Restrictive Covenants in Dr Alan Boydell v NZP Pharma Limited

Restrictive covenants can be enforceable even if they cover areas which are “fantastical”

Restrictive covenants are used in employment contracts to restrict employees for a period of time after they leave their employment. The aim is to limit the damage that a departing employee can do to their old employer but there is always a balance to be struck as, by their very nature, they restrict what the employee can do at a time when their employment has already come to an end. For this reason they have to be very carefully drafted and will generally only be enforced by the courts if they go no further than is reasonably necessary to protect the employer’s legitimate business interests.

There are several different types of covenant which can be used, including: those that restrict soliciting and dealing with customers; those that prevent the solicitation of employees; those that restrict interference with suppliers; and, at their most restrictive, those that stop the employee from working for a competing business.

The careful drafting of these clauses is critically important. However, in the recent case of Dr Alan Boydell v NZP Pharma Limited, the Court of Appeal agreed that it was possibIe to find a clause to be potentially valid if it covered what it needed to, but also unintentionally covered areas which were “fantastical” and were not contemplated.

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The Case

Dr Boydell worked for NZP, a specialist pharmaceutical business. His contract of employment included a non-competition covenant preventing him from working in any capacity for any competing businesses of either NZP or any of its group companies for 12 months.

The High Court granted an interim injunction enforcing the covenant. In doing so, the judge severed certain parts of the clause, including removing the reference to other group companies. This decision was appealed by NZP who argued that the judge could not use severance to make significant changes the effect of the restraints.

The Decision

The Court of Appeal disagreed and held that if a clause covers what it needs to and what was contemplated but also unintentionally covers areas which are “fantastical” (Home Counties Dairies Ltd v Skilton) then this doesn’t mean that it is not a potentially valid clause. If there are two realistic constructions then the court should rely on the one which would result in a valid clause.

This meant that, by severing the references to group companies (which were “fantastical”), the judge had not significantly changed the overall effect of the clause.

What Can We Learn?

This case is helpful to employers who may have concerns regarding the way in which their restrictive covenants are drafted. However, if the covenant had been drafted clearly and narrowly in the first place then there would likely have been no need for litigation at all.

Employers should regularly review any restrictive covenants in their employment contracts. They should consider what business interest they are seeking to protect and, with that in mind, make sure that the clauses are clearly drafted, do not cover areas which neither party would expect them to cover, and are constructed as narrowly as possible to provide the necessary protection.

So what should employers be doing now?

Review restrictions in contracts of employment
Think about what business interests they are seeking to protect
Think about the minimum constraints that would be needed to achieve this protection
Check the drafting is clear

This is a very technical area and one where a regular legal review could be useful.

Plus bear in mind the recent government announcement that they intend to limit the length of time for non-competition clauses to 3 months. This is due to be brought into effect “when parliamentary time allows” which means it is not going to happen in the near future but watch this space for developments.

Also worth noting that this three month limit is not planned to apply to non-solicitation of customers or poaching of employees or clauses restricting interference with suppliers. These will still potentially be able to stay in effect for longer subject to the clauses going no further than reasonably necessary to protect legitimate business interests.

Maeve Vickery, Employment Lawyer, Vista