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Restraint of Trade Clauses

15 Aug 2014, 11:08 by Edward Webb

Labels: contract, court, employee, employer, employment, trade-clauses

A restraint of trade clause is a term contained within a contract that seeks to limit a party’s ability to be employed by an alternative business. The most common type of restraint clause is contained within a contract of employment and is one which simply seeks to restrict an employee’s ability to work for another business during the term of their employment.
The next level of restraint of trade clause seeks to limit an ex-employee from working for a competitor for a specified period of time. Clauses such as this are prima facie void, they will only be uphold by the court if the employer can show it has a ‘legitimate proprietary interest to protect’ (LPI).
An LPI may be a trade secret, a list of existing clients, a manufacturing process or other important confidential information.
One of the leading cases on restraint of trade clauses is Faccenda Chicken Ltd v Fowler [1986] I.C.R. In this case Mr Fowler had previously worked for Faccenda Chicken Ltd, when he finished his employment he set up his own business. Faccenda Chicken Ltd sued Mr Fowler and argued he had information about the names and address of its clients. The court held that whilst there is a clear obligation not to disclose information that may cover a secret process or other information which is a sufficiently high degree of confidentiality to amount to a trade secret it does not extend to all information acquired by an employee during the time of their employment.
The question of whether a restraint of trade clause will be deemed enforceable or not is by no means a simple question. The court will look at a number of factors.
The first is whether the clause is an express or implied term (i.e. written into the contract of employment or not). If it is an implied term the court is not likely to enforce the contract but if it is an express term, the court will then look to see if there is a LPI (e.g. trade secret).
The next stage is to consider the extent of the clause. The court will want to see that the clause goes no further than offering the minimum protection necessary to protect the employer. If the clause is too restrictive it is not likely to be enforced. The characteristics of the clause that will be considered are the time restriction, geographical restriction and scope of the clause.
The above characteristics are taken on a case by case basis. I have previously dealt with a restraint of trade dispute in the aerospace industry. My client wanted to employee Mr A from its rival (Party B) however, Mr A had a 12 month restraint of trade clause. At first, it was argued this clause would not be enforced because whilst Mr A was aware of some trade secrets / client lists, these were largely historic. Party B protested and investigated it’s employee further, it transpired that Mr A was aware of a technical specification for a new product and had emailed this to himself the night before his resignation. Unfortunately this was not helpful. In any event, I was able to argue for a reduction in the restrain to trade clause to 5 months because it was clear this was all that was necessary to protect Party B’s interests.
Historically, restraining someone for a period of over 5 years had been enforceable (Forster & Sons Ltd v Suggett (1918) 35 T.L.R 87), indeed in more high value cases a clause restraining someone’s ability to work for 25 years in a particular industry has been held to be enforceable (Nordenfelt v Maxim Nordenfelt Guns Co Ltd [1984] A.C. 535).
Owing to the complexities of restraint of trade clauses, due consideration must be given when drafting the same. It may be that each department in a given business will need a different level of protection and the more senior the employee the more extensive the restriction.


Pre-termination negotiations to remain confidential

13 Jul 2013, 09:04 by Priya Bakshi

Labels: breach-of-contract, compromise-agreements, contract, discriminaton, employee, employer, employment-contract, employment-rights-act, unfair-dismissal

From 29 July 2013 section 111A of the Employment Rights Act 1996 will come into force. Employers will be able to negotiate and agree with the employee terms to end the employment contract without these conversations being admissible in a subsequent unfair dismissal claim. Such negotiations will therefore remain confidential. These compromise agreements, a legally binding contract, will be renamed ‘settlement agreements'.

However the change in the law, namely the confidentiality provisions, is conditional and will not apply to the following types of claims: 

  • Automatic unfair dismissals, such as whistleblowing, trade union membership or asserting a statutory right.
  • Claims of discrimination, harassment, victimisationbreach of contract or wrongful dismissal.

The ACAS Code of Practice on Settlement Agreements is set out to assist and guide both employers and employees with regards to this law reform. In particular, it sets out that confidentiality provisions will only apply where there is no "improper behaviour" by either of the parties. Where there is improper behaviour, confidentiality will only attach to evidence to the extent that the tribunal considers just. Examples of what constitutes "improper behaviour" have been provided in the ACAS Code of Practice.


Christopher Knowles attends careers talk held at Loughborough University

21 Nov 2011, 16:02 by John Snell

Labels: barrister, barristers, contract, criminal-law, employment-law, land-law, lawyer, pupil

Always keen to support those interested in a career at the Bar, New Walk Chambers were amongst the speakers at the "A career in law" careers talk held at Loughborough University on the 9th November 2011.

Christopher Knowles attended the event and gave a talk on a  career at the Bar and the life of a Pupil Barrister. He was one of three speakers at the event - the other two being representatives from the Government Legal Service and the College of Law.

His talk covered the numerous routes to a career as a Barrister, and what chambers would be looking for in prospective pupils and how to apply for pupillage.During the course of the talk, Christopher touched upon the Inns of Court, the Bar Professional Training Course and CV and application form tips.

Following the talk, Christopher remained behind to answer questions from students and participated in an exercise with the College of Law, which covered aspects of the core modules which would be studied on the graduate diploma in law course, namely contract, criminal, tort, land, constitutional, equity and trusts, and european law.


Direct Access: Compromise Agreements

03 Nov 2008, 10:48 by Robert Rees

Labels: compromise-agreements, contract, direct-access, employee, employment, employment-tribunal, lawyers

  As the recession looms there will be many employers wishing to relieve themselves of staff to save costs. Many will prefer their employees to leave voluntarily and to sign compromise agreements. These when properly made lawfully prevent employees going to employment tribunals to  contest the circumstances of their leaving. Employers will sweeten the pill by agreeing to pay and ex-gratia lump sum. Barristers through the direct access scheme are amongst qualified lawyers who are allowed to sign these agreements to make them lawful as preventing employees from going to employment tribunals.

In case an employee has in fact been guilty of some behaviour which would otherwise have entitled the employer to dismiss, prudent employers can include a clause or warranty to the effect that the money payable under the compromise agreement will not in fact be paid if it is discovered that indeed the employee has been guilty of something which would have given the employer the right to dismiss. Such a clause can be termed a warranty along these lines, the employee agreeing as follows:

"You warrant as a strict condition of this agreement that there are no circumstances of which you are aware or of which you ought reasonably to be aware which would constitute a repudiatory breach on your part of your contract of employment which would entitle or have entitled the company to terminate your employment without notice."

In Collidge v Freeport plc [2008] IRLR 697 an employee was found to have been guilty of financial impropriety prior to a payment of £445k, under a compromise agreement and so no payment was made by the employer. The Court of Appeal upheld the judge's unsurprising finding that such a clause was a condition precedent for payment under the compromise agreement and the employer did not have to make the payment. Mr C's warranty was a condition, a sina qua non, of the employer's obligations to pay. The warranty was a pre-condition of the employers liability to perform its obligations under the contract.

Writen by Robert Rees, Barrister at New Walk Chambers, specialising in direct access, employment law and compromise agreements.


Bank Overdraft Charges Test Case - The End of the First Chapter

24 Apr 2008, 15:03 by Christopher Jeyes

Labels: bank-charges, breach, commercial-law, contract, overdraft, penalty-clauses, unfair-terms

  After what seems like an eternity, Mr Justice Andrew Smith has released his judgment in the Bank Charges Test Case (Office of Fair Trading v. Abbey National plc and 7 others [2008] EWHC 875 (Comm) - BBC News), dealing with the questions of whether overdraft "penalty" charges are covered by the Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/2083, "the 1999 Regulations") and therefore subject to an assessment of fairness, whether the terms and conditions of the banks who took part in the case were in plain and intelligible language, and whether the relevant terms were penal in nature and therefore unenforceable at common law.

In a gargantuan judgment of 119 pages and 450 paragraphs, which one expects will cause the Courts some headaches when the millions of charge-reclaiming consumers lodge copies of it in support of their claims, Andrew Smith J concludes that the charges levied by the banks are not charges for services provided, and are therefore not excluded from the assessment of fairness by reg.6(2)(b) of the 1999 Regulations. Although the Judge accepted that services are provided when a bank makes payment upon receipt of an instruction from a customer and thereby allows a customer to borrow funds, the way in which such fees had been packaged and expressed did not suggest that they were in fact fees for services, only fees arising from the circumstances in which a transaction took place. In any event, the banks had contended that the fees were part of the "free if in credit" banking structure, and that they financed the system as a whole. Given that situation it is not surprising that the Judge held that the 1999 Regulations do not exclude assessment of such terms.

As expected, "Money Saving Expert" Martin Lewis (from whose website millions of template claim letters have been downloaded) proclaims this decision to be a "major victory" for the consumer, but whilst it certainly does the consumer's case no harm (consumer in the singular because the 1999 Regulations have a bearing only on individual contracts), there is still a long way to go. For a start, the ruling applies only to the terms and conditions of the banks involved in the case, and only the current editions of those terms. The banks could now re-write their terms to clearly express the erstwhile penalty fees as the fees for services provided, or even re-structure their charging regime such that the "free if in credit" system comes to an end, and all bank customers have to pay the price. And of course, there may yet be an appeal to a higher court.

That being said, it is anticipated that the Office of Fair Trading ("OFT") will now rapidly produce its conclusions as to the fairness of the "penalty" fees applied by the banks, most probably in line with its decision on credit card default charges, in which charges were generally considered fair if they were £12 or less.

The penalty issue was decided in favour of the banks, the Judge considering that on the terms before him, the fees charged were not occasioned by a breach of contract, because the consumer was not under a relevant contractual obligation. Given that the sum was payable otherwise than on breach of contract, the rules on penalties did not apply. This was an argument I raised in an article in the New Law Journal ("Highly Charged?" 20 April 2007 pp.536-7). Disappointingly for me, my other argument (that by agreeing to an ad hoc overdraft the banks waived any contractual breach and charged a fee pursuant to a variation of the contract) did not find favour with the Judge, but I can take heart from the fact that it seems to have been adopted by the ten QCs appearing for the various banks!

The millions of outstanding bank charge claims will remain on hold for the time being, but I suspect that, unless there is an appeal and a further stay of the claims, the solicitors for the banks, and the courts, had better be steeling themselves for a summer deluge!

Written by Chris Jeyes, Barrister at New Walk Chambers, specialising in Contract, Banking, Civil and Commercial Law.


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