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Are your restrictive covenants enforceable?

2 November 2012

Restrictive covenants are only enforceable if they protect a legitimate interest (such as trade connections or trade secrets) and are no wider than reasonably necessary to protect that interest.

The recent case of Patsystems Holdings Ltd v Neilly serves as a reminder that the reasonableness of the covenant is assessed at the time that the covenant is entered into. If it is unreasonable at that date, then it will not be enforceable later, even if the circumstances have changed by then. 

This means that if, for example, you enter into a contract with an employee which contains restrictions which are unreasonably wide at the time, the covenants will not be enforceable. This is the case even if you anticipate that the employee will soon be promoted with the result that the covenants would be reasonable following the promotion.

In the Patsystems case, the employee was promoted four years into his employment and received a salary increase. The employer wrote to him to confirm this, and he signed the bottom of the letter stating "I agree to the variation of my terms with Patsystems, which are stated in this letter and I acknowledge and agree that all the other terms and conditions outlined in my original documentation remain unchanged".

Patsystems argued that the acknowledgement of the terms and conditions remaining unchanged meant that the reasonableness of the restrictions should be judged at the time that the employee was promoted. The Court disagreed. The Judge said it would be too uncertain if an unenforceable covenant could become enforceable as a result of a later contractual change, without the parties having expressly agreed to the covenant.

If a restriction is unenforceable, the only way to save it is to enter into a fresh restriction which will bind the employee going forwards. The Judge said that this could be done in two ways:

  • clearly asking the employee to confirm his or her acceptance of the covenant (for example by counter signing a letter with very clear wording), or
  • entering into a new contract with the employee containing a restrictive covenant.

Finally, in another recent case (FW Farnsworth Limited v Lacy), the employer sent the employee an updated contract when he were promoted but he didn't sign it. The Court held that on the particular facts of this case, the employer could still rely on the contract (and enforce the restrictions within it). Key factors in the decision was that the employee had read the contract and, without protest, applied for the private medical insurance benefits within it. However it is important to appreciate that on other facts, the decision may not be the same. The employer should therefore ensure that contracts are signed and returned.

Key points

  • Think about the covenants you are including in employees' contracts. If you wish them to be enforceable (rather than merely acting as a deterrent), they should not be wider than reasonably necessary. For example, it would not necessarily be the case that all staff in different functions automatically have the same restrictions.
  • When an employee is promoted or circumstances change, ideally the employee should be required to sign a fresh contract which properly reflects the new circumstances. Potentially, this might have contain more protection for the employer if the employee has become more senior, for example obligations to report their own wrong doing or the wrong doing of others, which might not have been appropriate before.
  • If it is not realistic for you to consider a new, more detailed, contract, by simply reissuing the same contract with updated details as appropriate (job title, etc) and the same restrictive covenants, you could find that otherwise unenforceable covenants now become enforceable if they are no wider than reasonably necessary in the new circumstances.
  • Ensure that an employee actually signs any updated contract or confirmation letter and that they return a copy to you. If a new contract is issued but not signed, it may be difficult to rely on the updated terms.

For more information please contact Christopher Bushnell, Associate

T: +44 (0)20 7427 6427