The court had to decide whether two covenants given by Ms Gibson-Forbes, the seller under the SPA, were enforceable by Rush Hair, the buyer under the SPA. The covenants given by Ms Gibson-Forbes, which lasted for two years from the completion date of the sale of the business were:

Ms Gibson-Forbes incorporated a new company, which opened a hairdressing salon in Windsor. Rush claimed that, as the salon opened in the two-year restricted period and the new company employed or engaged three of the individuals named in the non-poaching clause, Ms Gibson-Forbes was in breach of both of the covenants entered into under the SPA.

Ms Gibson-Forbes argued that she was not in breach of the covenants. In respect of the non-poaching covenant, it was the new company, and not her, which had employed or engaged the individuals. In any event, she argued that both covenants were unreasonable and therefore unenforceable, her key arguments being that:

When considering whether the covenants were enforceable, the court followed the three-step approach taken to interpreting covenants in employment relationships that was summarised by the High Court in TFS Derivatives Ltd v Morgan ([2004] EWHC 3181, www.practicallaw.com/8-200-8279). That is:

Meaning of the non-poaching covenant. The court rejected Rush’s argument that it should pierce the corporate veil of the newly incorporated company, in order for Ms Gibson-Forbes to be held to the non-poaching covenant she entered into. There was no evidence that Ms Gibson-Forbes had incorporated the new company in order to conceal her identity or role, or to use it as a cloak or a sham to evade being bound by the non-poaching covenant.

However, the court found that the meaning of the non-poaching covenant was ambiguous, and could be read as either prohibiting Ms Gibson-Forbes from poaching the individuals only on her own behalf, or from doing so on her own behalf and as agent for another person. The court was therefore entitled to construe the non-poaching covenant in the only way that was commercially sensible, taking into account the factual background which was known to both parties. The court found that the clause restricted Ms Gibson-Forbes from poaching the individuals on either her own behalf or as agent.

These arguments about construction are a useful reminder of the importance of drafting covenants clearly and unambiguously.

Legitimate business interests. The courts will take a different approach when considering the legitimate interests that may be protected in the commercial context as opposed to the employer-employee context. For example, in order to realise the full potential benefit from the business being bought, it might be legitimate for a buyer to seek to protect itself against all competition from a seller. However, such a covenant is unlikely to be enforceable by an employer against an employee (Allied Dunbar (Frank Weisinger) Ltd v Weisinger [1988] IRLR 60).

In Rush Hair, the court referred to Rush’s legitimate interest of protecting the goodwill of the business from being diminished. This could happen as a result of: stylists leaving the business, which was particularly important given the close personal relationships between stylists and customers who might follow the stylists to a new salon; and Ms Gibson-Forbes’ reputation in the local area, which might attract the business’ customers, even if she was not styling hair herself.

Reasonable necessity. When determining whether the covenants went no further than was reasonably necessary to protect a legitimate business interest, the court in Rush Hair referred to the well-established distinction in the case law between covenants that are given by an employee to an employer, and those that are given by a seller of a business to a buyer. The court referred to Cavendish Square Holdings BV v El Makdessi, where the High Court held that in the commercial context there is greater freedom of contract than between employee and employer, and that although the buyer has the burden of establishing that the covenant was reasonable, this burden is not a heavy one ([2012] EWHC 3582; www.practicallaw.com/3-524-3638). However, a court will not simply rubber stamp an agreement reached between a buyer and a seller: a covenant will still be unenforceable, even in the commercial context, if it goes beyond what is reasonably necessary to protect the legitimate business interest.

Buyers seeking to agree enforceable covenants should consider the following when drafting:

Length of the restriction. In Rush Hair, the court upheld the two-year covenants, and referred to a number of similar cases involving hairdressers where lengthy restrictions had been upheld. It is helpful that the court recognised, as the High Court did in Cavendish Square, that no covenant has been held unenforceable in the commercial context purely because of its duration.

Bargaining power of the parties. Generally, a court will be slower to find a covenant unreasonable where there is equality of bargaining power between the parties, although this is only one factor to be considered when determining the reasonableness of a covenant. However, even though the court found that Ms Gibson-Forbes was in a weaker bargaining position because she effectively only had the option of either selling her business to the buyer or walking away with nothing, this did not result in the court finding that the covenants were unenforceable.

Geographical scope. A very wide geographical restriction might be grounds for a court to hold that the covenant is unenforceable. In Rush Hair, the court held that it was reasonable to have a two-mile restriction covering Windsor, even though this is where Ms Gibson-Forbes lived, as this would protect Rush from the detriment it wanted to avoid, that is, losing customers in Windsor. However, the reasonableness of the geographical scope of a covenant will be heavily fact-dependant. A worldwide restriction on a seller that provides services through the internet might be reasonable, whereas a worldwide restriction on Ms Gibson-Forbes operating a hairdressing business would probably have been unreasonable.

The amount of consideration. A greater amount of consideration given by the buyer is likely to weigh in favour of the covenants being enforceable.