Why prompt action is vital if an employee breaches a restrictive covenant
Restrictive covenants are clauses in employment contracts which restrict what an employee can do after employment has ended. Restrictive covenants will be void – and unenforceable by the employer – for being in restraint of trade, unless the employer can show it has a legitimate business interest to protect and the clause goes no further than is reasonably necessary to protect it. If an employer thinks that an employee is acting in breach of a restrictive covenant, they can apply to the court for an interim injunction to stop the employee’s activities, pending a full trial in which it will be decided if the clause is enforceable. The court will consider the strength of the employer’s case, whether damages (compensation) would be an adequate and appropriate remedy, the ‘balance of convenience’ between the parties in relation to an injunction and whether the ‘status quo’ should be maintained pending a trial.
In Planon v Gilligan, the Court of Appeal analysed the test which the court must apply when deciding whether to issue an interim injunction. Mr Gilligan was employed by Planon as a Sales Manager. His employment contract contained a clause which prevented him from working for a competitor for a period of 12 months following termination of his employment. In July 2021 he resigned but refused to tell Planon who he was going to work for. On 1 September, he started working for a competitor, which Planon discovered the next day. A few weeks later, Planon sent a letter before action. A month after that Planon lodged a claim and made an application for an interim injunction. A hearing took place on 5 November 2021. The High Court judge refused to grant the interim injunction, for the following reasons:
- Planon had overstated the effect of Mr Gilligan’s move to its competitor. Mr Gilligan had no intention of trying to do anything against Planon’s business interests and had told the competitor about the restrictive covenants
- The restrictive covenant was an unreasonable restraint of trade and went further than was reasonably necessary to protect Planon’s legitimate business interests; it would make it very difficult for Mr Gilligan to work for anyone in the industry for 12 months, and it would be very difficult for him to transfer to another industry to find alternative work.
- Mr Gilligan and his family would suffer disproportionate harm if he was compelled to stop working for 12 months.
- Damages might not be an adequate remedy for Planon and there was also a risk that Mr Gilligan would not have the means to pay the award of damages. Likewise, if an injunction was wrongly granted, it might be difficult to adequately compensate Mr Gilligan for the losses he suffered.
Planon appealed to the Court of Appeal. The appeal was dismissed (so Planon didn’t get their injunction) but the reasons given by this court differed from the High Court. The High Court judge had applied the test for assessing the reasonableness of the restrictive covenant incorrectly. The judge had focused solely on the impact that it would have on Mr Gilligan’s employment prospects.
By the time of the hearing, Mr Gilligan had been employed by Planon’s competitor for 7 months and this delay was fundamental to the court’s decision not to grant an injunction. One Court of Appeal judge said that even if the clause were enforceable in theory, the delay meant that it would not now be appropriate to grant the injunction, because the damage was already done. Another judge said the damage would have been done in the first few days and certainly well before the High Court hearing, such that refusal of the injunction was reasonable at the first hearing. The Court of Appeal said the High Court had also been entitled to decide that damages would not adequately compensate Mr Gilligan should it be found after issuing the injunction, that the restrictive covenant was unenforceable. One judge noted that unless an employee was independently wealthy, or the employer had offered to put the employee on paid garden leave for the whole period of restraint, damages would not be adequate as a remedy, especially if the employee has a mortgage and a family to support.
This case shows how important it is to take prompt action when applying for an injunction in cases where restrictive covenants are alleged to have been breached. The Court of Appeal noted that the damage is often done within the first few days of the new employment. Courts may therefore be minded to leave well alone if employers delay too long, and the damage has already been done by the time the matter gets to court. It is also important to ensure that covenants are only as wide, and last for as long, as necessary to protect business interests to maximise the chances of them being enforced.
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