Two recent cases have highlighted the importance of properly drafted restrictive covenants. These cases provide a timely reminder that the starting point for restrictive covenants is that they are void as restraints of trade, unless they go no further than is reasonably necessary to protect a legitimate business interest.
Going further than is reasonably necessary
Associated Foreign Exchange Ltd v International Foreign Exchange (UK) Ltd & anor [2010] concerned the attempted enforcement of a 12-month non-solicitation clause.
Facts
Saeed Abbassi was employed by Associated Foreign Exchange Ltd (AFEX) as an accounts executive. He had a modest salary and commission, relatively light working hours and holiday entitlement, a short notice period (of just two months), and could be liable to pay for training courses he attended.
On 24 September 2009, AFEX put Abbassi on garden leave following questions about his client fund management. His employment was terminated on 24 December. Shortly afterwards, Abbassi was employed by one of AFEX’s competitors, International Foreign Exchange (UK) Ltd (IFX). Abbassi’s contract appeared to prevent him from dealing with AFEX’s clients for six months and soliciting clients for 12 months after termination.
Proceedings were brought by AFEX against both IFX and Abbassi, applying for an interim injunction to enforce the non-solicitation covenant.
As there was no prospect of a full trial being heard before the 12-month covenant would have expired, the court had to decide whether AFEX was likely to establish that the non-solicitation covenant was enforceable in considering whether to grant the interim injunction. The six-month non-dealing covenant was not in issue.
Decision
The court decided that AFEX did have legitimate business interests that required protection: a recently departed employee would have knowledge of the most profitable clients, enabling them to be targeted. Indeed, it was common ground between the parties that a non-solicitation clause for six months would be reasonable. The key question for the court was what was a reasonable time during which AFEX would be entitled to protection against solicitation of clients with whom Abbassi had contact and influence during his employment, and who were not bound to AFEX by contract or by stability of association.
The court gave weight to the fact that Abbassi had not held a senior position with AFEX. Further, there was no evidence to demonstrate that Abbassi was frequently involved in projects where he was pivotal or even significant in winning business. The court also acknowledged that the foreign exchange market in which AFEX worked was highly competitive, and that customers were free to (and often did) negotiate with and use whichever broker they wished to for any given transaction.
The court held that given the fast moving nature of the market, AFEX was unlikely to establish at trial that there would be any adverse effect on customer connections if Abbassi solicited clients six months after his departure. Importantly, AFEX failed to demonstrate that it was usual or necessary to take many months to establish a relationship with a new client. The fact that there were one or two exceptions to this general rule was not justification for a non-solicitation clause affecting all clients.
What are you restricting?
Phoenix Partners Group LLP v Asoyag [2010] concerned the attempted enforcement of a six-month non-competition clause.
Facts
Phoenix Partners Group LLP (Phoenix) employed Maurice Asoyag as a financial broker, partly due to his significant client contacts in the Euro Stoxx market, which Phoenix saw as advantageous to its business since it had little pre-existing activity in that market.
On 8 December 2009, Asoyag gave notice to resign. He had accepted an offer of employment as a broker on the Euro Stoxx index with GFI Holding Ltd (GFI).
Asoyag asked Phoenix to release him from various post-termination restrictive covenants, including a six-month non-compete provision and a six-month non-solicitation and non-dealing provision, but Phoenix refused. Nevertheless, Asoyag started working with GFI on the day following the termination of his employment with Phoenix. Phoenix were initially granted an injunction that Asoyag applied to have discharged.
Again, there was no possibility of a full trial taking place before the expiry of the covenants. The High Court, therefore, needed to consider, at this stage, whether or not Phoenix would be likely to succeed in establishing a right to injunctive relief at trial.
Decision
The High Court decided that there was no real issue concerning the enforceability in theory of the restrictive covenants; they were relatively limited in duration and tailored to Asoyag’s particular role. There was some question about the geographical scope of the non-compete clause but this was not an issue.
Having decided the covenants were enforceable, the High Court went on to consider whether or not Asoyag had breached any of them. The non-compete clause prevented Asoyag, for six months, from being involved in:
‘Any part of a trade or business which competes with any part of any trade or business carried on by the Company in which the Employee shall have been actively engaged or involved at any time during the Period.’ (Emphasis added.)
The use of the present tense, ‘competes’ meant that the question of whether Asoyag was actually in breach of the restriction had to be judged as at the date of the alleged breaches.
The evidence presented to the High Court showed that since Asoyag’s departure from Phoenix, Phoenix’s trading activity in the Euro Stoxx market had diminished to such an extent that it could not be held that there was any competition between Phoenix and GFI in this market. The fact that Asoyag’s departure had caused the lack of competition does not appear to have been seen as a relevant factor when interpreting the provision.
Contrary to the evidence provided by Phoenix, the High Court also held that there was no reasonable prospect of such trading being re-established during the period of the restrictive covenants and, therefore, there was no real prospect that Asoyag would be held in breach of the non-compete provision.
Further, the High Court held that Phoenix would be unlikely to be able to establish a breach of the non-solicitation and non-dealing clause, which specified that Asoyag was prevented from soliciting and dealing with any clients and customers of Phoenix ‘in competition with’ Phoenix. As such, Phoenix received no protection from the Court and Asoyag was free to continue to work at GFI.
Conclusion
As is always the case when considering restrictive covenants, the court will be driven by the incumbent facts and circumstances. Every restrictive covenant must be properly tailored after detailed consideration of each employee’s role, responsibilities and seniority. It is also key that the definitions used in creating the restrictive covenants are crafted carefully, so as to properly capture the business that an employer wishes to protect. Phoenix gives some vindication of a tendency on the part of lawyers to scrutinise every word used in restrictive covenants and, particularly as team moves become a more common threat, employers should check their covenants to ensure that they will not be left without a remedy if a whole team leaves them high and dry.
