Restrictive Covenant in Contract of Employment

Re: Avril & Bates – Restrictive Covenant in Contract of Employment

The quoted clause in the contracts of employment contains both purported chronological and geographical limitations upon the post-employment sale by Avril and Bates of cosmetic products. They are prohibited from doing so for a period of 3 years within 5 miles of their designated selling towns or, in any event, “anywhere in London, England, Scotland or Wales”. The latter stipulation broadens the geographical limitation to the extent that, were it fully enforceable, the effective prohibition would extend to the whole of Great Britain and references to the designated selling towns and London would become redundant/

The clause is a restrictive covenant in the parties’ contracts of employment and is in restraint of trade. While there is an implied duty of fidelity in a contract of employment during its subsistence which prevents an employee from working for competitors or engaging personally in competition with the interests of the employer, no such duty endures once the contract is terminated. Where, as in this case, there has been an express agreement regulating the post-employment activities of the employees, the courts will intervene in order to ensure that there is a correct balance between the right of the individual to earn a livelihood using his skills and experience even if these have been acquired while in the service of the previous employer and the right of the employer to protect his business from competition which is unfair by virtue of the fact that the employee may be using information gleaned in the service of the employer and business contacts developed during that period. The protection imposed by the employer in such a restrictive covenant is subject to two conditions:

• • The restraint must be calculated to protect the legitimate business interests of the employer;

• • It must be reasonable both in terms of the period of time for which it will endure and in terms of the geographical area in which the restraint is effective.

The generally accepted categories of legitimate business interest are:

• • Prevention of disclosure of confidential or commercially sensitive information;

• • Prevention of exploitation of the employer’s clients and business connections.

Clearly, disclosure of confidential information can be very hard to prove whereas evidence of the ex-employee working in a similar field will be far easier to obtain. For this reason, Cross J in Printers and Finishers Limited v Holloway^[1] expressed the view that employers confronted with this problem should “exact covenants from their employees restricting their filed of activity after they have left their employment” rather than invite the courts to “extend general equitable doctrine to prevent the breaking of confidences beyond all reasonable bounds.” Avril and Bates’ employer appears to have heeded this advice since the restriction is simply upon “selling” cosmetic products. However, in Avril’s case this restriction is too widely framed. By serving as a cashier at Slipper’s and taking money on occasion in payment for cosmetics she might be regarded as “selling” them. However, it is important in this instance to consider the spirit and intention of the restraint. By merely acting as a member of staff for a vendor of cosmetics, Avril is in no way threatening the business interests and commercial viability of Cos-U-Like. Accordingly, it is most unlikely that a court would regard her employment by Slippers as a cashier as a breach of covenant. Support for this view may be found in Fellowes & Son v Fisher^[2] in which the defendant was a conveyancing clerk employed by a firm of solicitors in Walthamstow. He agreed that for a period of 5 years post-employment he would not “be employed or concerned in the legal profession anywhere in the postal districts of Walthamstow and Chingford. After leaving, he worked for another firm of solicitors which had offices in Walthamstow and his previous employers sought an injunction restraining him. It is doubtful whether a restraint of such duration in so densely populated an area would have been upheld in any event (see below) but in any case it was held that the clause was too widely drawn since it would have prohibited work as, for example, a justices’ clerk or in a local authority legal department neither of which activities could possibly have threatened the interests of his former employers. If, however, Avril were employed in a more proactive sales role – giving advice and making recommendations to customers (potentially former customers of her previous employer) or if indeed she were found to be encouraging members of her previous client base to use Slippers to purchase cosmetics she may well be found to be in breach. (This is, however, subject to the validity of the geographical constraints discussed below.)

The employer’s clients and business connections are sometimes referred to as the “goodwill” of the business. This is an asset of considerable worth to a business and will therefore be regarded as a legitimate interest warranting protection. The situation is more complicated where the employee has brought their own previous contacts to the employer and now wishes to move them on to a new employer. Thus if Avril or Bates had certain customers which they had brought to Cos U Like from a previous period of sales activity, it might be argued that these customers remained their “property”. This argument was upheld in M & S Drapers v Reynolds^[3] in the case of a salesman but was rejected in the case of a senior employee in Hanover Insurance Brokers v Shapiro^[4]. In the rather broad and somewhat unspecific Cos U Like contract clause, there is no express reference to customers and merely a reliance upon a prohibition of “selling”. Again, this may be regarded as unenforceable because it is so broadly framed as not to be reasonable.

Once the existence of a legitimate business interest has been established, the courts will consider the reasonableness of the restriction. This will be considered in the context of:

• • Market context;

• • Time; and

• • Area

In the cases of Avril and Bates the court will consider the nature and scale of operations of Cos U Like. All that it is possible to glean from the facts given is that there was some selling of cosmetics (which is not further defined or refined to show the range of goods with which the salesmen dealt) in Tooting and Dorking (since this is where Avril and Bates respectively worked). In Nordenfelt v Maxim Nordenfelt Guns and Ammunition Ltd^[5] a worldwide restraint was held to be valid where the employer’s business was genuinely worldwide whereas in Office Angels Ltd v Rainer-Thomas & O’Connor^[6] the employer operated only in a limited geographical area and a covenant which purported to restrict activities outside this area was held to be unenforceable. Therefore, the purported extension of the prohibition to the whole of Great Britain might be regarded as reasonable if Cos U Like possessed extensive national coverage but would not be regarded as defensible if its activities were in reality restricted to London and the Home Counties. The scale of the potential client base having regarded to the geographical area and the type of product will also be considered. Providers of a highly specialist product which can be expected to attract relatively few customers within a given area will be more vigorously protected: in Marley Tile Co Ltd v Johnson^[7], a clause which prohibited sales for one year post-employment in any area in which the employee had worked prior to leaving was considered. The areas in question were Devon and Cornwall and it was found that the potential number of customers was thus 2500. This restraint was held to be void due to the size of the area, the number of potential customers and the nature of the product supplied by the claimant.

The courts will consider the nature and extent of the contact between the employee and the customers. This is due to the fact that the more frequent and close the contact between the parties, the greater the opportunity for the former employee to influence the customer from the new position. Thus if, as in Marion White Ltd v Francis^[8], a hair stylist who has built a reputation in a particular salon were to set up in rival business within a relatively short distance of the previous premises, a restraint would be regarded as reasonable. Similarly, in Fitch v Dewes^[9], a solicitor’s clerk who regularly had contact with approximately half the firm’s customers was prohibited from practising within a 7 mile radius for an unlimited period of time. (It is, however, doubtful that the unlimited duration of this particular covenant would often be regarded as appropriate. In Middleton v Brown^[10], Jessel MR suggested that the test for duration should be the length of time that it would reasonably take for a replacement employee to demonstrate his effectiveness to existing customers in order for there then to be fair competition between the old and the new employers. In the cases of Avril and Bates, consideration would have to be given to the operation in practice of their sales activities. They are described as having sold cosmetics “door to door”. If the vast majority of such sales were as a result of “cold-calling” upon previously unsolicited customers, there would be little goodwill or legitimate business interest possessed by Cos U Like and therefore only very limited, if indeed any, protection would be justified. Conversely, however, if there was a very high level of “repeat business” the activities of Bates who has continued to sell in this way would warrant restraint if he were attempting to exploit his previous client base. This principle is demonstrated by Bowler v Lovegrove^[11] in which the defendant was a negotiating clerk who worked for a firm of estate agents. A covenant not to enter a similar business for a period of one year within a restricted area was held to be void. While the restrictions upon time and area in this case would not appear excessive, the restriction was regarded as unnecessary because the work was largely of a non-recurring nature.

Bates would appear to be working for a competitor of Cos U Like and engaged in a similar activity. Nonetheless, the restriction placed upon him will be subject to construction by the courts. In Littlewoods Organisation Ltd v Harris^[12], the employers rain a mail order business with their main rivals being Great Universal Stores. The employee covenanted specifically not to work for GUS for a period of 12 months post-employment but then resigned and went to work for GUS. He argued that the covenant as drafted was unreasonably wide since it would prevent him from working for GUS or any of its subsidiary companies anywhere in the world even if the particular operation with which he was concerned did not involve mail order. However, the majority of the Court of Appeal were prepared to uphold the covenant on the ground that where a covenant in restraint of trade was drafted in general terms which were capable without alteration of being construed in a more specific manner so as to protect the legitimate business interests of the employer, the court would so construe it. Accordingly, it was capable of being construed as applying only to the mail order interests of the employer. Regarded in this way, it was not unreasonably wide and in fact was necessary to protect the employer’s legitimate business interests. Accordingly, the fact that the covenant in respect of Bates is very wide (“selling”), it is probable that a court would interpret “selling” in this context as applying to door-to-door sales activity of the type in which Bates was previously engaged.

It is probable that the time stipulation in respect of both Avril and Bates (3 years) would in their circumstances be regarded as excessive in any event. The reasonableness of the time constraint varies from case to case depending upon the nature of the business and the involvement of the employee. Far longer periods may be regarded as appropriate as for example in Nordenfelt (supra) in which a 25 year restriction was regarded as valid. However, in Herbert Morris Ltd v Saxelby^[13], a seven year restriction upon an engineer was not enforced. Thus there are three interrelated factors: the nature of the business will be considered as a background – a highly specialised business with a limited potential customer base will attract more protection than a more commonplace, high volume operation. Against this background, time and area operate as interdependent variables: the greater the area, the less reasonable it is to impose a long time restraint and vice versa. In the case of Avril and Bates, the overall level of protection is likely to be comparatively limited given the high demand for cosmetics, considerable scope for new business and the large size of the potential customer base. Having commented that 3 years is likely to be regarded as a long period of restrain in such an industry, the appropriate duration will also depend upon whether the court is prepared to allow as reasonable a nationwide prohibition (in which case the duration is likely to be shorter) or restrict the same to the previously designated selling areas (in which case a longer duration is probable). The court will be guided in these deliberations by a consideration of the parties’ ability to earn a living. Thus, for example, if the prohibition is restricted to the designated selling areas and the rest of the country is thus available to Avril and Bates, more extended protection of the restrictively defined areas would be regarded as appropriate.

Having considered these general principles, it is necessary not to overlook the geographical facts of Avril and Bates’ cases. If, as is probable, the restriction upon England, Scotland and Wales, is regarded as too wide, the court will have to consider enforcing the covenant in respect of the designated selling areas and/or London. Avril is working in Dorking (not her designated selling area and not in London). Provided therefore that her covenant is not construed as applying nationally, she will be free to continue to work. In any event, as has been seen above, it is unlikely that the covenant would be held to apply to her activities as a cashier. The fact that Bates is working within 5 miles of Tooting is irrelevant since this was not his designated selling area. However, he would appear to be potentially engaging in activities which could threaten the legitimate business interests of Cos U Like and he is doing so in London. Given the nature of the business and the size and population of London, a covenant preventing him from working in London is not likely to be regarded as reasonable. If, however, he were working within 5 miles of Dorking (his designated selling area) the threat to Cos U Like of losing existing customers is likely to warrant protection although whether a period of as long as three years would be regarded as necessary is doubtful since, as has been seen above, a replacement employee could become established within a much shorter space of time.

Bibliography

Holland, J. & Burnett, S., Employment Law, (LPC Guide 2005)

Pitt, G., Employment Law, (5^th Ed., 2004)

Selwyn, N., Selwyn’s Law of Employment (13^th Ed., 2004)

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Footnotes

^[1] [1965] 1 WLR 1 @ p.6

^[2] [1976] QB 122

^[3] [1956] 3 All ER 814

^[4] [1994] IRLR 82

^[5] [1895] 1 QB 151

^[6] [1991] IRLR 214

^[7] [1982] IRLR 75

^[8] [1972] 3 All ER 857

^[9] [1921] 2 AC 158

^[10] (1878) 47 LJ Ch 11

^[11] [1921] 1 Ch 642

^[12] [1978] 1 All ER 1026

^[13] [1915] 2 Ch 57