Literacy Capital PLC v Vanessa Jane Webb

Covenants restraining trade are prima facie unenforceable. The party relying on them must show that they are reasonable in the interests of the parties and the public, and no wider than reasonably necessary to protect a legitimate interest.

Whether the doctrine applies depends on all the circumstances at the time of contracting. It may apply to hybrid arrangements involving employment, the sale of a business and share-purchase agreements. At an interlocutory stage the court should ordinarily avoid finally determining enforceability, but may do so where the covenant is plainly excessive. A nationwide restriction lasting eight to ten years, covering businesses unrelated to the vendor’s former business, was plainly unenforceable.

Literacy Capital PLC sought an interlocutory injunction against Vanessa Jane Webb, restraining alleged competition with Mountain Healthcare Limited and other companies in its group. The restrictions arose under 2021 investment and loan-note agreements made when Webb sold her interest in Mountain and ceased her directorships.

The covenants applied throughout the UK and Channel Islands, covered businesses carried on by any group company, and operated for up to ten years. Webb argued that they were void under the common law doctrine of restraint of trade because they were excessively wide and lengthy. The central issues were whether the doctrine applied and whether the restrictions were so plainly unreasonable that the court could determine their validity at the interim stage.

1. Application dismissed. The restrictive covenants were void and unenforceable at common law. No realistic argument existed that they were unaffected by the doctrine or reasonable in scope and duration.
2. The doctrine of restraint of trade applies flexibly by reference to the practical effect of the restraint and all relevant circumstances at the time of contracting. It traditionally applies to post-employment restraints and restraints imposed on a person who sells a business. It may also apply to share-purchase agreements and to arrangements combining those features.
3. The party relying on a restraint bears the burden of showing that it is reasonable in the interests of the parties and the public. The court considers the legitimate interest relied upon, the scope of the restricted activities, geographical extent and duration, and whether a narrower covenant would suffice. The fact that an agreement was made at arm’s length, or involved substantial financial consideration, does not remove the need for justification.
4. At the interlocutory stage the court should generally determine only whether there is a serious issue to be tried and should avoid prolonged examination of enforceability. Exceptionally, it may decide the issue where the covenant is clearly wider than reasonably necessary and has no realistic prospect of being upheld.
5. Here, the legitimate interest was principally the goodwill of Mountain’s SARC business. The covenants extended to unrelated group businesses, imposed a nationwide restriction without supporting evidence of a nationwide business, and lasted eight to ten years. The claimant provided no evidence justifying that duration or geographical scope. The restrictions could not be severed in a clean and simple way.
6. The court did not determine the balance of convenience because the defendant had not relied on that part of the American Cyanamid test. A consequentials hearing was directed if required, and time for permission to appeal was extended.