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Two year non-solicitation and non-dealing clause upheld in shareholder agreement

The Decision

This case involved breaches of contractual terms which were designed to prevent an exiting shareholder from trading in competition. Damages of £610,250 and a final injunction preventing further breaches were awarded by the Court.

Judgment in Score Draw Ltd -v- PNH International Ltd [2021] EWHC 756 (Ch) has recently been handed down. The judgment upheld a clause which prevented the shareholder, whilst a shareholder and during the Restricted Period (24 months after it was no longer a shareholder) from soliciting or accepting custom from a Restricted Person in respect of Restricted Products supplied by the Claimant Company.

The Defence

The Defendant tried to persuade the Court that the contractual restrictions should not be upheld because they were an unenforceable restraint of trade. That argument failed because the Judge, having analysed the risks posed by the circumstances of the Defendant becoming a shareholder, was satisfied that restrictions went “…no further than reasonably necessary to protect [the Claimant] against that risk…”.

The Defendant had two more arguments, both of which failed. The first was based on an email sent by the Claimant which the Defendant said acknowledged (and did not object to) the Defendant undertaking work which would otherwise be a breach. The Judge disagreed that it was reasonable for the Defendant to consider that the email was an indication that they were permitted to act in breach and did not consider that the Defendant had relied on it as permission in any event.

The other line of Defence was that the Claimant itself was in breach of the Shareholders’ Agreement so could not enforce its terms against the Defendant. Whilst the Judge acknowledged that it was arguable that there was one possible breach by the Claimant the Defendant failed to establish any breach, let alone one serious enough to justify termination of the Shareholders’ Agreement.

Lessons Learned

This Judgment is a reminder that the Courts will typically look to uphold well drafted restrictions on trading set out in a shareholders’ agreement provided they can be established to be “no more than is reasonably necessary to protect” a legitimate business interest. In this case the legitimate business interest was to protect against the risks identified by the Judge posed by the Defendant becoming a shareholder.

However, parties who have the benefit of such restrictions should be careful not to do anything which could be construed as permitting the other party to act in breach as it may later form part of their defence.

Whilst a final injunction was granted at the end of this case, it may have been open to the Claimant to seek an immediate injunction on an urgent basis (known as an interim injunction) as soon as it was aware that the Defendant was acting in breach. That could have stopped the Defendant in its tracks and prevented losses accruing to the business during the time it takes for Court proceedings to get to trial.

For more information on your options relating to breaches of restrictive covenants in commercial contracts, contact Liam Tolen.

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