Enforceability of restrictive covenants
Posted: 11th November 2016
Share purchase agreements commonly contain restrictive covenants and the courts are showing an increasing willingness to enforce them to the hilt. In one case, a hairdresser who sold her business, but later established a rival salon nearby, was hit with a High Court injunction and a six-figure legal costs bill.
The award-winning hairdresser, Rush Hair Ltd, had run three successful salons and had built up a loyal cohort of stylists and customers. She ran them as franchises of a hairdressing chain, to which she ultimately sold the business. The sale contract contained clauses by which she agreed, for a period of two years, not to entice away or employ certain named stylists and not to set up a rival salon within a two-mile radius.
Less than two years after the deal was completed, however, she opened a new salon in the same street as one of her former branches. Two of the named stylists also started working for her new venture and the purchaser launched proceedings. The hairdresser argued that she had signed up to the restrictive covenants under duress and that they unlawfully impinged on her ability to make a living.
In upholding the purchaser’s claim, however, the Court found that it was entitled to protect the goodwill that it had paid for and that the restrictions were reasonable. There was no public policy reason why they should not be enforced. An injunction was issued against the hairdresser, requiring her to meet her obligations under the covenants. She was also ordered to pay the purchaser’s legal costs, estimated at £100,000.