Member Article

Post termination restrictions

With Watson Burton LLP Law Firm

It is common for contracts of employment to contain post termination restrictions on employees, purporting to prevent competition following their departure. Whilst on the face of it such restrictive clauses are deemed void for public policy reasons, they can be enforced if the employer demonstrates that there is a legitimate business interest that it wishes to protect, and that the restraint is reasonable in time and area; in other words, that the restrictive clause is not wider than is necessary to protect the legitimate business interests of the employer.

Drafting such clauses is something of a balancing act for employers. Employers will want to ensure that they have adequate business protection in their contract, but cannot go too far to achieve such protection, without risking such clauses being held to be unenforceable.

In the case of Christie Owen & Davis plc v Walton ([2008] CSOH 37), the Court of Session recently ruled that a non-compete clause, forbidding a former employee from engaging in employment with a competitor, in any capacity, was enforceable. It found that the restriction, which protected the employer’s business in respect of the areas in which the former employee had been “materially involved” during the course of his employment, was reasonable.

Mr Walton was employed as a chartered surveyor by Christie Owen & Davis plc (the “Company”). From 2002 to 2005 he was employed in the valuation services team and thereafter, until his departure on 16 December 2007, in the agency department, specialising in the care sector. However, whilst working for the Company, Mr Walton entered into negotiations with, and was offered employment by, a Scottish competitor working in the healthcare sector. Mr Walton accepted the post in December 2007.

In November 2006, Mr Walton sent emails to his personal email account attaching several files, including details of contacts and lists of Company-owned care homes in Scotland. This was detected by the Company’s IT team, which informed senior management. The Company investigated the matter further and confronted Mr Walton. Subsequently the Company concluded that Mr Walton had the intention of using the material to assist his future employer. Mr Walton, however, denied this and claimed that the material was sent to his personal email account for a bona fide reason, namely, to enable him to work at home in the evenings.

Consequently, at a meeting on 3 December 2007, Mr Walton returned several hard copies of documents he had removed from Company premises. Whilst the Company admitted that one document was not confidential, the remaining items were and, as a result, the Company decided to dismiss Mr Walton for gross misconduct.

The Company subsequently pursued a claim against Mr Walton, alleging amongst other things, that:

• following termination of employment, Mr Walton tried to solicit business from some of the Company’s clients, both current and prospective in breach of express post termination restrictions; and
• following investigation, the Company had reasonable grounds to believe that Mr Walton would use confidential information in breach of the restrictive covenants in his contract.

The court granted an interim order against Mr Walton, upholding the post termination restriction and preventing him from taking up his new role. Mr Walton appealed.

Mr Walton argued that the wording of the restrictions in his contract of employment, and in particular the definition of “Prohibited Business”, in which he could not be engaged, were too wide and could not be enforced, as they prohibited him from carrying out any activity as a chartered surveyor. He protested that he had been directly and materially involved in a wider range of activities than the care sector and therefore interpretation of the restrictions went further than was necessary to protect the Company’s business.

Mr Walton was unsuccessful. The Court noted that the definition of “Prohibited Business” in his contract of employment limited the restriction to businesses in which Mr Walton had been “directly and materially” involved in the 18 months prior to his termination, and did not extend to every matter in which Mr Walton had had dealings during this period. The contract anticipated that Mr Walton would perform various activities during his employment, not all of which would be restricted by the covenant, as Mr Walton’s involvement in all of them would not be “material”. The Court interpreted “material involvement” as an involvement which amounted to a significant part of Mr Walton’s work in the defined 18 month period. Occasional involvement in part of the Company’s business would not engage the restriction. On balance, the Court upheld the order against Mr Walton.

This case does not present new law but it does provide a useful summary of the principles and provides interesting commentary as to what amounts to “material” for the purposes of restrictive covenants. If you have any comments or questions about this article or any employment related matters, please contact Padma Tadi of Watson Burton LLP at padma.tadi@wastonburton.com.

This was posted in Bdaily's Members' News section by Ruth Mitchell .