Employer could not “buy” post-termination restriction

The High Court has refused to enforce a post-termination restriction which would have prevented an employee from dealing with customers for six months, even though the company would have paid the employee during the period of restriction.

Speedread

In Bartholomews Agri Food Ltd v Thornton, the employee’s contract stated that he could not solicit any customers of the company for six months after his employment terminated. Unusually, the restriction provided for the employee to receive full pay throughout its duration. Nevertheless the High Court ruled that it was in restraint of trade and unenforceable. This was because the employee signed up to the restriction when he was a junior member of staff with no customer contacts. It was unenforceable at that time and remained unenforceable, regardless of the employee’s subsequent promotion to a role where it would have been regarded as reasonable. In addition, the Court found that the restriction was unreasonably wide as it applied to all the company’s customers, not just those the employee had worked with. The Court decided that the fact that the employee would have received full pay during the period of restraint did not save the restriction from being unenforceable.

Facts

Mr Thornton joined Bartholomews in 1997 as a trainee agronomist. He provided advice to customers on crop planting, seed choice, soil condition and crop nutrition. On joining he was provided with terms and conditions of employment which contained a six month post-termination restriction on providing similar services to the company’s customers on behalf of a competing business in the company’s trading area (West and East Sussex, Kent, Hampshire, Wiltshire and Dorset). Unusually, it also provided that the company would give him full pay during the period of the restriction, even though it would have been after the end of his employment.

Mr Thornton resigned and intended to start working for a competitor. Bartholomews sought an interim injunction to prevent him from dealing with its customers.

Decision

The High Court refused the injunction application, ruling that the restriction was in restraint of trade and unenforceable.

The restriction was imposed in 1997 when Mr Thornton was a trainee agronomist with no experience and no customer contacts. Its term were inappropriate for such a junior employee. The High Court referred to the decision of Pat Systems v Neilly . In that case it was held that a restriction which was unenforceable when it was agreed, in view of the employee’s status and role at the time, would remain unenforceable even if the employee had subsequently been promoted to a role in which the restriction would have been reasonable.

The restriction was also much wider than reasonably necessary to protect Bartholomews’ business interests. It applied to all Bartholomews’ customers, regardless of whether Mr Thornton had knowledge of those customers and regardless of whether he had ever carried out any work for those customers. Mr Thornton dealt with customers who represented less than 2% of the company’s customer-base. It would be wrong to prevent him working with the other 98% of the customers.

In addition, the fact that Mr Bartholomew would continue to be paid in full during the period of the restriction did not save it. Had the payment been made, Mr Thornton would have benefited from a windfall as he would have received two salaries for six months, from Bartholomews for the restriction and from his new employer, yet that was not sufficient to render the restriction enforceable. The Court held that it is contrary to public policy to permit an employer to purchase a restraint.

Implications

Restrictions on post-termination activities have to be drafted carefully and legal advice should be sought. The clauses will only be enforced if they go no further than is necessary to protect the company’s legitimate business interests such as its customers, trade secrets and confidential information. In this case, the non-dealing clause was too wide as it sought to prevent the employee dealing with all customers, not just those with whom he had dealt. The Court ruled that the clause would have been enforceable if it had provided that for six months Mr Thornton could not deal with or solicit customers with whom he had dealt for a period of time before the termination of his employment.

Restrictions are not generally appropriate for junior members of staff and should always be reviewed on promotion, which is what Bartholomews should have done in this case. As we discussed in our podcast, if a restriction was unenforceable when entered into, it does not become enforceable over time if the employee rises through the ranks to a role where the restriction might be considered reasonable. Even if the restriction was enforceable when entered into, it might not provide adequate protection for the company when the employee is more senior.

When updating or introducing new restrictions during employment, employers also need to ensure that they provide a real benefit to the employee in return for him agreeing to the new restraint. They should therefore tie the introduction of the restriction to, for example, a promotion or pay rise. The recent case of Re-Use Collections Ltd v Sendall (which we discussed in our podcast) demonstrates that a failure to do so will mean that the restriction is unenforceable.

These issues are dealt with in more detail in our podcast on post termination restrictions and in the following articles by Peter De Maria.

High Court Rejects Attempt to Enforce 12 Months Non-competition Covenant 

Restrictive covenants: thank you for your consideration