It is standard practice to include restrictive covenants in employment contracts, especially in the case of senior employees, to prevent them from soliciting clients when their employment terminates. Restrictive covenants can amount to an unlawful restraint of trade and thus be void. Such clauses in contracts are only enforceable if they go no further than is necessary to protect legitimate business interests of the party seeking to enforce them.
A recent case in the Mercantile Court reinforces some of the difficulties in drafting restrictive covenants and ensuring that they do not run the risk of being found to be too wide to be enforceable. In Safetynet Security Ltd v Coppage and Another, the Mercantile Court had to consider whether a non-solicitation clause that prevented an employee from soliciting any individual or organisation who had been a customer of the company during his employment for a period of 6 months, was enforceable.
Mr Coppage was employed as the Business Development Director of Safetynet, which was a small business providing security services. Earlier this year Safetynet commenced a redundancy consultation and Mr Coppage was at risk of redundancy. Before the completion of the company’s redundancy process, Mr Coppage resigned. The day following his resignation, a new security company was incorporated under the name of Freedom Security Solutions Ltd and shortly afterwards 5% of Safetynet’s clients transferred their work to this new company.
Safetynet brought a claim against Mr Coppage for breach of his non-solicitation obligations, alleging that he was the controlling mind behind Freedom Security Solutions Ltd. Mr Coppage argued that the restriction on soliciting any customer was too wide and thus made the non-solicitation clause unenforceable.
Generally, restrictive covenants on non-solicitation are limited to clients with whom an employee had contact during a specified period of time before termination as opposed to all clients of a business. However, in this case the court concluded that, given Mr Coppage’s seniority in the business and his pivotal role as the “face of the business”, the restriction on preventing Mr Coppage from soliciting all customers was reasonable and therefore enforceable.
In determining whether a non-solicitation clause is reasonable, the court set out the following guiding principles:
- The court should consider the construction of the clause for its pure meaning.
- The court should consider the object of the restraint, for instance the protection of the employer’s client base and goodwill.
- Finally, the court must construe the clause in context and have regard to the factual matrix at the date on which the contract was made.
The case will be welcomed by many small businesses. However, it must be stressed that you cannot have a one clause fits all when imposing post-termination obligations on employees. While it may not be reasonable to extend restrictions on soliciting all clients of a business on junior employees or employees within larger organisations, in some cases where (as in the case of Safetynet) you operate a small business and the employee concerned is the “face of the business”, such restrictions may be reasonable to protect the legitimate interests of the business. As the case of Safetynet highlights, the enforceability of a restrictive covenant is dependent not only on the drafting of the clause but also on the factual context at the time of drafting.
Employers should regularly review restrictive covenants to see if they need to be updated so that they properly reflect an employee’s role in the business, for instance where an employee has been promoted to a more senior role, and to ensure that they go no further than is necessary to protect legitimate business interests.