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Restrictive covenants in employment contracts

Employment law specialists

MDS Advisory recently acted in a complex High Court claim involving a host of parallel claims and cross claims including allegations of breach of restrictive covenant in an employment contract, misuse of confidential information and breach of fiduciary duty. The action was brought some time after the falling-out between employee and employer and so there was no question of the court awarding an injunction. But a central issue in the claim was the amount of damages that were at play: what should the employer receive if the case against the ex-employee were proven?

The standard measure of contractual damages (ie how much can be claimed) has been set in stone for many years: the court will ask what loss flowed from the breach and then what type and amount of loss was foreseeable at the time that the contract was formed?

But where a breach of covenant has led to a significant unfair advantage or “springboard” for the ex-employee in their new venture, damages can escalate. This can be even more significant where the ex-employee has done other things such as misuse confidential information. There has been a lot of case law on this issue in recent years and judges now have a relatively new concept called “negotiating damages” that they may award. In essence, a judge will ask “what would the employer have accepted in an imaginary negotiation to release the employee from their covenant in order to allow the employee to go ahead and take the employer’s business”? The leading case on this issue is One Step (Support) Ltd v Morris-Garner, which was decided by the Supreme Court in 2018. Such damages are more likely to compensate the employer for its wider loss and are generally higher than those awarded under the standard measure.

Beyond the law, there are always complex facts to understand. Not every breach of a restrictive covenant results in a material benefit to the ex-employee. At what point will a court find a claim should attract the higher level damages? Sometimes it is a case of “you know it when you see it”.

As a result of our wider practice in the field of employment law, MDS Advisory have a wealth of recent real-world experience and expertise. Clients seeking advice, whether in relation to drafting of restrictions or a dispute that has arisen around any employment issue, are welcome to contact our employment specialist Adam Oliver on adamoliver@mdsadvisory.com.