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Restrictive Covenants

Meredith Hurst Sunday, December 1, 2013

We have seen a run of cases where the Courts have adopted a hard-line approach to the interpretation of restrictive covenants. The eagerly awaited Court of Appeal decision in Coppage & Another v Safety Net Security Limited handed down in October made surprising and some might say bad law.

 

Mr Coppage was Business Development Director and subject to the terms of a contract with Safety Net Security Limited. The contract contained a restrictive covenant in the following terms: It is a condition of your employment, that for a period of six months immediately following termination of your employment for any reason whatsoever, you will not, whether directly or indirectly as principal, agent, employee, director, partner or otherwise howsoever, approach any individual or organisation who has during your period of employment been a customer of ours, if the purpose of such an approach is to solicit business which could have been undertaken by us.

 

The main issue was whether that covenant was binding on Mr Coppage or whether it was unenforceable as being in restraint of trade. This case will come as a surprise to anyone familiar with advising on restrictive covenants and most lawyers would have anticipated a finding in favour of Mr Coppage.

 

This was not to be. The Court was prepared to uphold the clause even though it applied to all customers of the employer and not just those with whom Mr Coppage had personal dealings. Usually, mere knowledge of a client would be insufficient. The clause was also retrospectively unlimited in time. In other words, it purported to prohibit poaching those who had been customers of the company from the beginning of Mr Coppage's employment. 

 

One could be excused for considering these aspects fatal to enforceability but the Court disagreed. What saved the Company was the relatively limited period of time for which the clause remained in force after employment. This was a powerful factor supporting the overall reasonableness of the clause in this case. What was also material (as with all cases of this nature) was the peculiar factual matrix. Mr Coppage was regarded as the 'face' of the business and the Court was prepared to accept that he had the potential to damage the business as a result.

 

A case handed down last week follows in the footsteps of Coppage. In Croesus Financial Services v Bradshaw, the clause to which the employee was subject, provided that he could not canvass or solicit, or do business with any customer with whom he'd had personal contact in the course of his duties.

 

A clause of this nature would usually be limited to customers with whom the employee has had material dealings. This was one of the arguments that Mr Bradshaw advanced in opposition to the provision. The Court rejected his submission. It interpreted the clause to mean that only customers whom Mr Bradshaw had personally engaged in a more than trivial business contact were caught. 

 

The second basis of challenge was the 12 month duration of the provision but the Court was prepared to find that a restriction of this period was standard in the financial services sector. The business would require a considerable period of time to establish relationships between Mr Bradshaw's previous customers and its advisors.

 

Whilst both of these cases were held in favour of the employer, that is not to say that this will always be the case. Clauses should always be carefully drafted in the context of the employee and the business concerned. Failure to do so may lead to the Court striking a provision down as unreasonable.

  

Read Coppage here

 

Read Croesus here   

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