Restrictive covenants: restraint of trade and bespoke contracts

Quantum Advisory Ltd v Quantum Actuarial LLP [2020] EWHC 1072 (Comm)

The question 

Restrictive covenants are typically unenforceable unless they:

1. are to protect a legitimate business interest;
2. are no wider than reasonably necessary to protect that interest; and
3. are not contrary to the public interest.

But does the restraint of trade doctrine apply to all restrictive covenants?

The key takeaway 

Not all restrictive covenants are subject to the restraint of trade doctrine – in this case, the doctrine did not apply to restrictive covenants in a bespoke services agreement.  The context of the agreement and the covenants must be considered.

The facts 

A business providing various professional services was formed by certain individuals and split between three different companies (the Legacy Companies) with the intention of merging the Legacy Companies into a single entity after three years. However, the business was forced to undergo a restructuring due to the diverging interests of the individuals involved. 

The business was to be carried on by a new limited liability partnership (LLP), with the Legacy Companies’ clients (the Legacy Clients) remaining with the Legacy Companies and the LLP providing services to the Legacy Clients on behalf of the Legacy Companies at a fixed cost. 

This restructuring was documented in a Services Agreement (the Agreement) between the LLP and the Legacy Companies which restricted the LLP’s ability to:

1. solicit or entice away or attempt to solicit or entice away any Legacy Clients;
2. obtain instructions for any services from the Legacy Clients or undertake any services for the Legacy Clients; or
3. undertake services in relation to certain new business or any work introduced by Introducers without referring such matters to the Legacy Companies first; for the term of the Agreement and for 12 months after its termination or expiry (the Restraints). 

The parties conducted business under the Services Agreement for a number of years. However, the LLP became dissatisfied with certain terms (in particular, income allocation) and alleged that the Restraints were an unreasonable restraint of trade as the drafting of the Agreement meant that they lasted for a total of 100 years unless the Agreement was terminated early. In response, the Legacy Companies sought a declaration that the Agreement was binding on the parties and an injunction to restrain the LLP from acting in breach. 

The decision

The Court concluded that the doctrine of restraint of trade did not apply to the Restraints. The Court emphasised that the Agreement needed to be considered on its own terms and circumstances as an Agreement created to address the competing interests of the parties. It focused on the purpose of the Agreement, noting that:

1. the Agreement was brought into existence wholly for the purposes of the restructuring. The LLP had no previous business or being but for the Agreement, which demonstrated that the Agreement provided it with an opportunity to trade, rather than restraining its trade; and
2. the Restraints were put in place to establish the ownership boundaries of the Legacy Clients.

The Court went on to determine that, even if the restraint of trade doctrine had applied to the Restraints, they would have satisfied the reasonableness requirements as the parties were of equal bargaining power and the Restraints were placed in a “free agreement” made between “experienced, intelligent, articulate and highly competent business people, who were properly able to look after their own interests and who expressly agreed that the restraints were reasonable” and were necessary to protect the parties’ interests. 

The potential 100-year duration of the Restraints was reasonable when viewed in context as it was not imposed on the LLP, and neither the term of the Agreement nor the termination provisions were within the scope of the doctrine. 

Why is this important?

The decision offers a valuable insight into the court’s attitude towards restrictive covenants outside of the usual employment and sale scenarios where these types of clauses are typically found. There is no general rule that the restraint of trade doctrine will not apply to bespoke contracts, but it shows that commercial context is crucial 

Any practical tips?

The general rules as to the scope of restrictive covenants should always be considered carefully Consider using recitals and acknowledgements to identify the legitimate business interest(s) being protected, and any commercial context that should be taken into account. 

Autumn 2020