid – If you’re going to be locked up by a non-compete agreement, you might as well get paid for your troubles. Unless you’re a superstar, you probably won’t get covered for the entire year you’re out of work, but you should push for 75% to 80% of your salary.

5) Consult An Solicitor – Specifically, look for an employment or commercial law expert who can negotiate certain terms and determine which are truly enforceable. Obviously you will need to pay for the privilege, but it is usually worth it: The cost of going to trial over a breach of a non-compete agreement typically runs in the tens of thousands of pounds.