Reasonableness of Restraints of Trade: 'Non-Contractual' Intentions Are Relevant

Reasonableness of Restraints of Trade: 'Non-Contractual' Intentions Are Relevant

December 9, 2021, Covington Alert

In Harcus Sinclair LLP v Your Lawyers Ltd [2021] UKSC 32, the Supreme Court held that a six-year restraint of trade provision in a non-disclosure agreement between two law firms was enforceable and prevented one of the firms from bringing a group litigation claim in competition with the other.

Importantly, the decision clarifies that, when assessing the reasonableness of a restraint of trade provision, the courts are entitled to take into account not only the obligations of the parties arising out of the relevant contractual terms, but also the parties’ ‘non-contractual’ intentions – i.e. their unstated contemplations as to what their contractual obligations would be (assessed objectively at the time the contract was made). Therefore, legitimate business interests need not be referenced expressly in the contract in order to be considered in an assessment of reasonableness. Similarly, consideration given for a restraint of trade provision is not necessarily limited to that stated in the contract - courts may also consider the benefits intended or contemplated by the parties as flowing from the contract.

Restraints of trade are of course a common feature of employment contracts in the form of post-termination restrictive covenants. Employment contracts are often silent as to the employer's specific legitimate interests, however. It is nonetheless well-recognised that in considering the reasonableness of restrictive covenants in employment contracts, an employer will have certain such legitimate interests to protect, examples being confidential information, trade secrets and a stable customer base. As such, employers will be unsurprised by this aspect of the decision. What will be of interest though is the Supreme Court’s emphasis on non-contractual intentions (here the backdrop to the non-disclosure agreement was that the law firms were considering collaborating together to bring a group litigation claim). In circumstances where alleged legitimate interests fall outside usual parameters, this case may provide greater scope than previously for employees and employers to pursue intentions-based arguments either to expand or to limit the scope of restrictive covenants.

This decision is therefore a salient reminder to employers to carefully consider, at the time of entering into a contract with an employee, what is intended in respect of any restrictive covenant – whether or not such intentions are expressly written into the contract – as these may come under greater scrutiny in future. Restrictive covenants should always be tailored to meet the level of protection reasonably necessary. In light of this case, though, to avoid potential uncertainty, best practice would be to refer expressly to the legitimate business interests that specific restrictive covenants are intended to protect.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Commercial Litigation and Employment practices.