TFS Derivatives Led v Morgan

A post-termination employment covenant is enforceable only where it protects a legitimate business interest and is no wider than reasonably necessary in the interests of the parties and the public. The court must first construe the covenant in its factual setting. It must not artificially narrow clear wording to save an excessive restraint.

A prohibition on work in a competing business may, however, concern the employee’s former business activity, rather than employment by a competing corporate entity in any role. An unreasonable discrete phrase may be severed where its removal requires no rewriting, leaves a coherent bargain supported by consideration, and does not alter the contract’s character or offend public policy.

TFS Derivatives Limited, an inter-dealer equity-derivatives broker, sought final injunctive relief against its former DAX broker, Simon Morgan. His contract contained post-termination non-competition and employee non-solicitation covenants. After resigning, he agreed to join a competitor to establish its DAX desk.

The claimant had obtained an ex parte order and the parties agreed to a speedy trial, during which the defendant gave undertakings. He abandoned his original allegation of repudiatory breach arising from garden leave. The remaining issue was whether the restrictive covenants, particularly clause 12.1(a), were void as unreasonable restraints of trade and, if valid, whether an injunction should be granted.

1. The claimant succeeded in enforcing clause 12.1(a), subject to severance. Cox J granted injunctive relief preventing the defendant from working in the relevant competing activity until 22 December 2004. He could immediately work for GFI in other business activities.

2. The applicable inquiry was whether the covenant was properly construed, whether the employer had a legitimate interest requiring protection, and whether the restriction went no further than reasonably necessary. The employer also had to establish reasonableness in the interests of the public. The court retained a final discretion whether to grant relief. The judge applied Office Angels Limited v Rainer Thomas & O’Connor [1991] IRLR 214.

3. Applying ordinary principles of construction, including Arbuthnot Fund Managers v Rawlings [2003] EWCA Civ 518, clause 12.1(a) concerned the particular business activity in which the defendant had been materially involved. It did not prevent him from working for a competing corporate entity in every possible capacity. The words “in any capacity” qualified only being “interested” in a business.

4. The words “or similar to” were unsupported by evidence of any need for protection and were unreasonably wide. They could be severed from clauses 12.1(a) to (c). Their removal required no addition or modification, left effective restrictions supported by consideration, did not change the character of the contract, and was consistent with public policy.

5. TFS had legitimate interests in customer connection, confidential brokerage rates and trading information, and workforce stability. The defendant had strong client relationships and knowledge capable of giving a competitor a substantial advantage. A confidentiality covenant and non-solicitation restrictions did not make a short non-compete covenant unnecessary. The comparison with a six-month garden-leave clause was fact-sensitive; it did not displace the need for a reasonable non-compete covenant.

6. Clauses 12.1(b) and (c), as severed, were reasonable protections for workforce stability. However, no evidence showed that the defendant had breached or threatened to breach them. The court therefore declined injunctive relief under those clauses.

• High Court (Queen’s Bench Division): Following an ex parte order on 6 September 2004 and undertakings pending trial, Cox J determined the claimant’s application for final injunctive relief.