Out-Law / Your Daily Need-To-Know

RBH case shows value of restrictive covenants as enforcement succeeds ‘in entirety’

Out-Law News | 09 Nov 2021 | 9:36 am |

Jon Coley tells HRNews about applications for injunctive relief and the need to ‘come to equity with clean hands’

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  • Transcript

    Occasionally a case comes along which serves as a very good illustration of why employers have restrictive covenants written into contracts of employment, and the deep trouble employees can get into if they breach them and are caught. 

    The case in question is Richard Baker Harrison v Brooks and Sambrook which ended very badly for the two employees at the centre of it. The facts briefly. RBH is a leading distributor of minerals and chemical raw materials which it supplies to manufacturers worldwide. The first and second defendants were RBH's former employees, Mark Brooks and Andrew Sambrook. Together in their roles with RBH they were responsible for a number of supplier relationships, including a German company called Hoffmann Minerals, a key client of RBH. A year before they resigned, Brooks and Sambrook set up a competitor business called SBS Sourcing Limited, also a mineral sourcing and supply services business. 

    RBH brought a claim to enforce obligations of non-competition, confidentiality, and post-termination restrictions against the employees. The company alleged the two of them had established SBS as a start-up competitor, and that they had actively sought to transfer business away from RBH to their own start-up, in breach of their contractual obligations. 

    The High Court looked at the various duties and obligations owed by the two employees and found that in addition to an implied term of good faith and fidelity, there was also an implied term of mutual trust and confidence, and in the case of Mark Brooks, a fiduciary duty, all of which had been breached. The couple had cooked up a plan to win the Hoffman contract for themselves and everything they did from start to finish was geared towards that end, including contacting Hoffman directly to offer their services under the SBS umbrella. The court ruled that claims of RBH in relation to liability and enforceability of the restrictive covenants succeeded in their entirety.

    There are a number of points to take from this case which we will be looking at in the course of the next few programmes. One relates to employees emailing of confidential information to their home. In this case, before he resigned, Andrew Sambrook spent emailing hundreds of documents and papers to his home, including huge amounts of confidential information which he then printed off. 

    Another issue is protecting the business when key employees plan to leave to set up in competition, often taking key employees with them. We will look at ‘team moves’ in a forthcoming programme.

    Another issue is injunctive relief whereby the company under threat goes off  to the High Court asking for an injunction to effectively freeze some or all of the activities of the former employees to try to limit the potential damage before the full merits hearing takes place, often many months in the future – it was 8 months in this case. So let’s consider that issue now.  

    RBH’s application to the High Court for interim injunctive relief was successful and it resulted in Brooks and Sambrook having to give undertakings on a number of issues. They agreed, among other things: (i) not to use, disclose or make copies of RBH's confidential information either directly or indirectly, and (ii) to adhere to post termination restraints relating to RBH's customers, prospective customers, and suppliers. The injunction was granted on 3 December 2020. The full hearing didn’t happen until late July 2021. So in the interim period of almost 8 months RBH had at least achieved a level of damage limitation so that step was a very important one for them to take.

    So, what about applications for injunctive relief? They are obviously a very attractive option for the employer, effectively stopping the defendants in their tracks, but when will they be granted and in what circumstances? To help with that I phoned Jon Coley who has been involved in countless cases of this kind:
     
    Jon Coley: “When enforcing restrictive covenants for clients it is always important to remember that it is very much a discretionary remedy. It is an equitable remedy in the hands of the court and the court therefore in considering whether or not to grant an injunction will consider the behaviour of the parties up to that moment in time and it is important, to use a legal expression from the case over the years, to come to equity with clean hands which means, roughly translated, to always maintain the moral high ground and that is particularly important when you are looking to rely upon restrictive covenants that are in a contract of employment. Very often employees when they come to resign or when they come to leave their employer will try to raise a case for constructive dismissal or try to raise some argument to suggest that, for instance, that the implied term of trust and confidence has been broken and the reason they are trying to do that is to rely on past authority that if there is a fundamental breach of contract and repudiation of the contract by the employer then the restrictive covenants fall away and the employee can therefore leave the employment without being distracted and without the employer being able to enforce the restrictive covenants that they have in place. We were reminded of that very recently in a case where the employer had sought to introduce a new contract of employment with detrimental changes to the employees. So for instance they had changed references to pensions, bonuses etcetera and the employees resigned in the face of those proposed changes to the contracts. Interestingly in that case they resigned on notice and so there was an argument as to whether they had affirmed the contract following the breaches by the employer. It didn't really help the employer in the long run because the employer then made further breaches during that notice period which the employees then relied upon. The court weighed up those later breaches against the earlier breaches and were able to quite quickly come to the conclusion that in fact there had been a fundamental breach of contract by the employer and therefore the employer was not able to rely upon the restrictive covenants that it has in place in relation to those employees. So I think it is an important reminder and a lesson out there for people who do have restrictive covenants in place that you do need to behave, for want of a better description, reasonably and maintain the moral high ground otherwise you do put in jeopardy the ability sometimes to rely upon the restrictive covenants that you have in place."

    In this case RBH did behave reasonably and they were able to maintain the moral high ground. That comes through very clearly in the High Court’s judgement, as does the severest criticism of the two employees whose evidence was mostly rejected as a pack of lies by the judge. That judgment is an interesting read - two men who plot a bright future for themselves but get caught and lose everything. We have put a link to the judgment in the transcript of this programme.

    LINKS
    - Link to High Court’s judgement in Richard Baker Harrison Ltd v Brooks and Others