Case Law Corner – Restrictive CovenantsTuesday, October 29th, 2013
Leonard Coppage’s contract of employment at Safetynet Security Limited contained a restrictive covenant that read:
“It is a condition of your employment, that for a period of six months immediately following termination of your employment for any reason whatsoever, you will not, whether directly or indirectly as principal, agent, employee, director, partner or otherwise howsoever approach any individual or organisation who has during your period of employment been a customer of ours, if the purpose of such an approach is to solicit business which could have been undertaken by us.”
Following Mr Coppage’s resignation as business director on 16 April 2012, Joshua Hadley also resigned, both of them forming Freedom Security Solutions Limited. Several days after their resignations, 5 Safetynet customers moved to Freedom. Safetynet alleged that the defection of the five customers was the result of direct solicitation by Mr Coppage, which he denied. However, evidence pointed to the fact that there had been 135 telephone calls and 175 texts from Mr Coppage to the five customers in the period 12 to 30 April 2012, therefore, the judge agreed in this regard with Safetynet.
Regarding the breach of the non-solicitation clause, the judge found in favour of Safetynet and awarded damages. Mr Coppage and Mr Hanley then challenged the wording of the restrictive covenant, claiming that it amounted to an unreasonable restraint of trading. To be an enforceable covenant, Coppage and Hanley argued that it should have stated that it only applied to customers with whom they had had dealings in the previous 12 months of employment. However, the court ruled that Safetynet was a small business and upheld that the restrictive covenant was appropriate in these circumstances.
This is a tricky one because, on the surface, the restrictive covenant was widely-drawn and could be construed as too restrictive. However, as the judge pointed out, if they had ruled this way, a director is still bound by Section 170 (2) of the Companies Act 2006, which states that a director has a duty to avoid conflicts of interest where the director exploits information or opportunity that he became aware of during the time that he was a director – i.e. he should not use the information or opportunity from his directorship at Safetynet to benefit him in any future directorships.
The lessons learned from this case law seem to be that directors need to be aware of their obligations as a director, not just the restrictions that may be imposed on them by a covenant agreement. For employers, it is wise that they review such covenants to ensure that they are reasonable and only serve to protect the organisation’s business interests. Further, such covenants need to ensure that they are reflective of the employee’s role within the organisation.
On a general note, payments made for restrictive covenants will be considered under Section 225 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). This says that any payment for restrictive undertakings would normally be considered as earnings from employment and will be liable for tax and NICs. There is no implication that a payment was made in this case (as is often the case).
- Bailii.org – Coppage v Safetynet Services