Damages for breach of restrictive covenant

In Dunedin Independent plc v Welsh the Outer House of the Court Of Session (the Scots equivalent of the High Court) considered the unusual position of an employer suing an ex-employee for breach of restrictive covenant.

Here the law in question was Scots but broadly similar to English law.

Mr Welsh was a director of a financial services company in Scotland as was registered as an IFA.

There were a number of restrictive covenant clauses contained in his contract of employment that governed his activities post termination of service that included confidentiality, no-solicitation and non-dealing provisions.

His contract terminated on 9 September 2002 and he began to work as a self-employed consultant for Spence & Spence, a firm of financial advisers.Later in February 2003 he became director and employee of Anderson Welsh, a firm of financial advisers.

In November Dunedin sought unsuccessfully an interim injunction re non-dealing but was successful in its application for confidentiality and non-solicitation provisions.

Later in March 2006 a full hearing progressed including a claim for damages for breach of the employment contract terms.

Dunedin argued Welsh had contacted a number of clients to induce them to transfer their business to him. It argued it had suffered a financial loss by way of lost commissions it would have earned during the 12 months the restrictions applied.

Welsh admitted contacting the clients but argued no breach of contract.

On the facts the court decided:

• The non-dealing clause was “wider than necessary”(on its wording) and therefore was an unfair restraint of trade and accordingly unenforceable in law;
• That it could but did not feel compelled to “correct” the wording of this clause so as to make it enforceable;
• That on the facts there was evidence to show Welsh had contacted clients but had not solicited them since the clients themselves chose Welsh on his experience and background knowledge. Since the clause did not prevent him contacting clients merely “soliciting” them he was not in breach of contract;
• By way of background that in terms of potential calculation of loss would be what Dunedin had lost (commissions less discounts) as opposed to what Welsh had gained.

Accordingly it can be seen that great care is required when drafting enforceable restrictive covenant clauses to protect a legitimate business interest and it can pay to instruct an expert to get this right.

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