Settlement agreement and non-compete clause in shareholders' agreement


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The Commercial Court has held in Ideal Standard International SA and another v Herbert that a settlement agreement had not discharged an employee from non-compete obligations contained in a shareholders' agreement.

Mr Herbert was a senior employee and his employment contract contained confidentiality obligations but no restrictive covenants. He entered into a shareholders' agreement with five group companies. The agreement contained a non-compete clause. In May 2018 Mr Herbert was dismissed and signed a settlement agreement with his employer which stated that the parties would have no further obligations to each other, save for what was provided in the settlement agreement itself. A week after the agreement was signed Mr Herbert began working for a competitor. Two companies in the Ideal Standard group sought an interim injunction against Mr Herbert to stop him competing, but he argued that the restrictive covenant in the shareholders agreement had been discharged by the settlement agreement.

The Commercial Court granted the interim injunction. It held that the settlement agreement did not discharge the non-compete clauses. The settlement agreement had been signed by an executive "for and on behalf of" the employing company, not any other company in the group. Also the shareholders' agreement stated that any waiver or election not to enforce any right in the agreement had to be in writing and signed by or on behalf of the person granting the waiver. The settlement agreement did not refer to the shareholders' agreement and there was nothing in writing to make it clear that the applicants and other parties to the shareholders' agreement had waived their rights under it.

Take note: The decision in Herbert is a useful reminder that terms contained in documents other than the employee's contract of employment should be considered before advice can be given as to whether a waiver in a settlement agreement will cover any additional restrictions. Here the restrictions contained in the shareholders' agreement benefitted several group companies, while the settlement agreement was only signed on behalf of the company employing Mr Herbert. As a result he could not be released from the restrictions contained in the shareholders' agreement simply by virtue of entering into the settlement agreement.

This article is taken from HR Law - January 2019.

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