What is a Restrictive Covenant?

An agreement or promise restricting the person or persons giving the covenant from taking certain actions.

For example, in an employment situation there may be a restrictive covenant prohibiting the employee from working for a competitor for a specified period of time, generally after the employment has ended.

What the Law Says

Under the doctrine of restraint of trade, any contractual term which purports to restrict a party’s actions is void and unenforceable, unless the contractor can show that it has a legitimate and reasonable interest that requires protection, having regard to the parties’ and the public’s interest.

Restrictive Covenant in Agency Agreement

Restrictive covenants are frequently challenged on the grounds that they are too widely drawn. In the recent case of One Money Mail Ltd v (1) Ria Financial Services (2) Sebastian Wasilewski 2015, the Court of Appeal upheld restrictive covenants drafted into an agency agreement regarding the transfer of money services.

Under the contract the agent agreed:

1. not to operate as a principal or as an agent for another competitor organisation during the term of the agreement; and

2. for a period of 6 months from termination of the agreement to refrain from working for or setting up a money remittance business and using clients, contacts or employees within a radius of 5 miles from the place of business from which the agent had previously engaged in a money remittance and cheque cashing service.

The Court of Appeal found that:

1. the restriction on acting for competitors during the term of the agency agreement, as well as the principal’s right to appoint other agents and terminate on short notice in certain circumstances, did not “sterilise” the agent’s activities and prevent him from earning a living;
2. the principal was obliged to process any business the agent brought in and pay commission on it; and
3. the post termination restriction was reasonable because it was limited both in time and space and necessary to protect the principal’s investment in training and supporting its agents.

Conclusion

In an agency agreement a restrictive covenant can normally be justified by the need to protect the investment of the principal in setting up the agency network. The decision in One Money Mail Ltd v (1) Ria Financial Services (2) Sebastian Wasilewski 2015 provides a useful example of the application of the restraint of trade doctrine in a common contemporary commercial situation.

This case serves as confirmation that the courts are inclined to uphold reasonable restrictive covenants in commercial situations.