Non-contractual intentions are relevant to the reasonableness and enforceability of non-compete clauses

Harcus Sinclair LLP and another v Your Lawyers Ltd [2021] UKSC 32

The questions

Are non-contractual intentions of contracting parties relevant when determining whether a non-compete clause is enforceable? 

The key takeaway

The parties’ objective intentions and contemplations at the time the contract was entered into are relevant when assessing the reasonableness of non-compete clauses, even if such intentions were not included expressly in the contract itself. 

The background

The claimants, Your Lawyers Ltd (YL), were instructed by a large group of individuals in respect of claims against Volkswagen Group United Kingdom Ltd in the wake of the vehicle emissions scandal. They intended to apply for a group litigation order and approached Harcus Sinclair LLP (HS) to collaborate. 

As part of a non-disclosure agreement (NDA), HS undertook not to accept instructions from other claimants to the group action, without express permission from YL, for 6 years. However, HS subsequently accepted an instruction from another group of claimants and commenced proceedings on their behalf. They also signed an agreement to collaborate with another law firm, Slater and Gordon. YL applied to the court for enforcement of the non-compete clause.

The High Court agreed that the non-compete clause was enforceable and HS was in breach of contract, as: (i) the non-compete clause protected YL’s legitimate interest in pursuing the group action; (ii) it was not more than reasonably necessary to protect YL’s legitimate interests, as at the date of the NDA; and (iii) enforcement of the clause was not contrary to public policy. An injunction was granted preventing HS from acting in the group litigation. 
The Court of Appeal overturned the first instance decision stating that the NDA only purported to protect confidential information. Whilst the parties had discussed collaboration, the issues had to be considered on the basis of the express provisions contained in the NDA. The Court of Appeal agreed with the High Court that the non-compete clause was a solicitor’s undertaking, but held that the Court had no jurisdiction in respect of it. 

The development

The Supreme Court agreed with the High Court that the non-compete clause was reasonable and enforceable. Describing the issue as a “critical question of law”, the Court held that YL’s legitimate interests when assessing reasonableness comprised both the NDA and the parties’ non-contractual intentions at the date of the NDA. 

The Supreme Court also clarified the test for enforceability of the non-compete undertaking, identifying two key principles: 

• the non-compete will be reasonable if it protected the promisee’s legitimate interests and went no further than was reasonably necessary to protect those legitimate interests, and 
• if the promisee can successfully establish the non-compete is reasonable, then it is for the promisor to show that it is unreasonable as being contrary to public policy. 

In this case, it was a common intention that the parties would work together on the group action and this was therefore a protectable legitimate interest. 

The court also concluded that the NDA did not constitute a solicitor’s undertaking but was purely contractual and concerned a business opportunity. As such, it did not have jurisdiction as it was not binding as a matter of professional conduct. 

Why is this important?

This decision shows that the Court will look at the wider context to assess the reasonableness of a non-compete provision, including issues not expressly provided for in the contract. It also highlights the need to adequately identify the legitimate interests that underpin a restraint of trade clause in order to demonstrate its “reasonableness”. 

Any practical tips?

Before drafting or agreeing a non-compete provision consider the legitimate interests that are being protected. Consider stating these interests within the agreement, either as recitals or within the relevant clause as an acknowledgement from both parties. Also consider how other obligations, such as to protect confidential information, interact with and may support the non-compete provisions.