When can post-termination restrictions be enforced?

By Jennifer Van Dale, Solicitor, Baker & McKenzie

Article exclusively contributed by Baker & McKenzie

Cathy worked as an estate agent for the ABC Real Estate Agency in Tsim Sha Tsui ("ABC"). Her contract stated that she could not work in the same capacity for any other real estate agency in the same district for three months after her employment ended. It also stated that she agreed not to solicit any of her current employer's clients for a period of six months after she left. The contract provided that these restrictions were necessary to protect ABC from unfair competition and the misuse of its confidential information by ex-employees.

Cathy worked very successfully for a few years but was then offered a better salary package by a rival real estate agency in Tsim Sha Tsui ("XYZ"). She resigned from ABC and joined XYZ two weeks later.

ABC sued Cathy on the grounds that she was in breach of her contract. In particular, they cited the covenant about not joining another nearby agency within three months of leaving. Cathy did not dispute that she had joined a real estate agency to work as an estate agent and had done so within 12 weeks of resigning from ABC. She did dispute, however, that she was in breach on the basis that there was no evidence that her former employer was at risk from unfair competition or the misuse of its confidential information. These were the interests that ABC sought to protect under the terms of the contract.

This case is very similar to that of Countrywide Assured Financial Services Limited v Smart & Pollard, which was heard in the UK. In that case, Mr Pollard had worked as a mortgage consultant for Countrywide from December 2001 until early 2004 and was regarded as extremely successful. He received an offer of better terms from a rival company ("Parkers") in the same area and asked Countrywide to match the offer. When they refused to do so, he resigned and joined Parkers.

Mr Pollard's original contract stated that he would not work as a mortgage consultant for three months within a three-mile radius of his previous place of employment. Countrywide claimed that he was in breach of this term. A second restriction, which prevented him from soliciting Countrywide's clients for a period of six months, was not in dispute.

The High Court held that it was a basic principle of law that a covenant in restraint of trade is invalid as a matter of public policy unless the employer can justify the restraint. The court also summarised that the key requirements were that the covenant:
(i) is reasonable in the interest of the contracting parties and the public;
(ii) protects some identifiable proprietary interest of the employer, such as trade secrets or trade connections; and
(iii) imposes a restriction which is no greater than reasonably necessary.

The issue was whether Mr Pollard's contract met requirement (ii). The contract stated that the purpose of the covenant was to allow Countrywide to "protect itself from unfair competition and from misuse of confidential information by former employees". In court, however, Countrywide argued that they also wished to protect their client base and the goodwill generated by Mr Pollard's work.

The court rejected the argument that Countrywide had any right to enforce the first restriction in order to protect its goodwill or client base. That was the purpose of the second restriction, and it was already established that there was no risk of Mr Pollard breaching that covenant.

In rejecting the claim, the court reiterated the principle that "where the employer ... chooses specifically to state the interest of the employer which the covenant is intended to protect, the employer is not ... entitled thereafter to seek to justify the covenant by reference to some separate and additional interest which has not been specified". As the contract did not mention goodwill, Countrywide was not entitled to use the restriction to seek to protect that.

In Cathy's case, the contract provided that the restrictions were necessary to protect ABC from unfair competition and misuse of its confidential information by ex-employees. In order to enforce the restrictions, ABC would be required to show that there is a real risk of unfair competition or that Cathy will misuse confidential information.

The lesson for employers is to ensure that they clearly and correctly identify the proprietary interest which they wish to protect when drafting a restrictive covenant.

Q&A on restrictive covenants in employment contracts
Q1 What if the contract does not state the purpose of the restrictive covenant?
A1 In the Countrywide case, the court held that in the event of a dispute, "the court is ... entitled to look at the wording of the contract and the surrounding circumstances for the purpose of ascertaining that interest, by reference to what would, objectively, appear to have been the intention of the parties".

Q2 Is a restraint of trade clause necessary during the course of employment?
A2 During the course of employment, employees have implied duties of fidelity, trust and confidence. If the employee competes with his or her employer, this will be in breach of contract even if there is no express obligation not to compete.

Taken from Career Times 29 April 2005

(Last review date: 23 August 2013)

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Disclaimer: The opinions expressed in this article are those of the contributor

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