Restrictive Covenants and Restraint of Trade – Supreme Court Guidance

Professionally drafted restrictive covenants in employment contracts are a legitimate means of protecting businesses from unfair competition – but only insofar as they do not amount to an unreasonable restraint on an individual’s freedom to work. In an important test case, the Supreme Court considered where the balance is to be struck between those two competing interests.

The case concerned a senior employee’s contract of employment with an executive search and recruitment company. It included a non-competition covenant which, for six months following her departure, forbade her from being engaged, concerned or interested in any competitor business. Shortly after her employment came to an end, she informed the company of her intention to start working for a competitor. She contended that the covenant was an unreasonable restraint of trade and void.

The company launched proceedings and obtained an interim injunction against the former employee, holding her to the terms of the covenant. That order was, however, subsequently overturned by the Court of Appeal on the basis that the covenant was unreasonable, in that the term ‘interested in’ was so wide as to prevent her from having even a minor shareholding in any competing business.

In ruling on the company’s appeal against that decision, the Supreme Court noted that the term ‘interested in’ has long been included in standard precedents used in the drafting of non-competition clauses. However, on the basis of its natural and ordinary meaning, the term sought to prohibit the former employee from any shareholding, large or small, in any competing business. That objective was too broad and amounted to an unlawful restraint of trade.

In unanimously upholding the appeal, however, the Court ruled that the offending words could be severed from the covenant, rendering the balance of its contents valid and enforceable. Applying a blue pencil to the term ‘interested in’ neither fundamentally changed the character of the contract nor did it generate any major change in the overall effect of the post-termination restrictions on the former employee’s conduct. Although those restrictions had long since expired, the Court formally reinstated the injunction.

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