Restrictive Covenants in employment contracts

The case of Patsystems Holding Ltd v Neilly is a lesson in why an employer cannot rely on restrictive covenants in a contract signed many years before they are used.

When employees are promoted it is not just a job title that changes – it is their position within the business.  Often the more senior the employee, the greater access they will have to business sensitive information.  However, despite this, they will often remain on their initial contractual terms which may now be out of date. Alternatively, a junior employee may be given an inappropriate contract containing wide restrictions which, when they are promoted, cannot be enforced. It is easy for those who have been with the business for many years to slip through the net and original contracts to be lost

The recent case of Patsystems Holding LTD v Neilly [2012] EWHC 2609 (QB) has reaffirmed the principle that the reasonableness of a restrictive covenant must be judged at the time a contract is entered into.

Mr Neilly commenced employment with Patsystems in 2000 as an Account Manager.  A non-compete clause was included in his contract at this time which provided that, Mr Neilly was not entitled to carry on or be engaged in (directly or indirectly) any trade or business carried on by Patsystems for a period of 12 months from termination of employment.

In 2005, Mr Neilly was promoted to Director of Global Accounts.  Patsystems sent him a letter (and he returned a signed copy) stating that other than the variation to the terms of his contract which were set out in the letter, the terms and conditions of his contract remained unchanged. A new contract of employment was not entered into at this time.

Mr Neilly handed in his resignation in 2012 indicating that he had accepted an offer of employment with a company which operated in broadly the same market as Patsystems. Patsystems summarily dismissed Mr Neilly stating that acceptance of the offer was in breach of the non-compete clause in his contract and sought an injunction to enforce this clause. Mr Neilly counterclaimed for wrongful dismissal.

The High Court held that the non-compete clause in Mr Neilly’s contract was not enforceable since it had not been reasonable at the date the contract was first entered into in 2000.  When Mr Neilly was first employed by Patsystems the level of his role and responsibility meant that a 12 month non-compete clause would not have been reasonable. The Court considered previous case law which confirmed that the time for ascertaining the reasonableness of a restrictive covenant is the time of making the contract. If a restrictive covenant is not reasonable at the time a contract is entered into, a subsequent change in circumstances which results in it being reasonable at the time of it being enforced, will not save a covenant from being void.

Once the contract was entered into, the only way in which the non-compete clause could be enforceable would be to either ask Mr Neilly to explicitly accept the covenant or for the parties to enter into a new contract containing the covenant.  It was held that a broad acceptance by Mr Neilly that the contract would be on the same terms and conditions could not be construed as an agreement to reinstate a term that was previously considered to be unenforceable.

This case demonstrate the importance of reviewing employees’ contracts following promotion as these may need to be entered into afresh to ensure any restrictive covenants are enforceable.   It is also important to note that the reasonableness of a covenant is to be judged at the time it is entered into. Employers should therefore consider the terms of any such clauses carefully in line with the seniority and responsibilities of employees, to ensure the restrictions are reasonable.

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