In a recent High Court ruling, an application for an interim injunction aimed at enforcing restrictive covenants was swiftly dismissed, illustrating the court’s reluctance to uphold extreme covenants. Literacy Capital Plc (the Claimant), an investment company, sought to prevent Vanessa Webb (the Defendant), a former director of the Claimant’s subsidiary, Mountain Healthcare, from engaging in activities that were deemed competitive with Mountain Healthcare’s business.
After leaving her role, the Defendant established another healthcare business, Nurture Health, which eventually began offering services similar to those provided by Mountain Healthcare. This led the Claimant to allege that the Defendant was in breach of the restrictive covenants agreed upon in their 2021 investment agreement. However, the court found these covenants to be excessively broad and of an unreasonable duration, ruling them unenforceable and refusing to grant an injunction. The outcome serves as a cautionary tale about the enforceability of restrictive covenants and the limitations of such restrictions when viewed as a restraint of trade.
Case facts
The Defendant played an instrumental role in Mountain Healthcare’s growth prior to its sale to the Claimant in 2018. As part of the acquisition, the Defendant entered into an investment agreement and loan agreement with the Claimant, which included deferred consideration for the sale of her shares to be paid under a loan arrangement.
In 2021, the Defendant resigned from her position at Mountain Healthcare and renegotiated the terms of both agreements with the Claimant. The renegotiated agreements included restrictive covenants designed to prevent the Defendant from engaging in activities which were competitive with Mountain Healthcare. These covenants were to remain effective until the later of either (i) one year after the Defendant ceased to be a director or employee, or (ii) 12 months after the redemption of the Defendant’s loan notes, potentially lasting up to a decade.
Following her departure from Mountain Healthcare, the Defendant established Nurture Health, a new venture in the healthcare sector. Initially, Nurture Health operated in a different segment of that sector, but after the expiration of a separate one-year non-compete clause, the company began to offer services in the same segment of the market as Mountain Healthcare. This expansion included winning a contract in 2024 to provide services similar to those offered by Mountain Healthcare to a similar customer base.
These events led to the Claimant alleging that the Defendant had breached the restrictive covenants in the renegotiated 2021 investment agreement. The Claimant sought to enforce these covenants and filed for an interim injunction.
An interim injunction is a temporary court order that can compel an individual to either do, or refrain from doing, a specific act until a full hearing can be conducted. When enforcing restrictive covenants, an interim injunction may be sought to maintain the status quo and prevent a party from engaging in activities that would breach the covenant until the court can fully assess the validity and enforceability of the covenants. The Claimant’s aim was to stop the Defendant’s business from undertaking any activities which competed with Mountain Healthcare.
High Court decision
The High Court dismissed the application for an interim injunction, finding that the covenants in question were void and unenforceable. The court stated that the Claimant would not be able to raise any persuasive case that the covenants should be enforced, referring to their scope (UK-wide) and duration. In particular, the court said that a restrictive covenant spanning a decade significantly exceeded the customary timeframe accepted in situations involving post-employment restrictions or business acquisitions. The court emphasised that public policy is against unreasonable restraints on trade.
The court recognised that it is not normal practice to make a definitive assessment on the enforceability of restrictive covenants during an interim hearing. However, given the extreme nature of the covenants, the court departed from that norm in this case and found that the restrictive covenants were unenforceable. In addition to rejecting the interim injunction application, this led the court to dismiss the entire action for permanent injunction.
Comment
Reflecting on the High Court’s firm stance, this ruling emphasises the critical need for restrictive covenants to be reasonable, clearly defined and directly related to the protection of legitimate business interests. The decision sends a clear message that overly broad or unduly lengthy restrictions will not be enforced by the courts. A 10-year duration, as seen in this case, far exceeds the norm, even for investment or business sale agreements, which often include longer covenants than would usually be considered enforceable under an employment contract.
It is also worth noting that the last government intended to restrict non-compete clauses in employment contracts to a maximum of three months, although this restriction was not proposed for other types of covenants.
Earlier this year, we prepared a guide to restrictive covenants which can be found here. Should you be interested in integrating restrictive covenants into your existing agreements, or if you are considering a review of your current contractual covenants, please do reach out to our Employment team.
