148: Settlement agreement did not discharge non-compete clause in shareholders’ agreement

In Ideal Standard International SA and another v Herbert, the Commercial Court granted an interim injunction to restrain an employee from breaching an 18 month non-compete covenant in a shareholders’ agreement, which he argued had been waived by a settlement agreement.

Mr Herbert was employed by Ideal Standard for around 20 years, most recently as Vice President of Products and Innovation. His employment contract did not contain any restrictive covenants. However, as part of a long term incentive scheme for senior executives, Mr Herbert entered into a shareholders’ agreement containing a restrictive covenant which prevented him from competing with Ideal Standard and its group companies for 18 months after termination of his employment within any jurisdiction in which the group carried on business. The shareholders’ agreement specified that any waiver of this covenant had to be in writing and signed by or on behalf of the company granting it.

Following his dismissal, Mr Herbert entered into a settlement agreement with Ideal Standard. This stated that it was intended to settle his outstanding differences with Ideal Standard and any group company, and that the parties would have no further obligations to each other, save for what was provided for in the agreement itself. The settlement agreement was signed by Ideal Standard, but not by any of the group companies. Shortly afterwards, Mr Herbert began working for a competitor. Two companies in the Ideal Standard group applied for an interim injunction to enforce the non-compete clause in the shareholders’ agreement.

Mr Herbert argued that the covenant had been waived by the settlement agreement and that, in any event, it was unenforceable because an 18 month restriction was too long, and the restricted activities were too wide in scope. The Commercial Court rejected these arguments. It noted that the settlement agreement did not expressly refer to the shareholders’ agreement and was not a valid waiver of the restrictive covenant since it was signed only by the employing company, not by any group company. The non-compete clause in the shareholders’ agreement was therefore preserved. Mr Herbert had worked closely with Ideal Standard’s clients and employees for many years and had access to important confidential information with a long shelf life. In these circumstances, an 18 month restriction could be reasonable to protect the group’s legitimate business interests. The Court granted an interim injunction to prevent breach of the non-compete clause pending arbitration.

This case illustrates that the intended impact of dismissal on any restrictive covenants arising outside the employment contract must be considered when negotiating and drafting a settlement agreement. All relevant documents, such as share plan rules or shareholders’ agreements, must also be checked to ensure that the correct procedural requirements are followed. Although non-compete clauses in shareholders’ agreements are often perceived to be easier to enforce than those in an employment contract, the Commercial Court emphasised that the enforceability of restrictive covenants should always be judged according to the same legal principles, whatever the context.