Damages for Breach of Non-Solicitation

A non-solicitation clause is a contractual restriction under which an employee, former employee, business partner, or other contracting party agrees not to actively solicit specified customers, clients, employees, suppliers, or business contacts of the other party for a defined period.

When such a clause is breached, the injured party may seek damages as compensation for the loss caused by the breach. Depending on the wording of the contract and applicable law, the claimant may also seek an injunction to prevent continuing solicitation.

1. Nature of Damages

Damages for breach of non-solicitation are generally intended to place the innocent party, so far as money can do so, in the position it would have occupied had the contract been performed.

The claimant may attempt to recover:

• Lost profits from customers who were solicited and subsequently left.
• Loss of business opportunities directly attributable to the solicitation.
• Costs incurred in replacing improperly solicited employees.
• Recruitment and training expenses in appropriate circumstances.
• Other foreseeable financial losses caused by the breach.

However, damages are not automatically awarded merely because a clause was breached. The claimant normally needs to establish the contractual breach and a legally recoverable loss, subject to the applicable law.

2. Proof of Causation

A major issue is establishing that the loss resulted from the prohibited solicitation.

For example, if a former employee contacts ten customers but only one customer leaves because of that contact, the claimant cannot ordinarily claim damages for all ten customers merely because they were contacted.

Evidence may include:

• Emails and messages between the former employee and customers.
• Customer communications confirming solicitation.
• Sales records before and after the solicitation.
• Evidence of customers transferring their business.
• Employee recruitment records.
• Financial statements showing lost revenue or profits.

3. Assessment of Lost Profits

Where customers are diverted because of solicitation, damages may sometimes be calculated by comparing the profits the claimant reasonably expected to earn with the profits actually earned after the breach.

The calculation must avoid speculation. Courts generally require sufficiently reliable evidence showing the connection between the breach and the claimed financial loss.

4. Contractual Damages and Liquidated Damages

A non-solicitation agreement may contain a predetermined sum payable upon breach.

Such a provision does not necessarily mean that the stated amount will automatically be recovered. Courts distinguish between a genuine contractual mechanism for compensating loss and an unenforceable penalty, depending on the applicable legal system.

The wording of the clause, the commercial circumstances, the relationship between the parties, and the relationship between the stipulated sum and the potential loss can therefore be important.

5. Injunction as an Alternative or Additional Remedy

Damages may sometimes be inadequate because customer relationships or confidential business connections are difficult to value precisely.

Accordingly, a claimant may seek an injunction preventing further solicitation. Courts may consider:

• Whether there is a valid contractual restriction.
• Whether the restriction is enforceable.
• Whether there is a continuing or threatened breach.
• Whether damages would provide an adequate remedy.
• The balance of convenience between the parties.

6. Reasonableness of the Restriction

Non-solicitation provisions can face enforceability challenges if they are excessively broad.

Relevant considerations can include:

• Duration of the restriction.
• Geographic scope, where applicable.
• Categories of customers or employees covered.
• Whether the restriction protects a legitimate business interest.
• Whether the restriction goes further than reasonably necessary.

A restriction covering virtually every customer in every market for an unlimited period may receive substantially different treatment from a narrowly drafted restriction covering identifiable customers for a reasonable period.

Important Case Laws

1. Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd (1894)

This leading English case established important principles concerning restraint of trade. The House of Lords recognised that contractual restraints may be enforceable where they are reasonable between the parties and consistent with the public interest.

Relevance: A non-solicitation clause must generally be examined for reasonableness rather than treated as automatically enforceable.

2. Herbert Morris Ltd v Saxelby (1916)

The House of Lords considered restrictions imposed on an employee after termination of employment. The case emphasised the distinction between protecting a legitimate business interest and merely preventing competition.

Relevance: A non-solicitation clause should protect a legitimate proprietary or business interest rather than simply restrain an employee from competing.

3. Faccenda Chicken Ltd v Fowler (1987)

The English Court of Appeal considered the obligations of an employee concerning confidential information after employment ended and distinguished between ordinary information and genuine confidential information.

Relevance: Non-solicitation disputes frequently overlap with confidential customer information. Evidence concerning how the former employee obtained and used customer information can therefore be important.

4. Office Angels Ltd v Rainer-Thomas (1991)

The English High Court considered restrictive covenants involving former employees and customer solicitation.

Relevance: The case illustrates the importance of identifying the legitimate business interest being protected and ensuring that restrictions concerning customers are appropriately formulated.

5. Mason v Provident Clothing and Supply Co Ltd (1913)

The House of Lords considered post-employment restrictions and examined whether the restriction was wider than reasonably necessary for protecting the employer's legitimate interests.

Relevance: The reasonableness of a restrictive covenant is central to determining whether a non-solicitation obligation can be enforced.

6. Gujarat Bottling Co. Ltd. v Coca Cola Co. (1995)

The Supreme Court of India considered contractual restrictions and the operation of Section 27 of the Indian Contract Act, 1872, in the context of commercial arrangements.

Relevance: The case is particularly important in India because restrictions on carrying on a trade or business can raise questions under Section 27. Courts examine the nature and context of the contractual restriction.

7. Superintendence Company of India (P) Ltd. v Krishan Murgai (1981)

The Supreme Court of India examined a post-employment restrictive covenant and the effect of Section 27 of the Contract Act.

Relevance: The decision is important when determining whether a post-employment restriction preventing competitive activity or solicitation can be enforced in India.

8. Percept D'Mark (India) Pvt. Ltd. v Zaheer Khan (2006)

The Supreme Court of India considered restrictive contractual provisions and Section 27 of the Contract Act.

Relevance: The case reinforces the importance of the statutory prohibition against agreements in restraint of trade and demonstrates the difficulty of enforcing broad post-contractual restraints in India.

Indian Legal Position

In India, Section 27 of the Indian Contract Act, 1872 is particularly important. It generally declares agreements restraining a person from exercising a lawful profession, trade, or business to be void to the extent contemplated by the provision, subject to its statutory exception concerning the sale of goodwill.

Therefore, an employer seeking damages for breach of a post-employment non-solicitation clause must first consider whether the underlying restriction itself is legally enforceable.

A distinction can also arise between:

• A restriction operating during employment, and
• A restriction attempting to operate after employment has ended.

Indian courts have generally been more willing to uphold obligations operating during the employment relationship than broad restraints imposed after employment.

Factors Affecting the Amount of Damages

When damages are legally recoverable, the following factors can affect their assessment:

Conclusion

Damages for breach of non-solicitation are primarily compensatory. The claimant must generally demonstrate that a valid and enforceable non-solicitation obligation existed, that it was breached, and that the breach caused a legally recoverable loss. Courts pay particular attention to causation, proof of loss, foreseeability, mitigation, and the reasonableness or enforceability of the restrictive covenant.

In India, the analysis must additionally pay close attention to Section 27 of the Indian Contract Act, 1872, especially where the non-solicitation obligation operates after employment or termination of a commercial relationship.