HM Insights

Reasonableness of restrictive covenant must be judged at time it was entered into and not when employer seeks to enforce it

Patsystems Holding Ltd -v- Neilly [2012] EWHC 2609

A useful illustration that covenants are fixed in time and not "dynamic" in their application when it comes to judging their reasonableness.

Facts

Mr Neilly commenced employment with Patsystems in June 2000 as an account manager with an annual salary of £35,000.  Mr Neilly's contract provided for a one month notice period and contained a restrictive covenant to the effect that he was prohibited from competing with Patsystems for 12 months after termination of his employment.

In 2005, Mr Neilly was promoted to Director of Global Accounts.  His salary was increased to £80,000 per annum, and his notice period to three months.  He was sent a letter confirming these changes and he signed an endorsement which stated: "I agree to the variation of my terms...and acknowledge and agree that all the other terms and conditions outlined in my original documentation remain unchanged."

In 2012, Mr Neilly accepted an offer of employment with Trading Technologies, a company which operated in broadly the same market as Patsystems, and gave three months' notice of his resignation.  Patsystems wrote to Mr Neilly, advising that he would be in repudiatory breach of contract if he commenced employment with Trading Technologies.  The following week, he was summarily dismissed, Patsystems "accepting" him going to work for a competitor as a repudiatory breach.

Patsystems sought an injunction, seeking to enforce the restrictive covenant in Mr Neilly's contract.  Mr Neilly in turn brought a claim for wrongful dismissal.

Decision

The High Court refused to grant the injunction.  It held that the restrictive covenant was not enforceable because it had been unreasonable at the time it had been entered into – imposing a 12 month non-complete clause on an employee with the status and responsibilities that Mr Neilly had at the time was not justified.  It clarified that the reasonableness of a restrictive covenant should be judged at the time it was entered into, and if it was unreasonable at that time, a subsequent change of circumstances – in this case a promotion – could not render it reasonable when it came to be enforced.  Patsystems should therefore have entered into a fresh covenant in 2005 when Mr Neilly was awarded the promotion.

The High Court also held that Mr Neilly had indeed been wrongfully dismissed.

Although not required to make rulings on the following points, the High Court commented that 12 months was too long for a non-complete clause in the circumstances and a period of six months would have been sufficient.

Comment

Although an English case and, when it comes to the enforcement of restrictive covenants, each case turns on its facts, this judgment highlights that, in varying an employee's contract – particularly when they are being promoted – employers should decide whether there is any need for a restrictive covenant to remain in force and, if so, ask the employee to enter into a fresh one.  Given that reasonableness is judged as at the date the covenant is entered into, it is insufficient to simply ask an employee to acknowledge that a covenant remains in place unchanged.  Employers must also ensure that covenants are valid at the point they are entered into – if invalid, they might as well not exist.

In terms of validity, employers must be able to justify their reasons for requiring a particular period of restriction, which may depend on, for example, how senior the employee is.  Simply imposing a six or 12 month period on all employees will not be sufficient.