Case Review: Reasonable Restrictive Covenants

Restrictive covenants need to be “reasonable” in order for them to be enforceable. However, it is less well-known that this test for reasonableness must be assessed at the time of the contract, rather than the time that the employer is seeking to enforce them. A contract might have been signed and entered into years before there is an issue, and the situations of both the employer and employee might have changed dramatically.

The recent case of Patsystems Holding Ltd v Neilly is a wake-up call for employers that they cannot rely on covenants in a contract signed year before.

Mr Neilly was a senior employee, who joined the company Patsystems as a junior employee in 2000, was promoted several times and became a director in 2005. His non-competition restrictive covenant, which he entered into as a new employee in 2000 which was not renewed or re-affirmed was held to be unenforceable. The employer wished to rely on the covenant to prevent him from joining a competitor firm for 12 months after leaving their employ.

When he was promoted, rather than receiving and signing a new contract of employment, he signed a letter agreeing to certain variations (no mention of restrictive covenants) and acknowledged that all other terms in his original contract.

Mr Neilly resigned from Patsystems in 2012 with the intention of moving to a competitor company. However Patsystems informed him that the non-competition clause in his contract would prevent him from joining the competitor firm, and then dismissed him. They subsequently applied to the High Court to enforce the 12 month anti-competition clause.

However as the letter signed by Mr Neilly was deemed to be inadequate, as in the absence of an express renewal or re-affirmation of the original covenant, the validity of the clause had to be considered as at 2000 – and at the time, as a junior employee, the court found that the 12 month restriction was too onerous.

Unfortunately for the employer, the letter sent to Mr Neilly confirming his promotion and variations to his terms was inadequate. In the absence of an express renewal or re-affirmation of the original covenant, the validity of the clause had to be assessed as at 2000 and at that time the court believed the restriction was too onerous for an employee of Mr Neilly’s then junior status.

Consequently, the covenant would have been unenforceable in 2000 and could not be saved by the subsequent change in circumstances (Mr Neilly’s promotion) which, arguably, could have rendered them enforceable had they been entered into or re-affirmed in 2005.

So, when employees are promoted and covenants may be an issue, they should be asked either to re-affirm the covenants in their contract (if they look good enough) or to sign a new contract with new covenants.

If you are a senior employee or Director and need advice on a contract of employment or compromise agreement, please give us a call on 0800 014 8727 for a no-obligation and confidential discussion.