Dear Auntie
I run a chain of bakeries and six months ago I bought a bakery business from one of my major competitors, Baking Bad. I paid a lot of money for the business and didn’t want the previous owner of Baking Bad, Ms Patty Cake, to set up a rival bakery or recruit the Baking Bad senior pastry chef until I’d had a chance to settle the business in and build relationships with its customers and staff. My lawyers helpfully inserted some restrictive covenants in the purchase agreement to stop Ms Patty Cake from establishing a competitive bakery or soliciting the senior pastry chef for two years after the purchase completed.
However, I’ve recently learnt that Ms Cake is about to set up a new bakery in the area and has asked my pastry chef to join her. I’m furious about this particularly as she expressly promised not to do this type of thing in the purchase agreement. Can I do anything about her behaviour? I’ve been told that restrictive covenants which run for two years are unlikely to be enforceable.
I also know that Ms Cake has agreed to bake for a big exclusive party 3 months from now. If I can do anything about her behaviour I’d like to wait until just before then to take action so as to do the most of amount of damage to her business.
Kind regards,
Mr Cinna Man
Dear Mr Man,
I’m sorry to hear that you’re in this predicament. The good news is that you should be able to take some action against Ms Cake.
The High Court considered a similar issue in the case of Rush Hair Limited v Hayley Gibson-Forbes and S. J. Forbes Limited [2016] EWHC 2589. In this case, Ms Gibson-Forbes sold her hair-dressing business to Rush Hair. The purchase agreement contained some restrictive covenants pursuant to which Ms Gibson-Forbes agreed that for two years following the completion of the purchase she would not solicit certain key employees of the sold hair-dressing business nor would she be engaged or concerned in a competitive business. Within this two year period Ms Gibson-Forbes did set up a new competitive hair-dressing salon and employed a key stylist from the sold hair-dressing business. Rush Hair applied to the High Court for an injunction to enforce the restrictive covenants against Ms Gibson-Forbes. In this case the High Court was prepared to enforce the restrictive covenants against Ms Gibson-Forbes and it did not take issue with their two year duration.
As with all cases involving restrictive covenants, they are very fact specific and much will depend on the precise drafting used and the nature of the relevant business, however, in the context of a purchase agreement it appears that courts may be persuaded to enforce two year restrictions. As you quite rightly identify, the position will be different in the context of an employment agreement where a court is unlikely to enforce restrictive covenants of this duration.
In order to increase the likelihood of a court enforcing your restrictive covenants you shouldn’t wait until just before Ms Cake’s exclusive party to take action against her. In the recent case of Legends Live Ltd v Harrison [2016] EWHC 1938 the High Court refused to enforce certain restrictive covenants. The reason for the High Court’s refusal was because the application to enforce the restrictions had been deliberately delayed so as to cause avoidable damage, loss and disruption to a business rival. As such, if you deliberately wait until just before Ms Cake’s exclusive party to make your application with no other reason for delaying in this way, the court may refuse to enforce your restrictive covenants even if they would otherwise be enforceable.
I hope you find this helpful.
Kind regards,
HRLaw Auntie
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