Restrictive Covenants

Restrictive Covenants

In the situation described in this problem, a restrictive covenant

would be the best way to protect the company's interests. Although the

implied terms of employee confidentiality regarding company

information would be valid in this case, they wouldn't stop an

employee working with rivals. All doubt should be removed by the

inclusion of a clause in which the employee undertakes not to carry on

a particular trade or profession for a period after the termination of

the contract. It would permit the company to seek a interim interdict

in court against Dr MGleam and Ms Wilkes preventing them from

breaching the covenant.

Restrictive covenants are common in many contracts (partnership, share

holders, buyer-seller) including employment contracts. Prima facie,

such rules are illegal and unenforceable unless the covenantee (the

side who gains from the restriction) can invoke the restraint of trade

doctrine which was introduced into law as a result of the famous House

of Lords case of Nordenfelt v. Maxim Nordenfelt.

To prove that the covenant is justified, the covenantee must show

three things. That the covenant is necessary to protect a legitimate

interest of the covenantee (it's not sufficient to avoid future

competition with the covenantor). The restraint in the covenant must

be reasonable as between the parties, and that the restraint is in the

public interest. It is interesting to note that few cases where a

covenant is held to be reasonable have been viewed as being contrary

to public interest.

These three criteria are not yes/no questions and therefore courts

will examine the practical effects of a co...

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separately. In this fashion, if a judge were to construe the covenant

as being unreasonable, one term could be 'blue penciled' without

canceling the whole covenant.(Mulvein v. Murray 1908)

As all sources state that it is within the rights of the company to

protect their trade secrets and trade connections, it is entirely

reasonable for Dr McGlean and Ms Wilkes to sign a covenant restricted

their right to trade with past and present clients of the company

within the districts the company operates in and for a specified

period of time. Dr McGlean's covenant would specifically treat the

subject of electronic engineering and Ms Wilkes' would be in terms of

marketing and connections. Such terms would prevent the employees

getting 'poached' by rivals and would be held as reasonable and

enforceable in a court of law.