The stolen customer: Restrictive covenants and the importance of getting it right
Richard Baker Harrison Limited ("RBH") is a leading distributor of minerals and chemical raw materials which it supplies to manufacturers worldwide. A year before they resigned, former RBH employees, Mark Brooks and Andrew Sambrook, – "the defendants" – established SBS Sourcing Limited ("SBS"), also a mineral sourcing and supply services business.
RBH had fostered a number of strong supplier relationships, including a longstanding relationship with Hoffmann Minerals GmbH ("Hoffmann"): a one-of-a-kind producer in the marketplace. The defendants had developed a plan to win the Hoffmann contract and even contacted Hoffmann directly to offer their services under SBS.
RBH alleged that the defendants were in breach of their contractual obligations on the basis that SBS was set up as a competitor and sought to transfer business away from RBH. A claim was subsequently brought by RBH against its former employees to enforce their obligations of non-competition, confidentiality, and post-termination restrictions.
What are restrictive covenants and why should you include them in an employment contract?
Restrictive covenants are designed to limit or restrict the activity of a former employee once their employment with you terminates. Including them in an employment contract can help protect your legitimate business interests (e.g., protection of confidential information), provided they are reasonable.
What are the different types of restrictive covenants in an employment contract?
There are 4 main types of restrictive covenants which are seen in employment contracts:
- Non-solicitation clauses: prevent former employees from actively contacting your clients/customers.
- Non-poaching and non-employment covenants: prevent former employees from poaching or employing other members of staff after they leave.
- Non-compete clauses: prevent former employees from joining a rival employer or setting up their own business in direct competition for a defined period after termination.
- Non-dealing clauses: prevent former employees from providing services/goods you provide to customers without any active steps being taken.
Are restrictive covenants legally binding?
Restrictive covenants can be legally binding provided that they are not void for being in restraint of trade and contrary to public policy. Any restriction imposed on your employee(s) must therefore be necessary to protect your legitimate business interest i.e., your confidential information, trade secrets or contacts. Restrictions wider than necessary may be considered unenforceable.
What can you do if a former employee breaches their post termination obligations?
Provided that the restrictive covenant is enforceable, you have a number of enforcement options with the most common being:
- Undertakings: the former employee can offer undertakings to observe their contractual restrictions pending a speedy trial. This can be relied on to secure short-term protection without incurring the costs of going to court.
- Damages: where financial compensation is an adequate remedy for your losses then the court is unlikely to grant an injunction and instead damages may be awarded. However, in most cases, damages do not adequately compensate a claimant employer.
- Injunction: a court can grant injunctions as either interim relief (prior to or during proceedings) or final relief (referred to as a "permanent" injunction).
- Action against third parties: you could act against a third party that has benefitted from your former employee's breach, such as:
- Your former employee's new employer.
- A recipient of confidential information belonging to you.
- Where your former employer has set up a competing business, the funders of such business.
Decision in RBH
RBH's claim in relation to liability and enforceability of the restrictive covenants succeeded in its entirety. The High Court considered the various duties and obligations owed by the defendants, including the exclusive and longstanding relationship RBH had established with Hoffmann and found that, in addition to breaching their implied term of good faith and fidelity, Mark Brooks had also breached his implied term of mutual trust and confidence.
Key take away for employers
Whilst the decision in this case is welcomed by employers trying to enforce their restrictive covenants, it is another example of the importance of such restraints being valid, enforceable, and reasonable. If the court rejects the restraints, the outcome for employers can be detrimental – we recommend seeking legal advice where there is any uncertainty on the validity of such restraints.