Are Your Post Termination Restrictions in Your Commercial Contract Reasonable?

To enforce contractual restrictions that amount to a restraint of trade, they must be deemed reasonable by the Court. Examples include, non-compete clauses, non-dealing clauses, non-solicitation clauses, and non-poaching clauses.

There is no one size fits all approach to this question, but there is some helpful guidance from the Court and the following is largely taken from how Mr Justice Cavanagh summarised the position in Credico Marketing Ltd & Anor v Lambert & Ors [2021] EWHC 1504 (QB).  

The central question that a court must ask itself, when considering the enforceability of a restrictive covenant is whether the party seeking to rely upon them can show that the restrictions go no further than is reasonably necessary to protect that party's legitimate business interests.

Case law points to six issues to be considered by the Court:

1. What do the restrictions actually mean? What is being restricted?
2. Has the Claimant shown on the evidence that it has legitimate interests requiring protection?
3. If so, are they no wider than reasonably necessary?
4. If so, should the Court exercise its discretion in granting an injunction (if sought)?
5. The burden is on the Claimant to establish that the restriction is no greater than reasonably necessary for the proper protection of protectable interests.
6. Reasonable necessity is to be assessed from the perspective of reasonable persons in the position of the parties at the time that the contract was entered into, having regard to the contractual provisions as a whole and to the factual matrix to which the contract would then realistically have been expected to apply.

In relation to reasonable necessity, one leading judgment made clear that:

"…it is only if the Court finds that a "much less far-reaching" covenant would have afforded adequate protection is it likely to regard the existing restriction as unreasonable. The exercise is not a marginal one, otherwise Courts would be faced with a paralysing debate in every case about whether a covenant with x days shaved off would still provide adequate protection." (Haddon-Cave J's emphasis).

Where businesses have dealt at arm's length with each other, they can usually be regarded as adequate guardians of their own interests. However, the possible impact of the bargain upon third parties, or the public more generally, may call for careful scrutiny by the Court

A court will be slow to substitute its (objective) view as to the interests of the contracting parties for the (subjective) views of the contracting parties themselves. The law recognises that if business contracts are fairly made by parties who are on equal terms such parties should know their business best.

It is important to draft restrictions with the above in mind if you are to stand a chance at successfully relying on these types of restrictions. If you are in a situation where you are looking to enforce, or are facing a claim for breaching post-termination restrictions, you should seek urgent specialist legal advice.

If you have any questions in relation to the points addressed in this article, please contact Liam Tolen.