Avoiding Problems with Restrictive Covenants
In the case of Rush Hair Ltd v Gibson Forbes & Anor, the High Court has upheld restrictive covenants preventing competition in a geographical area and the solicitation of employees for a period of two years.
The case illustrates some practical points that will be useful to anyone involved in drafting post termination restrictions.
The Facts
In 2008 a limited company owned and controlled by Ms Gibson-Forbes entered into a franchise agreement with Rush Hair. Under the agreement, Ms Gibson-Forbes' company opened and operated a Rush Hair salon in Windsor. Ms Gibson-Forbes was successful and opened two further Rush Hair franchised salons in Maidenhead and Egham, both operated by a second company that she controlled.
In 2015 Rush Hair agreed with Ms Gibson-Forbes to buy the shares in the two companies operating the salons in Windsor, Egham and Maidenhead. The parties entered into a share purchase agreement (SPA) which contained restrictive covenants preventing Ms Gibson-Forbes from soliciting various named members of staff and opening a competing business within two miles of the existing salons for a period of two years.
The restrictions applied to Ms Gibson-Forbes herself, not any limited company she may operate through. They also applied for a very long period of time (two years). Restrictions contained in employment contracts rarely exceed 12 months.
Ms Gibson-Forbes set up a competing business and hired some named staff in breach of the restrictions. The competing business was operated by a limited company, not Ms Gibson-Forbes herself. Rush Hair issued legal proceedings.
The High Court decided that the restrictions were enforceable. In terms of the two year period, the court made it clear that a less rigorous approach applies to restrictions contained in a share purchase agreement (ie. between vendor and purchaser) when compared to restrictions in a contract of employment (between employer and employee).
In terms of the restriction only applying to Ms Gibson-Forbes, and not any limited company she operated through, the court interpreted the wording widely, pointing out that Ms Gibson-Forbes was well known to operate her businesses via limited companies and the restriction would have no real commercial application if given a narrow interpretation.
Best Practice
Whilst the facts of the case are complicated, two key lessons emerge. First, try and make sure that the wording of any restriction addresses the specific business interests you are trying to protect. In this case, the express wording of the restrictions only referred to Ms Gibson-Forbes when it was well known she operated her businesses through limited companies. Whilst the restriction was upheld in the end, a lot of uncertainty could have been avoided with some simple additional wording at the outset.
Secondly, 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 will not be enforceable. In terms of employer/employee restrictions, it would be rare to try and restrict an individual's activities for more than 12 months.