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Barry  Stanton
Barry Stanton,
Protecting your business with restrictive covenants
25 September 2018

Protecting your business from departing employees who want to compete is an important issue that needs to be addressed in an employee’s contract of employment and reviewed when they are promoted to ensure the protection stays in line with the job they are undertaking.

When an employee acts in breach of their restrictive covenants employers can seek an interim injunction to prevent ongoing breaches until trial. Very often a trial never takes place and the matter concludes with the grant of an interim injunction. When deciding whether to grant an injunction the court needs to consider the American Cyanamid principles:

(i) is there a serious issue to be tried?
(ii) would damages be an adequate remedy?
(iii) Where does the balance of convenience lie?
(iv) are there any other special factors to be considered?

The High Court recently considered the basis on which an interim injunction should be granted in Foration Ltd v Acfield and the first question in particular. Three employees of Foration left and joined a competitor. Each of the employees had restrictive covenants in their contracts of employment which included a provision that they would not for 12 months after leaving induce Foration’s customers to transfer their business or accept any business from Foration’s customer. The contract defined Customer as being any potential client with whom they had dealt in the protected period. There was also a covenant preventing them from soliciting other employees to leave.

After the employees left, Foration lost customers to their new employer and Foration, therefore, alleged that the court could infer from this that they had acted in breach of their restrictive covenants and that the new employer had induced them to act in breach. Before the hearing, the defendants argued that the restrictions were unenforceable because customer was not sufficiently limited to those with whom they have had “material” dealings. They also argued that it was unreasonable to prevent dealings with customers of Foration where this took place outside Forations territory. As a result, they argued that there was not a serious issue to be tried and that the injunction should not be granted.

The High Court granted Foration an injunction. When it considered the argument about enforceability it held that this was not a matter to be considered at an interim hearing but at trial and the same was true about territorial scope. There was, therefore, a serious issue to be tried. The reason why customers had left was also a question of fact and needed to be determined at trial.

Interim injunctions can be costly and complex but the granting of an injunction very often brings an end to matters. The Court's reaffirmation of the American Cyanamid principles and in particular the approach to the question of whether there is a serious issue is good news for those seeking to obtain injunctive relief against departing employees.

Businesses should regularly review their employees' contracts and any restrictive covenants to make sure they remain valid. It is also sensible to consider whether they want to deploy other means of protecting their business and the potential costs of doing that against the cost of obtaining an injunction. 

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

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