Restrictive Covenant Disputes

What is a restrictive covenant?

A restrictive covenant is a contractual promise limiting what a person or business may do during a relationship or after it ends. The restriction may appear in an employment contract, director service agreement, shareholder or partnership agreement, settlement agreement, or the documents for a business sale.

These promises differ from an ordinary obligation to pay money or deliver a service. They seek to control future conduct: joining a competitor, approaching particular clients, dealing with customers, recruiting colleagues or using confidential material. That can protect a genuine commercial asset, but it can also restrict a person's ability to work or trade. The law therefore examines the justification and reach of the covenant rather than enforcing every restriction simply because it was signed.

A dispute may begin when an employer learns that a departing employee is joining a competitor, a director establishes a rival enterprise, a seller returns to the market, or customers and staff begin moving to another business. The first question is not merely whether competition exists. It is whether the contract protects a legitimate business interest, whether the particular covenant is capable of enforcement and what the evidence shows has happened or is likely to happen.

This page deals with contractual restrictions and their commercial enforcement. Broader contractual disagreements are covered under Business Contract Disputes. Disputes rooted in company ownership or management may also involve Shareholder Disputes, Director Disputes or Partnership Disputes.

When is a restrictive covenant enforceable?

A court does not begin by asking whether the restriction would be useful to the business. It asks whether there is a legitimate interest requiring protection and whether the covenant goes no further than is reasonably necessary to protect it.

A legitimate interest, not freedom from competition

Recognised interests may include customer connections and goodwill, confidential information or trade secrets, and the stability of a trained workforce. A business cannot normally restrain a former employee merely to prevent lawful competition. It should be able to identify the asset or relationship at risk and explain why a narrower protection would not be sufficient.

Reasonableness in the contractual context

Duration, geographical reach, restricted activities and the customers or employees covered must be considered together. The individual's seniority, access to information, influence over clients and role when the covenant was agreed are relevant. A restriction covering markets, services or customers with which the person had no material connection may be harder to justify.

The assessment is normally made by reference to the circumstances when the contract was entered into, not simply what happened at departure. Drafting also matters. A court may in limited circumstances sever objectionable wording while leaving the remainder effective, but it will not generally rewrite an unreasonable bargain for the parties.

If you need an early assessment of the wording, commercial interest and likely enforceability, call 0161 436 0000.

The main types of restrictive covenant

Agreements often use several restrictions together because each responds to a different risk. Their names are useful shorthand, but enforceability always depends on the wording and commercial purpose.

The clauses should be read as a whole. A non-dealing covenant may protect a customer relationship without banning all competition; confidentiality protection may reduce the need for an extensive non-compete. Conversely, information that will remain commercially valuable after departure may support tailored post-termination protection.

How restrictive covenant disputes arise

The contractual setting changes the evidence and the commercial stakes. A former employee moving to a competitor is not the same dispute as a director diverting an opportunity or a seller re-entering the market.

Former employees and team moves

An employer may discover a proposed competitor move, client approaches, downloads shortly before resignation or coordinated staff departures. The employee may say the covenant is too wide, their new role does not compete, the customers are outside the restriction or no confidential information has been taken. The new employer may also become involved if it is alleged to have encouraged a breach or used protected information.

Directors, shareholders and partners

Restrictions may operate alongside fiduciary duties, duties owed by directors, confidentiality obligations and ownership rights. A departure can involve competing ventures, client diversion, use of company opportunities or recruitment of staff. The contractual covenant must be analysed alongside the wider relationship rather than in isolation.

Business sales

A purchaser may allege that the seller has competed for transferred customers, used retained knowledge or undermined the goodwill purchased. The seller may dispute the market, territory, duration or activity caught by the agreement. Transaction documents, negotiations and the nature of the goodwill help explain the commercial purpose of the restriction.

What evidence matters?

A strong legal argument about wording is not enough without reliable evidence of the protected interest, alleged conduct and resulting risk. Evidence should be preserved lawfully and proportionately.

• The signed contract and every later variation
• Job descriptions, responsibilities and reporting lines
• Director, shareholder, partnership or sale agreements
• Customer allocation and relationship records
• Resignation, exit and garden-leave correspondence
• Emails, messages and client communications
• Access logs, download records and device evidence
• Confidentiality policies and security controls
• Evidence of the competing role or enterprise
• Witness accounts from customers and colleagues
• Lost opportunities, diverted work and financial evidence
• Requests for return, preservation or deletion of data

Businesses should avoid improvised searches of personal accounts or devices that may breach privacy, data-protection or procedural obligations. Employees and other respondents should preserve relevant material rather than deleting communications after receiving an allegation. Early advice can identify what may be collected, how it should be secured and whether specialist forensic assistance is justified.

When urgent action and an injunction may be considered

Some losses cannot be repaired adequately by a damages award months later. A confidential disclosure, coordinated team move or transfer of a valuable client relationship may require immediate assessment.

The first steps may include preserving evidence, clarifying the new role, identifying customers or information at risk, and sending focused correspondence seeking undertakings. An undertaking is a binding promise about future conduct and may provide protection without a contested hearing if its wording is clear and proportionate.

An interim injunction is a court order intended to preserve the position until the dispute can be determined. The applicant must present evidence supporting the covenant, the threatened or actual breach and the need for urgent relief. The court considers whether damages would be an adequate remedy and the practical consequences of granting or refusing the order. An applicant may also be required to give an undertaking to compensate loss caused by the injunction if it is later found that the order should not have been granted.

If customers, staff or confidential information are presently at risk, call 0161 436 0000 so that urgency and evidence preservation can be considered.

Remedies and the route to resolution

The appropriate outcome depends on whether the priority is stopping conduct, recovering loss, securing information or defining what the parties may do next.

Injunctions and declarations

An injunction may restrain defined conduct or require steps such as delivery up. A declaration can determine the meaning or enforceability of contractual rights. Final relief follows a full determination unless the parties resolve the dispute earlier.

Damages and financial relief

Damages may compensate loss caused by an enforceable covenant's breach, but causation and valuation still require evidence. Lost customers, diverted profit or investigation costs are not assumed merely because a breach occurred. In some circumstances other financial remedies may be argued, depending on the contractual and factual basis.

Negotiated outcomes

Settlement can define a permitted role, excluded customers, revised territory or shortened period; secure return and deletion of information; record undertakings; or agree compensation and costs. Direct negotiation or mediation can provide a practical outcome that a binary court decision may not.