The draftsman's tightrope

Restrictive covenants in a contract of employment, that is, provisions which purport to restrict the freedom of the employee to compete with his employer after he has left the employment, will be presumed to be void for illegality.

However, an employer may displace this presumption if he can persuade the court that, judged at the time the contract was made, or the time that the covenants were introduced, they were designed to protect his legitimate interests and that they extended no further than is reasonably necessary to protect those interests (see House of Lords' decisions in Mason v Provident Clothing and Supply Co Ltd [1913] AC 724, and Herbert Morris Ltd v Saxelby [1916] AC 688).

In practice, the majority of disputes about restrictive covenants are effectively disposed of at, or shortly after, the interim application stage. It should be remembered that, while during an interim injunction application questions of fact will not be determined (the low threshold test usually requiring only that there be a serious question to be tried), questions of construction will be determined by the court at that stage unless there are disputed facts bearing on construction.

In determining the proper construction of the restrictive covenants under consideration, the court will adopt a common-sense approach and the draftsman can take comfort from the fact that the court is unlikely to entertain arguments which seek to test covenants to destruction by raising fanciful ways in which the covenant has too wide a purported effect.

It is well established that the court is much more likely to uphold restrictive covenants intended to protect the purchaser of a business from the post-sale activities of the vendor. Equally clear is that the duty of fidelity owed by an employee to his employer gives the latter wider protection than post-termination restrictive covenants, prohibiting the employee from competing with his employer during his employment and from misusing any confidential information. This wider protection, while the employment relationship remains on foot, is worth bearing in mind.

It can be very effective to hold an employee to a fairly generous notice period and to have a provision in the contract of employment enabling the employer to require him to work elsewhere in the business (where he can do less harm) during that period. The use of such provisions means that the employer has the employee where he can watch him and the employee is under stronger restraint than could apply post-employment.

Garden leave

Garden leave provisions are another (but less certain) means of utilising the duty of fidelity to keep the employee under tighter restrictions. However, the period for which the employee can be required not to work for anyone else, and yet be given no work by the employer, should be kept as short as possible, particularly in a case where the employee needs to exercise his skills to keep them up (for instance a skilled tradesman or professional) or where he needs publicity for his effectiveness (such as a performer). It should also be kept in mind that the longer the period of garden leave, the shorter the period of post-termination restriction that will be justifiable.

An ex-employer cannot restrain mere competition by his ex-employee and so the key, when drafting or reviewing restrictive covenants for an employer is 'the identification of some advantage or asset inherent in the business which can properly be regarded as, in a general sense, his property, and which it would be unjust to allow the employee to appropriate for his own purposes, even though he, the employee, may have contributed to its creation' (per Lord Wilberforce in Stenhouse Australia Ltd v Phillips [1974] 1 All ER 117).

While precedents are a useful starting point for ensuring tight definitions and properly limiting the scope and relevance of the restrictions, a 'one size fits all' approach is misconceived and is a common contributory factor in the failure of restrictive covenants at trial.

A full understanding of the nature of the business, the work of the employee and the stability of the customer connection and the workforce, is key to this process. Once this understanding is gained, it is recommended that the draftsman prepare a memorandum summarising these points. It assists in the drafting and will be invaluable in the event that proceedings need to be taken to enforce the covenants. Where an application for interim relief is being made, there will be a need for swift action and this information will assist in the formulation of the claim and of the evidence in support.

While a business that is heavily reliant on passing trade would usually be able to justify the use of an area-based restriction, a company with a stable customer base and long sales cycle would need to rely on non-solicitation and non-dealing covenants whose duration was linked to the nature and length of the sales cycle, the stability of the customer connection and the influence which the employee had over the customers with whom he dealt, or for whom he was responsible.

Non-competition convenant

A company employing a salesperson might well be able to justify the use of a non-competition covenant if, for example, it could be shown that the salesperson had had exposure to sales information so highly confidential as to be the equivalent of a trade secret.

Such information might include records of the needs of customers, their contract renewal dates, the prices they are paying, the discounts that they enjoy and their complaints about the product or service.

A non-competition covenant can be a permissible, and vital, adjunct to a claim for equitable protection of highly confidential information, particularly where the information is hard to identify without compromising it or hard for the employee, however honest and well-intentioned he might be, not to make unconscious use of should he engage in competition.

Once again, the guiding principle is that the covenant goes no further than is reasonably necessary to protect the integrity of the protectable confidential information; it is therefore essential, when drafting such a covenant, to understand the 'shelf life' and nature of the confidential information, the stability of the customer connection, and the duration of the sales cycle.

An employer should be advised of the need to keep restrictive covenants under review, both on a regular cycle and when there are changes to the business or to the employee's work, in order to keep the protection relevant and effective.

The draftsman has to walk a tightrope: in seeking (rightly) to ensure that the purported scope of a restrictive covenant is as narrow as possible, there is a danger of producing a covenant that is so narrow in scope that it is enforceable but it provides such narrow protection as to be useless.

Where there is a form of restriction (including its scope and duration) commonly in use in a particular industry or field, the court will be more likely to hold that such a restriction is enforceable. Conversely, where an employer seeks protection which is wider than that given by covenants that have become standard in the industry, he takes a substantial risk that the court will hold that his covenants are void.

Doctrine of severance

This doctrine should be kept in mind when devising covenants. Severance of unenforceable parts of a covenant is permissible if:

(i) it is possible to remove those parts without the need to add to or to modify the wording of what remains; and

(ii) the words severed must constitute a separate and independent promise and be capable of being severed without the severance affecting the meaning of the part remaining (see Attwood v Lamont [1920] 3 KB 571 (CA) and see also Rex Stewart Jeffries Parker Ginsberg Ltd v Parker [1988] IRLR 483).

It is very doubtful that an express severance provision will improve the prospects of saving a covenant by praying this doctrine in aid and the clauses themselves will need to be drafted in such a way as to permit reliance on severance.

Covenants following an agreed departure

It is increasingly common to see employer and employee entering into an agreement that provides for the employee's departure and for the compromise of statutory employment (and other common law) claims and which require the employee to observe certain restrictive covenants.

The same basic principles apply as those set out above, but here the draftsman has the opportunity of encouraging compliance by the use of financial incentives. In the case of well-paid executives, it is now common to see the payments being staged (or deferred until the end of the period of restriction) and being made conditional on compliance by the executive, backed by a repayment clause to be activated in the event of breach.

There is a real danger of such clauses being held to savour of a penalty and careful thought should be given to whether they can be so tailored as properly to amount to a genuine pre-estimate of the damage caused by breach. In any event, staged payments have the advantage that the employer may choose to wait for the ex-employee to sue for unpaid amounts and to take the risk of a counterclaim (if he can afford to wait), rather than seeking interim relief.

Litigation strategy

Employers will be well advised to adopt a careful litigation strategy, choosing a good test case to take to law to demonstrate to other employees the stress and costs involved in failing to observe the

post-termination restrictions in their contracts of employment. The draftsman's memorandum will be an invaluable aid to assessing whether a given case is suitable to litigate as an example to others.

Where it is important that the ex-employee observe the restrictive covenants in his contract of employment, they should specifically be brought to his attention at the time that he signs his contract. Some employers achieve this by requiring that employees separately sign to indicate acceptance of a loyalty agreement referred to in the main contract of employment.

There is nothing to prevent the employer from including in references for new employers a subtle warning that the employee in question is subject to express restrictive cove- nants. There is also little harm in writing to a departing employee, politely reminding him of his restrictive covenants (preferably, setting them out or supplying a copy), and asking that he give a written undertaking that he will observe them. A wholesale failure to comply can often be the first indication of trouble.

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