What is a Restrictive Covenant in England?

If you are running a business or dealing with contracts, you may come across the term ‘restrictive covenant’. Restrictive covenants have different meanings in different contexts, and you must understand what it means and how you can use one to your advantage. Conversely, you may be bound by a restrictive covenant, so it is also important that you know what your legal obligations are if you agree to one. This article will explain some key points around restrictive covenants, as well as offer guidance on some common restrictive covenants. 

What is a Restrictive Covenant?

Put simply, a restrictive covenant is an agreement not to do something you would otherwise be able to do. In this way, it is ‘restrictive’ of your actions, and it limits what you can do. In a commercial setting, you can use several types of covenants. 

The rest of this article will explain some key points around those types of restrictive covenants.

A Non-Compete Restrictive Covenant

Non-compete clauses protect a business’ interest by ensuring information stays private instead of entering the public domain. For example, you may have valuable information, trade secrets, or intellectual property not protected by copyright or trade mark.

A non-compete clause restricts an employee from competing with your business, either directly or indirectly. This type of clause must define a geographic area in which the non-compete clause applies. Generally, parties limit it to similar businesses for a specified time period. The clause can apply to a competing business or a business that the employee may set up which would compete with your business. Finally, a non-compete clause must also compensate the employee. 

Non-Solicitation Clause 

Soliciting refers to offering services to your customers or employees. Thus, a non-solicitation clause means that the other party cannot solicit your employees or customers from your business. This is also usually confined to an area, time period and similar businesses. 

Non-Dealing Restrictive Covenant

Non-dealing covenants are similar to non-solicitation clauses. They refer to where a party is prevented from dealing with the suppliers or customers of your business. Dealing refers to engaging in transactions. This means that if you agree to a non-dealing clause but not a non-solicitation clause, the other party can approach your customers or employees, but they cannot enter into a transaction with them. 

Non-Disclosure Restrictive Covenant

A non-disclosure clause prevents the other party from taking the information, trade secrets, ideas, or data of your business. It is a good way of protecting confidential information as part of your business. 

Protecting a Restrictive Covenant

The key point to remember is that a covenant will almost always be enforceable in court. A restrictive covenant, in particular, will be enforceable if it is to further the legitimate interest of your business. If there is no legitimate business interest as part of the rationale behind the restrictive covenant, then a court is unlikely to enforce the restrictive covenant. Additionally, a restrictive covenant must be reasonably restrictive on the other party. To satisfy this, the restriction must be no more than necessary to adequately protect the business interest. As such, it is important to seek professional legal advice if you are thinking about getting a party to agree to a restrictive covenant. 

If you successfully protect your restrictive covenant in court, you will usually be entitled to compensation. Sometimes, a court will be willing to use an injunction to protect your interest. An injunction is where a court requires a party to do or not to do something. Injunctions are discretionary, so it is up to the court whether it is an appropriate remedy in your situation or not.

Key Takeaways

A restrictive covenant is an important tool in commercial and employment contracts. The result of a restrictive covenant is that the party who has agreed to the contract cannot do a specific action. Importantly, a restrictive covenant must be a reasonable restriction that is no more than necessary to achieve a legitimate business interest. If it is not, a court will be unwilling to enforce it. If a court is not willing to enforce the restrictive covenant, then it has very little value for you. Some common types of restrictive covenants include non-compete, non-soliciting, non-dealing, and non-disclosure clauses.

If you need help with a restrictive covenant, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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