3rd August 2022
Gwendoline Davies, Nick McQueen and Jack Heward from our Commercial Dispute Resolution team, and Simon Cuerden from our Corporate team, consider a recent decision on enforcing non-compete restrictive covenants in business sale agreements and the courts’ approach.
This follows our earlier briefing looking at recent statistics that support the continuing trend of ‘The Great Resignation’.
This decision  provides a clear and helpful reminder of the principles the courts will apply when considering the enforceability of a non-compete restrictive covenant in a business sale agreement.
One aspect of the case concerned the alleged breach of this type of covenant in a sale and purchase agreement (SPA). The defendant was a shareholder of the companies purchased by the claimant under the SPA and was a party to the SPA. The court agreed that some of the defendant’s objections to the wording of the covenant raised serious concerns.
Among other things, the clause in question prohibited solicitation or hiring of any employee or consultant of the companies and/or the claimant purchaser, at any date during the currency of the covenant. The defendant argued that there was no limitation on the seniority of those employees or consultants, nor any requirement that they held any confidential information. The employee or consultant could have been recruited after the date of the SPA, and after termination of the defendant’s relationship with the claimant. The defendant need not even have known that the individual was an employee or consultant of the claimant to fall foul of the prohibition.
The defendant also objected to the five-year period of the restriction and the fact that it applied to every element of the clause. In respect of the length of protection required, the claimant made no attempt to distinguish between less invasive elements such as non-interference with clients and non-poaching of employees and the more invasive bare and broad non-compete provision.
The court was not persuaded that the claimant had discharged the burden of showing that the clause was reasonable. A covenant lasting as long as five years was a serious imposition requiring specific justification. The same applied to the potential application of the clause to employees or consultants however insignificant their role and even if they joined the business after the sale.
The key message? While it was possible to save the covenant by more radical ‘blue-pencilling’ than had been suggested by the claimant, it was not the court’s function to seek to rescue a covenant, or parts of it, in ways which had not been put forward by the party relying on the clause and which had not been the subject of argument (still less of evidence). The ‘blue pencil test’ is where an unenforceable provision can be removed without needing to add to or modify the rest of the wording.
The court highlighted the following from case law:
Our team of specialist lawyers is experienced in successfully advising clients throughout the entire process of business protection from drafting restrictive covenants and obtaining interim injunctions through to enforcing injunctions and taking matters to trial. Our lawyers understand the process and recognise that each situation has its own specific circumstances and commercial realities. They have the experience to be able to discuss the various options with you and the likely outcomes.
…our recent webinars as part of our Restrictive Covenant and Confidential Information series?
…our upcoming webinar (scheduled to take place later this year) which forms the next part of this series.
Details to follow but please feel free to email us to register your interest.
 Ivy Technology Ltd v Martin & Anor  EWHC 1218 (Comm)
(FCIArb) Head of Commercial Dispute Resolution