When it comes to both employment and commercial contracts, restrictive covenants – if carefully drafted and deemed valid and enforceable by the courts, should a dispute reach litigation stage – can be vital and useful tools in protecting the interests of your business. But why might you be inclined to include restrictive covenants in your agreements, and what steps can you take if you suspect a breach?
We’ve put together this guide to cover the following topics:
- What is a restrictive covenant?
- How and why would a business use a restrictive covenant?
- Common ways restrictive covenants might be breached and how this can affect your business
- Establishing if a restrictive covenant has been breached & evidence gathering
- Rectifying a breach of restrictive covenant
- Summary
What is a restrictive covenant?
Broadly speaking, restrictive covenants are terms which are inserted into a contract with a view to preventing one party from carrying out a defined act. More specifically, in the context of commercial and employment contracts, this can be elaborated upon as follows:
Commercial contracts
The main aim of a restrictive covenant in a commercial contract is to prevent the contracting party from undertaking specific commercial activities that they would otherwise be at liberty to undertake.
Employment contracts
Used in this context, restrictive covenants are also prohibitory in nature, i.e. to prevent an employee or former employee from engaging in certain activities.
How and why would a business use a restrictive covenant?
As a rule of thumb, it’s worth considering having properly drawn up contracts that include appropriate restrictive covenants when it comes to employee and commercial matters, no matter how small your business is. It’s sensible to have all your contracts drafted and/or checked by a lawyer experienced in the area to which the contract relates, as having the right contractual terms drafted in the correct way from the outset can make a world of difference as to whether they are deemed enforceable by the courts, should a dispute get to that stage.
Restrictive covenants in employment contracts
When it comes to employment contracts, a good set of post-termination restrictions is vital to legitimately protect your company’s interests. For example, to discourage employees from setting up their own business in direct competition with yours, or to prevent them from taking crucial information about your clients, your business model or your services to a competitor.
For more information as to why you ought to include restrictive covenants in your employment contracts, see our detailed guide to restrictive covenants in employment law.
Restrictive covenants in commercial contracts
In relation to commercial contracts, the aim of restrictive covenants is again with a view to protecting legitimate business interests in a variety of scenarios, for example, supply chain agreements, joint venture agreements and the sale of a company or business. Falling under the umbrella of ‘legitimate business interests’ in this context, an example would be a business requiring protection in circumstances where a party has access to confidential industry information, clients, contacts, the workforce and supply chains.
Enforcing restrictive covenants in contracts and the burden of proof
Whilst our detailed guides to restrictive covenants in employment law and restrictive covenants in commercial contracts go into the enforceability of these covenants in greater depth and discuss the length of time they can feasibly remain in place, the key takeaway for the purposes of this article is the fact that the courts will consider the reasonableness of a given restrictive covenant within the context of each individual dispute. A balancing act will also be performed between the parties’ interests when assessing whether it’s enforceable.
This again goes to the very heart of the importance of ensuring that your restrictive covenants and contracts are drafted properly to ensure that they are worth the paper that they’re written on – thereby reducing your financial outlay in the long run if a dispute arises.
One final and interesting point of note here is that in commercial contracts, the burden of proving that a restrictive covenant is reasonable is less onerous than a restriction contained in an employment contract.
Common ways restrictive covenants might be breached and how this can affect your business
Employment contracts: typical breaches
Restrictive covenants in employment contracts are designed with the purpose of minimising the risk of the following situations arising. So, it’s worth thinking strategically as to whether any of the following examples might become – or have been in the past – a reality for your business:
- A former employee actively contacts your existing customers or clients, possibly to persuade them to change the way they deal with your business. This is particularly risky when your former employee was in a role that had significant contact with or influence over that customer, and can result in a loss of trade if the customer is persuaded to go elsewhere/dissuaded from continuing its relationship with your company for some reason.
- An ex-employee poaches other members of your workforce after leaving the company, thus destabilising your workforce.
- A former employee provides the same services or goods to a customer that your business previously provided, resulting in loss of trade.
- An ex-employee joins a competitor, or immediately sets up their own business that directly completes with yours. Again, the result is a potential loss of trade and income.
Commercial contracts: typical breaches
There are some overlapping themes when it comes to the types of restrictive covenants that can be found in commercial contracts as can be found in employment contracts. For example, non-compete clauses and non-poaching clauses. Scenarios of where they might be necessary are as follows:
- A party to a business agreement tries to canvass, solicit or entice your company’s customers or members of your existing workforce with a view to diverting or employing them elsewhere.
- An existing supplier is approached and persuaded to stop trading with your company, thus disrupting supply chains.
- Commercially sensitive information is stolen by a party to a business agreement (such as trade secrets, inventions and other key information that would cultivate that party a competitive advantage in the market), which ultimately results in disruption to your business and your profits.
All too often, our commercial and employment lawyers see companies where their founders have invested a significant amount of time, money and effort into starting up, only to become unstuck because the right contractual clauses weren’t included in their business and employment contracts. The above examples are all illustrative of how catastrophic the consequences in terms of loss of trade and potential damage to reputation can be if the right advice isn’t taken in early course – and constantly updated and refreshed in the face of the ever-changing landscape of the world of commerce.
Establishing if a restrictive covenant has been breached & evidence gathering
One thing you might be wondering is what, in practical terms, is possible if you suspect that a restrictive covenant has been breached by a former employee or party to a commercial contract.
Steps you can take (dependant on the exact nature of your situation) to establish a breach can include:
- Checking company emails, files and mobile phone records for any evidence of the breach suspected. This might include conversations with existing members of the workforce or customers that are evidenced by way of these communications, emails forwarded on to third parties or personal email addresses.
- Checking for downloads made to a USB or other device by the former employee (speak to a computer expert if in doubt about the best way to go about these checks).
- Interviewing members of the existing workforce and speak to existing customers or clients who you have grounds to believe may have been approached, keeping a written record of all such conversations.
- Monitoring social media for clues: this includes LinkedIn, Facebook, Instagram and other popular social media platforms.
Rectifying a breach of restrictive covenant
The most important points to make here are that it’s imperative to act without delay if you suspect that a restrictive covenant has been breached – along with the necessity to realistically assess the impact upon your business and the loss that already has been and is likely to be sustained.
There are a variety of steps that can be taken if a breach of a restrictive covenant is brought to light, including applying for an interim injunction, seeking damages, taking action for breach of contract against a third party or seeking an undertaking from the court. For a detailed discussion of each of the remedies available for breach in an employment contract, please see our guide to restrictive covenants in employment law. Similarly, for the remedies available for the breach of a commercial contract, see our article on how to use restrictive covenants in commercial contracts.
Summary
Whether in commercial contracts or in employment contracts, restrictive covenants can offer helpful protection for your business. If you do think your business could benefit from restrictive covenants in either of these areas our employment solicitors can help you to draft effective covenants and advise you on whether they may have been breached and on enforcement methods where they have.
