Will Your Business’ Post-Termination Restrictive Covenants stand up to scrutiny?

What Is a Restrictive Covenant?

A restrictive covenant is a contractual provision that seeks to limit what an employee can do after their employment ends. Common examples include:

• Non-compete covenants, preventing an employee from working for a competitor.
• Non-solicitation covenants, preventing an employee from approaching former customers, clients or colleagues and seeking to poach them.
• Non-dealing covenants, preventing an employee from conducting business with former customers regardless of who initiated contact.

Such restrictions are designed to protect legitimate business interests, including confidential information, customer relationships and the workforce. However, because restrictive covenants limit an individual's ability to earn a living, the courts will scrutinise them closely.

The Facts

Huws Gray, a nationwide builders' merchant with over 250 branches, employed Daniel Gentleman as an area sales manager with responsibility for 103 high-value customers across three branches.

His employment contract contained a six-month non-compete covenant which prevented him after termination from being engaged or interested in any competing business within 20 miles of the branches for which he had responsibility during the six months before termination.

After resigning to join a direct competitor, Mr Gentleman was initially restrained by an interim injunction. At the final hearing, however, he challenged both the enforceability of the non-compete covenant and allegations that he had retained or misused confidential information.

The High Court ultimately found in his favour on all issues.

How Is Enforceability Measured?

In determining the enforceability of post-termination restrictive covenants, the court undertakes a three-stage process:

1. Construing the covenant.
2. Determining whether the employer has legitimate business interests that require protection.
3. Assessing whether the covenant is no wider than reasonably necessary to protect those interests.

The burden of establishing reasonableness rests on the employer.

The courts recognise that employers are entitled to protect legitimate interests such as customer connections and confidential information. However, restrictions must go no further than is necessary to achieve that objective.

Why Was the Non-Compete Covenant Unenforceable?

The court concluded that the covenant was substantially wider than required to protect Huws Gray's legitimate interests. 

Importantly, the court noted that a properly drafted non-dealing covenant may have provided targeted and adequate protection and courts tend to prefer the less draconian covenants rather than the blanket non competes.

The employment contract included non-solicitation and non-dealing provisions, but these were ineffective because key terms such as "Restricted Customer" and "Restricted Potential Customer" had not been defined.

The court was persuaded that narrower and more targeted restrictions could have protected the employer's legitimate interests without preventing the employee from working for a competitor altogether. The fact they were included (although they failed for the lack of definition) suggested the wider non-compete was not reasonably necessary.

The court also did not like the fact that the restriction could have bitten from the very start of Mr Gentlemen’s employment had his employment ended even during the probationary period on one week’s notice without having built up any customer relationships – it was excessive in terms of a restriction being read at that point.

What Happens If a Restrictive Covenant Is Too Wide?

Where a restrictive covenant is drafted too broadly, the court may find it unenforceable in its entirety.

This means the employer loses the protection it hoped to obtain and may be unable to prevent a former employee from joining a competitor or approaching customers.

In some circumstances, courts can use the "blue pencil" to remove discrete offending words while leaving the remainder of the covenant intact. However, this power is limited.

The court cannot rewrite the parties' agreement or add new wording. It can only sever clearly identifiable provisions where the remaining covenant continues to make sense.

In Huws Gray, the court concluded that blue pencilling could not rescue the covenant.

Can a Restrictive Covenant Be Too Narrow?

Yes.

While employers often focus on ensuring restrictions are sufficiently robust, a covenant that is too narrow may fail to protect legitimate business interests.

For example, a narrowly drafted customer covenant may not cover key clients, prospective customers or new business opportunities. Equally, confidentiality provisions that are overly limited may not adequately protect commercially sensitive information.

The challenge for employers is therefore to strike the right balance. Restrictions should be tailored to the employee's role, level of seniority, length of service, customer exposure, managerial responsibility and access to confidential information.

A covenant that is carefully targeted considering these factors is more likely to be enforceable than one that attempts to cover every possible risk regardless of the actual risk and role the person is carrying out.

Confidential Information

There was also a discussion about whether pricing was confidential information and the methods used to reach the price. The court was not in agreement that internal pricing calculations or the customers’ contact details were the property of the business here given the practicalities of price matching (and therefore rivals’ pricing being more important) and the fact customers’ details can be found in the public domain. 

Key Lessons for Employers

This case provides several important drafting lessons:

• Ensure restrictive covenants are tailored to the employee's actual role and responsibilities.
• Use well drafted and targeted non-solicitation and non-dealing covenants wherever possible.
• Clearly define key contractual terms.
• Avoid restrictions that extend to parts of the business with which the employee has had no meaningful involvement.
• Review restrictions periodically to ensure they remain appropriate as roles change.
• Do not assume that a court will rescue defective drafting through interpretation or severance.

Conclusion

The decision in Huws Gray Limited v Daniel Gentleman reinforces a well-established principle: restrictive covenants must be no wider than reasonably necessary to protect legitimate business interests. Employers seeking to rely on post-termination restrictions should ensure they are drafted with precision and are proportionate to the risks posed by the employee's departure.

As this case demonstrates, a broad non-compete covenant may offer less protection than a carefully drafted suite of narrower restrictions. When it comes to restrictive covenants, precision remains far more valuable than breadth.

If you need your restrictions drafted in your contract of employments or reviewed to ensure the chances of enforceability are maximised, get in touch with our Employment team who are experts in advising and drafting post termination restrictions. Contact a member of our Employment team on 020 8290 0440 to arrange an appointment.

This article is for general information purposes only and does not constitute legal advice. Specific advice should be sought for individual circumstances.