Scully UK Limited v Lee

An employee restraint is enforceable only where it protects a legitimate proprietary interest, such as confidential information or customer connections, and goes no further than reasonably necessary to protect that interest. A covenant must be construed according to its natural contractual meaning and commercial purpose. A restraint covering businesses that need not compete with the employer, or activities extending beyond the employer’s legitimate interest, may be unreasonable. Severance is available only where the offending restriction is genuinely independent and can be removed without rewriting the covenant. A covenant may fail because of excessive breadth even though its duration or geographical scope is reasonable.

Mr Anthony Lee left employment with Scully UK Limited and joined Veeder-Root Environmental Systems Ltd. His employment contract contained restrictive covenants preventing involvement in businesses dealing with overspill prevention or tank gauging equipment and restricting solicitation of Scully’s clients, customers, suppliers, agents and distributors.

The trial judge held that clause 17(c), the restraint on involvement in competing or specified businesses, was enforceable after severing restrictions concerning shareholdings and advertising businesses. Clause 17(d), the non-solicitation covenant, was held unenforceable. Mr Lee appealed against the injunction based on clause 17(c), and Scully cross-appealed against the refusal to enforce clause 17(d). The central issues were the construction, reasonableness and severability of the two covenants.

1. The appeal was allowed and the cross-appeal dismissed. The injunction granted below was discharged.
2. Clause 17(c) was construed according to its natural contractual meaning. The words prohibiting involvement in any business dealing in overspill prevention or tank gauging equipment were not limited to competing businesses or to businesses operating in the petrochemical industry. The phrase “without prejudice to the foregoing” prevented the later reference to competing businesses from limiting the earlier prohibition.
3. The employer had a legitimate interest in protecting confidential information. The evidence established that Mr Lee possessed non-public technical, marketing and product-development information capable of damaging Scully if disclosed or used. In a restrictive covenant case, the information need only be identified sufficiently to enable the court to determine whether a legitimate interest exists; the particularity required in an action directly enforcing confidentiality is not necessarily required.
4. Clause 17(c) was nevertheless an unreasonable restraint of trade. Its breadth extended to businesses which might not compete with Scully, to equipment beyond the type relevant to Scully’s business, and to involvement as a shareholder or in any other capacity. The covenant therefore went beyond what was reasonably necessary to protect Scully’s confidential information.
5. Severance could not cure the defect. Severance is permissible only where the obligation removed is genuinely separate and independent and its excision does not affect the meaning of what remains. The necessary deletion or alteration of the wide business description and involvement provisions would amount to impermissible rewriting, rather than severance.
6. Clause 17(d) was unenforceable. Although the absence of a geographical limit and the inclusion of agents and distributors were not necessarily fatal, Scully had not established that a 24-month restriction was reasonably necessary to protect its goodwill and trade connections. The trial judge had applied the correct evaluative approach.

1. Court of Appeal (Civil Division) [1998] EWCA Civ 188: allowed Mr Lee’s appeal, dismissed Scully’s cross-appeal and discharged the injunction.
2. Queen’s Bench Division: HH Judge Havery QC held clause 17(c) enforceable after severance and clause 17(d) unenforceable, granting an injunction in terms of paragraph 1 of the order sought.