First contract - restrictive covenant issues

[matelot]

Hi, I'm looking to embark on my first contract, contracting directly with a customer, through my own limited company, of which I'm a director.

My customer in this case is also a customer of a previous employer from whom I resigned 5 months ago. As an employee of that company, I worked on that customer's project for 18 months.

The employment contract I had with the employer contains restricitive covenants which are intended to prevent me from working for the employer's customers for 12 months. What I'm not sure about is whether the covenants are likely to be enforced, particularly if the contract I am currently negotiating with the customer is not directly with me but with my limited company.

Any advice gratefully received. The relevant parts of the contract are below.

Cheers

Richard


The Employee agrees with the Company that s/he will not either during the employment nor during the Restricted Period without the prior written consent of the Company (such consent not to be unreasonably withheld) and whether by him/herself, through his/her employees or agents or otherwise and whether on the Employee’s own behalf or on behalf of any other person, firm, company or other organization, directly or indirectly:

• in competition with the Company, solicit business from or canvass any Customer or Prospective Customer if such solicitation or canvassing is in respect of Restricted Goods or Restricted Services;
• in competition with the Company, accept orders for Restricted Goods or Restricted Services from any Customer or Prospective Customer;
• provide Restricted Goods or Restricted Services to any Customer or Prospective Customer;

where

“Customer” means any person, firm, company or other organization whatsoever to whom or which the Company distributed, sold or supplied Company Goods or Company Services during the 12 months immediately preceding the Termination Date and with whom or which, during such period the Employee had personal dealings in the course of the employment or any employee who was under the direct or indirect supervision of the Employee had personal dealings in the course of his employment;

“Restricted Period” means the period of 12 months immediately following the Termination Date, provided always that if no duties have been assigned to the Employee by the Company during a period immediately preceding the Termination Date in accordance with clause 21 it means the period of 12 months immediately following the last date on which the Employee carried out duties assigned to him by the Company;

[yasockie]

We're not experts here, so you're best seeking professional legal advice, but from what I can tell such clauses can be enforceable sometimes.

One easy way to get out of it would be a frank discussion with former client.
Another question is the former client ever likely to find out?

[northernladuk]

Restrictive covenants are enforceable in certain situations, normally where one party can prove loss, intellectual, cash, whatever. It can be used to stop you going from an agent to a client and from client to their suppliers/customers etc etc depending on wording. It wouldn't be wise to completely ignore one thinking it will never apply to you. Saying that though many are not enforced and can be worked out through negotiation. If there is no loss to any parties then they could be quite happy for you to go and it would be a good idea to ask.

Only thing that looks out of order in that list is 12 months. You cannot be held to a 12 monther as it is against your human right to work or something... 6 months is, however, quite enforceable.

[Wanderer]

The employment contract I had with the employer contains restricitive covenants which are intended to prevent me from working for the employer's customers for 12 months. What I'm not sure about is whether the covenants are likely to be enforced, particularly if the contract I am currently negotiating with the customer is not directly with me but with my limited company.

Technically, yes they can be enforced. There is case law where a car salesman employee resigned to setup his own LTD company and proceeded to try and poach his previous employer's customers. This case went to court and the salesman lost from what I remember. Sorry I don't have a link to the case.

However, the question of the restrictive covenant from a permie to go and work for a client they worked for through their previous employer - that might be a bit more of a grey area. I guess it depends on what you are bringing to the new client. If it could be construed to be trade secrets or confidential information then you may be in trouble. If you could argue that it's pretty generic skills and you will respect your previous employers confidentiality then you might be OK.

It's probably best that you don't shout about it to your old employer though....

[Safe Collections]

It is also worth remembering that your Ltd co is it's own independent legal entity, any clause agreed would only bind the limited company and not you as a director/shareholder personally.

You would be free to incorporate a brand new limited company at any time and trade without the restrictions the old company was obligated to follow.

[northernladuk]

You would be free to incorporate a brand new limited company at any time and trade without the restrictions the old company was obligated to follow.

Are you sure this is true? It doesn't follow the spirit of the clause so I am sure would fail if challenged. There is also the other side that although it may not go legal the parties involved could screw it up for you.

[Wanderer]

It is also worth remembering that your Ltd co is it's own independent legal entity, any clause agreed would only bind the limited company and not you as a director/shareholder personally.

You would be free to incorporate a brand new limited company at any time and trade without the restrictions the old company was obligated to follow.

Not necessarily true from what I understand, though I'm not a lawyer. Check out Gilford Motor Co Ltd v Horne.

The car salesman did just this and the court looked through the "veil of incorporation" and determined that the director had attempted to poach the clients from his old employer.

The question of the restrictive covenants vs restraint of trade is set out in some examples here. Sounds like a mixed bag and if it ever went to court then it could go either way.

I'd be inclined to risk it, shrinking violets get nowhere in business.

[Safe Collections]

Not necessarily true from what I understand, though I'm not a lawyer. Check out Gilford Motor Co Ltd v Horne.

The car salesman did just this and the court looked through the "veil of incorporation" and determined that the director had attempted to poach the clients from his old employer.

The question of the restrictive covenants vs restraint of trade is set out in some examples here. Sounds like a mixed bag and if it ever went to court then it could go either way.

I'd be inclined to risk it, shrinking violets get nowhere in business.

We have recently acted on behalf of a client who wanted to enforce a restrictive covenant against a previous employee. They failed to do so because the clause they were relying on was unenforceable.

Having had a number of very in depth discussions with our Barrister during the case it would appear that many covenants are essentially legally worthless and are generally included simply as a scare tactic.

Obviously we are not saying if the clause above in enforceable or not, but in our experience it is a notoriously difficult area to litigate in.

If in doubt, see a specialist contract solicitor (not a high street general practice).