When businesses are sold, key employees are hired, or shareholders join forces, the parties involved often need assurance that their investment, relationships and confidential information will be protected once the deal is done. Restrictive covenants \u2014 clauses that limit what a person can do after a transaction or employment relationship ends \u2014 are among the most powerful tools available to provide that protection. <\/p>\n\n\n\n
Yet they are also among the most frequently challenged clauses in English commercial litigation. Courts will not simply enforce a restrictive covenant because the parties agreed to it. Covenants must be drafted carefully, tailored to the specific context and properly supported in the underlying agreement. Get them right and they can be invaluable. Get them wrong and they may be worthless \u2014 or, worse, expose your business to significant legal risk and cost. <\/p>\n\n\n\n
In this article, the commercial team at Ronald Fletcher Baker LLP explores how restrictive covenants operate across three key commercial contexts, the principles courts apply when assessing their enforceability, and the very real consequences of poor drafting. <\/p>\n\n\n\n
A restrictive covenant is a contractual obligation that restricts one party’s freedom to act in a particular way, usually after a contract or relationship has come to an end. In a commercial context, the most common types include: <\/p>\n\n\n\n
Each of these types can appear across share purchase agreements, employment contracts and shareholder agreements \u2014 but the way they are assessed by the courts differs significantly depending on the context in which they arise. <\/p>\n\n\n\n
English law approaches all restrictive covenants through the lens of restraint of trade. The starting point is that any clause that restricts a person’s ability to carry on their trade, profession or business is, in principle, contrary to public policy and therefore void \u2014 unless it can be justified. <\/p>\n\n\n\n
To be enforceable, a restrictive covenant must satisfy two core requirements: <\/p>\n\n\n\n
Key Principle: A court will not rewrite a covenant that goes too far.<\/em> Whether a covenant is reasonable is assessed at the date the contract was entered into \u2014 not at the date enforcement is sought. This makes it all the more important that covenants are carefully considered and properly calibrated from the outset. <\/p>\n\n\n\n When a business is acquired, the purchaser is not just buying assets \u2014 they are buying goodwill. The value of the business is often tied to its customer relationships, its reputation and its key personnel. Without appropriate protection, a seller could, the day after completion, set up a competing business and begin approaching the very clients and staff that gave the purchased business its value. <\/p>\n\n\n\n Restrictive covenants in share purchase agreements (SPAs) are therefore essential to protect the goodwill that the buyer has paid for. They are typically imposed on the sellers and any individuals closely connected with the business. <\/p>\n\n\n\n Courts take a more generous approach to covenants in SPAs than in employment contracts. The rationale is straightforward: the seller has received valuable consideration for the goodwill of the business, and it is commercially reasonable that they should be bound not to immediately undermine what they have sold. <\/p>\n\n\n\n This means that longer time periods and broader geographic restrictions are more likely to be upheld in a commercial sale context than in an employment context. However, covenants must still be reasonable. Even in an SPA, an indefinite non-compete clause covering every industry worldwide would be unenforceable. <\/p>\n\n\n\n Employers invest heavily in their people \u2014 in training, in giving access to confidential information and in building relationships with clients. When an employee leaves, particularly to join a competitor, there is a real risk that this investment will be lost and that the employer’s position in the market will be undermined. <\/p>\n\n\n\n Restrictive covenants in employment contracts allow employers to protect legitimate interests \u2014 such as client relationships, confidential information and stable teams \u2014 for a defined period following termination. Without them, departing employees are free to act immediately in competition. <\/p>\n\n\n\n Courts scrutinise employment covenants far more closely than those in commercial agreements. An employee is in a fundamentally different position to a business seller: they did not receive a capital sum reflecting the value of goodwill, and their freedom to earn a living is a matter of significant public interest. <\/p>\n\n\n\n The result is that employment covenants must be justified on the specific facts of the particular employee’s role. A covenant that is appropriate for a senior director may be entirely unenforceable if applied to a junior member of staff. This point is frequently overlooked by employers who use standard form contracts across their entire workforce. <\/p>\n\n\n\n Practical Warning: Blanket restrictive covenants applied to all employees regardless of seniority or access to confidential information, are very unlikely to be enforceable.<\/em> Many employers include garden leave provisions alongside restrictive covenants. During garden leave, the employee continues to be paid but is not required to attend work, allowing client relationships to naturally diminish. Courts generally take into account any period of garden leave served when assessing the reasonableness of post-termination restrictions \u2014 a long period of garden leave may effectively reduce the enforceable duration of a post-termination covenant. <\/p>\n\n\n\n A shareholder agreement governs the relationship between the shareholders of a company, often covering matters such as decision-making, dividend policy and what happens on exit. Restrictive covenants in this context serve a dual purpose: they protect the company’s interests and they protect the shareholders from one another. <\/p>\n\n\n\n Common scenarios include provisions preventing a departing shareholder from competing with the company, poaching its staff or soliciting its clients after they have sold or transferred their shares. In a closely-held company, where shareholders are often also directors or key employees, these protections can be particularly important. <\/p>\n\n\n\n One of the most significant complications in shareholder agreements is the dual capacity in which many shareholders operate. A shareholder who is also an employee may be bound by restrictive covenants in both their employment contract and the shareholder agreement. Ensuring that these provisions are consistent, complementary and do not create conflicts requires careful thought. <\/p>\n\n\n\n Courts will analyse covenants in a shareholder agreement through a similar lens to those in employment contracts when the covenant is effectively imposed on someone in an employment-type relationship. However, where the covenant is genuinely referable to the shareholding \u2014 for example, on the sale of shares \u2014 a more commercial approach akin to the SPA context may apply. <\/p>\n\n\n\n Important: The characterisation of the covenant matters.<\/em> The consequences of poorly drafted restrictive covenants can be severe and wide-ranging. Businesses that rely on unenforceable restrictions often discover their vulnerability at precisely the worst moment \u2014 when a key person has left and is already in competition. <\/p>\n\n\n\n If a court finds that a covenant goes beyond what is reasonably necessary to protect a legitimate interest, it will be struck out entirely. The business is then left with no protection at all, even if a slightly narrower restriction would have been perfectly valid. <\/p>\n\n\n\n While courts have limited powers to ‘sever’ an unreasonable element of a covenant and preserve the remainder, this is only possible where the offending part can be removed without fundamentally changing the nature of the obligation \u2014 and courts are reluctant to do the work of rewriting what the parties should have drafted correctly in the first place. <\/p>\n\n\n\n Where a business seeks an emergency injunction to restrain a breach of a restrictive covenant, the court must be satisfied that there is a serious question to be tried. If the covenant is obviously defective in its drafting, the court may refuse interim relief entirely \u2014 allowing the competitive activity to continue pending a full trial, by which time the damage may already be done. <\/p>\n\n\n\n Where a business’s confidential information has been misused, or a client base has been poached, the financial loss can be difficult to quantify and difficult to recover even if proceedings are successful. Courts frequently note that damages are an inadequate remedy in covenant cases \u2014 all the more reason to ensure the covenant is enforceable from the outset, enabling injunctive relief to be sought swiftly. <\/p>\n\n\n\n Enforcing a defective covenant \u2014 or defending a claim brought under one \u2014 can be extremely expensive. Litigation involving restrictive covenants often moves quickly, involves urgent applications and requires specialist legal input at short notice. Businesses that discover their covenants are defective at that stage face a difficult choice between expensive litigation with uncertain prospects or conceding the position entirely. <\/p>\n\n\n\n Proceedings arising from covenant disputes can attract attention, particularly in sectors where the movement of key individuals or client relationships is closely watched. Businesses involved in such disputes may find the process as damaging as the underlying breach. <\/p>\n\n\n\n The good news is that all of the above risks are largely avoidable with proper legal advice and careful drafting. The following principles should guide the approach: <\/p>\n\n\n\n Restrictive covenants are not a ‘tick-box’ exercise. They represent some of the most legally tested and commercially significant provisions found in commercial agreements, and the courts apply exacting standards when asked to enforce them. <\/p>\n\n\n\n Whether you are negotiating the acquisition of a business, onboarding a senior employee or restructuring your shareholders’ arrangements, taking the time to draft these provisions carefully \u2014 with the benefit of specialist legal advice \u2014 can make the difference between robust, enforceable protection and an expensive lesson in the limits of contract law. <\/p>","protected":false},"author":12,"featured_media":8977,"parent":0,"menu_order":0,"template":"","format":"standard","meta":{"_acf_changed":false,"om_disable_all_campaigns":false,"_uf_show_specific_survey":0,"_uf_disable_surveys":false,"footnotes":""},"categories":[65],"tags":[87],"class_list":["post-8976","insight","type-insight","status-publish","format-standard","has-post-thumbnail","hentry","category-corporate","tag-richmond-office"],"acf":[],"aioseo_notices":[],"yoast_head":"\n
If a restriction is found to be unreasonable in scope, the court will not simply trim it down to an enforceable size \u2014 it will be struck out entirely.<\/em>
This is known as the rule against the ‘blue pencil’ approach, subject to limited exceptions for severance.<\/em> <\/p>\n\n\n\nRestrictive Covenants in Share Purchase Agreements<\/strong> <\/h2>\n\n\n\n
Why They Matter<\/strong> <\/h3>\n\n\n\n
What the Courts Expect<\/strong> <\/h3>\n\n\n\n
Common Drafting Issues<\/strong> <\/h3>\n\n\n\n
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Restrictive Covenants in Employment Contracts<\/strong> <\/h2>\n\n\n\n
Why They Matter<\/strong> <\/h3>\n\n\n\n
The Employment Context: A Higher Bar<\/strong> <\/h3>\n\n\n\n
Covenants must be individually justified and regularly reviewed as roles evolve.<\/em> <\/p>\n\n\n\nGarden Leave and Its Interaction with Covenants<\/strong> <\/h3>\n\n\n\n
Key Drafting Considerations<\/strong> <\/h3>\n\n\n\n
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Restrictive Covenants in Shareholder Agreements<\/strong> <\/h2>\n\n\n\n
Why They Matter<\/strong> <\/h3>\n\n\n\n
Drafting Challenges<\/strong> <\/h3>\n\n\n\n
A covenant described as relating to share ownership but which in practice restricts an employee’s conduct will be assessed as an employment covenant \u2014 attracting a higher level of judicial scrutiny.<\/em>
Proper legal advice is essential to ensure the correct characterisation and drafting.<\/em> <\/p>\n\n\n\nRepercussions of Getting it Wrong<\/strong> <\/h3>\n\n\n\n
The Covenant is Struck Down<\/strong> <\/h3>\n\n\n\n
Injunctive Relief May be Refused<\/strong> <\/h3>\n\n\n\n
Damages May be Inadequate<\/strong> <\/h3>\n\n\n\n
Wasted Legal Costs<\/strong> <\/h3>\n\n\n\n
Reputational Risk<\/strong> <\/h3>\n\n\n\n
How to Get it Right: Key Takeaways<\/strong> <\/h2>\n\n\n\n
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Conclusion<\/strong> <\/h2>\n\n\n\n