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The High Court has enforced a 12 month non-compete restriction and provided a helpful reminder of the importance of careful drafting when dealing with restrictive covenants.
28 March 2022
Case Study
In the recent High Court case of Law By Design Ltd -v- Ali, the High Court has provided a useful reminder of the importance of careful drafting when it comes to legally enforceable restrictive covenants.
In 2013, Ms Ali began employment with Law By Design Ltd (LBD), a boutique employment law firm working predominantly with NHS clients. Three years later, Ms Ali entered into a shareholders’ agreement that included restrictive covenants stating that she “could not be engaged, concerned or interested in, or assist, a business which competes directly or indirectly with a business of the Company in an area in which Law By Design had operated in the previous 12 months”.
Sometime later, in 2021, in order to secure her employment with LBD, Ms Ali entered into a service agreement that resulted in a substantial pay rise to reflect her focus on the firm’s NHS clients.
It also included a restriction preventing her from working for any “business that competed with those parts of the Company with which the Employee was involved to a material extent in the 12 months before Termination” for 12 months after her employment ended. Three months after entering into the service agreement, Ms Ali resigned to join another firm who dealt with NHS clients.
Case Study
The High Court held that LBD had a legitimate business interest to protect, that being “the customer connections built up by employees providing legal services to NHS clients”.
The court went on to confirm that the service agreement was drafted in such a way that meant it was “an uncomplicated conclusion to reach that this covenant extended no wider than was reasonably necessary” for the protection of LBD’s legitimate business interests.
Critically, the definition of restricted business was drafted in such a way that limited the restriction to the parts of LBD that Ms Ali had recently been involved with to a material extent prior to her departure from the firm.
This ensured that the restriction was reasonable in its scope, went only so far as was reasonably necessary to protect LBD, and was subsequently enforceable.
The High Court also held that 12 months was a reasonable period for the restriction to last, finding that a year was “reasonably necessary in order to find, successfully recruit and then train/integrate a lawyer in a small firm such as Law By Design” and that a year was also the “shelf life of the confidential information and Ms Ali’s ability to remember it”.
The High Court paid particular attention to the circumstances of Ms Ali’s departure, specifically considering a business plan that Ms Ali presented to her new employer, describing it as “revelatory” of Ms Ali’s true intentions when leaving LBD.
It was clear, they said, that unless the restrictive covenants were enforceable, she intended to move clients from LBD to her new firm. The court took the view that enforcing the non-compete clause in the service agreement was a necessary solution to protect LBD’s legitimate business interests.
By contrast, the court found that the equivalent clause in the shareholders agreement was unenforceable as it was too wide in scope to be reasonably necessary to protect LBD’s legitimate business interests. The drafting of that clause would have prevented Ms Ali’s involvement in any other business which competed, directly or indirectly, with any part of LBD’s business regardless of whether Ms Ali had been materially involved with that part of the business.
This case serves to remind employers of how important it is to draft restrictive covenants in employment contracts, service agreements or shareholder agreements carefully to ensure they go only so far as is reasonable to protect legitimate business interests.
Clearly defining terms that take into account the specific circumstances of the particular employee’s employment and their level of involvement with the organisation, will assist employers if they later try to rely on restrictions to protect their interests.
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