Restrictive Covenants are typically found in employment contracts where they are used to regulate the activities of employees during their employment and to enforce restrictions post-employment. However, restrictive covenants can also be found in other areas, for example in agreements in relation to the sale of businesses. This was the situation in Rush Hair Limited v Hayley Gibson-Forbes and S.J. Forbes Limited, a case which was recently heard by the High Court.
In that case Rush sought to enforce two restrictive covenants contained in a share purchase agreement relating to the sale of a business to them by Ms Gibson. The covenants in question stipulated that Ms Gibson would not at any time during the period of two years from completion of the sale of the company:
- Seek to canvas, solicit, entice or employ key employees from the company.
- Be directly or indirectly engaged, concerned, employed or interested in any competing business within a defined geographical area.
Ms Gibson did not directly breach any covenants herself but a company, S.J. Forbes Limited, of which Ms Gibson was a director and shareholder, did. Accordingly, Ms Gibson argued that as the covenants did not expressly prohibit the conduct of S.J. Forbes, she had therefore not acted in breach of the restrictive covenants.
However the Court disagreed and upheld both covenants.
In considering the restrictions contained in the first covenant, the Court found that it prohibited not only activities carried out by Ms Gibson on her own behalf but also activities done by her as an agent for S.J. Forbes. Ms Gibson had historically operated her business from a limited company of which she was a director and shareholder and it was the limited company that employed the staff.
The Court was of the view that both Rush and Ms Gibson would have understood that a covenant binding on Ms Gibson only in respect of acts done on her own behalf (rather than as agent for another) would have been ineffective. The Judge considered that the wording contained in the restrictive covenant did not compel such an interpretation and that the covenant should be construed in the only way that was commercially sensible, namely prohibiting Ms Gibson from canvassing, soliciting, enticing or employing any of the named individuals whether on her own behalf or as an agent for another.
This case illustrates how the courts are prepared to pierce the corporate veil where the alleged breaches are carried out by a company controlled by the breaching party so as to prevent that party from circumventing restrictions to which it had agreed to in the first instance.
If you acquire advice and assistance regarding the drafting of share purchase agreements or employment contracts or with the enforcement of any of the terms of those agreements then please contact Luke Patel on 0113 227 9316 or by email at “LPatel@LawBlacks.com”.