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Will the courts enforce non compete covenants

22 February 2017 #Dispute Resolution #Employment


COURTS SUPPORT ENFORCEMENT OF NON-COMPETE COVENANT AGAINST DEPARTING EMPLOYEE

The recent interim judgment of the High Court in the case of Ropner Insurance Services Limited -v- Wood and Clearwood International Limited has emphasised once again that courts are willing in appropriate cases to grant injunctions to prevent employees breaching restrictive covenants.  Although interim injunctions are intended to hold the position until a final decision of the court is made, in practice they can signal the end of the case, as the ex-employee is then prevented from competing and left without resources to fight the litigation.  As a result, such orders can be extremely powerful weapons for employers.  However, enforcing restrictive covenants through the courts is not straightforward: they need to be drafted very carefully to ensure that they go no further than is necessary to protect the employer’s legitimate business interests.

In the Ropner case, the Claimant was an insurance broking firm.  Mr Wood, the First Defendant, worked for them as a broker.  His contract contained a six-month notice period and a restrictive covenant that prevented him from soliciting or transacting insurance business with the claimant’s clients, with whom he had had dealings, for a period of 12 months after the termination of his employment.

Mr Wood handed in his notice and asked to be allowed to leave early, but his employer refused.  In practice, taking into account the notice period and the post-termination restriction, this gave his employer 18 months to secure clients with whom Mr Wood had dealt.  However, shortly after the end of his six-month notice period, Ropner discovered that some of its clients were not renewing their insurance contracts and were instead moving across to the second defendant, Clearwood International, a company set up and controlled by Mr Wood.  The Claimant therefore asked the court to grant an injunction preventing Mr Wood and Clearwood International from carrying out any business in breach of the covenant for its duration.

The court decided that, even though the restraint was for a period of 12 months, because it was limited to those insurance clients with whom Mr Wood had actual dealings whilst employed by the Claimant, and related only to the type of business with which he was involved, it was at least arguable that they were enforceable.  It also decided that, if the injunction was not granted, then damages would be very difficult to quantify, presumably because once insurance clients left they might be lost forever.  Although the court did not make a final decision on the enforceability of the covenant as this was an interim application only, the effect of the interim order was to prevent both Mr Wood and his new company from competing with Ropner.  Because of the time which these cases take to come to court, it is likely that the covenant will have run its course by the time that a final decision is reached.

This is a reminder that carefully drafted restrictions can be a very important tool in protecting an employer’s business, and also that employees who breach such covenants run a serious risk – at least where the covenant can be shown to go no further than is necessary to protect an employer’s business – of legal action which can be ruinous for the employee.

In practice some employers still struggle to enforce such covenants because they are either drafted too broadly, or without the specific employee in mind, and in those circumstances it can be straightforward for an employee to defeat a threatened claim.

If you are an employer concerned about taking action to protect your business, or an employee worried about the risk of injunctive proceedings against you, our team has extensive experience of such cases and can provide you with practical advice and guidance on your rights and risks.

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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