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The High Court rejects 10-year non-compete clause, ruling it overly broad and unenforceable. A key lesson for employers on reasonable restrictive covenants.
28 August 2024
Case Study
The High Court has recently dismissed an application made by Literacy Capital Plc (the claimant) for an interim injunction against Vanessa Jane Webb (the defendant). The purpose of the injunction was to stop the defendant from competing with the claimant’s subsidiaries.
The claimant, through its subsidiaries, acquired the defendant’s 25% shareholding in Mountain Healthcare Ltd. In 2021, the defendant resigned from Mountain Healthcare Ltd, renegotiated the share sale and entered into a new investment agreement.
Restrictive covenants in the investment agreement stipulated that the defendant could not compete with any business of the claimant’s subsidiaries within a) 12 months of her ceasing to be a director/employee of the subsidiaries, and b) the period starting with the date she became a loan note holder and ending 12 months after she stops being a loan note holder. This period of time could last a maximum of 10 years.
The claimant’s application for an interim injunction relied on part b of the restrictive covenants.
Case Study
The Court ruled that the claimant failed to provide any evidence to justify the need for a 10-year restrictive covenant. It referred to the 12-month restrictive covenant (part a) would have been reasonable because it arose as a result of the defendant’s status as founding director.
In addition, the Court ruled that the claimant failed to provide any evidence to justify the nationwide scope of the 10-year restrictive covenant. The claimant’s assertion that it had nationwide ambition was not sufficient to justify the covenant.
On the question of whether the restrictive covenants were void, the Court held that the scope went far beyond the core of Mountain Healthcare Ltd’s services and, therefore, reached far beyond any legitimate protectable interest. In particular, the 10-year duration went far past the duration allowed in ex-employee cases and in sale of business cases.
The Court continued that the covenants could not be severed in any simple or clean way to make them legally enforceable. There was no way of interpreting them which resolved their overly long duration or their overly wide geographical scope.
As a result, the restrictive covenants were void and unenforceable.
This case should serve as a cautionary tale for employers, business owners and their advisers. Even where the restrictive covenant is negotiated as part of a commercial agreement, the Court will still apply restraint of trade law if it thinks the restrictive covenants are connected with the individual’s status as an employee.
In addition, there was no way for the Court to sever the covenants so that they might be enforceable. The Court could not, for example, substitute a time period which it felt would have been reasonable in the circumstances. Therefore, in this scenario, the claimant would have been better protected by agreeing to more realistic and less ambitious restrictive covenants when it negotiated the commercial agreements. The alternative, as it has been found out, is no protection at all.
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