Restrictive Covenants: Limiting Scope And Duration

The nature of restrictive covenants in commercial agreements can be a thorny issue giving rise to litigation. A court has provided helpful guidance on the scope and enforceability of covenants in an agreement. The commercial lawyers at award-winning firm ParrisWhittaker support businesses of all sizes on their commercial terms and disputes.

The parties to commercial agreements should always ensure the terms are clear and unambiguous, otherwise they could be unenforceable. Further, terms such as restrictive covenants and non-competition clauses should be sufficiently limited to avoid being struck out as vague, disproportionate or unfair.

A recent case in the UK illustrates the court’s approach to covenants that were so wide in scope and that they amounted to a restraint of trade.

What’s the background?

An investment company (L) holds controlling shareholdings in companies that purchased a medical centre co-founded by the defendant D.

L sought an interim injunction to restrain D from breaching restrictive covenants within an investment agreement. D, a medical professional and businesswoman, claimed the covenants were void and unenforceable. The key elements were:

• The restrictive covenants lasted for 10 years post agreement
• As to the businesses covered by the covenants, the restrictions went far wider than the services delivered by the company while D worked there. They included consultancy, supplying the courts with administrative staff and mental health services
• As to geographical scope, the covenants covered the whole of the UK and Channel Islands

At issue was whether the restrictive covenants were unenforceable under the common law. Particularly, were the terms too long and geographically too wide in the commercial context?

The court noted that L had put no evidence to the court to justify a 10-year covenant; nor could L justify imposing a nationwide covenant as it had. It ruled that the scope of the restrictive covenants went far beyond the core of the businesses’ services and reached far beyond any legitimate protectable interest.

Restraint of trade

Importantly, the judge noted that the point of time at which the Agreements are to be considered was the time they were made. On the evidence, it was “beyond argument” that the restrictive covenants arose from D’s status as an employee and as a founder and grower of the business and as the seller of the business. Therefore, it amounted to restraint of trade.

This was a clear case of restrictive covenants being drafted so widely and of such long duration that they were plainly void and unenforceable at common law for breaching the public policy against restraint of trade. They sought to go far beyond protecting L’s legitimate interests in buying D’s business and protecting the goodwill it received.

L’s application for an interim injunction was refused.

How we can help

Businesses have the freedom of contract to agree the terms on which business is to be conducted or transactions executed. However, where restrictions and covenants are so wide in scope as to potentially be unenforceable, a dispute could arise.

For advice and representations on restrictive covenants and other commercial terms, contact the award-winning commercial litigation lawyers at ParrisWhittaker at +1.242.352.6112

1 Literacy Capital plc v Webb [2024] EWHC 2026