In the recent England and Wales High Court case of P14 Medical Ltd v Mahon [2020] EWHC 1823 Cavanagh J has expressed the view that it is beyond doubt that a restrictive covenant in a transferring employee’s employment contract can transfer under TUPE.

In this case a TUPE transfer occurred. Mr Mahon was a transferring employee. After the transfer, Mr Mahon resigned from the transferee, P14 Medical, to join a competitor of the business. But Mr Mahon’s transferred employment contract had restrictions which forbade that. Could P14 Medical sue to enforce those restrictions?

In principle, yes, said Cavanagh J. As the effect of TUPE is that the contracts of employment of all employees in the part transferred are automatically transferred, by operation of law, from the transferor to the transferee, and the terms and conditions remain the same, this operates so as to transfer restrictive covenants, as it does to all other terms and conditions.

Of course, such covenants are enforceable only in so far as they are reasonable and necessary for the protection of the parties' interests (see Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535).

The question of how such a covenant should be interpreted after a transfer was dealt with by the leading case on the subject, Morris Angel and Son Ltd v Hollande [1993] IRLR 169, CA In this case, Mr Hollande, who had been group managing director, was obliged for a period of one year after ceasing to be employed not to procure orders from or do business with any person, firm or company who had at any time during the one year immediately preceding such cessation done business with the group. The individual company by which he was employed within the group was sold to the plaintiffs. Immediately after the sale agreement, he was dismissed. The plaintiff sought to enforce the restrictive covenant.

The trial judge took a literal approach and construed the service agreement to read as if it had been made between Mr Hollande and the plaintiffs and therefore the restrictive covenant in this light read as an agreement by Mr Hollande not to do business with anyone who in the year preceding the termination of his employment had done business with the transferee. As he was not in breach of such an obligation injunctive relief was denied.

However, the Court of Appeal considered this analysis was wrong. It would have, in effect changed the covenant, and made it wider than originally was.

Therefore, the Court of Appeal, in effect, adapted the terms of the agreement, and construed the covenant to mean that it could be enforced by the plaintiff against the defendant if within one year of the date on which they dismissed him, he did business with the persons who in the previous year had done business with the undertaking transferred, of which the plaintiffs were deemed, as a result of the transfer, retrospectively to have been the owner. Otherwise, the approach adopted by the court below turned the obligation on the employee into a quite different and much wider obligation than that which bound him before the transfer. Dillon LJ stated:

“The more reasonable construction is in my judgment that the words 'the transfer shall have effect ...' are to be read as referring to the transferee as the owner of the undertaking transferred or in respect of the undertaking transferred. The effect therefore is that clause 15(1) can be enforced by the plaintiffs if Mr Hollande within the year after 27 April 1992 does business with persons who in the previous year had done business with the undertaking transferred, of which the plaintiffs are deemed as a result of the transfer retrospectively to have been the owner. The plaintiffs are thus given locus standi to enforce the restriction”. (emphasis added).

The upshot of P14 Medical Ltd v Mahon, then, in finding that relevant restrictive covenants in the transferring employee’s employment contract survived the TUPE transfer, the balance of convenience favoured the grant of an injunction to the transferee, P14 Medical, both in relation to those express restrictive covenants and in relation to the implied obligation not to use or disclose trade secrets.

The most important, but not the only, consideration for Cavanagh J relevant to the balance of convenience was his assessment that P14 Medical was likely to be successful if the matter went to a full trial. The express restrictive covenants were part of Mr Mahon’s contract of employment taken over by P14 Medical. They were not unlawfully in restraint of trade; and Mr Mahon, Cavanagh J found, was, unless restrained, likely to act in breach of those restrictions, which had been entered into for the benefit of the business transferred.

Similarly, he considered that, on the facts, P14 Medical was likely to be successful in establishing that the proposed activities of Mr Mahon on behalf of his new, competitor employer would be in breach of his implied contractual obligation not to use or disclose trade secrets of the transferred business, after the termination of his employment.

Dr John McMullen is a partner in Spencer West LLP and Visiting Professor of Law at Leeds University Business School, Centre for Employment Relations, Innovation and Change. He is the author of Business Transfers and Employee Rights.  The new 4th edition of his book, Redundancy Law and Practice, will be publiahed in January 2021.E mail: drjohn.mcmullen@spencer-west.com.