For a restrictive covenant to be enforceable, the employer must be able to show that it protects a legitimate business interest.
In Boydell v NZP Ltd and anor, the Court of Appeal held that the restrictive covenant that the company wanted to enforce would have such a “fantastical” outcome that it could not have been within the contemplation of the parties when they agreed to it.
Basic facts
NZP Pharma Ltd, which specialises in developing and producing bile acid derivatives for sale to pharmaceutical companies, occupies a niche area of the pharmaceutical industry. Dr Boydell had worked as Head of Commercial, Speciality Products for the company since early 2021 but handed in his notice in October 2022 in order to join another company as their head of “bile acid business”. His employment ended on 25 January 2023.
However, on 24 January, NZP issued a claim for an interim injunction enforcing various restrictive covenants. One of these was a non-competition clause contained in a variation of Dr Boydell’s contract, which ran for one year from the termination of his employment and prevented him from competing with the company’s “business activity” or any of its group companies. Dr Boydell argued that the clause had been drafted too widely.
High Court decision
The High Court judge granted an injunction but only after severing some words from the clause, which involved removing references to “affiliates” and “group companies” along with some references to activities relating to the supply chain.
The company appealed, as did Dr Boydell, who argued that the clause was still too wide.
Court of Appeal decision
The Court of Appeal observed that, as originally drafted, the non-compete clause was extremely wide as it sought to prevent Dr Boydell from being involved in any activity for the benefit of any third party that carried out any business activity that would compete with NZP or any other company in the group.
It also noted that although NZP was a highly specialised business, other companies in the group were less specialised. Some of them, for instance, produced general pharmaceutical products such as nasal sprays. As currently drafted, the court was concerned that the clause would prevent Dr Boydell from working for any company (such as Boots and Superdrug) which sold pharmaceutical products, including nasal sprays, for 12 months.
At the time of signing the variation which introduced the covenants into Dr Boydell’s contract, the court took the view that had the parties been asked by a hypothetical officious bystander whether he would be able to go to work for Boots or Superdrug after leaving NZP, they would have said: “of course he would”. It was such an “extravagant”, “fantastical”, “unlikely or improbable” outcome that it must have been entirely outside the contemplation of the parties.
Given that the statutory test for granting an injunction is whether it is “just and convenient”, the Court of Appeal held that the non-compete clause went far beyond what was reasonably necessary to protect the company’s legitimate interests. As such, the High Court judge was entitled at the interim injunction stage to sever the words that he had from the clause and grant an injunction on a more limited basis, not least because the words that he had deleted were peripheral to the main thrust of the clause.
It also dismissed Dr Boydell’s argument that the clause, as redrafted, was still too wide, holding that where a company was involved in a variety of business activities, it might be difficult to justify a covenant against competition such as this one. However, that argument did not hold water in these circumstances because of the highly specialised nature of NZP’s business and that Dr Boydell was a very senior employee.