Restrictive covenants will be a familiar term to many people. They are often found in employment contracts and restrict certain activities, for example, the solicitation of employees and customers, or from setting up a competing business.

They have a reputation for being difficult to enforce in the Courts and must be drafted with great care to ensure that they stand the best chance of enforceability should they be held up to scrutiny in a dispute. The aim of a restrictive covenant should always be to protect the legitimate business interests of the party looking to enforce its terms.

Recently a case has been heard in the Commercial Court involving an exiting employee, Mr. Herbert, who was also a shareholder of the company and had started a new job with a competing business two weeks after his exit (Ideal Standard International SA v Herbert [2018] EWHC 3326 (Comm) (22 November 2018)).

Both his employment agreement and a shareholders agreement to which he was a party to contained non-compete restrictive covenants. As part of his exit from the company, Mr. Herbert signed a settlement agreement which discharged him from the restrictive covenants in his employment contract. Mr. Herbert later argued that the settlement agreement had also discharged the non-compete clause contained in the shareholders agreement and entitled him to work for the competitor.

shareholders agreementThis particular case hung on whether the waiver in the settlement agreement could be interpreted in such a way to include the non-compete clause contained in the shareholders agreement. The Court held that it did not.

The shareholders agreement stated that any waiver or election not to enforce any right in the shareholders agreement had to be in writing and signed by or on behalf of the person granting the waiver, which the settlement agreement failed to do. The settlement agreement also made no reference to the shareholders agreement. The judge further stated in their reasoning that the waiver was made by Mr. Herbert in favour of his employer and not the other way around.

It is important that if you are looking to exit a business and you also hold shares, that any settlement agreement you enter into will waive all of your restraint of trade obligations and that any such settlement agreement is signed by all the necessary parties.

If you would like to discuss restrictive covenants or you have concerns around your exit from a company, then please contact Michael Lam on 0116 402 7240 or by email at michael.lam@bhwsolicitors.com.


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