Restrictive covenants are void except in certain circumstances
First published in the Bermuda Chamber of Commerce, Insider Newsletter, May 2018 edition
Restrictive covenants, such as those which seek to prevent solicitation of customers, clients, suppliers, other employees, or general competition for a defined period after termination, are standard in mid- to high-level employment contracts.
The general rule in English law, which has been adopted into Bermuda law by Supreme Court and Court of Appeal precedent, is that any contractual term which purports to restrict an employee’s trade activities after termination of their employment is contrary to public policy and void as a restraint of trade; except to the extent that the employer can show:
The term is designed to protect a legitimate proprietary interest of the employer, which:
a. may include the employer’s trade connections with customers and suppliers, confidential information or trade secrets;
b. does not extend to preventing competition by the use of the employee’s skills and expertise;
The restriction is designed to provide only such protection as is reasonable having regard to:
a. the interests of the parties, being the employer’s proprietary interest and the employee’s interest in participating in his trade; and
b. the public’s interest, being the interest of the public in having appropriately skilled and experienced personnel participate in the trade.
In the ordinary course, a restrictive covenant which is designed to protect a legitimate proprietary interest but does so by way of unreasonable restrictions is void. The court will not rewrite a covenant which is wider than reasonably necessary. For instance, if a three year period specified in a covenant is considered to be too wide but a one period would be appropriate in the circumstances of the case, the covenant will still fail. For this reason, it is also important to ensure that restrictive covenants are expressed to severable both from each other (if there is more than one) and from the rest of the contract of employment.
As such employers should take great care, and seek legal advice in each case, to ensure that any restrictive covenants provide reasonable protection necessary to protect the legitimate proprietary interest of the employer but go no wider, otherwise such covenants will be at risk of being held to be unenforceable. What might be considered a reasonable scope for a restrictive covenant will vary in each case, across different industry sectors and with the seniority of the employee concerned. It is therefore important to review whether covenants are sufficiently robust as an employee progresses up the promotion ladder, and also to consider, as part of reasonableness, the cumulative effects of a restrictive covenant together with other related contractual clauses such as garden leave provisions.
In the event of an actual or threatened breach of a restrictive covenant, whether by an individual employee or by a team (a ‘springboard’ action), the covenant can be enforced by an application for an injunction, often on a without notice basis, and often coupled with applications for disclosure, damages (if appropriate), disgorgement of profits and restraints on use of the employer’s confidential information.
