Unsigned contracts, consideration and restrictive covenants
What effect does an employee’s failure to sign a contract have when it comes to enforcing restrictive covenants? Does continuing to work amount to an implied agreement to the new contract and what about consideration? These issues were considered by the High Court in the recent case Tenon FM Ltd v Cawley as part of an application for an interim injunction to enforce restrictive covenants.
Ms Cawley worked as an Operations Director for Tenon. She had started employment in 2008 and was promoted on two occasions, in 2011 and 2016. At the High Court the company produced three employment contracts dated 2008, 2011 and 2012 respectively none of which was signed by Ms Cawley. The two later contracts contained more onerous restrictive covenants and an express provision making them effective from signature.
Tenon discovered that Ms Cawley had attempted to persuade one of their employees to join her future employer. It applied for an interim injunction to enforce the post termination restrictions.
The application was unsuccessful as the Court found that the covenants did not apply as Ms Cawley had not entered into the 2011 or 2012 contracts. The Court reached its decision for a number of reasons:-
- The contracts were expressed to be effective from signature and were therefore not binding.
- Continuing to work did not indicate she had consented to the new terms as the restrictions did not have an immediate impact on her.
- There was no consideration provided by the company for the variation and no authority to support the company’s contention that continuing to employ her meant that the company had provided valuable consideration.
- Finally, not everyone at senior level had restrictive covenants in their contracts which undermined the argument that they were reasonable and that there was a legitimate business interest to protect.
Key lessons for employers from this are:
- Ensure all your contracts (particularly those of senior employees) are signed and put in place a system to check that any variations are also signed.
- If you make any changes to the contract which are onerous or negative ensure that there is valuable consideration for the employee’s agreement to these e.g. a bonus or other one-off payment and that this is documented.
- Make sure that employees with a similar level of seniority have the same post termination restrictions so that there is no lack of consistency which could undermine arguments that there is a legitimate business interest to protect and that covenants are reasonable.
For more information please contact Trevor Bettany.