Restrictive covenants: an age old story

Although restrictive covenants can be a powerful tool to protect a business's interests they are also a well-known source of contention and, as described in the case of Freshasia Foods Ltd v Jing Lu, are just as problematic now as they were 100 years ago. 

On the face of it, this case looked like a relatively straightforward ex-employee dispute, but it was in fact layered with complexity around restrictive covenants. The question was raised as to whether an interim injunction should be granted to enforce such restrictive covenants and to put a stop to potential continuing business losses (stated to have already been £200,000 worth of business and 55 customers) within a niche market in the UK.

The answer, in a nutshell, was that they should not where wording within the restrictive covenants was too broad and therefore went beyond protecting the legitimate interest of the business.

An injunction was granted in respect of elements of the application, but not all (where the associated wording was too broad). We await the outcome of the trial in May 2019 following the decision on the interim injunction application.

Background

Mr Lu was employed as the Marketing Manager at Freshasia Foods Ltd ("Freshasia") a supplier in the "very specialised market of frozen food and packaged food" supplied to Chinese retail shops and restaurants. On joining Freshasia Mr Lu became subject to the employee handbook which contained the restrictive covenants in question.

When Mr Lu left Freshasia and joined Oriental Food Express Limited, trading as Kung Fu, Freshasia claimed to have suffered a loss (as stated above) and tried to obtain an interim injunction to enforce the restrictive covenants relating to non-solicitation and non-competition.

Non-solicitation

In relation to the non-solicitation clause, on the first read through, it would appear to most to be fairly standard. However, the clause, as set out below, included reference to "potential customers" and any person with whom Mr Lu had "business dealings or knowledge", which led the court to find that the clause was too broad and went beyond protecting Freshasia's legitimate interests.

Mr Daniel Alexander QC, sitting as Deputy Judge in this case noted in particular that the reference to "business dealings or knowledge" lacked clarity and would therefore be unlikely to withstand any scrutiny at trial due to it being too broad.

On this basis, the underlined wording below was severed from the clause.

"for a period of six months (for non-senior employees) or twelve months (for senior employees) (hereinafter referred to as the "leaving period") in respect of any aspect of the business which the Company undertakes, solicit, or attempt to solicit the custom of, or sell, or deliver to or accept work for private gain and/or for any third party, from any private individual, firm or company or otherwise deal with any person who at the date of termination of this contract is a customer or potential customer of the Company to whom you have personally sold and/or delivered the Company's products on behalf of the Company or whom you had introduced to the Company, or approached on behalf of the Company, or with whom you had any business dealings or knowledge in the leaving period immediately prior to the date of termination of your employment."

Non-competition

In addition, the non-competition clause (as set out below) did not pass muster with the court holding that the prohibitive activities and geographic scope were too wide to satisfy grounds for enforcement and it did not (as is meant to the be case) go "no wider than reasonably necessary to protect confidential information or trade connection". Therefore, as Freshasia's case was likely to fail in this respect at trial injunctive action for the enforcement of this clause was not allowed.

"You agree not to directly or indirectly compete with the business of the Company and its associated companies during the period of employment and for the leaving period and notwithstanding the cause or reason for termination. [...]
The term "not compete" as used herein shall mean that you shall not own, manage, operate, consult or be employed in a business substantially similar to or competitive with, the present business of the Company."

Take home points

Restrictive covenants can be a powerful tool in a company's armoury. However, the legitimacy of such clauses is called into question when they are drafted too widely. In this case, some protection was afforded to Freshasia by offending wording in the non-solicitation provision being edited out by the court leaving the remaining wording enforceable. However, wider protection was lost through imprecise wording. One might say that the real power in these clauses lies in the "terror and expense of litigation" as most employees will be deterred from breaching them due to the expense of litigation. However, time spent making sure that wording is precise can provide significant protection should the covenants be breached.

Particular focus in this case was drawn to the practical realities of enforcement of the restrictive covenants. In this case enforcement of the non-competition provision would have left Mr Lu without employment and (as Freshasia had not offered to pay his salary until this matter reached trial) the enforcement may have caused difficulties in relation his mortgage repayments. Therefore, when it comes to consideration of the likely enforceability of restrictive covenants consideration is likely to be given to "the practical realities" of this, in other words, how it will affect the former employee generally.

The key aim in drafting good restrictive covenants is to ensure that they cover no more than the company's legitimate interest so that their enforceability cannot be called into question. Those businesses which rely on strong business protection tools (such as those involved with marketing services) should give careful thought to this.

Some practical steps that employers can follow to ensure that their business is protected through restrictive covenants are to:

• ensure clear and precise drafting covering only that which needs to be protected;
• make sure that covenants are tailored to the individual's circumstances and seniority;
• match the duration of covenants to the period during which damage can genuinely be done (perhaps differentiating the length of different covenants in the same contract);
• consider whether non-competition clauses are really needed for any period in the context of other less onerous but valuable covenants; and
• ensure that clauses are not so onerous as to deprive an employee of a living.

Our employment litigation team have produced a useful toolkit in relation to restrictive covenants so please let us know if you would like to receive a copy. Contact me for more information.