Visualmark acted as agent for BCM Group for the promotion and sale of office equipment under the terms of a written agency agreement signed in 2001 which contained post-termination restrictive covenants. In 2002, there was an exchange of letters between the parties recording a change in the way in which Visualmark was remunerated.
Following the breakdown of the business relationship between the parties in April 2006, the parties asked the court to rule on whether the post-termination restrictive covenants in the written agreement of 2001 continued to apply to the parties following this exchange of letters or whether a new agreement had been formed which did not include these covenants.
The judge considered that the letters represented a variation of the 2001 agreement as to remuneration only. As such, the other terms of the 2001 agreement, including the restrictive covenants, continued to apply. This is backed up by the Commercial Agents Regulations, which provide that an agency contract for a fixed period which continues to be performed by both parties after that period has expired shall be deemed to be converted into an agency contract for an indefinite period.
The parties then asked the judge to consider whether and to what extent the restrictive covenants were enforceable. This decision was the first decision of the English courts concerning the enforceability of the post-termination restrictive covenants contained in an agency agreement.
The restrictive covenant which was at issue was the second post-termination restrictive covenant. This provided that:
“Within a period of two years thereafter (Visualmark) will not thereafter canvass, approach or solicit the custom of (in respect of any business which competes for the business of (BCM Group) as at the date of such termination) any person firm or company who has, during the period of one year prior to termination been a customer of (BCM Group).”
Visualmark claimed that this covenant was too wide to be enforceable, both in terms of its duration and its ambit, and BCM Group denied this.
The judge recognised that the courts take a strict approach to the interpretation of restrictive covenants. Under the English common law doctrine of restraint of trade, any covenants agreed between parties which operate as to restrict trade, will only be enforceable to the extent that they do no more than is reasonably necessary to protect a legitimate business interest. The restriction must be reasonable in terms of both duration and geographical scope.
The Commercial Agents Regulations also set out rules relating to post-termination restrictive covenants. Under the Regulations a restraint of trade clause in an agency agreement will only be valid if and to the extent that it:
- is concluded in writing;
- relates to the geographical area or the group of customers and the geographical area entrusted to the commercial agent; and
- does not exceed a period of two years after termination of the agency agreement.
The judge considered that, when considering the reasonableness of restrictive covenants, there was a relevant distinction between an employee and an agent. An agent, who is less closely tied to the principal than an employee is to an employer, should not be subject to more onerous restrictive covenants than an employee.
The judge held that BCM Group had a legitimate business interest to be protected, namely in maintaining the business and contacts established by Visualmark. The judge also rejected the argument that the period of two years was too long in these circumstances. (However the judge stated that a two year period may not always be appropriate for agency agreements, despite the wording of the Regulations.)
In terms of the ambit of the clause, the judge agreed with Visualmark that it was too broad. This was because it applied to any customer of BCM Group, irrespective of whether it was a customer with whom Visualmark had had any dealings or not. This meant that Visualmark had no means of identifying the customers with whom it had not dealt on behalf of BCM! In addition this range of customers could not be said to be the customers which were entrusted to Visualmark for the purposes of the Regulations.
The final question to be considered by the judge was whether the unenforceable restrictive covenant could be amended so that a reduced part of the clause would be enforceable. The judge recognised that the courts are extremely reluctant to re-write voluntarily undertaken contractual obligations. The judge took the view that only deletion was permissible and in very limited circumstances. However, the judge decided that there was no deletion which would give this covenant an acceptable and enforceable meaning.
Written by Jane Elliot