Restrictive Covenants Essay

1288 words - 5 pages

Restrictive Covenants

In the situation described in this problem, a restrictive covenant
would be the best way to protect the company's interests. Although the
implied terms of employee confidentiality regarding company
information would be valid in this case, they wouldn't stop an
employee working with rivals. All doubt should be removed by the
inclusion of a clause in which the employee undertakes not to carry on
a particular trade or profession for a period after the termination of
the contract. It would permit the company to seek a interim interdict
in court against Dr MGleam and Ms Wilkes preventing them from
breaching the covenant.

Restrictive covenants are common in many contracts (partnership, share
holders, buyer-seller) including employment contracts. Prima facie,
such rules are illegal and unenforceable unless the covenantee (the
side who gains from the restriction) can invoke the restraint of trade
doctrine which was introduced into law as a result of the famous House
of Lords case of Nordenfelt v. Maxim Nordenfelt.

To prove that the covenant is justified, the covenantee must show
three things. That the covenant is necessary to protect a legitimate
interest of the covenantee (it's not sufficient to avoid future
competition with the covenantor). The restraint in the covenant must
be reasonable as between the parties, and that the restraint is in the
public interest. It is interesting to note that few cases where a
covenant is held to be reasonable have been viewed as being contrary
to public interest.

These three criteria are not yes/no questions and therefore courts
will examine the practical effects of a covenant as much as its form.
The method to determine the reasonableness of a covenant is to
examine; the spatial area the restriction covers, the duration for
which it applies and the nature of the restriction imposed. The
covenant can legitimately protect trade secrets or trade connections,
but the House of Lords has held that it is not permissible for the
employee to protect himself from the competition of his employee after
his service has terminated (Fitch v. Dewes). Note that many cases on
covenants are English; the law is similar in this subject however. In
any case (no pun intended) the English cases are persuasive.

There are no hard and fast rules governing the duration of the
restraint; in the past courts have enforced worldwide covenants
(limited in time) as is the case in Bluebell Apparel v. Dickson.
Courts have also set aside UK wide covenants for smaller businesses
too (Dumbarton Steamboat Co. v. Macfarlane)

The multi-national nature of the company leads one to believe that the
a worldwide covenant would be possible, however significant sections
of the globe (Canada, South America, Africa) are not operated in by
the company....

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