It is often stated that court decisions in cases involving the interpretation of restrictive covenants cannot operate as binding precedents because the decisions are so dependent upon the facts of each different case. Nevertheless, an examination of these decisions can help when trying to determine whether a covenant might be regarded as enforceable or not. In particular, they can help to identify the factors that the court might take into account.
One such case which has recently been reported, was Coppage –v- Safety Net Services Limited [2003] EWCA Civ 1176. In that case the Court of Appeal considered an appeal by Mr Coppage a former director of the respondent company, concerning the interpretation of a restrictive covenant that applied for a period of 6 months immediately following termination of his employment and prevented solicitation of “any individual or organisation who had during your period of employment been a customer of ours…”
In the appeal Mr Coppage sought to argue that the restrictive covenant was too wide because it sought to protect all existing customers. He sought to argue that it would only have been reasonable for the organisation to protect
- Customers with whom he had been in contact; or
- Those who had been customers within the twelve months or so prior to the date upon which Mr Coppage departed.
The Court of Appeal disagreed and determined that it was not automatically unreasonable for the company to seek to protect the relationship with existing customers even if the employee had not been in contact with them. However, when considering the impact of this case we need to bear in mind that the company only had a small number of regular customers (just over 100) and that the departing employee had been the managing director.
Director’s fiduciary duties
It is interesting to note that since Mr Coppage had been a director of the claimant company at the time of his departure, the court were also asked to consider whether Mr Coppage had been in breach of his fiduciary duties when setting up the rival company which he had started so soon after his departure.
Mr Coppage sought to argue that this duty came to an end when his position as a director came to an end. However, whilst the Court of Appeal did not need to make any decision on this point (because his arguments concerning the interpretation of the restrictive covenant failed) the Court of Appeal did set out, by way of a helpful reminder, Section 170 (2) of the Companies Act 2006 which provides
“a person who ceases to be a director continues to be subject –
(a) to the duty in Section 175 (duty to avoid conflicts of interest) as regards the exploitation of any property, information or opportunity of which he became aware at a time when he was a director…”
Therefore, the mere fact that a new business has been set up after the directorship has ceased does not necessarily mean that the director will avoid being in breach of the fiduciary duties arising from his directorship.
Quantum
Mr Coppage also appealed against the amount of the judgement for £50,000 compensation. He sought to argue that the burden of proving the loss lay on the claimant and that, since the claimant had not provided any evidence in relation to the expenses (but only the gross fees earned in a sum of £159,587.31), it was impossible for the judge to determine what his level of profit would have been and the judge should not have given judgment in the sum that had been claimed.
The Court of Appeal concluded that the judge did have enough evidence about profitability in general to be able to make a decision as to the losses that had been suffered. Mr Coppage had not provided any evidence to the contrary nor had he asked for details of the expenses or overheads that the company would have incurred.
Whilst the appeal was unsuccessful, the case is a warning to claimants in such situations to ensure that they do provide adequate evidence to enable a judge to come to a reasoned conclusion on the loss that would have been suffered.
See also
- Conflict of interest by a director –Written 16/05/2013
- When is the reasonableness of a restrictive covenant to be determined? – written 31/01/2013