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Esther Smith

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Ask the Expert: When can restrictive covenants be enforced – or not?

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The question

I think that I am familiar with the general issues surrounding the enforcement of restrictive covenants, but would welcome advice on this specific matter:

If the covenant is part of an employment contract that an employer has unlawfully breached (for example, where a tribunal has found unfair dismissal to have taken place), can they nevertheless rely on a term restricting the employee’s ability to work for a rival during a given period of time after ceasing employment with them?

The legal verdict

Esther Smith, a partner at Thomas Eggar

In relation to restrictive covenants, employers can only enforce the terms of the contract post-employment where they themselves are not in breach of that contract.

So, as an example, if an employer terminates an employee’s employment with immediate effect and makes a payment in lieu of their notice period without the contractual right to make that payment, they would be in breach of the contract and could not, therefore, seek to enforce any restrictive covenants.

A finding of unfair dismissal in and of itself would not amount to a finding that the employer has breached the employment contract.

But if the former staff member pursues a claim of constructive dismissal that is upheld by a tribunal, the employer has, in effect, been found to be acting in fundamental breach of the employment contract (the first part of the test for whether a constructive dismissal has occurred). This means that any covenants would fall away.

Similarly, if a tribunal were to find that an employer was in breach of contract in any other respect (whether over failure to give notice pay or contractual sums such as bonuses or commission…), the same principle would apply.

Esther Smith is a partner in Thomas Eggar‘s Employment Law Unit.

Martin Brewer, a partner at Mills & Reeve

My initial thought on your question is that it seems to be confusing several different things: breach of contract; unfair dismissal and, without stating it, wrongful dismissal.

To answer the general point: it is a principle of contract law that if an employer terminates an individual’s employment in breach of the terms in the employment contract – the most common example being dismissal without giving proper notice – the employee is released from all of the terms of that contact, including, of course, post-termination restrictive covenants.

This is a very old principle dating from the case of General Billposting v Atkinson (1909).

It follows that not every breach of contract results in an employer not being able to rely on post-termination restrictive covenants. It is only where there is a wrongful dismissal (sometimes called unlawful dismissal but essentially dismissal in breach of contract) that the covenants fall away.

But it is important to understand that an unfair dismissal is not necessarily, and indeed in many cases will clearly not be, a wrongful dismissal. There is a difference between a dismissal being found to be unfair (ie unreasonable) and a dismissal that is in breach of contract (ie wrongful).

Incidentally, some employers have tried to get around the general rule of being unable to rely on covenants if the employer has dismissed someone in breach of contract, by including in their restrictive covenants words to the effect that a covenant will apply on termination "howsoever caused and whether lawful or not".

Sadly for employers our courts have not taken to this idea at all. In the case of Rock Refrigeration Ltd v Jones (1996), the Court of Appeal in England and Wales said expressly that the rule in General Billposting prevented a covenant that could, on the face of it, apply to both lawful and unlawful termination, from being enforced if termination was unlawful.

In short, if the dismissal is unlawful, words such as "howsoever caused" or "whether lawful or not" will not save the covenant and will not allow it to be enforced.

Martin Brewer is a partner at law firm, Mills & Reeve LLP.

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