Case Update – Enforceability of Non-Compete Clauses
The General Principle
Non-compete provisions which restrict a former employer for working for a competitor is not uncommon but for it to be considered enforceable it is essential that the restriction does not go any further than necessary to protect a legitimate business interest and is not an unfair restraint of trade. It is also important that the clause is properly drafted and is clear.
Boydell v NZP Ltd
In the recent case of Boydell V NZP, the Court of Appeal considered a decision made by the High Court to delete wording from a non-compete clause in order to make it enforceable.
Dr Boydell was a senior employee of NZP and was employed as Head of Commercial – Specialty Products. The non-compete clause restricted Dr Boydell from being involved in any activities that would compete with the business of NZP (or any group companies) for a period of 12 months from the termination of his employment.
When Dr Boydell resigned and obtained a new role with a competitor, NZP were successful in obtaining an injunction in the High Court to prevent him from his new employment, arguing it was in breach of the non-compete clause. When making their order the High Court altered the wording of the clause to remove reference to the activities of “any group companies” to reduce the overall scope of the clause. The principle applied by the court is known as the “blue pencil test”. Under the blue pencil test, a court can strike out elements of a contractual clause which would be void or unenforceable, but leave the remainder of the clause intact so long as it does not substantially alter the remaining provisions. Overall, the blue pencil test provides a way for courts to salvage parts of a clause that remain valid and enforceable whilst striking out those that are not.
Dr Boydell appealed the decision as he was of the view that the non-compete clause without the alteration would have been unenforceable as it ultimately prevented him from working at all in the pharmaceutical industry. By way of example, it essentially would have stopped him from even working in a high street pharmacy. Dr Boydell was of the view that the High Court had overstepped their duties when applying the blue pencil test to the provision and upholding the non-compete clause and felt they had materially changed the meaning of the clause. In addition to this he further pleaded that even after the severance of “group companies” the clause was too broadly drafted and as such went further than what was reasonably necessary to protect a legitimate business interest.
The Court of Appeal rejected Dr Boydell’s appeal. In considering the position, the Court of Appeal focused on what was in the parties’ actual contemplation at the time of entering the restriction and held that where a clause also unintentionally covers areas which are “fantastical” then it can still be valid. An area which is fantastical would be one which would not be in the parties’ contemplation when entering the contract. For example, entirely preventing Dr Boydell from being able to work in the pharmaceutical industry at all. This is a principle previously set out in the case of Home Counties Dairies Ltd v Skilton.
The Court of Appeal did not find the restriction to be too broadly drafted post alternation so as to be unenforceable. The reason for this was due to Dr Boydell’s seniority and the fact the sector of the industry he worked in was highly specialised industry. The Court held that it can be more reasonable for wide drafting to be used in such circumstances in order to protect a business interest.
This case serves as a reminder that whilst it is difficult to enforce restrictions, they certainly are enforceable when correctly prepared. This case is not however the go ahead for employers to draft clauses wider than necessary and expect them to be enforced by a court. The enforceability of post termination restrictions will always need to be assessed on a case-by-case basis. Careful consideration should be given when preparing and drafting restrictions with attention given to identifying what legitimate business interest requires protecting and what restrictions would be necessary to provide the required protections.
In light of this, if you would like any assistance with preparing post termination restrictions or would like a review of your current post termination restrictions, please get in touch with our Employment team who will be happy to assist with any questions.
This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.
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