Restrictive Covenants - Protecting Your Business
A recent case in the High Court involving a hair salon in Windsor and an entrepreneurial former owner has served as a useful reminder of some of the rules around restrictive covenants and non-solicitation provisions in contracts.
Restrictive covenants can be an important tool for you to protect your business when an employee leaves, or perhaps when you enter into a joint venture arrangement or business acquisition with a third party. However, because they potentially act as a constraint on people's freedom to find work elsewhere, and a constraint on free competition, English law limits the extent to which you are able to rely on that sort of provision.
What are the common pitfalls?
What is, and is not, permissible when imposing restrictive covenants will vary depending on the context in which it is being imposed. However, there are some broad, practical themes which are worth bearing in mind when considering this sort of obligation:
- Think carefully about how long you need the restriction to apply. If you go for a longer period than is reasonably necessary to protect your business interests then the restriction may not be enforceable.
- An unenforceable restriction will most likely be unenforceable in its entirety - i.e. you won't be able to rely on it at all, even for the initial period during which the restriction might have been reasonable. It is better to have a short but enforceable restriction, than a lengthy unenforceable one.
- In terms of restrictions on employees, it would be rare to try and restrict an individual's activities for more than 12 months (and very often a shorter period will be appropriate). Restrictions arising out of the sale of a business will often properly run on for longer, but generally a period of more than a year should be very carefully considered.
- Try and make sure that the wording of any restriction addresses the specific business interests you are trying to protect. By narrowing the scope of the restriction, and tying it to your legitimate business interests, the restriction is more likely to be enforceable.
- As well as restrictive covenants, don't forget to ensure that you have adequate clauses to protect your confidential information and your intellectual property rights. Also consider what length of notice period is appropriate if an employee leaves and whether you want the right to place an employee on garden leave during the notice period.
Any obligations which have the effect of restricting competition or limiting people's ability to work are subject to stringent rules, and the courts are often quick to construe them against the person looking to rely on them. For that reason, very often less is more when trying to protect your business through this sort of obligation.