Member Article

Restrictive covenants seek to limit the ability of employees, typically senior ones, to work or carry out certain actions for a specific period after their employment is terminated. They are notoriously difficult to enforce because a court’s starting point is that they are an unenforceable restraint of trade, unless they are shown to be necessary to protect the employer’s business.

This applies in Scotland as in England and the rest of the UK: restrictive covenants created under English law should be enforceable in Scotland if the usual tests on enforceability are satisfied.

The onus is on an employer to demonstrate that they have a legitimate business interest to protect and that the protection afforded by the covenant is no more than reasonable; if covenants go beyond this, then they will be, and often are, struck down by the court.

Enforcement

Enforcement of restrictive covenants in Scotland is determined in line with Scots law.

The law relating to the interpretation and enforceability of restrictive covenants is very similar in Scotland and England, therefore in principle, a covenant created and enforceable under English law should be enforceable in Scotland.

As well as accepting that the restrictive covenant is necessary for the legitimate protection of an employer’s business, the court must also be satisfied the restricted party’s or the public’s interest are not unduly affected by the restriction on trade.

However, there are procedural variations in enforcement between Scotland and England, and the court may face conflicting authorities from either jurisdiction.

Where do I bring my claim?

Where the claim should be brought is likely to depend on where the employee lives, irrespective of where their employer is based.

Under the Civil Jurisdiction and Judgments Act 1982 (“the 1982 Act”), employers are required to raise proceedings related to contracts of employment – including, for this purpose, settlement agreements – in the part of the UK in which the employee is domiciled. Therefore, if an employee is domiciled in Scotland, then any claim to enforce the terms of an employment contract or settlement agreement must be pursued in Scotland.

An exclusive jurisdiction clause, agreeing that a court situated elsewhere in the UK would have jurisdiction to hear disputes, would not be enforceable. However, the fact that a claim must be brought in the Scottish courts does not prevent the inclusion of a governing law clause that specifies that English law will apply to the interpretation of the agreement. Jurisdiction and governing law are different concepts, and so should be dealt with separately in an employment contract or settlement agreement.

Practically, due to identical provisions on restraint of trade in Scotland and England, the Scottish courts will take a largely similar approach to English courts when adjudicating claims. The courts will still apply Scots law (which they deem to be the same as English law) unless a party leads expert evidence that demonstrates the relevant English law is materially different from Scots law.

Proceedings already raised in England

Where proceedings have initially been raised in England and a judgment has been obtained, an administrative process under the 1982 Act must be completed to register the judgment in Scotland for enforcement there. For judgments from England, as with other European member states, all that is required is that a party presents a copy of the judgment and a standard form certificate from the original court to the Court of Session.

A copy of this should then be served on the party who is in breach of the covenants. This enables the employer to proceed with the enforcement of the relevant restrictive covenants. Once a judgment is registered in Scotland it can be enforced in the same way as if proceedings had been raised in Scotland.

Practical steps to take

If an employer wants to enforce a restrictive covenant, often the best pre-emptory course of action would be to seek an interdict or interim interdict under the Scottish court procedure (known as an injunction in England and Wales). An interdict can be sought where there is evidence that the employee has already broken the terms of a restrictive covenant or where the employer reasonably anticipates that the terms of a covenant will be breached.

An interim interdict is a temporary remedy and remains in place while the full substantive claim is waiting to be heard. This can be sought on an urgent basis by making a motion to the court and can be heard on the same day. Interim interdicts can be granted without notice being given to the employee.

Parties in Scotland are able to bring proceedings in the Sheriff Court or the Court of Session. Where proceedings are raised in the Sheriff Court, these would need to be in the nearest court to where the employee resides, or the court closest to where the employee has breached the restrictive covenants. For a court to grant an interdict it must be satisfied the employer has a right that the defender has infringed or threatened to infringe. Normally this will be self-evident from the restrictive covenant provisions in the employment contract.

When applying for an interim interdict order, the court must be satisfied that:

- it has the appropriate jurisdiction to consider the matter;

- the pursuer has the title to sue;

- the matter is urgent;

- there is a substantial question to try; and

- the balance of convenience favours the granting of an interim interdict.

In some cases, an employee may give an "undertaking" to the court that would remove the need for an interim interdict. If they breach the terms of that undertaking, they would be found in contempt of court.

"Perpetual" interdicts last indefinitely. Once granted, if the employee does not comply with the terms of the interdict, they will be found in contempt of court, the punishment for which may include up to three years in prison, a monetary fine, or both depending on the seriousness of the breach. Where the claim is heard in a Sheriff Court, the maximum prison sentence and fine are three months and £2,500 respectively. In 2015, an employee was imprisoned for 10 months due to wilful and repeated breaches of an interdict restricting him from competing against his former employer.

Alternatives

In practice, employers will usually seek both an interdict and damages for breach of the covenants. However, damages can also be sought on their own if it is not possible to grant an interdict, for example where one of the enforcement criteria is not met. For this to happen, the loss caused by the breach must be quantifiable.

The court considers:

- whether the covenant is enforceable;

- if so, whether the employee has breached the covenant;

- if so, whether the breach has caused the employer loss; and

- how that loss should be measured.

Often, damages have to be assessed on factors other than financial loss, as there are circumstances where this cannot be quantified. Until recently, "negotiating damages" were often sought, based on the release fee that one party could hypothetically have received from the other party in exchange for removing the obligation imposed by a restrictive covenant. However, in April 2018, the Supreme Court ruled that these were no longer available, and the fact that damages cannot be quantified is irrelevant.

Conclusion

The enforceability of a restrictive covenant very much depends on whether the restriction is a proportionate and necessary means of protecting an employer’s legitimate business. Any restrictive covenant clause that is too wide to achieve this will be struck down, regardless of where the contract was entered into, or whether English or Scots law is stated or found to apply.

Where an employer can show such a clause is necessary, there are a number of options open to it. These can be anticipatory, such as interdict, or by way of a damages-based action, if loss due to the breach of the covenant can be measured.

When setting down restrictive covenants in any jurisdiction, employers must be clear on their necessity, and avoid the temptation to seek to protect themselves too widely, which may make the whole covenant unenforceable.