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This year the High Court decision in CEF Holdings Ltd v Mundey [2012], where the court refused to enforce restrictive covenants against a group of a firms former employees, restates some basic principles on reasonableness and reminds us of the need to write covenant very carefully.

The covenant was set out to restrict former employees of CEF Holding Ltd from soliciting employees of the Company was held to be unenforceable for various reasons, including being drafted too broadly.

This case is a useful reminder that restrictive covenants need to be drafted very carefully. They will be construed strictly and they must not go any further than is reasonably necessary to protect a legitimate business interest.

Significantly, CEF Holding only required their employees to give one week’s notice to leave their employment.  Clearly the court took a view that the company did not need much protection.

In this case, the covenant attempted to prevent the soliciting of “anyemployee of the Company, irrespective of where that individual worked or whether the Defendant was even aware of that individual’s existence.  Clearly in a modest or large company this is unreasonable.

Another factor considered by the High Court was that contracts of employment of their more senior employees did not contain restrictive covenants.  This greatly undermined the argument that the Company had a legitimate interest to protect.

This case is a very useful reminder that restrictive covenants need to be drafted very tightly.  They will be construed strictly and they must not go any further than is reasonably necessary to protect a legitimate business interest.

The reasonableness of a covenant can best be viewed in the remarks from Cox J in TFS Derivitives Limited v Morgan [2004] EWHC 3181 [QB]:

  1. “the court must decide what the covenant means when properly construed.
  2. Secondly, the court will consider whether the former employers have shown on the evidence that they have legitimate business interests requiring protection in relation to the employee’s employment. In this case, as will be seen later on, the defendant concedes that TFS have demonstrated on the evidence legitimate business interests to protect in respect of customer connection, confidential information and the integrity or stability of the workforce, although the extent of the confidential information is in dispute in relation to its shelf life and/or the extent to which it is either memorable or portable.
  3. once the existence of legitimate protectable interests has been established, the covenant must be shown to be no wider than is reasonably necessary for the protection of those interests. Reasonable necessity is to be assessed from the perspective of reasonable persons in the position of the parties as at the date of the contract, having regard to the contractual provisions as a whole and to the factual matrix to which the contract would then realistically have been expected to apply.”

Source: [2012] EWHC 1524 (QB)

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