Business restrictions – non-compete, non-solicitation and non-use clauses

In Quantum Actuarial LLP v Quantum Advisory Ltd [2021] EWCA Civ 227, the Court of Appeal confirmed a High Court ruling that restrictive covenants in a bespoke services agreement were not “restraints of trade” and so were enforceable.

Facts of the case
In 2007, a company restructure allowed the Managing Director (and largest shareholder) of a pensions advisory business to develop and diversify the administrative, actuarial, and related services delivered under the Quantum brand.

As part of the deal, the resulting LLP would take over the staff of the legacy companies and have full use of their premises, equipment and the Quantum brand name, as well as having an established client base on which to build new business. The resulting Services Agreement confirmed the LLP would receive a fee to cover its costs of delivering services (to customers of the legacy companies), but its profits would accrue to the legacy companies.  

The Services Agreement was drafted to last 99 years and prevented the LLP from soliciting or enticing away any client of the legacy companies (up to 12 months after expiry or termination).

Legal challenge
In 2018, the LLP challenged the terms of the Services Agreement, claiming that they amounted to an unreasonable restraint of trade. The LLP claimed the doctrine of restraint of trade applied so that the restriction should be amended to a more reasonable period of “between five to ten years” and the LLP was now “free to contract with whomever it wishes without any restraint”. The legacy companies sought a declaration from the court that the Services Agreement was fully enforceable and an injunction to restrain the LLP from breaching its terms.

The High Court held that the terms of the Services Agreement, were restrictive covenants and that the doctrine of restraint of trade did not apply. However, even if the doctrine did apply, the terms would have been reasonable and therefore enforceable. This decision was recently upheld by the Court of Appeal.

Restrictive covenant or restraint of trade?
Generally, parties are free to negotiate their contracts and regulate their commercial dealings as they see fit. Where the doctrine of restraint of trade applies, such terms must be:

• designed to protect a legitimate business interest;
• no wider than reasonably necessary to protect that interests; and
• not contrary to the public interest.

Restraints of trade most commonly occur between employer and employee or between seller and buyer of a company or business. However, the doctrine can also apply to non-compete, non-solicitation and non-use clauses in a commercial context, depending on the circumstances.

Whilst the Services Agreement sought to restrict the LLP’s trading activities, the court confirmed:

• the Services Agreement was a bespoke agreement entered into by sophisticated professional parties;
• there was nothing to suggest inequality of bargaining power between the parties;
• the creation of the LLP and the Services Agreement provided an opportunity to trade that would not otherwise have been available;
• the terms of the Services Agreement included each party’s acknowledgement that the restraints were reasonable;
• there was no suggestion that the restrictions had any adverse impact on the public interest;
• it would have been unacceptable for the legacy business to entrust the LLP with the servicing of legacy clients and assets without such protection; and
• the public interest in holding the parties to a freely negotiated contract, outweighed the effect of restricting the LLP in its ability to trade.

Based on these considerations, the terms of the Services Agreement were enforceable and would endure for 99 years (plus 12 months).

Points to note
This case is a helpful reminder that restrictive covenants will need to be considered on their own terms and in their commercial context.

Whilst the doctrine may prevent one party from enforcing oppressive restraints on trade, it is “not there to rescue business men and women from having entered into an agreement which they may later regret.” Parties need to be aware they are free to negotiate a bad deal and take care to understand the impact and negotiate such terms at the time the contract is entered into.

A party seeking to restrict another’s commercial activities must consider whether such terms are normal in similar, factual and contractual circumstances. Even where such restrictions are “accepted and moral currency” in similar dealings, careful drafting should ensure that their effect is not oppressive or exorbitant in nature.

For more information

For further information in relation to any of the above, please contact your relevant ACS contact or Emma Watt.

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