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Restrictive covenants in employment contracts - A generous decision from the Court of Appeal?

Coppage and another v Safety Net Security Ltd [2013] EWCA Civ 1176
Safety Net Security Ltd v Coppage and another [2012] EWHC B11 (Mercantile)

The Court of Appeal's decision - Don't look back?

The Court of Appeal’s decision (11 October 2013) in Coppage v Safety Net Security to uphold as reasonable and enforceable a 6 month non-solicitation restrictive covenant is surprising because of the fact that the covenant covered all customers during the period of Mr Coppage’s employment. In modern times the general advice had been that such covenants should be restricted to those who had been customers in a fixed period prior to termination (“look back” requirement) and to be confined to those with whom the employee had had personal dealings.

Sir Bernard Rix’ summary of the law relating to restrictive covenants at paragraph 9 of the judgment is a helpful one. He set out 8 points of guidance, the final one of which was that “cases in this area turn so much on their own facts that the citation of precedent is not of assistance”. It is that point that probably lies at the heart of the decision.

The importance of facts - Lying witnesses

Mr Coppage had joined Safety Net in 2008 and had become a director in 2010. His employment terminated on 16 April 2012. Safety Net brought a claim against Mr Coppage and his new company for breach of the restrictive covenant and for breach of fiduciary duty. In a remarkable example of the speed with which matters can be brought to trial judgment following a trial of the claim was handed down by His Honour Judge Simon Brown QC on 15 August 2012, exactly 4 months after termination.

Mr Coppage was clearly a very unsatisfactory witness. His witnesses had provided “wilfully inaccurate” affidavits. Each of Mr Coppage’s witnesses (as well as Mr Coppage) was disbelieved. The fact that you have lied and all of your witnesses have lied should not make a difference to the construction of a contractual provision entered into 4 years earlier but it would be surprising if it did not have some bearing on the outcome. Mr Coppage’s counsel having in a skeleton argument contended that the non-solicitation clause ought to have been restricted to customers with whom Mr Coppage had had dealings over the last 12 months of his employment apparently then “readily concede[d] that there is no obligation on the Claimant to limit the clause in this way.” A similar uncertainty of approach appears to have continued into the Court of Appeal.

The relevance of post contractual facts

It was found as a fact that Mr Coppage had had dealings with all of Safety Net’s customers and that 98 out of the 106 customers that Safety Net had had during Mr Coppage’s employment were customers at the time of his departure. Whilst Sir Bernard Rix made clear that the question of reasonableness had to be considered at the time that the contract was entered into and not in the light of subsequent events he also accepted that subsequent facts may throw light on what must have been in the reasonable contemplation of the parties at the time of the contract. Presumably therefore at the time of the original contract (or at least at the time that it was varied when Mr Coppage became a director) the parties regarded the customer base as a very stable one with whom Mr Coppage would have personal dealings.

A "just" decision on the facts, but...

The Safety Net decision reflects a more generous approach in recent years to employers in the enforcement of covenants. It may have been the “just” decision on the facts of the case but should this decision also be confined to its particular facts?

Most companies seek to grow as much as possible and in the absence of a fixed term employment contract one should assume that an employee may be with the company for many years. The fact that a company may have only, say, 90 customers in 2013 does not mean that it will have a similar number in 2018. The company may have grown significantly with various branch offices. The fact that an employee may start off dealing with all of the customers does not mean that he will in the future. The employee’s role may change or the company itself may grow to such an extent that it would be impossible for one person to have personal dealings with all of the employees. A customer may cease to be a customer years before the termination of the employment. It is difficult to see what legitimate business interest an employer could have in a company that ceased to be a customer 5 years earlier. In my opinion these are not far-fetched theoretical factual scenarios.

If Safety Net had expanded between 2008 and 2012 from 100 customers to 500 customers and had opened branch offices in different parts of the country and if Mr Coppage had had personal dealings with only say 100 of those customers would the covenant have been upheld? It ought to make no difference as the covenant must be construed at the time that it was entered into. In my view Sir Bernard Rix was right when he said that these cases turn on their own facts. This decision went the way it did because as a matter of fact Mr Coppage had been dishonest in his dealings with Safety Net and in his evidence. Safety Net had remained a small company and Mr Coppage had dealings with all of the clients. The facts justified the decision but whether this was an exercise in contractual construction at the date of the contract or making the law fit the facts may be open to question.

My advice - Still look back

Despite the warnings of Sir Bernard the decision will undoubtedly be relied on by those whose covenants fail to “look back” as well as forward. My advice will remain that covenants should look back and be confined to customers with whom the employee has had personal dealings.