Money can’t buy you restraint: A “how not to” guide to restrictive covenants

23 May 2016

Bartholomews Agri Food Limited v Michael Andrew Thornton

Remember the parable of The House on the Rock? In the words of Matthew 7:24-27: “everyone who hears these words of mine and does not put them into practice is like a foolish man who built his house on sand. The rain came down, the streams rose, and the winds blew and beat against that house, and it fell with a great crash.”  Well this is the parable of the agricultural merchant, who built their restrictive covenants in a general employee document with no foundation (or specific thought as to the employee in question). And when the judge rose, and his winds blew and beat against the covenant, the covenant fell with a great crash…

Consider the following provision, contained in what were described as the “common Terms and Conditions for all employees”:

“Employees shall not, for a period of six months immediately following the termination of their employment be engaged on work, supplying goods or services of a similar nature which compete with the Company to the Company's customers, with a trade competitor within the Company's trading area, (which is West and East Sussex, Kent, Hampshire, Wiltshire and Dorset) or on their won [sic] account without prior approval from the Company. In this unlikely event, the employee's full benefits will be paid during this period."

It was the above provision upon which the Applicant tried to rely when the Respondent agronomist resigned after more than 18 years’ service, intending to take up employment with a seed retailer. In response to the Applicant’s application for an interim injunction to enforce the above covenant, the Respondent resisted on the basis that the covenant was an unreasonable and unenforceable restraint of trade. It therefore fell to the judge to determine whether there was a serious question to be tried on its enforceability. The relevant questions were i) whether there was a legitimate business interest requiring protection, and ii) whether the relevant restriction was no wider than was reasonably necessary for its protection.

The Applicant boldly stepped up to sow the seeds of their somewhat ambitious case. They painted a picture of the Respondent as a valued confidant and a trusted advisor of their small family owned business customers. In addition, it was argued that the Respondent would often engage with other clients at various events throughout the year, during which he would learn all about their business interests.

As for the covenant itself, the relevant legitimate business interests were said to be the Applicant’s customer connections and confidential information. Much weight was placed on one particular PowerPoint presentation, left over from the 2016 “Spring Cropping Launch”, as an example of such confidential information. The Applicant pointed to the following limitations which, it said, showed that the covenant went no further than was necessary to protect those legitimate business interests:

  1. It was limited in time to 6 months;
  2. It was limited to the supply of goods/services of a “similar nature” to that which the Respondent had been supplying, in competition with the Applicant;
  3. It was limited to dealings with the Applicant’s existing customers, which they claimed was necessary due to the confidential information in the Respondent’s possession;
  4. It was limited geographically to a mere six counties; and
  5. If all of the above wasn’t reasonable enough, the clause provided for payment of the respondent’s full remuneration for the duration of the covenant, provided it was not breached. A bit like paying your ex-boyfriend not to date other women…

Unsurprisingly, the judge was “not persuaded”. Firstly, the Respondent had been bound by this restrictive covenant since he started as a trainee in 1997; a baby seedling of a scientist, with no experience, no customer contacts and zero highly confidential PowerPoint presentations to his name. A restrictive covenant is not something you “grow into”. If it is unenforceable when first imposed, it can never be enforceable.

This could have been the final word on the subject, but the judge went on to highlight the fact that this covenant covered all customers of the Applicant, regardless of whether or not the Respondent had ever had any contact with them. In the words of the judge, the Applicant’s “voluminous evidence” was “singularly lacking in information” concerning the number of customers they had, the number of agronomists they employed and their turnover. As it later transpired, the Applicant’s turnover for the previous year was £111,000,000, of which the Respondent’s customers contributed just over 1%. According to my maths, that makes the covenant just under 99% wider than necessary.

In relation to the geographical restriction, the judge felt that there was “a lack of correspondence between the area and the customers with which the Respondent had dealings”. It would seem from the evidence that the majority of the Respondent’s clients could be found in West Sussex alone, and that the Respondent simply did not have any clients in three of the six restricted counties. Having consulted Google, that’s about 9,874 km² wider than necessary.

As for the idea that the Applicant could effectively buy the Respondent’s loyalty for six months, this was quite simply contrary to public policy. And what about the supposed confidential information which the Applicant was seeking to protect with this badly drafted clause? It somehow remained undefined throughout the entire contract, and the only example provided was the abovementioned PowerPoint presentation. The problem was, the Respondent hadn’t actually retained a copy of this presentation, which in any case was made up primarily of general statistical information, which was both readily publicly available and largely out of date. Not, perhaps, their best example.

So what lessons can we learn from this? How can you avoid being the “foolish man”?

  1. Tailor all restrictive covenants to the individual employee. One restrictive covenant does not fit all, and factors such as seniority, client contacts and business knowledge must all be taken into account. Don’t forget that an unenforceable covenant at the time it was entered into can never become enforceable; but they can be reviewed and updated further down the line.  Any non-compete clause for a trainee was highly unlikely to be enforceable, no matter what its length or geographical reach. And by including the covenant in a document applicable to all employees, it would have been utterly impossible for the Applicant to have argued that the covenant was in any way tailored to the employee.
  2. Covenants must be reasonable. Inherently, restrictive covenants are a barrier to the employee’s choice in relation to his next source of employment and income, so any such restriction must be justifiable in order to protect a legitimate business interest. And paying your employee off for the inconvenience is no substitute!
  3. Covenants should be no wider than necessary, which means limiting their scope by time, geography and clients. Preventing the Respondent from working in counties where he didn’t have a single client was clearly wider than necessary. As was preventing him from engaging with any of the company’s clients, regardless of whether or not he had had any contact with them. Six months may have been an acceptable period of time in this case (had it not been unenforceable from the start) but this is something you should always consider carefully, to ensure the covenant lasts for no longer than is reasonably necessary.
  4. Finally, it is worth noting that restrictive covenants are only enforceable for the protection of the legitimate business interest(s) of the employer. Failing to put forward any credible evidence as to the confidential information to be protected was yet another barrier to enforceability.

Further information

Should you have any questions about the issues raised in this blog post please contact a member of our employment team.

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