Are restrictive convenants any insurance?

Romero Insurance Brokers Ltd v Andrew Templeton & Eastwood and Partners Ltd

This was a case taken in the High Court following an application by Romero for an interim injunction to enforce the restrictive covenants contained within Mr Templeton’s contract. Eastwood were joined to proceedings on the basis that they were Mr Templeton’s new employers and were benefiting from the alleged breaches (it was also argued they induced the breaches).

The case considered whether the covenants were enforceable and the nature of the relief available to Romero.

Key Facts:

Mr Templeton was employed by Romero from November 2011 until 8 October 2012 when he resigned and complained of constructive dismissal.  The court found that one of the key aims of employing Mr Templeton was to benefit from the personal relationships he had built up with clients in the Halifax area and for this to be the kick start for Romero to build up a significant stake in the Halifax market.

It is apparent that a number of clients were loyal to Mr Templeton and moved their business to Romero.  Unfortunately for Mr Templeton, Romero were not satisfied with the progress of the Halifax office and raised these issues with him.  It was agreed that Mr Templeton would take a pay cut whilst trying to improve the fortunes of the Halifax branch.  Not long after this, a report was commissioned by Romero on how to improve the business’s prospects.

The report suggested that Mr Templeton should be moved to the Leeds branch. Romero decided to broach this by informing Mr Templeton that he was at risk of redundancy.  After some meetings the relationship between the parties deteriorated and Mr Templeton took legal advice and resigned claiming that he had been constructively dismissed. He also contacted the clients that he had a personal relationship with and sought to take them to his new employer (Eastwood).

The Issues:

Upon finding out that Mr Templeton was contacting clients that were contracted with them, Romero applied to the High Court for an interim injunction (to stop Mr Templeton seeking to pursue their clients) and damages for the losses they had suffered prior to the granting of an injunction (if the injunction was granted).

In order to gain an injunction Romero sought to enforce the restrictive covenants contained in Mr Templeton’s contract of employment.  The covenant in question effectively prohibited Mr Templeton from seeking to do business with clients of Romero that he had had dealings with in the last six months of his employment.  The restriction was drafted to last for twelve months from the date of termination.

The court reiterated the well-known rules on the enforceability of restrictive covenants:

•   That the burden of proof lies with the party seeking to enforce the covenant.
•   That there must be a protectable interest.
•   That the restraint should be no more restrictive than is reasonably necessary to protect the protectable interest.

The Court determined that the protectable interest in this case was the trade connection with the customers.  The Court also determined that the only issue to decide in this particular case was whether the twelve month duration of the restriction made it unenforceable.  In essence; was the twelve month duration of the covenant unreasonable?

Decision:

In making their decision the Court reiterated that the fact of the particular case is vital to determining whether a restriction is unreasonable.  The Court therefore examined the insurance industry and noted that the majority of insurance contracts lasted for twelve months. With this in mind the Court found that a twelve month restriction was reasonable because it coincided with the duration of most insurance contracts.  The Court was clear that it would not have enforced a restriction that was for a longer duration.

Summary & Other Factors:

This judgment has reaffirmed the general principles on the enforceability of covenants.  What you should really be taking away from this case is that covenants should be drafted specifically with your industry in mind.  Where, in a lot of circumstances twelve months may be seen as unreasonable because of the specific nature of the insurance industry, the duration was reasonable.  Therefore, when considering covenants bespoke is always better than off-the-shelf.

Whilst the above is the ratio of the Romero case, there were some other interesting issues discussed that you should bear in mind:

•   Don’t confuse agreement with enforceability…

The Court discussed the process of agreeing covenants with employees.  They reasserted the fact that if a covenant is unreasonably wide then a ‘shrewd’ employee will simply  sign it in the knowledge that it is unenforceable when/if they decide to break the covenant.  The lesson here is to draft a covenant that is enforceable and not be tempted into unreasonably wide covenants that are unenforceable just because the employee will agree to it.

•   Act quickly…

Having a covenant in place is all well and good.  However, it is also about what you do when a senior employee leaves.  The Court stressed that the necessity of the covenant in this case was to allow Romero to build relationships with clients that knew Mr Templeton and that this was reasonable.  Having a reasonable covenant is only the first step though.  What many companies forget to do is to start building those relationships during the enforceability period.  If you have an enforceable covenant then it is crucial that you do the work to ensure that after the covenant dissipates the employee cannot simply walk back in and take the clients.

•   Different time limits are ok…

In the Romero case the covenant was for a duration of twelve months.  The covenant was also limited to customers or clients that Mr Templeton had had dealings with in the last six months of his employment.  The Advocate for Mr Templeton sought to argue that it was unreasonable to have two different time limits and that the shorter time limit should apply (and that therefore the twelve month period was unreasonable).  The Court dismissed this argument on the basis that the two time limits served two different functions and that both were reasonable.