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Restrictive Covenants

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Can a non-competition restrictive covenant in a service agreement prevent a solicitor from joining a competitor?

Yes, held the High Court in Law By Design Ltd v Ali.

The Claimant began employment at Law By Design in 2013. In 2016 she became a shareholder and signed a shareholder agreement. In 2021, following a substantial pay increase, she also entered into a service agreement. Both agreements contained restrictive covenants.

The non-competition clause in the service agreement prohibited the Claimant from being involved in any business which was in competition with the parts of the firm that she had been involved in to a material extent in the 12 months preceding termination. The covenant in the shareholder agreement prevented her from being "engaged, concerned or interested in, or assist, a business which competes, directly or indirectly, with a business of the Company" in a territory in which the Company has operated in the previous 12 months. Effectively this clause sought to prevent the Claimant working in England & Wales in relation to any business the firm was involved in.

When she resigned in May 2021 the Respondent sought undertakings in relation to the non-competition clauses but she refused. The Respondent applied for injunctive relief.

Applying the 4-stage test from TFS Derivatives Ltd v Morgan, the High Court held that the covenant in the shareholder agreement was wider than reasonably necessary to protect the firm's legitimate business interests and was unenforceable.

In relation to the service agreement however, it was clear that the Respondent had shown themselves to have legitimate business interests to protect. The court held that it was an 'uncomplicated conclusion' to reach that the covenant was drawn no wider than reasonably necessary and was therefore enforceable. An injunction was granted. The service agreement covenant remains in force until its lapse in November 2022.

Thanks to Karen Jackson of didlaw for preparing this case summary.