Blog: Time to review your restrictive covenants?
Hazel Coutts looks at a case in which the Court of Session refused a motion for interim interdict, leaving an employee free to pursue business in competition with his former employer despite the existence of restrictive covenants.
In the case of Informa UK Limited v Fraser McDougall, the Court of Session was asked to interpret a restrictive covenant within Mr McDougall’s contract which read: “…The Employee agrees that for a period of six months following employment with the Company will not …be employed by any direct competitor, or any subsidiary of a direct competitor…’
Mr McDougall resigned from his post in April 2017. In his formal notice of resignation he stated:
‘…For the sake of good form and business courtesy I wish to inform you that I will be joining a competitor company…”
Mr McDougall was placed on gardening leave during his six month notice period.
Informa UK Limited became aware that Mr McDougall was to take up a position with Phil Mac Associates, trading as Agbioinvestor. Phil Mac Associates was created by Dr John McDougall, Fraser McDougall’s father. Dr McDougall had co-founded Phillips McDougall which had been acquired, at substantial cost, by Informa UK Limited in 2013. Fraser McDougall’s employment transferred from Phillips McDougall to Informa UK Limited (the ‘company’) at that time. Dr McDougall retired from the business.
The company, concerned that their investment would be damaged, wrote to Fraser McDougall’s solicitor reciting the terms of the covenants and warning of the potential consequences of a breach. Fraser McDougall’s representative confirmed that as his client had been assumed as a partner of Phil Mac Associates, and not as an employee, there was no breach.
Fraser McDougall lodged caveats with the Court of Session to ensure that he would be notified in the event that the company raised proceedings against him.
On 5 December 2017 Agbioinvestor issued an announcement stating: “Much of the analyst team behind the respected Phillips McDougall …has transferred to a new business, Agbioinvestor… This month sees four analysts with more than forty years of collective experience gained in senior analytical and managerial roles at join Agbioinvestor”.
On that same day the court heard the company’s motion for interim interdict.
At the hearing the Judge did not accept the position put forward on behalf of the company that the verb ‘employed’ had to be interpreted in the general sense of ‘engaged’. Fraser McDougall’s representative submitted that the meaning of ‘be employed’ was clear and the words should mean what they say. He also argued that, as the employee had been placed on garden leave, the company had been provided with the protection it sought from the covenant.
The court accepted that there was a legitimate business interest for the company to protect and that the restrictions were reasonably necessary for the protection of the company’s interests. However, the Judge accepted that there were strong arguments that the words ‘be employed’ were used with their most obvious meaning and therefore, on the balance of convenience, she was not persuaded to exercise her discretion in favour of the company and refused to grant an interim interdict.
In light of this decision, it is important that employers consider carefully the terms of any restrictive covenants applied or likely to be issued to new employees. Failure to do so could have far reaching financial implications as in this case where effectively former employees were able to legitimately set up in competition simply by adopting a different form of corporate entity and employment status.
At MacRoberts we regularly draft restrictive covenants and advise on their enforceability. We can also assist in lodging caveats to protect business and property interests.
If you would like to discuss this case or any other issue, please do not hesitate to contact us.
- Hazel Coutts is a senior associate at MacRoberts