UK: Post termination restrictions in cross border employment

International Employment Bulletin contents

• International: Cross-border tele-working
• France: Redundancies in absence of economic reasons 
• Germany: holiday days during sick leave
• Italy: Employment law reform
• UK: Post termination restrictions in cross border employment

Those of you who attended our International Conference on cross border employment issues last October will remember the presentations we gave on protecting business interests and the difficulties faced when trying to enforce post termination restrictions where an employee works in different jurisdictions.  It may surprise some people to know that cross border issues are not confined to employment relationships that extend across international borders, but can arise in situations where, for example, the employee is resident in Scotland or Northern Ireland but works for an employer whose place of business is in England.

In the recent case of CEF Holdings Ltd and another v Mundey and others [2012] EWHC 1524 the English High Court refused an application for an order restricting a group of individuals from competing with their former employer or recruiting former colleagues and furthermore the court would not allow claims to proceed against two General Managers who lived in Scotland. 

The Facts of CEF

A number of CEF's employees, two of whom were General Managers, joined a business which was set up to compete with CEF.   The General Managers did not have restrictions in their contracts of employment limiting their activities after termination. This meant that in order to obtain an order against the General Managers CEF had to show that that they were in competition with CEF during the course of their employment, and in breach of their implied duties of fidelity in particular, that they had sought to entice CEF's staff to join them in their new company.  The other 17 employees had express provisions in their contracts of employment preventing them for a period of 6 months from joining a competitor or soliciting or enticing away CEF employees ("restrictive covenants").  While CEF was initially successful in obtaining an interim injunction against all the employees, it was not successful when its application for relief was considered in full and arguments put by the employees as to the enforceability of the restrictions.

The issues

The issues which the court had to decide included:

• Whether each of the restrictive covenants was enforceable.
• Whether the court had jurisdiction to deal with the claims against the two General Managers who lived in Scotland and not domiciled in England

The decision

The court ruled that the restrictive covenants were invalid because they were unreasonably wide.   In the case of the restriction relating to employees the court interpreted the wording as extending to the solicitation of employee's with whom the 17 employees would have had no contact in their employment.  Apart from this, the wording of the restrictive covenant was such that the 17 employees would not have known who they could solicit.  In respect of the non-compete restriction the court took into account the fact that the covenant:

• Prevented employees from having any interest in a competitor, which would extend to holding a single share in a publicly-quoted company.
• It was not clear what activities would amount to competing with CEF.
• There were no comparable restrictions imposed on their superiors, the two General Managers.

Under English law a contractual term restricting an employee's activities after termination is void for being in restraint of trade and contrary to public policy, unless the employer can show that it has a legitimate interest to protect and the protection sought is no more than is reasonable.  It is important to note that the court was of the view that the lack of comparable restrictions undermined CEF's argument that it had legitimate interests to protect which is key to the enforceability of any restrictive covenant.   The court also took into account flaws in the drafting of the covenants themselves and the fact that the employees only had to give a week's notice.

There was considerable legal argument on the issue as to whether the claims could go ahead in relation to the two German Managers who were not domiciled in England, but Scotland.  Schedule 4 of the Civil Jurisdiction and Judgment Act 1982 (CJJA 1982) allocates jurisdiction among the constituent parts of the UK (England and Wales, Scotland and Northern Ireland), in cases where the defendant is domiciled in the UK.   It provides that a person domiciled in one part of the UK must be sued in the courts of that part unless one of the exceptions in rules 3 to 13 of Schedule 4 applies. The jurisdictional rules in Schedule 4 are broadly similar to those contained in Council Regulation (EC) No 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.  In this case the relevant rules of Schedule 4 were:

• rule 3 (c) which provides that a person domiciled in a part of the UK may be sued in another part of the UK "in matters relating to tort, delict or quasi-delict, in the courts for the place where the harmful event occurred or may occur";
• rule 5(a) which provides that a person domiciled in a part of the UK may be sued in another part of the UK "where he is one of a number of defendants, in the courts for the place where any one of them is domiciled, provided the claims are so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings"; and
• rule 10 which deals with jurisdiction over contracts of employment.  Under this rule an employer may only bring proceedings in the courts of the part of the UK in which the employee is domiciled, unless the parties agree otherwise.

Furthermore, Section 16(3) of CJJA 1982 provides that in determining any question as to the meaning or effect of any provision of Schedule 4, regard shall be had to any principles laid down by the European court in connection with the Brussels Regulation 44/2001.

CEF argued that argued that rule 10 was not relevant in this case, because it can only apply to claims made under a contract of employment and not to claims it had brought against the two General Managers, one of which was conspiracy.  After an extensive review of the case law in this area and a report on the application of the Brussels Regulation (Study JLS/C4/2005/03), the court held that rule 10(3) applies to all claims where the status of the defendant as an employee is "legally relevant" to the claim in question.  The court held that wording of rule 10(1) ("matters relating to individual contracts of employment") is wide and while CEF tried to argue that the claims did not fall within rule 10(3), the court agreed with the arguments put on behalf of one of the General Managers that his contract of employment was central to the non-contractual claims that had been brought.  There court ruled that the provisions of rule 10(3) of Schedule 4 of the CJJA 1982 prevented CEF from bringing any of its claims (including the claims in conspiracy) against both of the non-English Managers.

Conclusion

If employers fail to keep their contracts up to date they could find themselves in the same situation as CEF where a disparity between the length employees notice periods and a lack of restrictive covenants in the contracts of the superiors of employees undermine their ability to enforce restrictive covenants.  Even if there is no routine review and updating of all employees contracts, there are stages when this can happen, for example, the employee is promoted or given a pay rise but this practice carries the danger of creating even more disparity.    The law and principles which apply to restrictive covenants is one that employment lawyers constantly keep under review particularly when it comes to drafting restrictive covenants.  Employers may not be able to keep up to date with the law and legal principles that apply, but they should regularly review all their contracts of employment to ensure they are fit for purpose and meet the reality of their business needs and requirements.  In the case of cross border workers ensuring their contract of employment is fit for purpose is even more key given there may be complex legal questions as to which law may actually govern the relationship (see the Article in this issue of Cross Border Teleworking) and as well as issues as to which court has jurisdiction to hear claims when disputes arise between employer and employee.

Contribution by Margaret Davis, Fieldfisher (London), Employment and Pensions Group