November 30, 2016

Enforceability of Restrictive Covenants in Transactional Agreements

In Rush Hair Ltd v Gibson-Forbes [2016] EWHC 2589, the High Court considered the enforceability of two-year restrictive covenants contained in a share purchase agreement. 

Rush Hair Ltd (Rush), a chain of hairdressing salons, and Ms Gibson-Forbes (GF) entered into an arrangement under which GF became entitled to operate her hairdressing business from some of Rush’s salons. Over the next few years, GF built a successful business and loyal customer base. Rush and GF then entered into a share purchase agreement (SPA) under which Rush agreed to purchase the share capital of the companies through which GF operated. The SPA contained two covenants which prevented GF for a period of two years after the sale from (a) being engaged or interested in any competing business in a two-mile radius of the salons from which she operated, and (b) poaching certain key employees. A few months after the sale, Rush brought proceedings against GF, claiming that she had breached both covenants. The first issue to be considered was the enforceability of the covenants.

The High Court held that both covenants were enforceable because they were no wider than reasonably necessary to protect Rush’s legitimate business interests, namely its right to protect the goodwill in the companies that it was purchasing (an important part of which was the value of the personal connections between the individual stylists and their regular customers). The Court also found that a two-year period was not unreasonable. This was because a different and less rigorous approach applied to the examination of covenants contained in a vendor-purchaser agreement, than in an employer-employee agreement, which reflected the fact that the bargaining power between the parties was stronger in the former than in the latter (in which a covenant of a two-year duration would almost certainly be unenforceable).

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