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Partner and Head of Family Law, Rugby
Giving advice on the enforceability of restrictive covenants involves careful analysis of the precise wording and consideration of their effect (intended or otherwise.) Contrary to popular belief, the courts regularly enforce restrictive covenants, provided they suit their purpose.
Covenants must go no further than is reasonably necessary to protect a legitimate business interest. Far more basic tests have recently seen the ‘glory’ of the Higher Courts - a salutary reminder to get the basics right.
Firstly you should consider covenants at the time they are entered into and not at the time of enforcement. This principle was first established in Commercial Plastics v Vincent (1965). In simple terms, restrictive covenants aren’t for life. They should be shaped to fit the role. Promotions and pay rises offer an opportunity to update covenants and tailoring them will maximise their enforceability.
A recent decision of the High Court, focussed on the matter of ‘consideration’ i.e. the ‘something in return’, a fundamental requirement of any contract not created by deed under English Law.
Consideration is not often an issue when restrictive covenants are contained within a contract of employment signed at the time of offer and acceptance of a new job. After all, salary and benefits are detailed in the contract as the quid-pro-quo and seen as adequate consideration. Problems can arise, however, when restrictive covenants are imposed at another time or contained within a separate side-agreement.
Keith Sendall was a director for a family run glass recycling business he’d worked for them for many years with neither a contract of employment nor restrictive covenants. His two sons were also employed there.
In 2000 the company was bought by Re-Use Collections Ltd and Sendall ceased to be a director. In October 2012 Re-Use asked him to enter sign a contract of employment. This contained specific provisions protecting confidential information and post-termination restrictive covenants. Sendall eventually signed this contract in February 2013. Shortly afterwards he resigned, as did his sons.
Re-Use discovered that the Sendalls were setting up May Glass Recycling in direct competition and were poaching their customers.
Re-Use sought an interim injunction against Sendall seeking to enforce the restrictions. These included a 6 month customer non-solicitation and non-dealing clause and a 12 month non-competition clause. Re-Use claimed that Sendall was a fiduciary and that he had, by setting up a competing company, breached his express and implied duties.
Sendall argued that he was only financing his sons (who had no restrictive covenants) to set up in business. He also argued that the post-termination restrictive covenants in his contract were not binding as no consideration was provided to him when the contract was signed.
Re-Use claimed that consideration had been provided. They claimed the restrictions were introduced as part of a package where, on agreeing to the covenants, Sendall received a pay rise along with life assurance, medical insurance and a company car. They also argued that consideration was provided simply through the continued employment of Sendall.
It may surprise you to hear that Re-Use’s arguments were roundly rejected by the High Court.
The High Court considered that Sendall was already enjoying the majority of the benefits prior to signing the new contract. Furthermore, although he had indeed received a pay rise, it was (unfortunately for Re-Use) not reflected in the new contract. Accordingly the High Court found that it was not connected to his acceptance of the new contract. The argument that his continued employment amounted to consideration was also given short thrift; continued employment would only amount to sufficient consideration had refusal to sign the new terms led to dismissal (which was not the case).
Consideration is a basic principle of contract law and applies equally to employment matters. The Courts are more prepared to enforce covenants these days (including non-compete covenants) provided they are suitably drawn, carefully considered and justified.
Often organisations give little thought to the specific application and effect of restrictive covenants and use blanket covenants across the entire workforce. Not a good idea! When tailored, however, restrictive covenants can be a very powerful tool that can be relied upon.
Re Use found its business under attack from a sophisticated and informed employee, and lost as a result of a basic error in the implementation of the covenants not (on this occasion) in the precision of their wording.
This case is a reminder that new restrictive covenants will not be enforceable unless consideration is provided at the time of implementation. Where consideration consists of promotion or new benefits, that fact should be noted and past consideration should not be relied upon. Likewise, although continued employment can provide adequate consideration, the threat of dismissal for non-acceptance must be communicated.
The ‘take-away’ must be to get the basics right (as well as the more difficult stuff) and that restrictive covenants should be reviewed regularly. They’re not for life! And that leads me to my final thought, when (and how!) did you last update your covenants?
Please contact our employment team if you would like advice on restrictive covenants.