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Enforcing restrictive covenants in employment contracts: A lesson in timing

As employers get to grips with ‘the great restructure’, Walker Morris Commercial Dispute Resolution experts Gwendoline DaviesNick McQueenRebecca Jackson and Jack Heward consider a recent decision on the enforceability of restrictive covenants in employment contracts and the importance of timing.

Why is Planon Ltd v Gilligan of interest?

This case [1] highlights the importance of moving swiftly when seeking to enforce restrictive covenants in employment contracts. While the Court of Appeal disagreed with the initial judge’s reasoning for refusing Planon’s application to enforce a non-compete provision in Mr Gilligan’s employment contract, it nevertheless dismissed Planon’s appeal. The key reason was timing. By the date of the appeal hearing, Mr Gilligan had already been in his new post for seven months and the period of the restriction only had about four months left to run. It seemed likely that much, if not all, of the damage which Mr Gilligan’s new employment might have caused to Planon’s legitimate interests had already been caused. The balance of convenience pointed firmly away from granting an injunction.

The decision is also of interest for the observations made as to whether damages would be an adequate remedy for the employee in restrictive covenant cases. It was noted, in principle, that restraining an employee from taking up a new employment opportunity for many months may well cause them damage that cannot be compensated in money alone, if it turns out at trial that the covenant is not enforceable.

What happened in the case?

Mr Gilligan was employed by Planon, a company that designs, develops and sells software for managing facilities. His employment contract contained various post-termination restrictions, including a restrictive covenant preventing him from working for a competitor for 12 months. In July 2021 Mr Gilligan gave one month’s notice to terminate his contract and was placed on gardening leave in early August. Shortly afterwards, he started employment with a company described by Planon as a ‘key competitor’. Planon issued a claim form and application notice in October. No statements of case had been served by the time the application was heard by the judge in early November. That was still the position by the time of the appeal hearing, nearly five months later, the parties having agreed a series of extensions to the timetable for service.

The judge refused Planon’s application. The principal factor he took into account against the grant of an injunction was that if the non-compete covenant was enforced, Mr Gilligan would not be able to work for the period of the restraint. The Court of Appeal disagreed with the judge’s approach, finding that he did not expressly apply the right test to the enforceability of the covenant. Among other things, he had wrongly considered the reasonableness of the non-compete clause by reference to Mr Gilligan’s ability to work rather than by reference to Planon’s legitimate business interests.

The Court of Appeal nevertheless went on to dismiss Planon’s appeal, the key reason being delay. Lord Justice Bean said that he was “the last person to encourage the approach of those litigators who fire off several aggressive letters per day, whether seeking to demonstrate their machismo, run up costs or simply batter the opposition into a state of exhaustion” but that Planon’s approach seemed to have “gone too far in the opposite direction”.

On the issue of damages, he said that it was “quite unrealistic” to argue that they would be an adequate remedy if an interim injunction against competition was granted, but was proved at trial to have been an unenforceable restraint of trade. The likely effect of such an injunction would be to deprive Mr Gilligan of his income until and unless he could find a new job.

How we can help

GwendolineNickRebecca and Jack have significant experience and expertise advising on disputes arising from restrictive covenants and confidentiality provisions. Please get in touch if you need advice or assistance.

We’re holding a webinar on Tuesday 21 June at 12pm on ‘Confidential information and departing employees: How to investigate breaches and protect your business’. Click here to sign up.

 

[1] [2022] EWCA Civ 642

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Gwendoline
Davies

Partner

(FCIArb) Head of Commercial Dispute Resolution

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Nick
McQueen

Partner

Dispute Resolution

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Rebecca
Jackson

Senior Associate

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Jack
Heward

Senior Associate

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