Restrictive Covenants

General Rule: Void unless reasonable in respect of subject matter, time and distance.

See Chart ????? (ask Linz re this)

EXAM STEPS TO FOLLOW re –ve covenants and their enforceability

Enforceability – MUST mention steps 1 + 2 in the exam !!!

1 st step An employer must have a legitimate business interest to protect

(e.g. trade secrets, goodwill, customer connections)

What is e/er claiming rights over ? ie, a salesman knows and deals with customers face

to face and could potentially give details re deals,

customer base to new e/er and then undercut

former e/er and take business away

Ie, a research + designer for a drugs company

working in a medical capacity has lots of secret info

not in the public knowledge

2 nd Step the restraint must be reasonable

– must be no wider in protecting the type of work

– no wider than necessary in time and area

– If they are drafted too widely then it may be void.

– If the Court decides its unreasonable the whole clause could fail

ie – senior management in a coach company, e/er says after leaving

that he cant work for any coach or tour operator in a 3 mile radius

for 12 months

– is 12 months too long ? how long till the info goes out of date ?

– if it’s a computer company 12 months is too long as it would be

obsolete as technology changes all the time

– is 3 miles too far ? decide for yourself

– is coach AND tour operator too wide ? yes, too restrictive, basically

stops e/ee working in the coach trade within 3 miles

– you can only stop them working within your FIELD of work

– tour operator is outside the field therefore too restrictive

– if its too restrictive WHOLE clause fails…… unless…….. blue pencil

rule

Blue Pencil Rule you can use this rule in some circs to cross out a certain bit of a

clause

Court can sever offending parts of clauses

In WD cases, -ve covenants are not enforceable but implied terms

still are

in the above example, it cant work for crossing out “3 miles” cos the

clause cant operate and wont make sense

it could be used to cross out “or tour operator” as clause still makes

sense, is valid and sensible

if it leaves a gap, the blue pencil CANNOT be used

Cases

Lansing Linde v Kerr

It deals with the meaning of protecting info where e/er worried about whistle blowers.

2

Express covenants can protect info which: – Abogados de accidente Hialeah

1. is used in the trade or business

2. if disclosed would cause real damage to owner of the information

3. The owner had tried to limit its dissemination

FSS Travel v Johnson

 Protection can only be claimed for identifiable objective knowledge with which the

employee had become acquainted during his employment (ie details of customers or

access to secret info)

 Can the e/er identify what information is legitimately protected ?

 Basically, the e/er wanted to protect all the info the e/ee had got while working there

(experience, skill, etc)

 Court said identify something specific rather than general experience and that it MUST be

more confidential than standard info all e/es come across

Austin Knight v Hinds

 A tired to argue that it had a business interest to protect

 A's application for an injunction failed on other grounds that the covenant to prevent

solicitation relating to any persons who at any time had been a customer of the company

or any of its associated companies.

 This failed as it was unreasonably wide and unenforceable as a restraint as H it

restrained H from dealing with all customers even those who H had not dealt with or had

contact with.

 This must be something the employee has learnt whilst in his employment and be

identified before.

 Protection could not be claimed in respect of the skill, experience, know how and general

knowledge acquired as part of his job.

 This is not a reason for preventing someone leaving for a competitor. The employee

could be the talent and the employer can't restrict them from leaving for this reason.

Remedy for breaching restrictive covenants

Injunction + Damages if e/ee reveals secret info e/er can seek damages for losses they

suffer plus any profit the e/ee has made after moving jobs and

breaching the covenants

Garden Leave Clauses

Principle applies mainly to senior members of the company and important e/es

– E/ee has a long notice period (6 months)

– E/ee is paid to stay away and not work anywhere

– his Contract continues while he is at home

– E/er must show he has a legitimate interest to protect if the e/ee argues

against it (ie, confidential info, e/er worried he’ll tell customers he’s leaving)

– Must be an express clause in the contract – it is very unlikely that a Court

will imply this type of clause but it can be agreed between the parties by

consent

– Problem for e/ee is that it could affect his future if he’s off the market and

not working for 6 months

– Clause can be combined with –ve covenants so that an e/ee has 6 months

garden leave followed by 12 months –ve covenants

Remedies for e/er = Injunction and damages (as above)

3

Solicitation /Poaching clauses

 Companies may want to put in a solicitation clause or poaching clause into the contract

for when the employee leaves so as to give the replacement a chance at building up a

relationship with clients.

 It may be reasonable to put in a clause restraining them from contacting the clients.

 Check how often the clients are in touch with the employee before the end of the

contract

 If the clients are users of the business weekly then it may only be reasonable to restrain

them from contacting them for 6 months.

 If annually then perhaps restraint for a 2 year period.

 If the clients call the ex-employee themselves then they may not be in breach.

 To overcome this a non-dealing clause could be put into the contract.

 The restriction should only be for the work that they actually do with you.

 The distance should not be wider than what they did for that particular employer.

Effect of restrictive covenants and dismissals

 If an employee is wrongfully dismissed then the employers cannot rely on the contract

but can rely on implied terms in the contract as these continue.

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