Extra cause for contractors to take care with restrictive covenants

They are traditionally not a part of the contract that many want to broach initially, but a High Court judgement indicates that contractors have more cause to address restrictive covenants, and how they relate to solicitation, at the outset of their engagement, writes Gemma Steele, of legal firm Browne Jacobson.

That’s because in the case of Towry EJ Limited V Barry Bennett and others, the employer (Towry) was not able to demonstrate that their former clients had moved to their former employee’s (Bennett’s and others’) current business.

Even though a “tidal wave” of Towry’s clients had moved to the business, solicitation could not be made out as Towry could not evidence that their former employees had, in fact, “persuaded” the clients to move.

Words like ‘employee’ can make some contractors switch off. Partly that’s because some consultancy agreements (as opposed to employment contracts) are entirely absent of restrictive covenants because such a restriction suggests that the contracting company has control over the consultant, and may therefore point towards an employment relationship (IR35). However ‘employee’ could mean you in a number of different situations, including if you are the director of your own limited company. Moreover, on those consultancy agreements, restrictions are still often used, in practice, as long as the remainder of the relationship points towards a business-to business engagement, suggestive of the contractor’s independent status.

In the Towry case, the High Court held that the key feature of solicitation is an element of persuasion, and being able to prove it. The volume of business lost by Towry to a competitor over a short period did suggest solicitation but this was not supported by sufficiently concrete evidence. Evidence given by former clients was that they were dissatisfied with Towry and left, and as such pointed away from active solicitation. 

The difficulty for a lot of employers will be that evidence of persuasion will need to come from the former clients themselves and a lot of employers will want to avoid approaching former or current clients on such a sensitive matter. Alternatively, the employer will have to look for evidence by way of emails before the employee left showing, for example, that they had been actively contacting customers.

So with the burden of proof lying squarely with the employer in trying to enforce restrictive covenants, employers may now consider tightening non-solicitation clauses, or they may make more use of so-called ‘non-dealing’ clauses. Had there been a non- dealing clause in the contract preventing employees from dealing with clients/suppliers for a restricted period, the unlawful conduct (of the ex-employee) would have been easier to establish. With a non-dealing clause in place, there would have been no need to prove persuasion, as well as the usual principles involved in enforcing the restrictions. 

From the point of view of a contractor or consultant who doesn’t wish to be overly restricted by their contractual obligations, there are two options:

  • Negotiate the duration or the geographical scope of the restrictive covenant at the outset.

This may be the more attractive route, as it offers the contractor more certainty and greater flexibility following the termination of the contract. Or, option two:

  • Do nothing, on the understanding that the covenant is included for its deterrent effect only.

The more widely the covenants are drafted, the less likely they are to be enforceable. So if you are faced with widely drafted covenant, either it would need to be re-negotiated (as above, though in return for acceptance of a more onerous provision the contractor will naturally want some form of incentive), or else it may be that the covenant is left alone, on the understanding that its value is more for deterrent effect than in ultimately enforcing it. 

Editor’s Note: Further Reading - Who’s IT contacts are they anyway?

 

Thursday 1st March 2012