A non-disclosure agreement drafted by an English consumer law firm was held recently to be enforceable and prevented another firm from bringing a rival group litigation claim against Volkswagen AG over emissions.
In a July 23 ruling in Harcus Sinclair LLP v. Your Lawyers Ltd., the U.K. Supreme Court held that a six-year non-competition clause in a commercial non-disclosure agreement between these two law firms was not an unlawful restraint of trade and was enforceable as a contractual term.
In this article, we revisit the key principles of the restraint of trade doctrine and notable legal developments in this context. We also consider the implications of the Supreme Court’s ruling on the doctrine, its third in three years.
The facts of this particular case concerned a novel situation in respect of the application of the doctrine. This situation involved a non-compete undertaking. The undertaking was given by one law firm to another in relation to a group litigation claim.
Indeed, the Supreme Court noted in its judgment that the issues in this case would not arise often.
However, the decision provides a helpful synopsis of the range of factors to be considered in determining whether the beneficiary of a restraint of trade undertaking has legitimate interests to protect.
This case concerned restraint of trade in a commercial agreement. However, there is a significant overlap with restraints of trade in an employment context, given that the bulk of the case law dealing with the enforceability of restraints of trade relates to restrictions imposed on employees during and after termination of employment.
The Restraint of Trade Doctrine
Case law has established that the following requirements need to be satisfied for a restraint of trade to be valid under English law:
- The existence of a valid interest that the party imposing the restraint seeks to protect;
- The restraint is no wider than is reasonable to protect that interest; and
- The restraint must not be contrary to the public interest.
In the employment context, there are certain categories of interests that a court will generally allow to be protected. These categories include trade connections, with suppliers or customers; trade secrets and other confidential information; and the stability of the workforce.
The courts have repeatedly emphasised, though, that these categories are non-exhaustive. Therefore, it comes as little surprise that the courts in Harcus Sinclair v.Your Lawyers were open to accepting a novel interest that was worthy of protection, based on the facts of the case, being Your Lawyers’ legitimate interest in protecting its own proposed group litigation claim from Harcus Sinclair setting up a rival group litigation claim.
The reasonableness of a restraint of trade provision is assessed as at the date it was entered into, and the courts will take a number of factors into account when assessing reasonableness, including, depending on the context of the restraint:
- The term of the restriction;
- Geographical area;
- The scope of the restrained activities;
- The character of the business;
- Any inequality of bargaining power; and
- The surrounding circumstances and factual background.
In circumstances where the restraint of trade operates by agreement between commercial parties, the courts will be reluctant to interfere with a decision that has been taken by those parties in assessing what is reasonable. This position is to be contrasted with employment cases, where there is a far greater likelihood of inequality of bargaining power, and which may therefore impact the court’s assessment of the reasonableness of a restraint in that context.
A Shift in the Courts’ Approach
It is the third time in three years that the Supreme Court has considered the restraint of trade doctrine and has analysed it in detail. The general principles for practitioners to follow are, therefore, now enshrined in case law.
As highlighted by these judgments, there has been a noticeable shift in the courts’ approach. The approach has evolved from adopting a historically narrow focus on what lies within the four corners of the contract to assess the reasonableness of a restraint of trade, to considering the surrounding circumstances and factual matrix.
It is now widely accepted that the modern approach to assessing reasonableness is to consider what a term, viewed in the light of the entire contract, would mean to a reasonable person, having all the relevant background knowledge reasonably available to the parties at the time the contract was made.
Implications of the Harcus Sinclair v. Your Lawyers Judgment
Enforceability of Restraints of Trade
The Supreme Court held that the Court of Appeal was wrong to overturn the High Court’s original decision, insofar as the High Court had concluded that Harcus Sinclair was in breach of contract, and had therefore granted an injunction requiring Harcus Sinclair to cease acting for its group of claimants.
The Supreme Court agreed with the High Court that the non-compete restriction was reasonable and enforceable, noting the following points in reaching its decision:
1. When assessing the reasonableness of a restraint of trade, the courts are entitled to take into account not only the relevant contractual terms, but also what the parties objectively intended or contemplated as to their future relationship, assessed as at the date of the contract. There is, therefore, no concrete requirement for the party benefiting from the restraint to ensure that its legitimate interests are expressly referred to in the contract. Indeed, in an employment context, many restrictive covenant clauses are likely to be silent in respect of the employer’s specific legitimate interests – e.g. the need to protect its trade secrets or customers.
2. Following on from point one, above, the Court of Appeal had therefore been wrong to determine the legitimate interests of Your Lawyers solely by reference to the terms of the contract, which did not oblige the parties to collaborate, and the High Court had been entitled to conclude that the non-compete undertaking was a reasonable protection of Your Lawyers’ legitimate interests, insofar as it related to the intended collaboration between the two firms.
3. In circumstances where there is equal bargaining power between the parties, such as in this case, the reasonableness of any restraint of trade between the parties should be assessed on the basis that they can be expected to look after their own interests in agreeing terms that are reasonable between themselves.
4. The six-year duration of the non-compete restriction – while on the face of it, a surprisingly long term to be upheld – was held by the Supreme Court to be logical and necessary, once Your Lawyers’ legitimate interests had been established, as the duration roughly equated to the limitation period for claims in the litigation on emissions with which they were concerned.
The decision therefore provides a clear and helpful overview of the approach to be taken in assessing the legitimate interests of the beneficiary of a restraint. It also highlights the need to identify precisely the legitimate interests said to be protected by a covenant in restraint of trade before proceeding to assess reasonableness; considering not just the relevant contractual terms, but also the objective intentions or contemplations of the parties at the time the contract was entered into.
On a separate point, the decision in Harcus Sinclair v. Your Lawyers has also raised a potential cause for concern from a regulatory perspective, insofar as the case confirmed, albeit through obiter commentary, that solicitors’ undertakings provided by limited liability partnerships are not summarily enforceable by the court.
However, the facts of the case meant that the court did not have to delve into this issue in particular detail, given that it held that, in any event:
- The non-compete clause between Harcus Sinclair and Your Lawyers was not an unlawful restraint of trade and was enforceable as a contractual term.
- The term was not a solicitor’s undertaking because the subject matter of the undertaking was a business arrangement between the firms, rather than a professional matter.
Practitioners will undoubtedly be keenly awaiting future developments in this area, noting the Supreme Court’s expression of hope that Parliament will “consider the lacuna that this judgment has confirmed.” There is now a well-established body of case law at the highest level, which will inevitably continue to grow, outlining the key principles for practitioners to follow when considering the reasonableness and enforceability of restraints of trade.
In order to be reasonable, the drafting of any restrictive covenants or other forms of restraints of trade should always be carefully considered at the outset, and tailored to the individuals and businesses in question, in determining what level of protection is reasonably necessary in each case.
Notwithstanding the need for careful drafting of express provisions in the contract in relation to restraints of trade, as ever, the factual matrix will always be of the utmost importance in these cases.
Parties would be well advised to consider at an early stage their intentions behind entering into any such restrictive covenant or other restraint of trade – whether or not expressly written into the contract – which may come under close scrutiny, and prove to be a fundamental factor, in determining its enforceability in any future litigation.
If you are a law firm, a professional practice partnership or LLP and would like to discuss any issues relating to restrictive covenants or any other restraint of trade, please contact Partner David Fisher who specialises in partnership and employment issues.
This article was first published by Law360.