Contract Conundrums

Posted 26/11/2012

Restrictive covenants are potentially very useful for employers to help prevent employees from poaching staff or clients and damaging business interests following the end of an employment relationship. It is important not only to ensure restrictions are reasonable, but that employees are contractually bound by them for there to be any prospect of the restrictions being successfully enforced.

Two recent High Court Judgments provide guidance for employers as to whether employees are contractually bound in principle by restrictive covenants contained in their employment contracts, subject to them also being deemed reasonable.

The FW Farnsworth Ltd v Lacy and others [2012] EWHC 2830 case concerned a common scenario, where an employee was issued with a new contract which contained restrictive covenants after he was promoted. The employee did not sign or return the contract. About three years later, the employee resigned and the employer sought to enforce restrictions prohibiting the employee from working for a rival business and soliciting certain clients. At this point, an Injunction was successfully obtained. The Court held that the employee was bound by the contract and therefore the restrictions, even though he had not signed it.

The acceptance of the new contract could be implied by the fact that he had applied for private medical insurance cover which was available to him under the contract. Arguably, if he had not applied for this or if it had been a benefit he had already enjoyed, the decision would have been different. In this case the employers were perhaps fortunate, and the decision serves to reinforce the importance of ensuring that new contracts are actually signed and returned by an employee.

In Patsystems Holding Ltd v Neilly [2012] EWHC 2609, a contract was issued when an individual started employment as an Account Manager for the company in 2000, which contained a twelve month non-compete restriction. In 2005, the employee was promoted to Director of Global Accounts, with a substantial increase in salary and notice. A letter was sent to him confirming these changes, which he signed, and which confirmed that all other terms and conditions remained unchanged.

In 2012, the employee gave three months’ notice and the employer wished to enforce the restriction. The High Court did not grant the Injunction on this occasion, on the basis that the non-compete clause was not enforceable since it had not been reasonable at the time it was entered into in 2000. Although it may have been reasonable for the senior position into which the employee was promoted, it was held that a twelve month non-compete clause could not be justified in the case of such a junior employee.

Where employers wish to vary an employee’s contract, particularly if the employee is being promoted, restrictive covenants should be reviewed and if necessary, entered into afresh. This would involve agreeing to a new contract or obtaining specific agreement to the original restrictive covenants themselves afresh, rather than simply referring back to the original contract as being unchanged.