Court of appeal takes unprecedented step

of inserting new wording into restrictive covenants

National law firm, Laytons advises employers on recent ruling that could lead to restrictive covenants being rewritten in contracts of employment

Laytons (www.laytons.com), the national firm of solicitors, are today warning that employees may find that poorly drafted restrictive covenants within their contracts of employment are enforceable against them, when previously they may have been regarded as invalid.

Laytons advice follows from a recent decision of the Court of Appeal, where a former director of a company challenged the enforceability of restrictive covenants contained within his contract of employment. The Court of Appeal found particular restrictions within the covenants to be too wide to be enforceable and modified the covenants by not only removing such wording but also adding and substituting words in their place.

The Court of Appeal went beyond the established ìblue pencilî test, which enables a court to delete any part of a covenant that is unreasonable and therefore unenforceable. The test has a narrow application allowing words to be deleted only if after their removal the remainder of the covenant makes sense. Words could not be added or changed. If a covenant could not be altered merely by the deletion of words to make it enforceable, then the entire covenant would be invalid.

ìThis is a new approach, and one that is favourable to employers. In effect, the court has taken an old power to amend a restrictive covenant and extended it.î Comments John Quibell, Partner, Company Commercial Dept., Laytons. ìIt is also contrary to advice given by lawyers who always said that, if a restrictive covenant was not drafted properly, it could not be enforced,î

The Court of Appeal viewed the addition of words as simply giving effect to an obvious intention on the part of the parties. The court took the view that it should ask itself what the employer and employee intended when they agreed the restriction.

Quibell sees the decision as having potentially very far reaching implications if this line of reasoning is extended to substituting the length of restrictions in covenants, or, as a business evolves and moves in to new areas, updating the wording of the covenant because the court may imply that an employee intended he should not compete with the employer after his contract of employment ended. Restrictive covenants ten years ago were not unusually drawn up for periods of two years post employment and would before this case have been considered unenforceable. They may now become enforceable under this new test.

ìThe court has now given itself wide powers, and it remains to be seen how they will use them.î Continues Quibell ìThe one thing that is certain is that this case has added uncertainty to an area of law upon which it is already notoriously difficult for lawyers to adviseî




About Laytons
Laytonsí Company Commercial team advises on all areas of corporate finance, commercial contracts and intellectual property, acting in a range of work, which primarily comprises purchase/sale of companies, corporate investments, joint ventures, product development agreements, supply contracts, licensing agreements, e-commerce and general commercial contracts.

Laytons is a national firm with offices in Bristol, Guildford, London and Manchester. The focus is on providing practical legal advice to help clients achieve their business objectives.