Court Dismisses Flawed Restrictive Covenants – Why Jersey and Guernsey Employers Should Review Contracts

One of the trends we are seeing increasingly in the Channel Islands is senior employees moving to join competitors, and employers therefore looking to rely on and enforce restrictive covenants. With businesses facing a competitive market to attract and retain experienced senior employees, it is more important than ever to ensure that they are taking proper steps to protect themselves from legal and financial risk if key employees leave to join a rival.

Click to view article

The recent English case of Quilter Private Client Advisers v Falconer [2020] EWHC 3294 is therefore essential reading for financial services businesses in Guernsey and Jersey, and acts as a reminder that care should be taken to tailor restrictive covenants as much as possible for all levels of employee. In Falconer the employee joined Quilter in January 2019.

The employee had a six month probationary period, during which either party could terminate the contract on only two weeks’ notice (which will turn out to be key). The employee’s contract contained the following restrictive covenants that applied after the termination of her employment and attempted to prevent her:

  1. working for a competitor for nine months (non-compete covenant);
  2. soliciting clients for 12 months (non-solicitation covenant);
  3. dealing with clients (non-dealing covenant); and
  4. using confidential information (confidentiality clause)
On their own, these provisions are not unusual in employment contracts in the Channel Islands, but as discussed below there were some unusual aspects about the covenants. Ms Falconer was not happy at Quilter and gave notice during her probation to join a competitor.

Having decided to leave, Ms Falconer scanned Quilter’s documents onto her personal laptop. She subsequently left Quilter and joined the competing business, and went on to solicit and deal with clients covered by the non-solicitation and non-dealing covenants.

About three months later, Quilter sought an injunction to prevent Ms Falconer working for her new employer and to stop her from soliciting and/or dealing with their clients.

At the hearing the judge rejected Quilter’s claim for an injunction restricting Ms Falconer from working for her new employer on the basis that the non-compete covenant was unreasonably wide and did not protect any of Quilter’s legitimate interests. The judge also declined to enforce the non-solicitation and non-dealing covenants on the same basis. Quilter therefore had limited protection against Ms Falconer competing with them.

The following are the key practice points for directors of financial services businesses to consider in relation to the use and enforcement of restrictive covenants following Falconer:

Use of probation – One of the issues the judge had in this case was that Ms Falconer was subject to a six month probationary period (terminable with only two weeks’ notice), but could have been prevented from working for a competitor for up to nine months. As the restriction was longer than the employment could have been (and actually was) the judge felt this was unreasonable. So businesses need to consider how to balance probationary periods, and tailor the contracts and covenants so that non-compete covenants are either not applicable during probation or are shorter if an employee leaves during probation.

Restricted period – The non-compete covenant imposed on Ms Falconer was longer than the non-compete restrictions imposed on more senior employees within the business. This was inconsistent and suggested that Quilter could not justify the longer period for employees at her level. Businesses must think about what restrictions they actually need and how long they need them. Generally employers are entitled to greater protection after the departure of a more senior employee than would be the case with a junior employee. However, we frequently see the same restrictions applied to all levels of staff, regardless of role or seniority, meaning at least the restrictions on junior staff are likely to be unenforceable. The fact that the covenants for more senior employees were shorter than for Ms Falconer really undermined the validity of the non-compete covenant.

Justification – The burden is on the employer to show that a covenant is no wider than necessary to protect a legitimate interest, but employers need to be able to demonstrate this by reference to their business and the particular employee. In Falconer the employer was criticised for filing a very long witness statement that did not have specific information in relation to these covenants for this employee. Generalisations will not be sufficient to establish justification. If possible there should be some documentation at the point the covenants are agreed to show why they are necessary.

Careful drafting can save covenants – One of the key saving provisions is a “look back” period. These are usually put in place to ensure that covenants do not look back too far and act as a limit to the number of clients that are potentially captured by the covenant. In Falconer it was 18 months, ie before she even started work. So the non-dealing and non-solicitation covenants were too widely drafted as they included clients that Ms Falconer had never met nor had any influence over.

Avoid subjectivity – Quilter ended up being fortunate that Ms Falconer had breached her implied duty of confidentiality by deliberately copying client information. They would have had trouble had the information been less obviously confidential as the express confidentiality clause was poorly drafted. It defined confidential information by reference to information “which we consider to be confidential,” ie it was subjective and therefore potentially limitless as the employer could define anything as confidential. We often see this language used in older covenants to describe competing businesses or clients, and the continued use of this subjective drafting is likely to render those covenants and confidentiality provisions unenforceable.

Channel Islands businesses should consider refreshing their covenants and putting in place a decision matrix to determine what covenants they need for a particular employee and why. Businesses should challenge themselves on whether a non-compete covenant in a small jurisdiction such as Guernsey or Jersey is justified, and, being frank, this is rarely going to be the case. Appropriate use of notice periods and garden leave can be just as effective, as can properly drafted covenants preventing the poaching of employees, or solicitation or dealing with clients. Businesses should also ensure that new covenants are agreed every time they promote an employee.

Walkers’ Guernsey and Jersey employment teams are experienced at advising on the full life-cycle of the employment relationship, including the preparation and negotiation of covenants, advising on data and confidentiality breaches, preparatory steps (including team moves) or other breaches whilst employees are still in employment, and advising on and enforcing restrictive covenants.

GUERNSEY
Adam ColePartnerT +44 (0) 1481 748 912adam.cole@walkersglobal.com
Sarah AshSenior CounselT +44 (0) 1481 748 935sarah.ash@walkersglobal.com
Victoria PrattSenior CounselT +44 (0)1481 748 938victoria.pratt@walkersglobal.com

JERSEY
Marc SeddonPartnerT +44 (0)1534 700 761marc.seddon@walkersglobal.com
Daniel ReadSenior CounselT +44 (0) 1534 700 764daniel.read@walkersglobal.com