The Court of Appeal has considered the validity of a non-compete clause in Boydell v NZP Ltd & Anr after the High Court severed words from it.

Non-compete clauses are widely used in senior employees' contracts to protect the employer's business by limiting the employees' activities post-employment. For such clauses to be enforceable, they must only protect legitimate business interests and the restraint on the employee must be reasonable.

Facts

Dr Boydell was the Head of Commercial – Speciality Products at pharmaceutical company NZP (part of the ICE Pharma Group of companies). Dr Boydell resigned in October 2022 and, after serving his notice, his employment ended in January 2023 when he secured a new position at a competing pharmaceutical company. NZP and its holding company sought to enforce Dr Boydell's restrictive covenants by seeking injunctive relief.

The High Court granted the injunction after severing wording relating to the restrictions against Dr Boydell working for NZP's group companies (as well as wording on activities relating to bile from various animals). This meant that the non-compete restriction remained place, albeit that Dr Boydell was not restricted from more general activities carried out by other companies in the group. The judge also granted injunctions to enforce non-solicitation and non-dealing covenants.

Dr Boydell appealed, arguing that the non-compete restriction was now too wide to be enforceable, as it could prevent him from working at any company which produced general pharmaceutical products such as Boots or Superdrug.

The Court of Appeal examined the construction of the non-compete clause, and considered the rule established in Home Counties Dairies Ltd v Skilton that if a clause is valid in all ordinary circumstances which have been contemplated by the parties, it will still be valid if is covers "circumstances which are so extravagant, fantastical, unlikely or improbable" that would have been outside the contemplation of the parties.  Therefore, although the clause could prevent Dr Boydell from working at a high street pharmacy, this was a fantastical and unlikely consequence that was not within the parties contemplation and it does not result in the clause being invalid.

Further, the Court of Appeal considered the rules established in Egon Zehnder Ltd v Tillman, that "parties to a contract…will have intended it to be valid" (the validity principle), and that the court can sever words in the restrictive covenant as long as it would not "generate any major change in the overall effect" of the clause, as the "focus is on the legal effect of the restraints, which will remain constant". Thus, the non-compete clause is able to be enforceable despite its scope being limited by the High Court.

What does this mean for employers?

Though this case provides reassurance to employers that non-compete restrictive covenants may remain enforceable despite unintentionally covering areas which are "fantastical" and not contemplated by the parties, it remains best practice to ensure these covenants are drafted carefully to restrict the employee's post-termination activities to only protect legitimate business interests.  

Non-compete clauses are also coming under increasing scrutiny, with the government now confirming it intends to legislate limiting the length of the clauses to three months. See our article here for an overview of the governments proposed changes.  In its response to the consultation on non-compete clauses in 2020 the Government has confirmed that the proposed statutory limit of three months will apply to non-compete clauses only and not to other types of restrictive covenant such as non-solicitation and non-dealing clauses, but there is no information on whether or how the limit would apply retrospectively to existing contracts nor the likely timescale for the changes.  For the time being, employers should continue their use of non-compete clauses, but also consider alternative types of covenants, confidentiality/IP clauses and the use of garden leave and notice periods to protect their business.

Contributors to this article were Sajida Hussain, Jessica Chapman and Nick Ashcroft

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