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Anti-competition clause 'too restrictive to be enforced'

Great care is needed when drawing up restrictive covenants; if they are not tight enough they may not be effective, but if they are too restrictive the courts may not enforce them.

A recent case gives a good insight into how the courts may view certain anti-competition clauses.

It involved an estate agency and one of its former employees. The firm’s terms and conditions contained a clause which stated that for 12 months after leaving the firm, employees could not solicit the agency’s customers, could not set up a rival business within 5 miles of their former office, and could not induce former colleagues to join them.

The anti-competition clause was put to the test when one of the agency’s employees left and set up a rival firm only 1.7 miles from the agency branch where he used to work. The agency took court action to enforce the clause but only met with partial success.

The court held that the former employee had solicited the agency’s clients and so imposed an injunction preventing him from doing so again.

However, the court found that he was not in breach of the clause preventing him from inducing former colleagues to join him. The evidence was that former colleagues had approached him rather than the other way round.

The court also declined to uphold the clause about not setting up a rival firm within five miles. It held that most of the work carried out by the employee while he was with the agency involved non-recurring business. This was not capable of creating a customer connection worthy of protection.

The clause was too wide in its scope and amounted to an excessive restraint of trade. It was therefore void and unenforceable. The agency was sufficiently protected by the anti-solicitation terms.

Please contact us if you would like more information about the issues raised in this article.