Restrictive covenants: seeking remedies
We take a look at what options are available to employers who wish to enforce a restrictive covenant.
Last month we discussed restrictive covenants and the factors you need to consider when including them in the contract of employment. This month we look at what options are available to employers who wish to enforce a restrictive covenant.
First of all if you are looking to enforcing a restrictive covenant, you must have avoided breaching the terms of the contract when terminating the employment. If you have failed to do so, then the employee is effectively released from any restrictive covenants or other post-termination clauses.
Avoiding an own goal
There are two ways in which you, as the employer, may be ‘in breach’ in this way. One is by constructively dismissing the employee. An employee is constructively dismissed when their employer commits a repudiatory breach of contract e.g. a failure to address a grievance or a unilateral reduction in pay, and the employee resigns in response to the breach. The second is where their employer dismisses the employee by paying in lieu of notice when there is no contractual right to pay in lieu of notice. ‘Softening the blow’ of dismissal by paying in lieu of notice in such circumstances can expose you to the risk of your employee being legally free to poach customers, clients or work for the competitor.
Where you are not in breach of contract, then there are a number of remedies available where it is believed that a former employee has breached the restrictive covenants.
In most cases you will want to enforce the restrictive covenants and to do this, you would need to seek an injunction. Before a final injunction is awarded, a full trial will take place involving a detailed consideration of the evidence. As it will take some time before a matter comes to trial, you will usually need to apply for an interim injunction pending the outcome of the full trial.
There are a number of things that the Court has to consider when considering an interim injunction. Firstly, is there a serious issue to be tried? This involves the court carrying out a limited exploration of the evidence to be satisfied that there is substance to the claim. Where it is obvious that the restrictions themselves are so wide as to be unenforceable, then the Court will conclude that there is not a serious issue to be tried.
The next issue is whether damages would be an adequate remedy. There are many reasons why damages might not be an adequate remedy, for example, the employee may not be ‘good for the funds’ if damages were awarded. Perhaps, without an injunction, it is likely that the employee will continue to breach the restrictive covenants and damages cannot be quantified. If however damages would be an adequate remedy it is unlikely that an injunction will be awarded.
The third aspect for the court to consider is what is known as the ‘balance of convenience’. This involves the Court looking at who will be most prejudiced by granting or not granting an injunction.
In exercising its discretion whether or not to grant an injunction the Court will look at a number of factors. You must act promptly in seeking to enforce restrictive covenants if you wish to do so, as speed will be one of many aspects considered by the Court. You should also conduct yourself appropriately, as the behaviour of the employer is another factor for consideration.
Damages may be a more appropriate remedy where, for example, the employee has been ‘warned off’ by a strongly worded letter and has ceased to breach the restrictive covenants (with little likelihood of a further breach). In making its decision, the Court will look at the enforceability of the restrictive covenant and whether the employee has in fact breached it. If a breach has occurred, the Court will consider whether that breach has caused loss and how that loss should be assessed.
An alternative to an interim injunction is for the former employee to agree to provide ‘undertakings’ until the outcome of the trial. This is attractive as if the former employee undertakes to observe the restrictive covenants it avoids the cost of an interim injunction.
Often a former employee will offer an undertaking in response to the commencement of proceedings and in those circumstances the undertaking can be given to the Court such that if the individual breaches the undertaking it will be a contempt of court. Where no proceedings have commenced, then any breach of the undertaking would be a contractual issue.
Claims against third parties
You aren’t always limited to bringing a claim against the former employee but may also have grounds to bring a claim against a third party. So where a former employee joins a competitor and starts poaching clients, then it may be possible to bring a claim against the new employer on the basis that he has induced the former employee to breach the restrictive covenants or conspired with him or her to do so. Where appropriate, this can be a useful tactic as the third party may be better placed to meet any award for damages. It can also put pressure on the former employee.
For a claim of ‘conspiracy’ to succeed, you would have to show that the employee and at least one other person were working together to cause loss by unlawful means.
In order to succeed in a breach of contract claim the third party would have to have knowingly and intentionally induced or procured the breach without reasonable justification. When the former employee’s new employer is known it can often be useful to send a copy of the restrictive covenants to that new employer and to make it known that the former employee is subject to those restrictions. Ideally this would prevent any breach in the first place but, if not, at least there is evidence that the new employer does have knowledge of the restrictions from that point.
The damage that can occur as a consequence of a former employee breaching a restrictive covenant can be considerable to a business. There are many strategic steps that can be taken that may avoid court proceedings being commenced. However to reduce damage and to avoid jeopardising the chances of enforcing any restrictive covenants, it is important to act promptly and seek legal advice straight away. Strong Solicitor’s letters are often an effective way in which to stop ex-employees and their new organisations ignoring post-termination restrictions. We are happy to write these letters for you.
Victoria Duddles (firstname.lastname@example.org) is an Associate in the Birmingham Employment, Pensions and Immigration Team. If your organisation needs to enforce a restrictive covenant against a former employee, Weightmans are able to provide joined up advice on the options available and the course of action that best fits your business. Please do not hesitate to get in touch.