Restrictive covenants are enforceable if they go no further than reasonably necessary to protect an employer’s legitimate business interests. In Sparta Global Ltd v Hayes, the High Court had to decide whether a non-compete restriction in an investment agreement was enforceable. It went further than a non-compete provision in the employee’s contract of employment.
What happened
Mr Hayes’ contract of employment with Sparta Global Ltd contained a six month non-compete restriction, which permitted him to work for a competitor in a different role from the one he performed for Sparta. During his probationary period, he also agreed to restrictions in an investment agreement. The non-compete in the investment agreement lasted 12 months and was a blanket ban on working for a competitor in any capacity.
When Mr Hayes resigned in late 2023, he wanted to start employment with one of Sparta’s competitors. Initially Sparta brought proceedings to enforce the restrictions in the employment contract but subsequently relied on the more onerous restrictions in the investment agreement.
The High Court had to decide whether to grant an interim injunction to enforce the longer non-compete.
The Court’s decision
There was no dispute that Sparta had a legitimate business interest to protect, as Mr Hayes had access to confidential information during his employment. However, as the non-compete would have expired by the date of a full trial, the Court had to form a preliminary view of whether the covenant in the investment agreement was enforceable when deciding whether to grant an interim injunction.
It decided that it was likely that at trial the court would find the restriction in the investment agreement an unlawful restraint of trade. A shareholder agreement may be a genuine commercial agreement between parties with equal bargaining power, in which case it will be easier to persuade a court that restrictions are reasonable. In other cases, a shareholder agreement may be closer to a contract of employment and a higher threshold for reasonableness will apply.
In this case, Sparta and Mr Hayes did not negotiate the investment agreement and it was more akin to a contract of employment. Its terms were a fait accompli between parties of unequal bargaining power. It was relevant that Mr Hayes had agreed to a 12 month restriction, but his employer only had to give him statutory notice.
Most importantly, Sparta had initially indicated that the shorter and less onerous non-compete in the employment contract was sufficient to protect its confidential information. It had not explained why it subsequently decided that it was insufficient. This indicated that the protection it now sought went beyond what was reasonably necessary and the Court refused to grant an injunction.
Next steps
It was relevant that there was no evidence that Mr Hayes had misused confidential information. The Court described the risk of future inadvertent disclosure of such information as “fanciful.” His new employer had given him an unrelated non-competing role until any trial, so he was not in breach of the non-compete in his employment contract. There was a real risk that he would lose his job if the Court granted an injunction, with serious implications for him and his family.
Those factors meant that the balance of convenience clearly fell in favour of refusing an injunction in this case. However, the decision indicates once again the highly fact and context specific nature of applications for injunctions.
Authored by Jo Broadbent, Katharine Savage and Stefan Martin.
