Why it’s worth getting departing staff to re-sign these clauses before they go
In a recent case, Capgemini India Private Ltd v Krishnan (2014 EWHC 1092 QBD), the High Court had to decide whether former employees were bound by an agreement they had entered into, following termination of their employment, which repeated restrictive covenants originally contained in their employment contracts with their previous employer.
Facts
The employees in this case, Krishnan and two colleagues, were employed by two companies within the Capgemini group. There was a restrictive covenant in their employment contracts preventing them from dealing for six months after they left the company with any existing customers with whom they either had business dealings, or whose sensitive information they had access to, within the last six months of their employment.
During their employment, the employees worked on a contract with a global payment processing company to provide a credit card processing service. In August 2013, Capgemini lost the contract to a competitor. The employees subsequently resigned, with notice, and began working for the new contractor on the same credit card processing service they had worked on previously.
Their former employer wrote to the employees, saying they were in breach of their restrictive covenants. It asked for an undertaking (written promise) from them that they would honour the covenants and said that if they did not, it would seek an injunction to enforce them. The employees, having taken legal advice, gave Capgemini this undertaking.
The employees subsequently tried to withdraw their undertaking after their new employer agreed it would meet any legal costs incurred as a consequence of them doing so. Capgemini issued proceedings for breach of the agreement and asked the High Court for an interim injunction.
High Court
The High Court noted that the employees entered into the undertaking after they had left Capgemini, so there was no presumption of unequal bargaining power between the employer and the employees (as would usually be the case in employment), and that each of the employees had received legal advice beforehand on the consequences of entering into the agreement.
A court's usual approach when dealing with restrictive covenants is to require the employer to prove the clauses are reasonably necessary to protect a legitimate business interest. In this case, the court decided that the employees had, by signing the undertaking, reversed this situation. As the employees were now seeking to avoid the agreement, it was now down to them to prove that setting it aside was justified. The employees had failed to do this.
The High Court’s final decision, however, was to refuse to grant the employer its injunction as the court believed it would serve no real purpose and would be a disproportionate response. The court noted that Capgemini had no real prospect of recovering the lost contract and subsequent business, whether it was granted the injunction or not. It decided, therefore, that although the employees had breached their agreement, damages would be an appropriate remedy rather than an injunction enforcing their agreement to observe the covenants.
Comment
The outcome of court cases about the enforcement of restrictive covenants is notoriously unpredictable, which is why the vast majority do not make it to court. This case is an example of that. Even though the court put the burden on the employees to establish that these contractual clauses should be set aside, it still refused to grant the employer its injunction.
Despite the result, this case does show that there is a benefit in getting employees to re-affirm covenants when they leave (this can usually be done as part of a settlement agreement). Although it sounds like just a legal technicality, requiring employees to establish why covenants should not be enforceable is, for employers, a significant improvement on the usual position, in which the company has to prove why its covenants should be enforced.
Hannah McIlwraith is a trainee and Paul Mander is a partner in the employment team at Penningtons Manches
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