Mark Shulman, Consultant Solicitor at Keystone Law

**RESTRICTIVE COVENANTS
Can an employee be treated as being on garden leave, even though their employer has not sought to place the employee on such leave? And was a restrictive covenant purporting to prevent the employee from working for a competitor enforceable? These questions were addressed by the High Court in [Ashcourt Rowan Financial Planning Ltd v Hall]()** [2013] EWHC 1185 (QB).

**Background
**The Claimant company (ARFP) belonged to a group of companies whose business was providing financial planning advice. Mr Hall (the Defendant), was an employee of ARFP until 28 March 2013 when his 6 months' notice of resignation expired.

On 11 April 2013 he started to work for Fidelius Limited ("Fidelius"), whose business included the provision of retail financial advice, as well as insurance broking and employee benefit services.

In High Court proceedings, ARFP sought to enforce post-termination covenants against Mr Hall, including seeking an order which would prevent him from working for Fidelius until 28 September 2013.

Mr Hall contended that ARFP were relying on covenants that were already spent and in any case were unreasonable restraints of trade and so unenforceable.

Garden leave
Mr Hall's terms and conditions of employment included the following:-

"14.2 During any period of notice, the Company shall not be under any obligation to provide you with any work and may (without the need to give any reason for so doing) at any time require you to perform:

(a) all of your normal duties; or

(b) part of your normal duties and no others; or

(c) any other such duties as it may reasonably require; or

(d) no duties whatsoever

and it may suspend or exclude you from all or any of its premises and may require you to refrain from contacting or dealing with any customer, clients, suppliers, contacts or staff of the Company or the Syndicate Group of companies ("the Group") in connection with the business of the Company or the Group. You will continue to receive your salary and benefits in full during any such period ("the garden leave period")."

After Mr Hall had resigned, Mr Williams, the company CEO acknowledged the letter of resignation and wrote setting out Mr Hall's "primary duties, tasks and activities" during the period of notice.

Mr Hall wrote acknowledging that "during my garden leave I remain bound by the express terms of the contract and following the termination of my employment will remain bound by clause 23 (Confidential Information)". He stated that the time that he spent "on garden leave" was to be deducted from the period of the restrictive covenants in his employment contract. In a reply dated 10 October 2012 Mr Williams stated that Mr Hall was not placed "on garden leave" and that the period of notice did not reduce the relevant periods of the restrictive covenants. Mr Williams wrote again stating:

"Clause 14.2 of your Terms and Conditions of Employment ("Contract") refers to the steps that the Company may take during your period of notice, which includes suspending and/or excluding you from its offices and from having contact with clients and Company employees during your notice period. As you will accept this is not a step the Company has taken in your case… and the Company has a very clear plan of tasks for you during your notice period. To confirm, therefore you are not currently on garden leave and the restrictions contained in…the Contract will not be reduced by the period of your notice. They will run in full from the date of termination of your employment."

During the High Court hearing the company submitted that, on the proper interpretation of clause 14.2 of the contract, "the garden leave period" applied only if ARFP exercise their right in clause 14.2(d) and required Mr Hall to perform no duties whatsoever.

Mr Hall disputed this interpretation of clause 14.2. He contended that "the garden leave period" attached throughout a period of notice whether ARFP require him to carry out all of his normal duties, some of his normal duties, other duties or no duties at all. He submitted that therefore under his contract of employment the period from 28 September 2012 to 28 March 2013 was a period of garden leave and so was to be deducted from the period of the restrictions.

The court accepted Mr Hall's point that the garden leave provisions in the contract would still apply where the company required him to perform only some of his normal duties. However, on the facts, the company had made it clear through correspondence that it was not putting Mr Hall on garden leave and in fact did not require anything of him that applied under clause 14 of his contract. As the court pointed out "They did not purport to do so, they protested that they were not doing so and they never evinced an intention to do so."

As Mr Hall was not on garden leave at any time before his employment ended, he was not entitled to have any of his notice period deducted from the period of the restrictions.

*Practical tip
*In the present case, the relevant contractual clause applied "during any period of notice" (i.e. whether notice was given by the employer or the employee). It makes sense for an employer to be clear about the arrangements during notice and so a letter of the kind sent by the company to Mr Hall should be considered if the employee is not to be placed on garden leave. Conversely, where garden leave arrangements are to be put in place, it would be prudent to write to the employee confirming details of the arrangements.

Enforceability
The other issue was the enforceability issue, i.e. whether a non-competition clause was enforceable. The relevant clause in Mr Hall's contract provided that:-

"You covenant that you shall not at any time during your employment or for the period of 6 months from the Termination Date without the prior written consent of the Company either alone or jointly with or as employee, manager, officer, director, agent, consultant, contractor or partner of any other person, firm, company or organisation directly or indirectly be engaged or concerned in any business or activity which competes directly with the Business and with which Business you have been concerned in the performance of your duties under these Terms and Conditions during the 12 months immediately preceding the Termination Date."

The relevant legal principles were not in dispute (as drawn together in Brake Bros v Ungless [2004] EWHC 2799). The court found it helpful to adopt the approach explained in TFR Derivatives v Morgan [2005] IRLR 246 by Cox J, who identified four stages in cases of this kind:

(1) Firstly, the court must decide what the covenant means when properly construed.

(2) Secondly, the court will consider whether the former employers have shown on the evidence that they have legitimate business interests requiring protection in relation to the employee's employment.

(3) Thirdly, once the existence of legitimate protectable interests has been established, the covenant must be shown to be no wider than is reasonably necessary of the protection of those interests. Reasonable necessity is to be assessed from the perspective of reasonable persons in the position of the parties as at the date of the contract, having regard to the contractual provisions as a whole and to the factual matrix to which the contract would then realistically have been expected to apply.

(4) Even if the covenant is held to be reasonable, the court will then finally decide whether, as a matter of discretion, the injunctive relief sought should in all the circumstances be granted, having regard, amongst other things, to its reasonableness as at the time of trial.

The court pointed out that there is a well-established difference in the approach to covenants in contracts for sale of assets (which are more readily protected), and those in employment contracts.

Little weight was placed on the provisions of Mr Hall's contract in which he acknowledged that the covenants were "fair and reasonable in the circumstances". As a matter of public policy, covenants in restraint of trade are not enforced if they go beyond what is reasonable between the parties and are injurious to the public interest. Therefore the parties could not agree to prevent or limit the court's enquiry about whether the covenants complied with public policy.

Mr Hall contended that the non-competition covenant was just that - designed to prevent, or at least having the effect of preventing him from working in the business in which he has worked for many years and, having no geographical limits, it would prevent him from doing so anywhere in the UK or beyond. He argued that other provisions of the contract of employment, in particular the obligations of confidentiality and the non-solicitation covenants, provide the protection to which ARFP were properly entitled.

Could ARFP show that the non-competition covenant was no wider than is reasonably necessary to protect ARFP's legitimate interests? No, said the court.

First, the covenant was not defined by whether there was direct competition from Mr Hall in his new employment or from Mr Hall's own "business or activity". The wide words "either alone or jointly with or as employee, manager, officer, director, agent, consultant, contractor or partner of any other person, firm, company or organisation directly or indirectly be engaged or concerned in…", and the looseness of the connection between Mr Hall's own work or activity and the prohibited business and activity meant that the scope of the covenant was too wide. It would prohibit him from being indirectly concerned in the business or activity of a direct competitor, whether or not the work done by Mr Hall or his "activity" itself directly competed.

Thus, the non-competition covenant covered, for example, being indirectly concerned in activities by way of a management role, regulatory compliance, training, research into investment products and other financial instruments and fiscal planning for the competitor business. There was no obvious justification for preventing Mr Hall from working for a competing business in such roles.

Secondly, the potential scope of the covenant was wider than required to protect ARFP's legitimate business interests because of the reference to Mr Hall being concerned with a business or commercial activity at any time or in any way during the last 12 months of his employment. ARFP could have required him to undertake other duties from time to time. Those other duties might have taken him into parts of the business where he was not involved with clients. There was no apparent justification for prohibiting Mr Hall after termination from being similarly engaged or concerned in a competing business or activity (especially if he was concerned in that area only transiently when employed by ARFP).

ARFP had sought to argue that in order for it to protect their business interests, it needed the benefit of covenants that worked in practice and that could be "policed". An area or non-competition covenant might be justified where the interest to be protected is trade secrets or confidential information akin to a trade secret, notwithstanding that there was an obligation present in the contract not to divulge confidential information post-termination
However, the judge (citing Gloster J in the Brake Bros case) emphasised that the courts will scrutinise "with particular care" arguments that seek to justify such restrictive covenants, "enquiring whether a lesser form of restriction (for example a non-solicitation clause) might not give the employer sufficient protection and would be a more proportionate form of embargo than one which bars out competitive employment in the whole of the United Kingdom".

The question whether a covenant can be justified is fact-sensitive. In the present case, given that when the need for "policing" is considered, it was of some significance that if clients of ARFP wish to change their advisers, they would, typically if not invariably, need or at least choose to contact ARFP to request and authorise the release of their information to the new adviser. To that extent ARFP would be alerted to possible misuse of information about their clients. The additional restraints of the non-competition covenant would, if enforced, have prohibited Mr Hall from working in many parts of the financial services industry where, and in ways in which, it could not reasonably be said that ARFP's legitimate interests would or might be compromised.  Balancing these considerations, the court concluded that the non-competition covenant was in restraint of trade and not enforceable.

*Practical tips
*First, in an interesting postscript, the Judge gave a warning to the parties. He pointed out that as things stood, there might be understandable differences between honest witnesses who had seen events from different points of view, and there was no reason to conclude that either has been dishonest in his statements. In these circumstances the Judge saw no reason to refer the litigation to the regulatory authorities (in this case to what is now the FCA), but this would not prevent another judge taking a different view if the case proceeded to trial. Litigators should therefore be aware of the additional potential consequences of a witness's evidence in litigation involving regulatory issues.

Secondly, when drafting restrictive covenants, consideration should be given as to how to address the issue highlighted in the case about working for a competitor in research or other indirect roles. Practitioners may wish to consider limiting the usual form of wording so that only the main or usual duties undertaken by the employee pre-termination would be restricted in any non-competition clause.

**How long is reasonable?
Was a 12-month restrictive covenant enforceable? Yes said the High Court in Romero Insurance Brokers Ltd v Templeton** [2013] EWHC 1198 (QB).

The claimant insurance brokers (Romero) had employed the first defendant (Mr Templeton) as an insurance broker with a view to building their business in his local area. In the eyes of the employer, the appointment was not as successful as they had hoped and they negotiated the defendant's salary downwards. Subsequently Mr Templeton resigned and claimed constructive dismissal while also beginning to work for the second defendant, Eastwood and Partners Limited, (who were joined to the proceedings). Romero sought an injunction preventing Mr Templeton from working with Eastwood.

A key issue was the enforceability of a 12-month covenant in a separate agreement with Romero prohibiting the procuring of orders from entities who had in the 6 months prior to the termination of Mr Templeton's employment done business with or been a client of Romero and with whom Mr Templeton had dealings.

The relevant covenant read:

"The Employee will not for the period of 12 months immediately following the termination of his employment without the prior consent of the Board in connection with the carrying on of any business similar to or in competition with the business of Insurance Brokers/Services on his own behalf or on behalf of any person firm or company directly or indirectly seek to procure orders from or do business with any person firm or company who has at any time in the 6 months immediately preceding such termination done business with or been a customer or client of the Company or any Subsidiaries or Associated Companies and with whom the Employee has had dealings…"

Firstly it was submitted for Mr Templeton that the covenants (which were in an agreement separate from his employment contract) were unsupported by consideration. The court decided that the covenants were part of the package constituting Mr Templeton's contract of employment. They could not be considered in isolation. They were supported by the consideration moving from Romero in the employment contract.

The judge pointed out that there was no dispute between the parties as to the principles to be applied in considering whether the covenant was unenforceable as a restraint of trade. It was for Romero to establish that the covenant was reasonable and that it had a 'protectable interest'. If the restraint was greater than is reasonably necessary to protect that trade connection, it would not be enforced. The only point in issue was whether the period of 12 months was more than was reasonably necessary to protect Romero's business connection with its clients with whom Mr Templeton was dealing. As had been said In Stenhouse Australia Ltd v Phillips [1974] AC 391 by Lord Wilberforce:

"The question is not how long the employee could be expected to enjoy, by virtue of his employment, a competitive edge over others seeking the clients' business. It is, rather, what is a reasonable time during which the employer is entitled to protection against solicitation of clients with whom the employee had contact and influence during employment…"

The court decided that the 12-month restriction was, in the circumstances, reasonable because:

* a restriction of 12 months was a period common in the insurance broking business in contracts with broker employees. Mr Templeton's contract with his previous employer before Romero had had a 12 month non-solicitation provision. His contract with Romero also had one for 12 months. * the imbalance between the period of 6 months as the period within which the client must have "done business with or been a customer or client" of Romero and the period of 12 months chosen as the length of the restriction did not affect enforceability because the periods were fulfilling different functions. Many insurance policies were renewed annually and the renewal date was when a client is most likely to change brokers. If the 6 month period had been set at 12 months, that could be argued to mean that a client with a renewal date towards the start of that period would be protected, looking at it on this basis, for nearly two years – which might have been thought to make the restriction vulnerable. But, if it was only 6 months, such a client might not be protected unless Mr Templeton had dealt with him since the renewal date.  Therefore, the fact that insurances often last for 12 months was relevant. * The legitimate purposes of the covenant here was to give time to Romero to build a connection between clients looked after by Mr Templeton and his replacement and to diminish by the passage of time the strength of the connection between Mr Templeton and the client. The court concluded that it was reasonable for Romero to seek to protect their client connection with a 12-month restriction against solicitation by Mr Templeton in the way Romero did. However, if the clause had been longer it would not have been enforceable.

*Comment
*The case is another timely reminder that when drafting restrictive covenants, it is necessary to fully understand the nature of the client's business and to tailor restrictions to the specific circumstances, rather than to rely upon a boilerplate clause which might be unsuitable when under challenge and subject to judicial scrutiny.

Mark Shulman* is a Consultant Solicitor with Keystone Law and an accredited workplace and employment mediator.
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