by Breda O'Malley , Niamh Cassidy January-17-2020 in Employment Law
Breda O’Malley and Niamh Cassidy examine the recent High Court decision in the Ryanair DAC v Peter Bellew case. The judgment can be viewed here.
Ryanair lost its application to the High Court, to compel Mr Bellew to comply with the restrictive covenants in his employment contract. Notwithstanding the outcome, the High Court is clearly supportive of the part restrictive covenants play in protecting business interests. We examine the issues of enforceability of restrictive covenants in the decision of Mr Justice Allen below. The Court had to assess whether Ryanair’s restraints on Mr Bellew were justifiable to protect Ryanair’s business, rather than to “hobble” Mr Bellew in the legitimate pursuit of his career.
Legal principles – the Enforceability of Restraints
The following are established legal principles:-
- In general, interference with an individual’s freedom to trade and earn a livelihood, is contrary to public policy and void.
- There are exceptions, whereby certain restraints on former employees may be justified.
- Whether a restraint is enforceable involves a careful examination of all of the circumstances;-
- The need for restraint;
- Aims of the restraint;
- The interests sought to be protected; and
- The general interest of the public.
- Any restraint must be fair, reasonable, necessary and in the public interest.
- The enforceability of the restraint is to be judged by reference to what the employee agreed in the contract not to do, rather than what he proposes to do, after his employment ends.
Background
In October 2017, Mr Peter Bellew was recruited as Chief Operations Officer (“COO”) of Ryanair.
In 2019, Mr Bellew’s relationship with Ryanair’s then CEO, Michael O’Leary, was deteriorating, and Mr Bellew was warned to improve his performance. Mr Bellew considered himself to be a ‘dead man walking’, and in July 2019, he resigned from his role as COO.
Mr Bellew subsequently told Mr O’Leary that he had secured a new role as COO of easyJet, a direct competitor of Ryanair, and that he would be joining easyJet in January 2020. Mr O’Leary reminded Mr Bellew of his 6-month notice period and subsequent twelve-month restrictive covenant period, in his contract of employment. Ryanair warned Mr Bellew that if he joined easyJet within the period restricted by Ryanair, Ryanair would apply for an injunction, to prevent him doing do.
On 18 July 2019, easyJet made an announcement that Mr Bellew would be joining it as COO on 1 January 2020. In August, Ryanair applied for specific performance of the restrictive covenants of Mr Bellew’s employment contract and sought an interlocutory injunction, to restrain Mr Bellew's employment by easyJet.
Mr Bellew’s restrictive covenants, are as follows: -
1.1 For a period of 12 months after the termination of your employment you shall not, without the prior
written consent of the Company, directly or indirectly in any capacity either on your own behalf or in
conjunction with or on behalf of any other person.
- be employed, engaged, concerned or interested in any capacity in any business wholly or partly in competition with the Company for air passenger services in any market;
- solicit or entice or endeavour to solicit or entice away from the Company any person who was employed within in (sic) a senior executive, managerial, or technical capacity by the Company.
1.2 If you receive an offer of employment or engagement during your employment with the Company, or
before the expiry of the restriction period set out in this clause, you shall give the person or entity
making the offer a copy of this clause.
Decision of Mr Justice Allen
The High Court rejected much of the defence put forward by Mr Bellew, finding that: -
- Mr Bellew clearly understood the restrictive covenants to which he freely agreed, and the restrictive covenants were binding on him;
- Ryanair had a legitimate interest in protecting the valuable sensitive and confidential commercial, operational and financial information that had come within Mr Bellew’s knowledge, in the course of his employment; and
- that Mr Bellew was not unfairly or unreasonably treated.
The Judge focused on the Ryanair information which Mr. Bellew has, and the damage that might be done to Ryanair, if that information would be disclosed to, or used for the benefit of, easyJet. The Court considered whether a confidentiality clause might be sufficient, and to protect this, concluded that “a confidentiality clause is no substitute for a non-compete clause.”
The Court held that the morality of Mr Bellew’s behaviour is immaterial to the construction of the clause, or the application of the law.
Restraint Period
Mr Justice Allen held he had “no difficulty with the time constraint.” He found that “the period of 12 months was abundantly justified by the likely useful life of the confidential commercial information that would come to Mr. Bellew’s knowledge.” This was based on the premise that Mr. Bellew would, during the period of his notice, continue to discharge all of the duties of COO.
Scope of Restraint
The Court examined the breadth of the restrictions on Mr Bellew, and the type of roles it would prevent Mr Bellew from taking up, which included a role in any capacity, whether in a low-cost airline, a legacy airline, or a role at several levels below Mr Bellew’s current role.
The Court found that the restraint on Mr Bellew’s employment in any airline, in any capacity went beyond the legitimate interests of Ryanair. When restraining Mr Bellew from taking up alternative employment, it needed to be limited to roles where there would be likely to be a risk of the disclosure, or use of Ryanair’s sensitive commercial information. If the restraint was limited to senior executive roles at low-cost airlines, it would have been more likely to be enforceable.
Mr Justice Allen held “with considerable reluctance, but without misgivings as to the applicable law, .… that the clause is void and unenforceable as an unjustified restraint of trade.”
Restraints in Business Sales
Covenants in restraint of competition are also found in contracts for the sale and purchase of businesses. The Courts take a less restrictive view of a covenant, in a contract for the sale of a business, the clear commercial purpose of which is to protect the goodwill of the business which the covenantee has bought and which the covenanter has been paid for. A suggestion was made by Ryanair in the hearing that the latitude afforded to restraints in relation to business sales, should apply to Mr Bellew’s restraints, given that they were imposed on him in return for his participation in the Ryanair share option plan. The Judge did not accept this proposition. The Court held that the share options given to Mr Bellew were part of his renumeration as a senior executive, and the restraints were not imposed on him, in return for his sale of a business.
Implications for Employers
The case turned on the Court’s view that the restraint on Mr Bellew went further than was necessary for the legitimate protection of Ryanair’s interests. The applicable test, whether in all the circumstances, both the nature of the restriction, and its extent, is reasonable to protect the goodwill of Ryanair, was not met.
There is no place for a ‘standard’ template restrictive covenant clause in an employment contract, if an employer wishes to be certain of its enforceability. The restrictive covenant clause needs to be tailored very specifically around each individual role, in view of the very real commercial risks it will pose to the business, if the incumbent leaves the role, and goes into another similar business. This could be kept under review at each annual review and all promotion stages, and updated as required for the business, in consideration for a pay increase, improvement in terms or promotion.
Employers must ensure that restrictive covenants are very carefully drafted, and tailored narrowly as practicable, to the role of the particular employee, so as to ensure that the restrictions are reasonable and strictly necessary to protect the employer’s legitimate business interests.
If you would like legal advice on the drafting and enforceability of restrictive covenants, please contact Breda O’Malley, Partner, Head of Employment Law Group bomalley@hayes-solicitors.ie.
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About the Authors
Breda O'Malley
Breda is a partner in the Employment Law Team at Hayes solicitors.
Breda advises on the full range employment issues across a broad range of sectors, for established business clients and senior executives.
Niamh Cassidy
Niamh is an associate solicitor in the Employment Law team at Hayes solicitors. Niamh advises both employees and employers, relating to both contentious and non-contentious employment and industrial relations matters, including recruitment, employment contracts and workplace policies, redundancies and dismissals.