Although restrictive covenants in agreements are potentially lawful, they have to be reasonable overall in order to be enforced. In Law By Design v Ali, the High Court judge held that as a non-competition clause in a restrictive covenant was drawn no wider than was reasonably necessary to protect the company’s business interests, it would grant an injunction preventing Ms Ali from starting work for a competitor for 12 months.
Basic facts
In May 2013, Ms Ali started work as an employee with Law By Design, whose sole director and shareholder was Sue Morrison. Following discussions in the latter half of 2015, Ms Ali signed a shareholders’ agreement in 2016 which gave her three per cent of the shares in the business. In return, she signed up to a non-competition clause (among other things) prohibiting her from becoming “engaged, concerned or interested in” a business that was in direct or indirect competition with Law By Design for 12 months after the termination of her employment with the company.
Following the departure of some members of staff to a competitor and to avert the risk of Ms Ali doing the same, Ms Morrison gave her a substantial pay rise to secure her commitment to Law By Design. In early 2021, Ms Ali signed up to a service agreement which contained similar restrictive covenants to the shareholders’ agreement in relation to any “restricted business”. This was defined as meaning “those parts of the company with which the employee was involved to a material extent in the 12 months before termination".
Three months later, however, Ms Ali handed in her notice. The business plan that she had drafted referred to transitioning some of the Law By Design work to her new employer. When Ms Morrison became aware that she was leaving to join a competitor, she asked Ms Ali to sign undertakings that she would abide by the terms of the covenants. Ms Ali provided her with undertakings to comply with all the restrictive covenants apart from the non-competition clauses.
Ms Morrison asked the High Court to issue an injunction requiring her to do so.
High Court decision
The High Court applied the four-stage test set out in TFS Derivatives Ltd v Morgan which meant it had to:
- Identify the meaning of the covenant
- Establish whether Law By Design had legitimate business interests requiring protection
- Establish whether the covenant was wider than was reasonably necessary to protect those business interests
- Decide whether the injunctive relief should be granted, having regard to the overall reasonableness of the covenant.
Applying those criteria to the shareholders agreement, the High Court held that the clause was indeed wider than was reasonably necessary to protect the company’s interests as it prevented involvement by a shareholder in any other business in England and Wales that directly or indirectly competed with any part of Law By Design's business in the 12 months before the shareholder left. It was, therefore, unenforceable.
With regard to the covenant in the service agreement however, the court came to the “uncomplicated conclusion” that it extended no wider than was reasonably necessary for the protection of Law By Design’s business interests. As the covenant turned around the “critical fulcrum” of a “restricted business”, it had limited the operation of the covenant to the parts of Law By Design in which Ms Ali was involved to a material extent in the time running up to her departure. In addition, 12 months was a reasonable period for it to last, as was the geographical restriction. For instance, if the services and clients were located solely in an area in which Ms Ali had not worked to a material extent in the 12 months before termination of her employment, then the clause would not bite.
The court therefore granted the injunction.