Part III – Post-Contractual Restrictions - Restrictive Covenants

Restrictive covenants are contractual obligations that are limit employees and consultants (or freelancers) performing named activities after their employment has ended. In the context of consultants, the restrictions may apply during and after their services have ended.

Treatment of Restrictive Covenants in Litigation

Restrictive covenants between business and their employees and consultants attract a reverse onus when they are relied upon in litigation. That is to say provisions of employment & consultancy contracts that prevent a member of staff performing some task are considered void from the outset, leaving it to the business to prove that the restrictive provisions are reasonable, and go no further than what is necessary to protect the legitimate interests of the business.

Interests that may be restrained by businesses are:

1. prevention of competition from the employee or consultant for a limited period of time.
2. having their customers taken away by former employees and consultants;
3. maintaining stability of their workforce;
4. the goods that named customers buy;
5. protection of supplier relationships; and
6. disclosure of trade secrets and highly sensitive confidential information.

Restrictive covenants are also able to regulate to some extent the activities of the person or company after the event. Again, their must be a nexus between the interest of the company and the activity regulated, and it must not extend too far in order to be enforceable. It depends on the business and their particular interest.

In this way, companies are able to expand their protection to a limited extent from employees competing with them after the period ends. Garden leave may also be used to extend the period to some extent.

An Additional Benefit of Contractual Clauses

The benefits of having contractual rights are:

1. lesser obligations of proving confidentiality, in that it may not be readily apparent that the disclosure was confidential simply by drawing on the circumstances of disclosure;

2. clarity as to the activities that are intended to be protected or otherwise;

3. damages are available for breach of contract as against the former employee in addition to an injunction, as opposed to relying on the equitable right that will only make available an injunction and not damages.

The Positions for Contractors

In the absence of a restrictive covenant, consultants the ordinary law of confidential information apply and they will be able to use any information that has is not considered confidential by the circumstances of the disclosure or were not notified that the information was confidential prior to its disclosure to them. As the default rules of intellectual property have the consultant owning the IP rights, is it a good idea to ensure that these are displaced in their engagement letter or contract, as you never know what future uses you will want to make of the materials created, and it is an uphill battle to rely on implied licenses.

Agreements for employees on secondment should ensure that IP rights are assigned to the intended party, there is authority to say that it is the legal person who pays the salary who owns the IP and not the person with whom they are employed.