When ex-employees want to compete . . .

competing business after termination of their employment.

It is common practice for companies to include provisions in senior

employees' employment contracts, designed to stop them from competing

with their ex-employer, from poaching customers and staff, and from

making use of confidential information.

On the face of it, such restrictions are in restraint of trade. To be

enforceable the restrictions must be drafted so as to go no further than

is necessary to protect the legitimate business interests of the

employer. If the restrictions go further than this they will be held

to be unreasonable and unenforceable.

The desire to show that the restrictions are reasonable has resulted

in restrictive covenants becoming increasingly complex in an effort to

pinpoint precisely which part of the employer's business is being

protected, how long the restrictions last for, and in what geographical

area they apply. All these efforts might now be in vain.

Recently, Living Design brought a petition in the Court of Session

seeking an interdict to prevent one of its ex-employees, Sandra

Davidson, from working with C R Smith, a competitor. The petition was

based on restrictive covenants accepted by Davidson.

She was paid #5000 for agreeing to the restrictions, which prohibited

her for a period of six months after termination of her employment from

being engaged in a competing business operating in Scotland or the North

of England. She also accepted restrictions preventing her from

soliciting employees or making use of confidential information.

She acknowledged that she had taken legal advice in relation to the

restrictions, and considered them to be reasonable.

The interdict sought would have required Davidson to abide by these

restrictions. Davidson did not contest the interdict in so far as it

related to soliciting employees or making use of confidential

information, but maintained that the restriction prohibiting her from

being involved in a competing business was unenforceable.

The restrictions were to apply for six months after the termination of

her employment ''however that comes about and whether lawful or not''.

Thus, in terms of the contract, even if Davidson had been wrongly

dismissed, the restrictions would still bite. Davidson argued that she

had been wrongly dismissed, which was denied by Living Design.

The court did not consider whether Davidson had been wrongly

dismissed, but held the restrictive covenant to be unenforceable on the

basis that a restriction which operates on termination of employment,

however that comes about, was ''manifestly wholly unreasonable''.

The court did not consider the enforceability of the other

restrictions (requiring Davidson not to poach employees or make use of

confidential information) as Davidson did not contest their

enforceability. As these restrictions also applied after termination of

their employment, whether lawfully or not, it seems likely that had the

restrictions been contested they would have been held to be

unenforceable.

Living Design's other hope was that the court would strike the

offending words from the contract so that what was left would be

considered to be reasonable. The contract specifically provided that if

the restrictions were unenforceable they would apply ''with such

modification as may be necessary to make them valid and enforceable''.

The court accepted that it could sever the unreasonable part of the

restriction if it was possible to do so simply by deleting the offending

words without having to re-write the contract or alter its scope. It

would have been possible to delete the offending words so that the

restrictions came into force on ''termination of (Davidson's)

employment''.

The court refused to take this step.

The decision is of fundamental importance. Living Design did not

encounter problems because it had a zealous lawyer -- stating that the

restrictions apply irrespective of how the employment is terminated is

perfectly normal.

Any employer checking his senior employees' service contracts is

likely to find similar wording. On the basis of this decision the

restrictions will now be unenforceable. Remember that the court did not

decide that Davidson had been wrongly dismissed: it simply took the view

that it would be unreasonable for the restrictions to apply if she had

been wrongly dismissed.

There seems no need for the court to have taken this view as, if

Davidson had actually been wrongly dismissed, Living Design would have

been in breach of her employment contract and thus unable to enforce the

restrictions anyway.

Davidson was paid #5000 to accept the restrictions. She agreed they

were reasonable. She agreed to abide by whatever modifications were

necessary to make them enforceable. She confirmed that she had taken

legal advice.

None of this helped the employer's position. In this area the tide

turned in favour of the employee some time ago. It would seem that the

high-water mark has now been reached. Whether the tide will turn again

remains to be seen.

In the meantime employers should take legal advice on how to amend

their service contracts so as to ensure that the Living Design decision

does not strike down their restrictive covenants. If they do not, the

costs to their business in real terms could be enormous.

A legal briefing has been prepared on this topic. For a copy please

contact Richard Masters, Corporate Finance Unit, or Craig Connal,

Employment Law Unit, Corporate Finance Group at McGrigor Donald.