Non-compete clause was reasonable, says Court of Appeal

The former managing director of an insurance broker has lost his claim that a ban on competing with his former employer was unfair. The Court of Appeal has upheld the restrictive covenant that appeared in his contract.

Huw Thomas was the managing director of insurance broker Farr, a company which arranged insurance for social housing projects. When the company was restructured he resigned, saying that the placing of Farr into the care of another subsidiary of its parent company represented a demotion and could lead to a loss of earnings.

Thomas accepted an offer of employment from a new entrant into the market for social housing insurance. He then sued Farr for constructive dismissal, breach of contract and a declaration that the non-compete clause in his contract was an unreasonable restraint on trade.

In a case that only dealt with the non-compete clause, the Court of Appeal upheld the High Court's ruling that Farr was entitled to put the clause in its contract.

Thomas argued that Farr was entitled to protect itself, but that other clauses in his contract which he did not dispute already provided enough protection. He was contracted not to solicit business from Farr customers, and was contracted not to disclose any confidential information belonging to Farr to the company's detriment.

Thomas argued that these clauses protected the company against any harm that could come to them by his employment elsewhere. He also said that the terms of the non-compete clause were too wide and that the restricted period of 12 months should only have been six months.

Appeal court judge Lord Justice Toulson said that the non-solicit clause would only stop Thomas from approaching Farr's clients. If he were to hold a similarly senior position in the new company, though, those approaches were likely to be made by more junior staff. The non-compete clause was necessary for that not to be done on the basis of Thomas's knowledge of Farr, he said.

The court also found that the 12-month period was a reasonable estimate of the period for which confidential information would be valuable, and so was appropriate. It also found that the terms of the restriction were appropriate because while they banned Thomas's acting in the social housing insurance broker market they did permit his working in other insurance broker markets.

Though the case will be welcomed by employers, experts have warned that these types of decisions are very specific, and that companies should be wary of extrapolating too widely from them.

"This result is good news for employers," said Ben Doherty, an employment specialist with Pinsent Masons, the law firm behind OUT-LAW.COM. "But it doesn't follow that all 12-month restrictive covenants will stand up in court as each case will be decided on its own facts."

"Non-solicitation and non-compete clauses must be written into employment contracts with great care. The employer should ensure that it has a legitimate business interest which it is appropriate to protect and that the protection included in the contract is no more than reasonable having regard to the interests of the parties and the public interest."