Blog - 11/03/2022
12 Month Non-Compete Covenant in Shareholder Agreement – Context is Key
In the recent case of Law by Design Limited v Saira Ali [EWHC 426 (QB) (28 February 2022) the High Court upheld a 12 month non-compete covenant against a solicitor which was in their service agreement but not the covenant in their shareholder’s agreement.
Saira Ali was an experienced employment lawyer who worked for Law by Design Limited which was a niche practice based in Manchester; in the main, it provided advice to clients within the healthcare services sector, particularly specific NHS entities in the North West of England and one in Hertfordshire. The majority of Ms Ali’s time was in the provision of employment advice to those entities. Ms Ali had a 12 month non-compete covenant under her contract of employment and a 12 month non-compete covenant under the terms of a Shareholder Agreement which she signed when she was allocated minority shares in Law By Design Limited.
The High Court found the non-compete covenant in the contract of employment enforceable, but not the non-compete covenant in the Shareholder Agreement.
Whilst it was accepted by the Court that there would usually be a different approach to the enforcement of restrictions in a Shareholders Agreement (where the parties have equality of bargaining power) and those contained in a contract of employment (which arises from a ‘master/servant’ relationship), the context in which the restriction in a Shareholders Agreement was agreed, was still relevant. The Court would look at the context of that Shareholders Agreement and determine whether or not it should still apply the ‘more stringent test of reasonableness’ one would find when considering an employer/employee relationship. In this case, the more stringent test was applied because, whilst it was a restriction in a Shareholders Agreement, the context remained that of ‘master/servant’.
Applying that more ‘stringent’ test, the Courts did not uphold the restriction in the Shareholders Agreement because it was too wide reaching; it prevented any competition directly or indirectly with Law By Design and was not limited (as it was in the contract of employment) to competing with that part of the business in which Ms Ali had worked. As such, it was too wide to justify enforcement in this case.
This is an important reminder that context is everything when considering the enforceability of restrictions in a Shareholders Agreement.
It is also interesting to note that the non-compete covenant in the contract of employment was upheld despite undertakings by Ms Ali that she would not misuse confidential information belonging to her former employer and her undertakings to observe her other covenants which included restrictions which prevented her from soliciting or dealing with her former employer’s clients.
This case is a reminder of the general principles applicable to the enforcement of non-compete covenants and the importance of context when considering restrictions in a shareholders agreement.
If you have any questions about matter, please contact Linky Trott or any member of the Employment team.
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