Enforceability of Restrictive Covenants in Commercial Agreements
Although restrictive agreements are most often found in employment contracts, they can be included in various other types of agreements. Examples include share allocation agreements, termination agreements or shareholder agreements. The latter is remarkable. Shareholders are usually key employees who are familiar with the company`s confidential information and business plans. Non-compete obligations in shareholder agreements protect all shareholders by preventing the owners of the company from using inside information to create or join a competing company for an unfair advantage. A recent Court of Appeal case, Allen t/a David Allen Chartered Accountants v Pollock and Anr [2020] EWCA Civ 258, considered the liability that can arise when a company dismisses an employee of a competing business, in circumstances where that employee is subject to restrictive agreements that prevent him or her from competing. Restrictive post-employment agreements are only useful to the employer if they can be enforced. The ongoing payment of severance pay is often a lever for the employer when attempting to enforce restrictive agreements in an employer`s contract. Unless it is severance pay, the enforcement of a restrictive agreement generally requires the employer to seek the assistance of an appropriate tribunal or, in some cases, arbitration. While contracts that restrict trade or tend to reduce competition are contrary to public policy and therefore unenforceable, restrictive agreements in employment contracts are considered a partial restriction on trade and are maintained if they are strictly limited: when is it likely that restrictive agreements will be imposed? The High Court dismissed the action and ruled that the restrictive covenants were unenforceable because (a) the duration of the restriction was unenforceable because 12 months were longer than was reasonably necessary to protect the company`s business interests, and (b) the restrictions applied to employee shareholders as long as they remained employees and shareholders. Thus, if a person ceases to be an employee but continues to be a shareholder, the restrictions will no longer apply. The company appealed.
An appropriate restriction in a restrictive agreement is one that goes no further than necessary to protect the legitimate interests of a party to the trade agreement. The restriction must be proportionate to the following: there is no general rule with regard to restrictive agreements and the doctrine of trade restriction is not limited to a particular type of contract. While restrictive covenants are an accepted form of restriction in some trade agreements, they are likely to meet the “commercial company” test and will not be considered excessively restrictive. In the case of other types of alliances, the entire relationship and circumstances must be taken into account. The court further considered whether the alliances would have been reasonable if the trade restriction doctrine had been applicable, which would in any case have “avoided” the restrictions. The court concluded that they were reasonable in light of the facts and cited the following key issues: The three types of agreements are intended to prevent someone from taking something from a business – customers, employees, businesses in general, proprietary products or trade secrets. There are many business reasons why your contracts should include carefully crafted restrictive agreements to protect your business. For example, if you`re buying a business, you need to enter into a restrictive agreement that the seller can`t put in direct competition with you near your newly acquired business. In addition to the list above, there are other types of trade agreements where a party can really obtain protection against the use of a restrictive agreement that is relevant and appropriate to the circumstances of the parties. When drafting a restrictive agreement, the restriction should be limited to a specific territory or territory. For example, in a business purchase agreement, the restrictive agreement that prevents the seller from setting up a competing company should be limited to the geographical area in which the newly acquired company operates (e.g. B, a county, city or city).
If you were to attempt to impose a restriction on the seller who moves to an area where the buyer`s existing business operates, but the newly acquired business does not, it is unlikely that the extent of the geographic area would be deemed appropriate by a court, depending on the size and nature of the business. Any separate employment contract between the commercial buyer and its former owner should also include restrictive agreements aimed at preventing the former owner from entering into direct competition with the buyer after the end of his employment relationship. It is likely that the restrictive agreements in the commercial sales contract will be more expensive than those contained in the employment contract. Restrictive covenants are used in a variety of business situations, including land use and other real estate situations. What does all this mean for an employee who has been fired? If the employer fired him or her solely to save money or for any other reason unrelated to the performance of the employee`s work, the employer is likely not authorized to enforce the restrictive agreements. However, if the termination is related to its performance at work, restrictive agreements are likely to be enforceable even after termination. Our covenant enforcement lawyers can help Chicago clients develop arguments to justify the termination of an employee. The courts seem to be less vigilant when it comes to removing restrictive agreements that apply to employee shareholders and those contained in commercial agreements.
The courts note that if a restrictive agreement restricting the shares of an employee shareholder is agreed between the parties for a certain defined period of time, if the agreement does not begin until an employee shareholder ceases to be a shareholder – an event that could theoretically occur many years after an employee shareholder has left the company – it should still be enforceable. Dodd was aware of the restrictive agreements, although she knew nothing of the circumstances in which Mr. Pollock had entered into them. Therefore, before Mr. Pollock took office, Dodd sought legal advice on the enforceability of the restrictive agreements and whether they would be in jeopardy if he were hired. There are four basic types of restrictive alliances. A non-compete obligation prohibits a former employee from competing with his or her former employer for a certain period of time in a certain geographic area. These are considered the most restrictive.
A non-solicitation provision prohibits a former employee from attracting current, past or potential customers of his or her former employer for a certain period of time. An “anti-raid” provision prohibits a former employee from persuading the former employer`s employees to work in a competing company, for example. A confidentiality agreement prevents a former employee from disclosing or using the proprietary or confidential information of his or her former employer or his or her employer`s clients….