This week we are looking at the enforceability of restrictive covenants. Restrictive covenants are a contractual clause that limits a former employee’s activities for a defined period of time post-termination in order to protect a legitimate business interest. These interests can include clients, staff, competitors and company information.
Generally speaking, the enforceability of a covenant will depend on how reasonably the covenant is worded to protect the business interest. If a covenant is drafted wider than necessary to protect the interest, it will only be enforceable if the covenant is still operating after the unenforceable provision has been removed. This is called severability.
When enforcing a covenant, an employer might apply for interim relief until the date of the hearing. If successful, an injunction will be granted to prevent the Defendant from breaching the covenant further between the date of the application and the date of the hearing.
Therefore, the question this week is:
Is a non-solicitation covenant drafted to include the words “potential customers” enforceable?
Freshasia Foods Ltd, the Claimant, are an Asian Frozen food supplier who specialize in suppling Chinese supermarkets and restaurants with dumplings and sliced meats. The Claimant’s industry is a niche sector with only a few competitors operating in the UK/EU region.
Mr Lu, the Defendant, was the Claimant’s Marketing Advertising Manager. The Defendant had responsibility for the Defendant’s advertising and social media platforms. The Defendant’s contract contained restrictive covenants for non-competition and non-solicitation.
The non-solicitation covenant prevented the Defendant from soliciting business from the an of the Claimant’s customers or potential customers for a period of 12 months post-termination. The non-compete covenant prohibited the Claimant from directly or indirectly competing with the Claimant’s business for 12 months post-termination. This included working for a company substantially similar to the Claimant’s business.
The Defendant handed in his notice. He told one manger he had decided to relocate to Hong Kong and told another he was taking a job in IT (in theory both could have been true). Instead, the Defendant started working for Oriental Foods Express Ltd, the Claimant’s competitor, in an almost identical marketing role.
The Employer, in this case the Claimant, then suffered a significant drop in business. It alleges that the Defendant breached his covenants which resulted in 55 customers taking £200,000.00 worth of business to competitors. The Claimant initiated legal proceedings and sought an injunction to prevent the Defendant from breaching his covenants further.
Covenant claims are heard in the High Court, not in the Employment Tribunal. The High Court held that the non-compete clause was wider than necessary to protect the Claimant’s business information. As the claim for breach of this covenant was unlikely to succeed at trial, no injunction was granted.
The High Court Judge also found that the word potential customers also made the non-solicitation covenant unreasonable. However, if the word potential was removed from the covenant then the remaining wording was enforceable. An injunction was granted.
The takeaway point:
No, use of the word potential makes the covenant unreasonable and unenforceable. However, luckily for the employer in this case, the unreasonable provision was severable and the remaining covenant was still enforceable.
This case further highlights the importance of not using hypothetical or vague language in the wording of covenants. In Tillman v Egon Zehnder Limited a similar approach was adopted for the words “interested in” and the covenant was unenforceable.
Additionally, this is a fairly rare example of a 12 month covenant being held to be reasonable. This is due to the niche industry the employer operated in. For most companies, a period of 3-6 months is likely to be reasonable and anything in excess of that likely to be unreasonable.