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No cuts to restrictive covenants

25 November 2016 #Dispute Resolution #Corporate


Restrictive covenants are commonplace in both business sale agreements and employment contracts.   Claims based on such covenants invariably turn on whether the covenant was breached in practice and/or whether it is sufficiently reasonable to be upheld.  The recent case of Rush Hair Limited -v- Gibson-Forbes addressed both these matters.

Ms Gibson-Forbes entered into a franchise in 2008 with the well-known hairdressing chain Rush. This was successful and in 2015 she agreed to sell to Rush the companies through which she ran her franchise. The sale and purchase agreement (SPA) contained two restrictions, both running for two years.  One prevented her from soliciting or employing three key employees.   The other prevented her competing with Rush within a two-mile radius of her old salon.

Within the two-year restriction period Ms Gibson-Forbes, through a limited company, first employed two of the restricted employees and then opened a new salon within the restricted area, managed by the third restricted employee. Rush sued, alleging breaches of both covenants.

Ms Gibson-Forbes denied both that she had breached the covenants and also that they were enforceable in any event. Firstly, she pointed out that the restrictions bound her personally whereas her salon was operated through a limited company, albeit one of which she was director and shareholder.  On her argument, her company was free to do as it liked.  However, the Court noted that Ms Gibson-Forbes was acting as the agent for her company.  To give commercial sense to the SPA, the proper interpretation of the restrictive covenant prevented her from acting as an agent for a third party as well as on her own account.  Accordingly, the restrictions effectively extended to her company.

Ms Gibson-Forbes’ next argument was that the non-compete restriction referred to competition with “the Rush business”, which was not defined in the SPA.  She said that this meant that the restriction was too uncertain to be upheld.  This received short shrift.  The Court held that it was perfectly obvious to everyone what was meant by the Rush business even though this was not expressly set out in the SPA.

Finally, Ms Gibson-Forbes argued that the restrictions should not be upheld as a matter of public policy. This argument also failed.  The Court noted that restrictions in a business sale can be more onerous than an employment contract.  Without the restrictions (i.e. if Ms Gibson-Forbes could set up next door and poach all the key employees) Rush would have nothing to show for the £40,000 it had agreed to pay her.  The geographic scope of the restriction was not unreasonable.  Although Ms Gibson-Forbes was prohibited from running a salon in Windsor for two years she remained able to do so in other nearby towns and in fact had done so.  The Court also held that a two-year restriction was in line with what had been allowed in previously reported cases.

There are no hard and fast rules in disputes such as these. Whether a restriction is upheld is decided on the individual facts of each case, with reference to previously reported decisions.  There is relatively little authority on business sale restrictive covenants so this is a helpful example of the pragmatic approach the court will take to enforce such restrictions. 

Clarkslegal, specialist Dispute Resolution lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Dispute Resolution matter please contact Clarkslegal's dispute resolution team by email at disputeresolution@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.

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Stephen James

Stephen James
Partner

E: sjames@clarkslegal.com
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