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Enforceability of restrictive covenants

Posted on 30th May 2013
Case law

In this recent decision, the High Court upheld a 12 month non-solicitation covenant against a former employee who claimed he had been constructively dismissed. This case is a good example of the factors a court will take into account when deciding if a restrictive covenant should be enforced against an employee.

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the instruction to not attend work and not to contact clients did not breach Mr T's contract. Mr T was bound by the post-termination contractual restrictions imposed on him

Romero Insurance Brokers Ltd v Templeton and another [2013] EWHC 1198

The facts

This case involved a senior insurance broker (Mr T) who had been recruited by an insurance brokers (Romero) to manage its new branch. After a long-standing career in insurance, Romero hoped that Mr T would be able to persuade his contacts to follow him.

Mr T entered into an agreement with Romero which contained a number of post-termination restrictive covenants, including a 12 month non-solicitation covenant which placed restrictions on Mr T’s ability to work for a rival business and engage with contacts with whom he had dealt in the 6 months prior to his termination.

Despite Mr T’s belief that he was successfully building up the business, Romero did not agree and this ultimately led to suggestions of a restructure whereby Mr T would be relocated to Romero’s main office with his role in the branch becoming redundant.

Mr T did not fully engage with Romero during its attempts to consult with him as he believed that Romero had already taken the decision to dismiss him. Mr T was told by Romero not to come into work and not to contact any clients.

Mr T was offered a job with a rival broker and later resigned with immediate effect claiming that he had lost trust and confidence in Romero and that the events which had unfolded at Romero had amounted to a breach of contract.

Mr T took up his new role and a number of his clients followed him.

The law

A contractual restriction on an employee’s post-termination activities will only be enforceable where an employer can demonstrate that it has a legitimate interest to protect and that the protection sought does not go further than is reasonable.

It is an established legal principle that where an employee’s employment is terminated in breach of his or her contract of employment, that employee will no longer be bound by any post-termination contractual restrictions. It is said they “fall away” as being unenforceable.

The decision

The High Court held that Mr T had not been constructively dismissed. The court rejected Mr T’s suggestion that the redundancy process which Romero followed was a sham. On balance, Romero’s actions, including its instruction for Mr T to not attend work and not to contact clients, did not amount to a breach of Mr T’s contract. Mr T was therefore bound by the post-termination contractual restrictions imposed on him by Romero.

The court went on to consider whether the non-solicitation covenant was enforceable against Mr T. The court found that Romero had a legitimate interest to protect, namely the connection with clients with whom Mr T had been dealing. The court also held that 12 months was a reasonable length of time for Mr T to be restrained, taking into account the general nature of insurance policies being renewable on an annual basis. The court supported its finding by reference to Mr T having been recruited by Romero to build up its business.

In practice

Had the restriction been for a period in excess of 12 months it would not have been enforceable. The period of restraint would have been more than was reasonably necessary to protect Romero’s interest.

This case is a reminder to employers, for post-termination restrictions to be enforceable against former employees, that there must be a genuine interest to protect and the duration of the restriction must not be more than is reasonably necessary.

What is reasonably necessary will vary from case to case and we will be happy to assist help you review or draft appropriate clauses specific to your business, requirements and objectives.

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