Restrictive covenants clauses: consistency is the key
Restrictive covenants in employment contracts are a bit like lifejackets: it’s nice to have them there and you hope that they will fit you in an emergency but you would really prefer not to have to use them. That said, if the time comes and your employees are approached by a competitor in breach of those restrictions, you want to be able to put a stop to it.
Utilitywise Plc – v – Northern Gas & Power Ltd & Ors
Last month saw a powerful illustration that covenants, like lifejackets, have their limitations. When Northern Gas & Power approached some 75 of Utilitywise’s employees, Utilitywise decided that the best way to prevent a mass exodus of staff would be to apply for an interim injunction against its competitor to prevent alleged breach of non-competition clauses in some of their employees’ contracts. This seemed to it to be a logical approach, rather than trying to enforce against an ever-increasing number of individual employees. Utilitywise maintained that Norther Gas & Power had “lured” its employees away using predatory tactics which amounted to inducing them to breach those clauses.
It’s widely understood that restrictive covenants are often struck out for being too wide. However, in this case the High Court found that this wasn’t a problem. Utilitywise was therefore over the obvious hurdle. The Court also found that it had a strong prima facie claim against NGP and that NGP indeed had used underhand tactics to steal Utilitywise’s employees. Unfortunately for Utilitywise, however, that still didn’t get it home.
The Court’s first issue was that Utilitywise’s employment contracts were inconsistent; they didn’t all contain non-compete clauses and those that did varied in terms from one to another. As such, it refused to grant the interim blanket order because it would lead to too much uncertainty. Northern Gas & Power wouldn’t know which employees had the clause in their contract and which ones didn’t (it said, anyway), and so would unwittingly be putting itself at risk of breaching the order. It would mean that NGP would be prevented from taking even those Utilitywise staff who had no non-competition wording in their contract and/or those who could probably argue that the inconsistencies in wording with their peers’ contracts rendered their own covenants unenforceable.
The second limb to the Court’s decision was that it simply wasn’t fair that the employees were excluded from the hearing and so denied a voice in the matter. Utilitywise should instead have taken action against individual employees who were looking to breach their employment contract, so that the case could be fought out between the contracting parties on the specific terms of the restriction relied upon for each individual.
Lessons for employers:
- Ensure a consistent approach to the drafting and inclusion of restrictive covenants in your employment contracts. This was a massive sticking point in this case and one that the High Court couldn’t get past.
- But remember that consistency doesn’t mean sticking the same non-competition wording on everyone regardless of their seniority or role. Differentiation between different roles is good but discrepancies between people in the same role is not. Start from the basis that covenants which are wider than reasonably necessary will be void. If someone far senior to me has the same length of restriction, I can easily argue that at my more junior level, mine must be too long. Similarly if I have a six month restraint and someone else doing effectively the same job has three, I can make the same argument.
- Be prepared! Interim injunction orders are always a last minute scramble: the more employers are prepared in advance for these events, the easier that process will be and the more chance of success it will have.
- In a collective case like this, look for the “recruiting sergeant”. Seventy-five people don’t decide to leave together without some internal marshalling, encouragement and communication. If you can find who was doing that then you may have some claim against the new employer for inducing that employee to act in breach of his contractual duties to you.
This post was written by Melissa Dunn.