RESTRAINT OF TRADE DURING AND ON THE
TERMINATION OF A CONTRACT OF

EMPLOYMENT

*LG.C. Stratton

I. INTRODUCTION AND DEFINITION

Once the pmties have reached an agreement the principle purpose of contract
law is to enforce such an agreement and impose penalties on any party in the
event of their breach of the contract. This concept applies to contracts of
employment I with the exception that where a covenant has been imposed on an
employee by an employer restricting the activities of the former during the
course of his employment or on the termination of his contract of employment
the doctrine of restraint of trade will prima facie render such covenant void on
the grounds that it is contrary to public policy and it will only be enforceable if it
is reasonable.2 '

The doctrine is therefore, anomalous in the sense that it impinges on the
common law principle of freedom of contract, although conversely, the ultimate
object of the restraint of trade doctrine is to allow the party subject to the
covenant to enter into contracts with third parties despite contractual restrictions
against such a course of action, i, e. to allow freedom of trade. Yet in another

• Solicitor,

I Esso Petroleum Ltd. v, Harpers Garage (Stourport) Ltd. [1968] A.c. 269 (H.L.), It
should be also be noted contracts of employment can take several forms ranging from lengthy
sophisticated service agreements for directors and senior managers to an exchange of letters for
junior employees,

2 Nordenfelt v, Maxim Nordenfeft Guns and Ammunition [1894] A.C, 535 at 565per Lord
Macnaghten: "reasonable that is, in reference to the interests of the parties concerned and
reasonable in reference to the interests of the public, so framed and so,guarded as to afford
adequate protection to the party in whose favour [they are] imposed, while at the same time", in
no way injurious to the public,"

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sense all contracts restrain trade to some degree by preventing the parties to an
agreement from dealing with other parties in relation to the subject matter of a
transaction once it has been entered into.

These apparent conceptual dichotomies have given rise to difficulties in
defining covenants in restraint of trade. In Esso Petroleum Co. Ltd. v. Harpers
Garage (Stourport) Ltd., Lord Reid stated that he "would not attempt to define
the dividing line between contracts which are and contracts which are not in
restraint of trade." 3 Nevertheless, judicial attempts have been made to define the
doctrine and in particular, by Lord Justice Diplock in Petrofina (Great Britain)
Ltd. v. Martin:

"A contract in restraint of trade is one in which a party (the
covenantor) agrees with the other party (the covenantee) to restrict
his liberty in the future to carryon trade with other persons not
parties to the contract in such manner as he chooses." 4

In the context of an employer and employee this definition envisages a
negative covenant preventing the employee from working for a third party rather
than a positive obligation to work only for the one employer. 5 Restraint
covenants can therefore, restrict an employee from competing directly with
business of the employer, but can also operate to protect confidential
information, or restrict an employee's personal activities so far as they impinge
on the effective running of the employer's business or the requirements of a third
party. Apart however from the theoretical aspects of the doctrine of restraint of
trade, its application in practice has important implications for an employer and
employee. These concerns and the evolution of the doctrine are evidenced by the
weight of recent case law on the topic.

II. THE CONCEPT OF INTEREST

3 Supra.n.l at 298.

4 [1966] Ch.146 at 180. The definition was accepted by Lord Hodson in Esso Petroleum
Co. Ltd. v. Harpers Garage (Stourport) Ltd. supra.nl at 317.

5 See Whitwood Chemicals Co. v. Hardman [1891] 2 Ch. 416 where the court refused an
injunction on the grounds that there was no negative covenant. See also Paul Goulding
"Injunctions and Contracts of Employment: the Evening Standard Doctrine" (1990) 191.L.J. 98.

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RESTRAINT OF TRADE

The concept of interest, when applied to restraint covenants, falls under two
main headings, which apply not only to employment contracts, but also other
contractual circumstances such as a restraint covenant imposed on the vendor of
a business; a retiring partner; or a former shareholder under a joint venture
agreement. Accordingly such covenants must be reasonable in the interests of
both the public and the parties concemed.6

The reasons for restraint covenants on the first ground of public interest, both
during and after employment, arise as they are anti-competitive; restrict the
mobility of labour; and militate against full employment all, of which are fully
justifiable from both an economic and social point of view. 7 However, that is not
to say that such covenants are not without their jurisprudential problems. The
courts have tended to treat the concept of public interest with circumspection
because of its wide and general nature which can create uncertainty. 8 One cause
for such uncertainty is that the courts have little or no evidence as to what
constitutes public interest. It can, therefore, be argued that the matter is best left
to the legislature which is better equipped to deal with these social, political and
economic issues. 9 Lastly, where contracting parties have entered into a binding
agreement at arm's length, such a contract should be enforceable without the
possibility of interference arising as a result of the vagaries of the doctrine of
public interest.lo

The reluctance of the courts to become involved with the public interest
concept is supported by the lack of case law on the topic. One of the few
examples is Wyatt v. Kreglinger, where an employee aged sixty had been

6 See supra. n.2.

7 For a discussion as to whether the present legal rules on restrictive covenants in
contracts of employment are economically efficient see Michael 1. Trebilcock, The Common Law
of Restraint qf Trade: a Legal and Economic Analysis, (Sweet & Maxwell, London, 1986), at
142.

8 See Richardson v. Mellish [1824], 2 Bing. 229 at 252 per Burroughs J. - "Public policy
is a very unruly horse, and once you get astride it you never know where it will carry you. It may
lead you from the sound law. It is never argued at all but when other points fail."

9 See Richardson v Mellish ibid. at 242 per Best C.J.- "Let that doubtful question of
policy be settled by that high tribunal namely, the legislature, which has the means of bringing
before it all the considerations that bear on the question."

10 For further discussion of the problems of public interest see 1.D. Heydon, The Restraint
of Trade Doctrine, (Butterworths, London, 1971) at 270ff.

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promised a pension by his employer provided he did not take up a competing
trade on his leaving. II In an unusual reversal of roles the employee sued for his
pension and the employer claimed the restraint was unreasonable. The court held
the covenant to be unreasonable as it would deprive the country of the services
of a sixty year old man who was competent to work. With early retirement and
ageism now so prevalent it is doubtful whether the court would reach the same
conclusion today.
It is, therefore, "the interest of the parties" that has drawn the attention of the

courts and given rise to the recent case law; particularly in regard to the
employer having a "proprietary interest" to protect. 12 As an employee is an agent
of the employer, there is no need for a covenant not to compete with the
employer, or disclose confidential information during (as opposed to after) the
period of employment as this will be implied 13 although it is usual for an
appropriate clause to be inserted in a service agreement. However, trade secrets
and employer know-how (as opposed to employee know-how and special skills)
are proprietary interests which require protection after employment has ceased.14

The courts have resorted to both "philosophical" 15 and "psychological" tests. 16

11 [1933] 1 K.B. 793 (CA). See also Thomas Cowan & Co. v. Orme [1960] 27 M.L.1.
41 (Singapore H.C.); Bull v. Pitney-Bowes Ltd [1966] 3 All E.R. 384. For further discussion of
public interest" see Michael J. Trebilcock, supra.n.7 at 106ff.

12 See Herbert Morris Ltd. v. Saxelby [1916] 1 A.c. 688 at 710 per Lord Parker - "the
reason, and the only reason, for upholding such a restraint on the part of the employee is that the
employer has some proprietary right, whether in the nature of a trade connection or in the nature
of trade secrets, for the protection of which restraint is - having regard to the duties of the
employee - reasonably necessary." For further discussion of "the parties interests" see Michael
J. Trebilcock, supra.n.7 at 79.

13 Faccenda Chicken Ltd. v. Fowler [1986] r.C.R. 297. For the factors to determine
whether any particular item of information falls within the implied term so as to prevent
disclosure of information by an employee after his employment has ceased, see the remarks of
Neill L.J. at 310 -311. For an earlier case, see Hivac Ltd. v. Park Royal Scientific Instruments
Ltd. [1946] Ch. 169 (C.A.).

14 See Cross 1. in Printers and Finishers Ltd v. Holloway [1964] 3 All E.R. 731 at 7360.

IS See Herbert Morris v Saxelby supra.n.12 at 714 per Lord Shaw - "Trade secrets, the
names of customers, all such things which in sound philosophical language are denominated
objective knowledge - these may not be given away by a servant; they are his master's property.
On the other hand, a man's aptitudes, his skill, his dexterity, his manual or mental ability - all
those things which in sound philosophical language are not objective, but subjective - they may

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RESTRAINT OF TRADE

However, although guidance may be obtained from these abstract concepts,
each case will have to be decided upon its own facts, which can give rise to
practical uncertainties and litigation. Similar uncertainties can arise in regard to
the reasonableness of a post employment restraint covenant in respect of the
period of time during which it is to apply and the geographic area over which it
is to operate.

III. RESTRAINT COVENANTS DURING EMPLOYMENT

(a) Application of the Doctrine
The initial question arises as to whether the doctrine of restraint of trade will

apply to covenants arising during the course of employment. Specific authorities
on this point are scant, although there are early decisions to support the
proposition that the doctrine does not apply to "in employment" covenants.17
However, the position was clarified in A. Schoeder Music Publishing Co. Ltd. v.
Macauley when it was confirmed that the doctrine applied to restraint covenants
which operated during employment, as was the case with those taking effect
after employment had ceased.18

(b) "Garden Leave Agreements"
"Garden Leave" or "Sterilisation" covenants arise when an employee

terminates his employment in order to work for a competitor; or alternatively the
employer terminates the contract. In such circumstances the employer will
require the employee to remain uninvolved with the competitor for as long a

and they ought not to be relinquished by a servant; they are not his master's property."

16 See Herbert Morris Ltd. v. Saxelby [1916] 1 A.C. 688 at 703-704 per Lord Atkinson-
"The respondent cannot, however, get rid of impressions left upon his mind by his experience
in the appellant's works; they are part of himself."

17 See Erhman v. Bartholomew [1898] 1 Ch. 671; Rely-A. Bell Burglar and Fire Alarm
Co. Ltd. v. Eisler [1926] I Ch. 609; and Warner Bros Pictures inc. v. Nelson [1937] I K.B. 209.

18 [1974] 1 W.L.R. 1308. The covenant provided that the plaintiffs engaged the exclusive
services of the defendant for the five year term of the service agreement. On the facts the
covenant was held void. See the remarks of Lord Reid at 1314 - "Normally the doctrine of
restraint of trade has no application to such restrictions (i.e. to work exclusively for an employer
for a period): they require no justification. But if contractual restrictions appear to be unnecessary
or to be reasonably capable of enforcement in an oppressive manner, then they must be justified
before they can be enforced."

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period as possible. A "garden leave" provision in a service agreement will
therefore, require the employee to serve out his notice during which period he
will receive his salary and benefits but will not undertake his normal duties.
Instead he will be required to remain at home, thus preventing him from making
his talents and "know-how" available to his new employer, but allowing time for
his possible successor to become established. Technically therefore, although a
notice has been served on the employer by the employee (or vice versa) and the
contract terminated at a future date the employee will nevertheless be working
out such notice, and as such the "garden leave" provisions will take effect during
the course of his employment.19

The leading case on this type of clause is Evening Standard Co. Ltd. v.
Henderson, where the defendant was required to give one year's notice to
terminate his employment and he was obliged not to work outside the company
without the permission of his employer. 20He was offered a job with a competitor
whereupon he gave two months' notice of termination. The plaintiff brought an
action to restrain him from working during his twelve months' notice period
under the agreement and offered to pay his salary and benefits during that
period, irrespective of whether he undertook his duties at work. The Court of
Appeal granted the plaintiffs an injunction giving rise to "the Evening Standard
Doctrine,,21 and finding there was no serious issue as to liability. Such a clause is
particularly open to abuse where there is a long period of notice under a service
agreement. 22
A number of factors arise in connection with the doctrine. A court will not

normally order an employee to comply with his obligations under a contract of
employment and will not grant an injunction, the effect of which would amount

19 See the italicised remarks of Simon Brown L.J. inJA. Mont (UK.) Ltd. v. Mills [1993]
I.R.L.R. 172 at 176, para. 33.

20 [1987] I.C.R. 588; [1987] I.R.L.R. 64, (C.A.).

21 See further Paul Goulding, supra.n.5.

22 The Evening Standard decision was confirmed in Provident Financial Group p.l.c v.
Hayward [1989] 3 All E.R. 298; [1989] I.R.L.R. 84 (C.A.); [1989] I.C.R. 160 although Dillon
L.J. expressed caution at 165 - "The practice of long periods of "garden leave" is obviously
capable of abuse. It is a weapon in the hands of the employers to ensure that an ambitious and
able executive will not give notice if he is going to be unable to work at all for anyone for a long
period of time."

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RESTRAINT OF TRADE

to specific performance, 23 and the enforcement of such a clause would appear to
be an exception to this rule. The court will not therefore, indirectly order specific
performance by granting an injunction, the effect of which would be to make the
defendant employee perform the contract, or be forced into "idleness and
starvation." In the Evening Standard case, the plaintiffs had effectively disposed
of the forced starvation argument as they had offered to pay the defendant's
salary and benefits, thus there was no question of him starving. The starvation
argument for not enforcing a "garden leave" clause is also further weakened as
no defendant would starve during a notice period under the present welfare state,
although their standard of living may be severely reduced.
A more compelling argument against indirect specific performance by way of

injunction arises where the defendant had been reduced to idleness and as a
result has no duties to perform and cannot, therefore, exercise his skills and
talent. In such circumstances, it may be argued that the covenant is a restraint of
trade and unenforceable. 24 In terms of the construction and interpretation of
"garden leave" agreements are the words "idleness" and "starvation" conjunctive
or disjunctive? If the former, then doubts would arise as to the validity of the
covenant as an employee will inevitably remain idle, and as argued above that
may be considered a restraint of trade. If the latter, then as both conditions would
not be required to be satisfied the employee's inevitable idleness would not
prevent an injunction from being granted.25

Of more fundamental importance is whether an employer can lawfully prevent
an employee from working, and conversely whether an employee has an implied
right to work. If such an implied right was based on contract there would seem to
be no reason why it should not be expressly excluded. If however, as a matter of
public policy, each individual has a specific right to work such a clause may be
void as being in restraint of trade.
These issues have not yet been fully canvassed before the courts. If, however,

"garden leave" agreements are to be enforced, it does increase the bargaining

23 Warren v. Mendy [1989] 1 W.L.R. 853; [1989] I.C.R. 525. This is the conclusion of
a long line of cases commencing with Lumley v. Wagner [1852] I De G.M. & G. 604. For
statutory authority see section 236 of the Trade Union and Labour Relations (Consolidation) Act
1992.

24 The point was recognised by Taylor L.J .in Provident Financial Group p.l.c. v.
Hayward supra.n.22 at 170 but as the notice period was only three months there was no question
of the defendant's skills atrophying and the matter was left undecided.

25 See per Taylor L.J. ibid.; also Paul Goulding, supra.n.5 at 106.

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power of an employer when confronted by a dissatisfied employee who wishes
to leave and whose future career may be placed in jeopardy. These and other
matters may yet render such agreements void under the doctrine of restraint of
trade, particularly where the notice period is exceptionally long.26
Are damages (as opposed to an injunction) a possible or adequate remedy for

an employer whose employee is in breach of a "garden leave" agreement? The
court, as in the Evening Standard case, may accept that a plaintiff will suffer
damage but find it impossible to decide the quantum. 27 The courts have,
therefore, considered the concept of damages as being an inadequate remedy and
have to date assumed that it will not be a viable alternative or addition to an
injunction.28 However the possibility has arisen that the courts may in future be
willing to reassess the question of damages as a suitable remedy in certain
circumstances. 29 For example, if a stockbroker left his employer with a list of his
private clients, it would be possible to ascertain the commissions received by his
new employer from these "poached" clients over a specified period of time. Such
a period would be defined by reference to the time limit imposed by a post
employment restraint covenant. The suitability of this type of assessment would
depend on the facts of each case, but does serve to illustrate that "garden leave"
agreements are still in a state of evolution and subject to future scrutiny by the
courts.
A further consideration is the length of notice which an employee has to serve,

as the longer the notice the less chance there is of the court enforcing the
agreemeneo A court may, however, impose an injunction for only part of the
contractual notice period rather than the whole, where the whole period is not
absolutely necessary for the protection of the employer. 31 Directors' service

26 For a discussion of "garden leave" agreements and a precedent of such a clause see
Sean Nesbitt, "Employee Restraints: Maximising Contractual Protection" [1996] Practical Law
for Companies, Vol vn, No.8, at 33ff.

27 Supra.n.20 at 594B per Lawton L.J ..

28 Warren v. Mendy supra.n.23 at 868 per Nourse L.J ..

29 Ibid.; also Paul Goulding, supra.n.5 at 104.

30 See Provident Financial Group p.l.c. v. Hayward supra.n.22 when there was no real
prospect of serious damage to the plaintiffs from the defendant working for his new employers
before the expiry of his notice period.

31 GFI Group Inc. v. Eagles/one [1994] I.R.L.R. 119.

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RESTRAINT OF TRADE

agreements may be for a maximum term of five years 32 or include lengthy
periods of notice and the enforceability of a "garden leave" covenant in such
circumstances should be carefully considered when drafting the covenant and
lengthy periods of notice avoided.
In practice, however, the notice periods for both parties are usually the same.

Long periods of notice tend to favour the employee as if his employment is
terminated he will receive "a golden handshake" by way of compensation. A
long notice period may also be acceptable to an employer who wishes to retain
the services of a particularly valuable employee. Alternatively, a young
ambitious employee may only require a short notice period in case an
opportunity to further his career arose, and he wished to take up an alternative
appointment as soon as possible. In the strict context of "garden leave"
agreements, however, a relatively short period of notice is desirable in the
interests of the employer to ensure the covenant is enforceable as well as
reducing compensation in the event of termination. Nevertheless, an immediate
conflict of interest can arise between the parties.
A "garden leave" provision can also be a relevant factor in determining the

enforceability of a post employment restraint covenant. In Credit Suisse Asset
Management Ltd. v. Armstrong and Others, the "garden leave" covenant applied
for six months fonowed by a further restriction of six months after the
termination of employment. 33 The court held the latter covenant was enforceable
as there was no basis for set 'off between 'the "garden leave" clause as against the
post employment covenant. Ftirthennore, the court emphasised the individual's
right to exercise his ,skills and a "garden leave" agreement, perhaps substantially
ih excess:of'ci year, may accordihglyrender any post restraint covenant
une'nforceable.34 . .

In addition for a "garden leave" agreement to be enforceable, the employer
must have a proprietary interest to protect. Usually, this will mean the employee
is proposing to take up employment with a direct competitor. An element of-the
emp~oyer',Spn;>prietary:interest and goo~will is money made available to the

32 See ~.ec;tion319.ofthe COIppanies Act 1985: periods in excess of five years have to be
approved at a ge~~rai m.ee'ting.'

33 rI 99611.R.L.R. 450.
34 Ibid. per Neill L.J. at 455, para. 44.

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departing employee during his fonner employment. 35 Even, however, if an
employee is paid his full salary and benefits during his notice period, a "garden
leave" clause will not be enforceable if it is geographically too wide, or the
period of restraint too long.36

In conclusion to avoid the various areas of uncertainty raised by the recent case
law, a service agreement should contain a "garden leave" clause which (inter
alia) provides that each party can give to the other a requisite period of notice to
tenninate the agreement; the employee must work exclusively for the employer;
the employer can require the employee to cease working on tennination of the
agreement. In addition the employer must have a proprietary interest to protect.
In the interests of the employer only the notice period must not be too lengthy so
as to protect both the "garden leave" covenant and any post employment restraint
covenant; and the employer should be under an obligation to pay to the
employee his full pay and benefits during the "sterilisation" period; but under no
obligation to provide work. 37 Clauses of this type are, however, a relatively
recent innovation and some of the matters referred to above may be subject to re-
examination and found wanting on the grounds that they offend the interests of
the parties and/or public policy and the doctrine of restraint of trade.

IV. POST EMPLOYMENT RESTRAINT COVENANTS

(a) The Distinction Between Post Employment and Post Business Restraints
It has long been established that the doctrine of restraint of trade applies in

regard to two areas of commercial activity. First, when imposed by an employer
on an employee after the employment of the latter has ceased. 38 Secondly, when
a vendor sells his business and after completion of the sale he is subject to a

35 For example Euro Brokers Ltd v. Rabey [1995] LR.L.R. 206, £10,000 per year
entertainment expenses; GFI Group Inc. v. Eaglestone supra.nJl at 121, para. 15, £59,616
entertainment expenses.

36 See Provident Financial Group p.l.c. v. Hayward supra.n.22 per Dillon L.J. at 167
para. Dff.

37 There are other standard conditions to be included. For a precedent of a "garden leave"
clause and a discussion of the topic generally see Sean Nesbitt, supra.n.26.

38Routhv . .Jones [1947] 1 All E.R. 758 (C.A.); Mason v. Provident Clothing and Supply
Co. Ltd. [1913] A.c. 724.

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RESTRAINT OF TRADE

covenant restricting him from setting up in competition with the purchaser?9
Two questions arise. Are there different criteria as to enforceability applicable

to the two sets of circumstances? Alternatively, if different criteria apply which
set will be relevant in the event of an employee who is also the vendor of a
business, i.e. the party concerned is acting in a dual capacity? These matters
arose in Allied Dunbar (Frank Weisinger) Ltd. v. Weisinger, where a self
employed salesman of financial services sold his practice to a subsidiary of
Allied Dunbar, and thereafter became a consultant for a period of two years,
after which he agreed not to compete with the parent company or a subsidiary of
Allied Dunbar.40 The court held the covenant in the contract of sale was to be
tested in accordance with the principles as between vendor and purchaser.4]
Mr.J.Millet summarised the attitude of the courts to the two different types of
covenant and their rationale as follows:

"It is well settled that in considering the validity of covenants in
restraint of trade very different principles apply where the covenant
is taken for the goodwill of a business sold by the covenantor to the
covenantee. In the former case (although not in the latter) it may be
legitimate to protect the covenantee from any competition by the
covenantor and the courts adopt a much less stringent approach to
the covenant recognising that the parties who negotiated it are the
best judge of what is reasonable between them. The inclusion of
such covenants may be necessary to enable the covenantee to realise
a proper price for the goodwill of his business and by upholding the
covenant the court may well facilitate trade rather than fetter it.,,42

39 Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. supra.n.2; Herbert Morris
Ltd. v. Saxelby supra.n.12; &so Petroleum Ltd. v. Harpers Garage (Stourport) Ltd supra.n.l;
Gledhow Autoparts Ltd. v. Delaney [1965] 1W.L.R. 1366per Sellers LJ. at 1372. The doctrine
can also apply on cessation of self employment, e.g. on the dissolution of a partnership; or to
directors of a joint venture company. As to the latter see Dawnay Day & Co. Ltd. v. De
Braconier D 'Alphen [1997] l.R.L.R. 442 (C.A.).

40 [1988] l.R.L.R. 60.

4] Ibid. at 64, para.21- "... these covenants as taken for the protection of the goodwill of
the business sold to the plaintiffs by the defendants, rather than for the protection of the
plaintiffs present and future business as employer..."

42 Ibid at 64 para 20. See also Systems Reliability Holdings v. Smith [1990] I.R.L.R. 377
and Alliance Paper Group p.l.c. v. Prestwich [1996] l.R.L.R. 25.

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(b) Criteriafor Validity
A clause in an employment contract restricting an employee's activities after

termination of his employment is prima facie void as being in restraint of trade,
unless the employer can establish that he has a proprietary interest which needs
protection, and also any restraint is reasonable in the interest of both parties and
the public at large. 43 Accordingly, an employer cannot, therefore, prevent his
former employee competing against him unless he has such a proprietary
interest.44

Whether an employer's interests will be regarded as having sufficient
substance to merit protection, will depend on the circumstances of each case and
in particular the type of business of the employer and the role of the employee in
the operation of that business. Nevertheless, it is possible to deduce that the
interest which the courts will allow to be protected comes under two heads. The
goodwill of the employer's business which would include trade connections with
both suppliers and customers. The extent of the employer's proprietary interests
in this regard will depend upon the access of the employee to such customers
and corlrtedions during his employment. 45 A distinction must also be made
between the persi;mality and' the personal skills of the employee which engender
the succe~s of a business, and a proprietary interest which'may prevent an
employer from establishing a proprietary iIiterestitltegard to hiscllstomers.46
The tnlde secrets anq inforinatioh can be treated as it' p'rotectable proprietary

interest if they are of a sufficiently high degreeof'confidentiality to warrant
prot~ction after'termination of efuploy1llent:Irideterniinin'g whether a trade
secret isconfidentiaI; or is such that an emp1'6ye~is free to use it elsewhere, the
court will take into account all the crrcumstartces of the 'case; ihcludihg the
nature of the employment; the nature of the informatiqIl ~tself; wheth.er the

. ..
..employerimpressed on the employee the confidentifllity of the information and
'~heth~r:the re1ev~t informati'on"can eaSily be is'oHitedfrom other 'information

43Nordenfelt v. Maxim Nordenfelt Guns andAmmuniti~n Cp, Ltd. S!J.I?ra.n.2.

44Attwoodv. Lamont rI92013 K.B. 5~

4SRex·'stkJ;a~i'Je.ffrl'esParket Gthsbdfg1jd: v. 'parker n988] LIt.L.R'. 483 (C.A.)<The
opportunities of a managing director tode'velop' relatidnsliips 'with';customers were such that a
perio~ Qf eighteen months was not unreasonable.

. ,.._,., 'i :',\l, "

46 See Cantor Fitzgerald (UK:) ltd.'v. waliace'[19921I\R.L.R. 2'15'.

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RESTRAINT OF TRADE

which the employee is free to use or disclose.47

(c) Types of Covenant

(i) Non-Solicitation and Non-Dealing Covenants
The purpose of a non-solicitation covenant is to prohibit an employee from

actively approaching customers of his former employer for a defined period of
time after cessation of his employment with the intent that they will become
customers of his new employer. 4H The non-solicitation covenant is normally
limited to those customers with whom the employee had contact 49 during a
specific period prior to the termination of his employment. 50 Such a covenant
will not be implied where a specific non-solicitation covenant has not been
included in the contract of employment. 51 The time period during which the
covenant remains effective after the termination of employment must be
reasonable and again will depend upon the circumstances. In practice, this will
usually mean a sufficient period to allow the successor of a departing employee
to establish himself with his employer's customers.
A non-solicitation covenant must be distinguished from a non-dealing

covenant which prohibits a former employee from having any dealings

47 Faccenda Chicken Ltd. v. Fowler supra.n.13 at 310-311; see also Lancashire Fires Ltd.
v. S.A. Lyons and Co. Ltd [1997] I.R.L.R. 113 (C.A.) for information amounting to a trade secret
which is so confidential that the employee is prevented from using it after leaving his
employment, even without a restriction, it is not incumbent upon an employer to point out to an
employee the precise limits which he seeks to protect as confidential.

48 Por the meaning of solicitation, see Cullard v. Taylor [1887] 3 T.L.R. 698, (sending
letter to customers was solicitation).

49 The employee must have such contact as will attract the customer's loyalty. See S. W.
Strange Ltd v. Mann [1965] 1 W.L.R. 629 (dealings on the telephone alone insufficient).

50 Plowman v. Ash [1964] 1 W.L.R. 568. See also Dentmaster (UK.) Ltd. v. Kent [1997]
I.R.L.R. 636 (C.A.)- where a non-solicitation clause prohibiting the employee from soliciting the
business of anyone who had been a customer of his employers during the last six months of his
employment, and with whom he had dealt at any time during the course of his employment, was
enforced. The subsequent restraint period was also for six months. In particular, see the remarks
of Waite L.J. at 638, para. 17- "Por my part given the brevity of the restraint period and the
limitation of this restraint to customers within the previous six months, I find nothing illogical
in the absence of a backward temporal limit on the employees dealing with such customers."

51 Wallace Bogan & Co. v Cove [1997] I.R.L.R. 453.

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whatsoever with the customers of his former employer. Unlike a non-solicitation
covenant, a non-dealing covenant is passive in nature and does not require an
active approach to former employer's customers, i.e. a customer could himself
approach the former employee. The latter covenant is, therefore, wider in nature
than a non-solicitation clause, as it involves interference with the rights of third
parties to enter into contracts. Evidentially, there is no need for the plaintiff to
prove that an approach to a customer has been made by the former employee. As
a result, the courts have approached such covenants with circumspection, and the
plaintiff will have to establish that, as with a non-solicitation covenant, he has
valid interests to protect, and there was a personal connection between the
former employee and his customers. Nevertheless, the courts will enforce such
covenants even if a customer makes it clear that he no longer wishes to do
business with the former employer and wishes to remain a customer of the
departing employee.52

(ii) Former Employees
A contract of employment may contain a covenant that a former employee will

not entice away any of the employees of his former employer to work for his
new employer. The employer's proprietary interest in this regard is somewhat
nebulous, although generally an employer has a legitimate interest in preventing
an employee from working for a new employer who is one of his competitors. 53
Accordingly, the courts may be reluctant to enforce such covenants and care will
be required in drafting to ensure that they are narrow in their interpretation in
that they relate to the immediate colleagues of the former employee.

(iii) Non-Competition
An employer has no right to restrain an employee from competing with him

after cessation of employment, and such a covenant will be prima facie void as

52 JohnMichaeIDesignp.l.c. v. Cooke [1987] I.c.R. 445 and the remarks of Nicholls L.J.
at 449, para E, - "The mere fact that a particular customer no longer wishes to remain a customer
of (the former employer) but wishes in future to deal with (the ex-employee) is not per se a sound
reason for excluding the customer from the scope of the injunction."

53 Kores Manufacturing Co. Ltd v. Kolok [1959] Ch. 108 per Jenkins L.J. at 125.
Seemingly the maintenance of a stable work force may constitute such a legitimate interest. See
Dawnay Day & Co. Ltd v. De Braconier D 'Alphen supra.n.39 and in particular per Evans L.J.
at 448, para. 46 - "an employer's interest in maintaining a stable, trained workforce is one which
he can properly protect within the limits of reasonableness by an undertaking of this sort. But it
does not follow that that will always be the case."

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being in restraint of trade. 54 As has been seen, to be enforceable such a covenant
must be reasonable as between the parties and also in the public interest. 55 Such
reasonableness must be established at the time the covenant was imposed.56

Other elements also have to pass the test of reasonableness in order to establish
the enforceability of a non-competition covenant. First, a restriction must not be
so wide as to prevent the former employee from working elsewhere, as such a
restriction could effectively amount to specific performance. 57 Secondly, both
the period and area of restraint must be reasonable, which will depend on the
facts of each case and the individual business needs of each employer. 58 All these
factors pose a challenge when drafting a restraint covenant in a service
agreement. The courts are not, however, unsympathetic to the dilemmas of the
draughtsman facing this task.59

The courts are nevertheless, somewhat ambivalent towards the construction of
restraint covenants; alternating between a strict construction of them against the
covenantee, or attempting to bring them within the scope of reasonableness and
avoid declaring them void, although the recent approach has been to adopt the

54 Routh v. Jones supra.n.38.

55 Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd. supra.n.2; also per
Lord Macnaghten at 565- "It is sufficient justification, and indeed it is the only justification, if
the restriction is reasonable - reasonable that is, in reference to the interests of the parties
concerned and reasonable in reference to the interests of the public." In that case the protective
words were unusual in that they were worldwide. Cf Littlewoods Organisation Ltd. v. Harris
[1977] I W.L.R. 1472 when a worldwide restraint was limited to the U.K..

56 Home Counties Dairies Ltd. v. Skilton [1970] I W.L.R. 526; Business Seating
(Renovations) Ltd. v. Broad [1989] r.C.R. 729.

57 Whitwood Chemical Co. v. Hardman supra.n.5.

58 For example Stenhouse Australia Ltd. v. Philips [1974] A.C. 391- five year restriction
on the managing director of an insurance broking company upheld. Dowden & Pook Ltd. v. Pook
[1904] 1 K.B. 45- on the facts a restriction without any geographical limit in area held invalid.
See also Mason v. Provident Clothing and Supply Co. Ltd. supra. n.38.

59 See Home Counties Dairies Ltd. v. Skilton [1970] 1 W.L.R. 526 at 538per Cross L.J.-
"It is in practice extremely difficult to frame restrictions which will adequately protect a trade
connection and may not at the same time cover some cases where a breach will not injure the
trade connection. If the court can see that the restriction has been carefully framed for a
legitimate purpose, I do not think it should hold it void as contrary to public policy in favour of
an employee who is in flagrant breach of it on such narrow grounds as those relied on in this
case."

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latter of the two altematives.60

(ei) Anticipatory and Post Termination Breach of Fiduciary Duties
The general duty of good faith which an employee owes to his employer places

a restriction on working, either during working hours, or in his spare time, for a
competitor or in competition with the interests of his employer. 61Such a duty is
particularly explicit in the case of company directors who are in a fiduciary
relationship to their companies. 62Furthermore, a director will be required to
account for any profit he has made from a transaction carried out in breach of
such a duty. 63The duty can also apply both during and after employment. 64

The breach of the implied duty of good faith or an express provision in a
service agreement also extends to action taken by an employee during the
continuance of his employment in anticipation of the employment being
terminated, when such actions can, or are likely to, damage the interests of the
employer. The law was succinctly summarised by Lord Justice Greer in Wessex
Dairies Ltd v. Smith:

"[The employee] is under the ordinary implied obligation ... namely
that during the continuance of his employment he will act in his
employer's interests and not use the time for which he is paid by the
employer for furthering his own interests."65

60 See J.D Heydon, supra.n.lO at 122-136; and P.L. Davies, "Post Employment
Restraints: Some Recent Developments" [1992] JB.L. 490 at 501.

6\ Hivac Ltd. v. Park Royal Scientific Instruments Ltd. supra.n.l3. The decision reversed
a trend whereby a director would not be restrained from working for a competing company. See
London and Mashonaland Exploration Co. [1891] W.N. 165 approved by Lord Blanesborough
Bell v. Lever Bros. [1932] A.C. 161 at 195 (H.L.). For a detailed submission that the former case
was wrongly decided see Michael Christie, "The Director's Duty not to Compete" [1992] 55
ML.R 506.

62 Cookv. Deeks [1916] 1 A.C. 554; 85 L.J.P.C. 161 (P.C.).

63 Industrial Developments Ltd. v. Cooley [1972] 1 W.L.R. 443.

64 Thomas Marshall v. Guinle [1978] 3 W.L.R. 116; [1978] I.C.R. 905.

65 [1935] 2 K.B. 80 at 84. The defendant personally approached his employer's customers
to resort to his business once he had set it up after his employment had terminated. See also Robb
v. Green [1895] 2 Q.B. 315- copying the names and addresses of his employer's customers with

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There is also an implied duty of confidentiality which is not limited solely to
the relationship of employer and employee. Equity will, therefore, protect a
person from conveying confidential information to a third party.66

It is also prudent to include a specific clause in a service agreement dealing
with confidentiality, so that the relevant issues are clearly defined and there can
be no misunderstandings. Employers may, however, consider such a clause to be
of such importance as to merit a separate "Trust and Confidence Agreement"
defining the information protected in full detail, e.g. inventions, patents,
copyrights, etc., and the obligations placed on the employer after termination of
his employment.67

A director of a company is also under a duty not to make a secret profit from
his utilisation of the assets of the company and opportunities and information
available to him arising from his role as a director. 68Such a duty arises
irrespective of the terms of any service agreement, either in regard to a specific
duty or post termination restraint of trade. A director, who specifically resigns
(falsely alleging ill health) to exploit a commercial opportunity known to him in
his capacity as director, will be in breach of duty, even though his former
employer would not have in any event received the benefit of the transaction in
question. Also, the director will be liable to account for any secret profit. 69
Further the duty does not end when a director's employment is terminated and he
is, therefore, prevented from pursuing maturing business opportunities which he

a view to use by the employee on setting up his own competing business. Confirmed in Roger
Bullivant Ltd. v. Ellis [1987] I.C.R. 464. It may be difficult to prove where a list of names has
been committed to memory, Hart v. Colley [1890] 59 L.J. Ch. 355. See also Pennycuick V-C in
Baker v. Gibbons [1972] 2 All E.R. 759 at 765.

66 Segar v. CopydexLtd. [1967] 1 W.L.R. 923 at 931, para Eper Lord Denning- "The law
on this subject depends ... on the broad principle of equity that he who has received information
in confidence shall not take advantage of it."

67 See Practical Commercial Precedents [1986] (ReI. 27) (gen.ed. Jeffrey Green), Volume
1, Part E, Employment Precedent E. 4.

68 Boston Deep Sea Fishing Co. Ltd. v. Ansell [1888] 39 Ch. D. 339. The duty can also
arise in respectofa senior employee- Canadian Aeroservices Ltd v. 0 'Malley [1973] 40 D.CR
(3d) 371.

69 Industrial Development Consultants Ltd. v. Cooley supra.n.63 where the service
agreement of a managing director contained no express covenants. See also Thomas Marshall
(Exports) Ltd. v. Guinle supra. n.64; Cranleigh Precision Engineering Ltd. v. Bryant [1964] 3
All E.R. 289.

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was engaged upon for his employer prior to his leaving, where the resignation
was prompted by a desire to acquire the opportunity for himself.1°

v. WRONGFUL TERMINA nON

If an employee who is subject to a restraint covenant on termination of his
employment is wrongfully dismissed, then such covenant is void and
unenforceable. This general principle was enunciated in General Bill Posting Co
Ltd. v. Atkinson, when the employers agreed with their manager that his
employment could be terminated on twelve months' notice by either party, with
a restriction on his right to trade after its termination. 71 The employers having
wrongfully dismissed him without notice, it was held he was entitled to treat the
dismissal as a repudiation of the contract, to sue them for damages, and that he
was no longer bound by the restraint covenant. In practice, however, a contract
of employment usually includes a clause that a restraint covenant will take effect
on the termination of employment, for example "for whatsoever reason" or
"howsoever determined." Such clauses, or clauses with similar wording, have
however, been upheld by the courts over a number of years. 72
However, the validity of these types of covenant was attacked in the recent

case of D v. M, where restrictions on the defendant's former managing director's
activities were to apply after his employment was "terminated for any reason
whatsoever" and "irrespective of the cause or manner" were held to be

70 Island Export Finance Ltd. v. Umunna [1986] B.C.L.C. 460 where on the facts the
plaintiffs claim failed as the defendant's resignation was not prompted by the desire to take
advantage of a maturing opportunity.

71 [1909] A.C. 118. See further at 121 per Lord Robertson - "It seems to me that the
covenant not to set up business is not only germane to but ancillary to the contract of service, and
that once the contract of service is rescinded the other falls with it."

72 Dairy Crest Ltd. v. Piggott [1989] I.C.R. 92- "after the termination or cessation in any
manner;" Business Seating (Renovations) Ltd. v. Broad supra.n.56- "for any cause whatsoever"
and "howsoever effected;" Lansing Linde v. Kerr [1991] 1 All E.R. 418- "howsoever caused."
See also Rock Refrigeration Ltd. v. Jones and Seward Refrigeration Ltd. [1996] I.R.L.R. 675 at
679, para. 38 per Morritt L.J.- "No fewer than 12 reported cases decided between 1964 and 1991
in which covenants in similar terms were not alleged or found to be invalid on this ground."

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unreasonable on their face and unenforceable. 73 Accordingly, there was no issue
to be tried. The clause was determined unenforceable as its purpose was to
secure coercive rights to the employer, which would survive his own contractual
misconduct. The decision, that covenants of this type were unenforceable, has
serious practical consequences as they are extant in many existing contracts of
employment.
This difficulty has now been resolved, as the Court of Appeal in the recent

case of Rock Refrigeration Ltd. v. Jones and Another where the defendant had
given lawful notice under his contract of employment and joined a competitor,
held accordingly that there was no question of wrongful termination. 74 The issue
in question was whether a restriction covenant, which is expressly provided to
take effect upon the termination of a contract of employment "howsoever
occasioned" was necessarily unreasonable and thus unenforceable. The court
held in revising D v. M that where there is a repudiatory breach of the contract of
employment by the employer the principle in General Bill Posting Co.Ltd. v.
Atkinson applies; the employee is released from his obligations under the
contract and restrictive covenants against him cannot be enforced. The court
further held that a covenant, otherwise reasonable, that purported to remain
binding in circumstances where it was impossible to enforce it could not, on that
account, be in unlawful restraint of trade; and that therefore, the restrictive
covenants in the first defendant's contract were enforceable unless/until the
plaintiff committed a repudiatory breach.
The effect, therefore, of the decision is that a restraint covenant will not be

unenforceable merely because it is drafted to take effect after termination of the
contract of employment, for example, "howsoever occasioned" or in other
similar terms. The restraint clause will in such circumstances stand or fall in
accordance with the restraint of trade doctrine. Nevertheless, where there is a
repudiatory breach of contract by the employer the employee will be released
from the contract and the restraint covenant in accordance with the principle of
General Bill Posting CO.Ltd. v. Atkinson.

73 [1996] I.R.L.R. 192. See also Living Design (Home Improvements) Ltd. v. Davidson
[1994] I.R.L.R. 69; PR Consultants Scotland Ltd. v. Mann [1996] I.R.L.R. 188; Briggs v. Oates
[1990] I.R.L.R. 472.

74 [1996] I.R.L.R. 675; [1997] I.C.R.938. For drafting considerations arising as a result
of the decision see Steve Wilson & Mick Woodley, "Terminating a Restraint Clause" (1997) 141
s.J 14; also Michael Jefferson, "Restraint of Trade: Dismissal and Drafting" [1997] 26 I.L.J62.
For a consideration of the theory on the law of discharge see P.L. Davies, supra.n.60 at 494.

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VI.SEVERANCE
Where a restraint covenant contains in part an enforceable restriction, and also

in part a restriction which is unenforceable, the courts may strike out the latter
and thereby sever the one from the other. Un surprisingly, the courts view such a
procedure with caution; 75 nor will the court rewrite the covenant. 76
Two tests as to the application of the doctrine have emerged from the case law.

First, the part of a covenant which is severed must be separate and distinct from
the other, and the underlying meaning of the clause must remain. 77 Secondly, the
"blue pencil" test where the words severed must constitute a generally separate
covenant, and do not form an integral part of a single covenant, and can be
severed without affecting the meaning of the remaining part. 7S Put simply, this
means the offending words can be literally deleted without affecting the
remaining words as they were actually written. The remaining enforceable terms
must also be supported by adequate consideration.79

Clearly in drafting restraint covenants they should be kept separate and
independently defined so as to make severance more easily applicable if such an
eventuality should arise.

VII. DRAFTING CONSIDER A TIONS
The difficulties facing the draughtsman of a restraint covenant, whether acting

for an employer or an employee, were succinctly summarised by Lord Justice
Pearson in Commercial Plastics v. Vincent:

7S Mason v. Provident Clothing and Supply Co. supra.n.38 at 745 per Lord Moulton-
"But... that ought only to be done in cases where the part so enforceable is clearly severable, and
even so only in cases where the excess is of trivial importance, or merely technical, and not part
of the main purport and substance of the clause."

76 Ibid. at 745 per Lord Moulton.

77 T. Lucas & Co Ltd. v. Mitchell [1972] 1 W.L.R. 938.

78 Attwoodv. Lamont supra.n.44.

79 Marshall v. N.M Financial Management Ltd. [1997] I.R.L.R. 449 (C.A.) where an
entitlement to the payment of post termination commission was held severable and payable. The
consideration for the payment of the renewal commission being the employee's services in
procuring business before his resignation.

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"It would seem that a good deal of legal "know-how" is required for
the successful drafting of a restraint covenant.,,80

Given the present and future uncertainties in respect of these covenants, the
busy practitioner has to give careful consideration as to how, if possible, any
pitfalls can be avoided. Although it is difficult to predict the future view a court
may adopt, various clauses can be included in contracts of employment which
may offer limited protection for the interests of the parties.

One such device is a "savings" clause discussed by the Court of Session in
Hinton & Higgs (U.K.) Ltd. v. Murphy and Valentine, where the clause
contemplated that the parties would abide by a result which could be effected by
the deletion of some unreasonable part of the contract rendering the contract as a
whole reasonable.81 Since that did not involve rewriting the contract (which the
court would not undertake) but selecting that version which the parties (inter
alia) had made with each other, and thus enabling the modified bargain to stand,
there was no reason why the court would refuse to perform that role. On the
facts, however, the clause was held unreasonable as being too wide in its
geographical limitation. Such a clause is of limited value as the draughtsman is
attempting to second guess the reaction of the court, and in any event, a resulting
modification may only be of a relatively minor nature as the contract cannot be
rewritten.
A less specific arrangement would be for the parties to agree that the part of

the clause held void is deemed not to form part of the contract, but the remaining
part shall be valid. Such a clause, in effect, merely anticipates severance by the
court. When acting for an employer there would, therefore, seem to be little
alternative but to err on the side of caution and draft a restraint covenant that is
strictly limited in scope so as to ensure enforceability.
When acting for the prospective employee the balance of negotiating power

may, more often than not, rest with a large wealthy employer. The risks
undertaken by the employee will be greater as he or she may leave a relatively
secure appointment, move house, home and family, when taking up a new post
and entering a restraint covenant. Also on termination of employment a covenant
may be unenforceable, but the employee will not be able to meet the expense and

80 [1965] 1 Q.B. 623 at 647.

81 [1989] I.R.L.R. 519. The contract provided that " ... in the event that any such restriction
shall be void would be valid if some part thereof were deleted ... such restrictions shall apply with
such modifications as may be necessary to make them valid or effective."

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risk of litigation. A compromise solution would be for the restraint covenant
only to take effect after an agreed period from the commencement of
employment say, for example, one year. This would give an employee an
opportunity to assess his new appointment during the first year, and if
dissatisfied leave without fear of being manacled by a restraint covenant.
Conversely, a covenant of this type may not be acceptable to an employer, who
will require a full and immediate commitment from the new recruit; tactful
negotiation would, therefore, be required on the part of the prospective
employee.

VIII. CONCLUSION

The courts have a long history of decisions in regard to covenants in restraint
of trade in regard to contracts of employment going back to the latter part of the
last century, and the unwary may be tempted to assumed all the relevant issues
have been resolved. Such an assumption would, however, be unfounded.
Generally it has always been difficult to balance the interests of the employer
and employee, whilst also taking into account the public interest in deciding the
enforceability of restraint covenants. In addition, constant change in commercial
and business activities linked with the increase in the importance of "know-how"
and technology have raised further questions which have had to be resolved.
Hence the rec;ent spate of cases in the courts. 82 It would also be imprudent to
conclude that the courts will remain inactive in this area as "garden leave"
agreements are, for example, still in a state of evolution. All these factors give
rise to problems in respect of both the drafting and interpretation of these
covenants. Care and a perspicacious outlook in regard to future developments
are therefore required.

82 For a further consideration of some recent cases see Charles Wynn-Evans, "Restrictive
Covenants and Confidential Information - Some Recent Cases" [1997] 18 Bus. Law. Rev. 247.

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