Restrictive covenants: no need to pay, and paying probably won’t help…
In many civil law countries – France, Germany, Spain and Italy to name but a few – it is both normal and indeed a legal necessity to pay for restrictive covenants, such as non-compete, non-solicit and non-dealing clauses, during the term for which they are in force. That has never been the case in the UK and other common law lands, where the test has always been whether an employer can demonstrate that it had a legitimate business interest justifying the imposition of the restriction. For some time, however, there has been debate about whether the UK might one day converge towards the continental norm. The High Court has now confirmed that the answer remains a resounding “no”. It has also issued (yet another) reminder about the need for good drafting, and for covenants to be kept fresh.
In Bartholomews Agri Food Limited v Thornton , a six month post-termination restriction on working for a competitor or supplying goods and services to customers in competition with the employer in a certain geographical area contained the unusual statement that if the employer sought to enforce it, “the employee’s full benefits will be paid”. Did this make any difference to enforceability? Not at all, with the Court stating “it is contrary to public policy in effect to permit an employers to purchase a restraint”.
It is worth noting that the employer could very easily have achieved the end result it sought had the six month post-termination restraint-combined-with-pay instead been a six month garden leave clause, the crucial difference being that an individual on garden leave remains an employee and subject to all of the rights and obligations contained in their employment contract (other than the obligation to work). And while the public policy arguments against restraints of trade will still be engaged if a garden leave clause is excessively long, the employer is not held to the same standard as with a post-termination covenant. Similarly, a deferred compensation scheme under which the compensation would be forfeited if the employee engaged in competitive activities could also be enforceable, albeit that it might not have served as much of a deterrent in this case.
Might an employer nevertheless still want to pay for covenants in some cases? Practically, payment may make an employee more likely to comply, even if Bartholomews reminds us that it is unlikely to make any legal difference if the covenants are not enforceable on their face. Additionally, employers are increasingly faced with the practical problem of cross-border competitive threats: if (say) you want a court in Paris to enforce an English injunction (as opposed to simply relying on the employee’s unwillingness to place himself or herself in contempt of the English court), might you place yourself in a better position by demonstrating a willingness to pay at least the minimum levels of compensation required under French law? It’s a question without a clear answer, but of increasing pertinence.
The case also highlighted two other points, neither of which are new but both of which are extremely important and often forgotten about:
- Mr Thornton’s covenants dated back to 1997, when he had joined Bartholomews as a trainee agronomist – a time when, the Court recorded, he had “no experience and no customer contacts and [they] were… manifestly inappropriate for such a junior employee”. The enforceability of covenants is assessed at the point they are agreed, not the point at which the employer tries to rely on them, regardless of how senior, important or valuable the employee has become in the intervening period, and in the textbook case of the tea boy who ends up as the CEO it is always important to ensure that fresh covenants are entered into, or existing covenants re-executed or re-affirmed, upon each relevant promotion;
- The covenants were extremely poorly drafted and as such “plainly far wider than is reasonably necessary for the protection of Bartholomews’ business interests.” They applied to all customers of Bartholomews and of its associated companies, regardless of whether Mr Thornton had knowledge of those customers and of whether he had ever carried out any work for them. It is always important to ensure that restrictive covenants are carefully worded and no longer or wider than is necessary to protect the employer’s interests.
The article was first published by Lewis Silkin.