1.

Adopting a structured approach, evaluate and apply the main principles relating to
restrictive covenants to a factual scenario

Restrictive Covenent

A restrictive covenant is typically a clause in a contract which prohibits an employee from

‘competing’ with his or her ex-employer for a certain period after the employee has left the business
(known as a non-compete). Restrictive covenants can also prevent ex-employees from soliciting or
dealing with customers/suppliers of the business (known as non-solicitation clauses) or from
poaching other employees (non-poaching clauses). Non-dealing prevent to deal with clients and
gardening leave

The starting point here is that restrictive covenants (sometimes known as post-termination
restrictions) are void on the grounds they are a restraint of trade and therefore contrary to public
policy. However, a covenant will be enforceable provided it is:
 designed to protect his legitimate business interests; and
 goes no further than is reasonably necessary to protect those interests

They should also be in a written contract and supported by consideration.

This refers to the blue pencil test. This is the principle that a Court will not amend the drafting of a
restrictive covenant to rescue it from any deficiencies. However, if the offending words can be
removed and there is no need to add to or to modify what remains (and removal will not generate a
major change in the effect of the clause) then the Court may ‘blue pencil’ (i.e. delete) the offending
wording.

• Void as restraint of trade

• Unless: designed to protect his legitimate business interests; and goes no further than is
reasonably necessary to protect those interests (Nordenfelt v Maxim Nordenfelt Guns and
Ammunition Co Ltd ([1894] AC 535) and Morris (Herbert) Ltd v Saxelby ([1916] 1 AC 688)) –
Identify the interest

• Consider:

• The breadth of the geographical area of any restriction;

• The length of time of the post termination restriction;

• The breadth of the activities that the employer is trying to restrict;

• The type of interest being protected

• Remember:

• Garden leave, PILON, injunctions

• Blue pencil test? - Tillman v Egon Zehnder Ltd [2019] UKSC 32

• “blue pencil” test (prior to the decision of the Supreme Court, the Court of
Appeal was the highest court to apply this test, e.g. Attwood v
Lamont [1920] 3 KB 571, which Tillman overruled: British Reinforced
Concrete Engineering Co Ltd v Schelff [1921] 2 Ch 563; T. Lucas & Co. Ltd. v
Mitchell [1974] Ch 129; Beckett Investment Management Group Ltd v
Hall [2007] EWCA Civ 613; [2007] ICR 1539). The “blue pencil” test can be
thought of as a technique which gives an employer “two bites of the
cherry”. If an employer claims that the wording of a clause is reasonable
and lawful, but loses the argument, it can have a second crack of the whip
and claim that the offending words ought to be set aside in order to
transform magically the unlawful restraint into one which is enforceable.
Such a “blue pencil” rule panders to the commercial interests of employers
and makes a major contribution towards the further erosion of freedom of
mobility of labour. Heaped on top of that, the courts will be prepared to
grant an injunction against the employee, which is ironic, in light of (i) the
common law’s general hostility to specific remedies, and (ii) the
comparative difficulty with which an employee will be able to secure
injunctive relief or specific performance to enforce the contractual bargain
struck with the employer.
• Concluding Thoughts
• As articulated above, the main point of this blog post has been to flag up
the incremental erosion of the restraint of trade doctrine as applied to
employment contracts and how its qualified nature prioritises the interests
of management over workers. Tillman represents yet another steer of the
good ship “common law” in the direction of prioritising the interests of the
very party to the employment relationship who is the strongest and least
deserving of protection. In addition, the fact that courts have had scant
difficulty in granting the remedy of injunctive relief for breach of covenant,
is also suspect in light of their traditional hostility to specific remedies,
 particularly in the context of the enforcement of the contract of
employment. Of course, I accept the validity of the proposition that
contractual provisions restraining vendors of commercial businesses from
competing in the future with the acquirers of their businesses should be
upheld. In such a case, the applicability of the doctrine is understandable
since the parties are more likely to be of equal bargaining strength,
consideration has passed from the buyer to the seller and the objective of
the transaction would be defeated if the vendor could simply set up shop
next door in competition as soon as the deal was completed. Absent any
limitations on the restraint of trade doctrine, the paradoxical result would
be that trade itself would be inhibited (as noted by Lord Wilson at para. [24]
in Tillman).

• Freedom to quit?

. It covers the different kinds of restriction commonly imposed on employees, and the incorporation of
such terms into contracts of employment. It also considers the impact of social media, which in some
cases has made it easier for employees to compete with a former employer.

Options for employer

See picture

Doctrine of restraint of trade:

When enforcing a restrictive covenant, the court must consider the doctrine of restraint of trade. Any
contractual term restricting an employee's activities after termination is void for being in restraint of
trade and contrary to public policy, unless the employer can show that:

• It has a legitimate proprietary interest that it is appropriate to protect.

• The protection sought is no more than is reasonable having regard to the interests of the parties
and the public interest.

Post-termination restraints are enforced by means of equitable remedies such as an injunction, which is
granted at the discretion of the court by reference to what it regards as fair in the circumstances. Cases
in this area therefore turn on their own facts, and the citation of precedent is not generally of
assistance. This makes this area a difficult one on which to advise.

Summary of key principles

The court applies the following key principles in assessing and enforcing post-
termination restrictive covenants:
 Legitimate interest. To be enforceable, a restrictive covenant must be
designed to protect a legitimate proprietary interest of the employer for
which the restraint is reasonably necessary. Legitimate interests include
an employer's trade connections with customers or suppliers,
confidential information and maintaining the stability of the workforce.
 Reasonableness. Post-termination restraints are enforceable if they
are reasonable, having regard to the interests of the parties and the
public interest. The question of reasonableness has to be considered at
the point when the covenant was entered into, not in the light of
subsequent events.
 Special treatment for employment covenants. Restrictive covenants
in employment contracts are generally viewed more strictly than those in
commercial contracts, such as those between a seller and a buyer.
They are usually less likely to be regarded as reasonable, because of
the inequality of bargaining positions between employer and employee.
 Preventing competition must not be an end in itself. Restrictive
covenants having the sole aim of preventing competition are never
upheld by the court. A non-competition restriction must be designed to
protect the employer's confidential information, trade secrets or
customer connections, and prevent the employee from obtaining an
unfair advantage by exploiting these for their own, or another
employer's, benefit. Non-solicitation clauses are therefore looked on
more favourably than pure non-competition clauses.
 Restrictions must be no wider than necessary. For any covenant in
restraint of trade to be treated as reasonable in the interests of the
parties, "it must afford no more than adequate protection to the benefit
of the party in whose favour it is imposed." (Herbert Morris Ltd v
Saxelby [1916] 1 AC 688.)
 Severability. Severability is a possibility provided certain criteria are
met (see Severability). However, given the possible cost implications to
the employer it is a tool of last resort rather than a principle to be relied
on in drafting wider covenants than reasonably necessary.
These principles are derived from a number of judgments frequently cited in
restrictive covenant cases, notably Office Angels v Rainer-Thomas and
O'Connor [1991] IRLR 214 (often said to contain the definitive statement of
the applicable principles, at paragraphs 21 to 25), TFS Derivatives Ltd v
Morgan [2004] EWHC 3181 (QB) (paragraph 35), Coppage and another v
Safety Net Security Ltd [2013] EWCA Civ 1176 (paragraph 9) and Tillman v
Egon Zehnder Ltd [2019] UKSC 32 (paragraph 84 to 87).
\ Formalities and execution
A restrictive covenant is a contractual term like any other, and so there should
be no particular formalities for entering into one. However, precision is
paramount when considering the extent and reasonableness of a restrictive
covenant. Given the costs and risks involved in enforcing such covenants in
the courts, there are key practical steps that an employer should take in
concluding these contractual terms. In particular:
 Restrictive covenants should always be documented expressly.
 It is always in the employer's interest to obtain the employee's signed
agreement to a restrictive covenant. Without this it may be difficult to
establish that all the elements of a binding contract (offer and
acceptance, consideration, intention to create legal relations and
certainty) are present.
 Restrictive covenants should ideally be contained in the employment
contract.
Where the covenants are contained in a separate document, this should be
signed by the employee and the wording should leave no doubt that the
covenants form part of the terms of employment. Where the covenants do not
form part of the terms of employment (for example, where they are contained
in a deferred remuneration scheme or share plan) it is important to ensure that
the employee signs a copy of the relevant scheme rules. For more
information, see

RECENT CASE LAWS

LAW BY DESIGN LIMITED v ALI
Enforcing a 12 month non-compete clause,
Fentem v Outform EMEA Limited
When resignation can turn into dismissals pilon clause no effect .. to avoid
bonus employer invoked pilon clause and employee resigned and claim for
unfair dismissal . resignation was not due to employer’s repudiatory contract
clause.