Law Report: Restrictions enforced after `garden leave'

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Credit Suisse Asset Management Ltd v Armstrong and others; Court of Appeal (Lord Justice Neill, Lord Justice Morritt and Lord Justice Hutchison) 15 May 1996

An employer was entitled to enforce a restrictive covenant, preventing an employee who had resigned from dealing with or soliciting business from his former clients for a period of six months after the expiry of his notice period, notwithstanding that during that notice period, itself six months, the employee had been put on "garden leave". There was no basis on which the court could set off the one against the other.

The Court of Appeal dismissed an appeal by the defendants, 10 former employees of the plaintiff, Credit Suisse Asset Management Ltd, against the decision of David Steel QC, sitting as a deputy High Court judge on 28 February 1996, who granted the plaintiff an interlocutory injunction enforcing restrictive covenants in the defendants' employment contracts for six months following their departure.

Patrick Elias QC and Gerard Clarke (Rowe & Maw) for the defendants; Michael Burton QC and Andrew Clarke (Theodore Goddard) for the plaintiff.

Lord Justice Neill said the 10 defendants had worked for the plaintiff in its private clients division. In the summer of 1995 the firm's senior management sought to introduce various changes in the way clients' portfolios were supervised by fund managers. The defendants were unhappy about the changes and on various dates thereafter handed in their notice. They were immediately placed on "garden leave". They continued to be employed by the plaintiff but were not required to undertake any duties in relation to fund management.

It became apparent that the defendants were seeking employment with a rival firm, James Capel & Co Ltd. The plaintiff sought to rely on restrictive covenants controlling the defendants' activities for a period after their contracts of employment had terminated.

The principal issue was whether the plaintiff was entitled to the further six months of protection provided by the restrictive covenant in addition to the six months already provided by the gardening leave.

It was a normal rule of practice that a court would not enforce a contract of employment, either by way of specific performance or by the granting of an injunction having similar effect. But the courts had come to recognise that there might be cases where either the employer, or more rarely the employee, was entitled to refuse to accept a repudiation.

In recent years, the ability of an employer to refuse to accept a repudiation had led to a number of developments. Uncertainty as to the enforceability of restrictive covenants had influenced the introduction of garden leave clauses. Such clauses enabled employers to obtain protection from competition by people who wished to leave their employment but who might have confidential information or important contacts with customers or clients which the employer wished to terminate before the end of the notice period.

The court's reaction to these clauses had been more flexible than in the case of restrictive covenants. If a restrictive covenant was found to be valid, as at the date when the contract of employment came into existence, and if there were no other reason to impede its enforcement, it would be enforced according to its terms.

In the case of garden leave clauses, the courts had recognised that they were open to abuse and had exercised a wide discretion when enforcing them, both as to the period of the injunction and as to its scope.

The court could exercise its discretion in deciding the permissible length of garden leave, but if the restrictive covenant was valid the employer was entitled to have it enforced, subject to the usual grounds on which an injunction might be withheld, such as delay and a finding that damages would be an adequate remedy. Moreover, the existence of a garden leave clause might be a factor to be taken into acount in determining the validity of a restrictive covenant as at the date of the contract.

It would have been open to the defendants to try to limit the period during which the garden clause applied; but if the restrictive covenant was valid it had to be enforced. There was no juridical basis on which the court could allow some kind of set off against the period of garden leave.