Labour & European Law Review Weekly Issue 298 06 December 2012
Generally, courts will enforce a restrictive covenant if it protects information that is confidential to the employer and is set within realistic geographical limits over a reasonable time period. In Pat Systems v Neilly, however, the High Court said that if the covenant was unenforceable when first entered into, it could not subsequently be revived unless that was clearly the intention of the parties.
When Mr Neilly started work with Pat Systems in 2000 as an account manager, he signed a contract of employment containing a restrictive covenant in clause 8.1. This stated he could not work for a competitor for 12 months after leaving the company.
In 2005 he was promoted and signed an amended agreement which stated that, apart from an increase in salary and an extension to the length of notice he had to give, all other terms and conditions set out in the agreement he signed in 2000 remained the same.
On 2 April 2012, he handed in his letter of resignation, giving three months’ notice. He told the chief executive that he had accepted a job offer from a business operating in broadly the same market as Pat Sytems.
Mr Webber said that Mr Neilly was prevented by clause 8.1 from doing so and summarily dismissed him. The company then applied to the HIgh Court for an injunction to force him to comply with the restrictive covenant. For his part, Mr Neilly brought a counterclaim for wrongful dismissal.
High Court decision
The High Court dismissed the claim by Pat Systems, holding that it could not enforce clause 8.1, given the status and responsibilities that Mr Neilly had when he first started work for them in 2000 which meant that the covenant was unreasonable at that time.
For the covenant to be effective the company needed to have entered into a new one with him in 2005 or at least asked him to sign a fresh agreement with the same covenant in it. As the company did not do either of those things, it could not now enforce it.
The court said that a general acknowledgment by Mr Neilly that his previous terms "remain unchanged" could not be construed as an agreement to reinstate a term which was a nullity. “If a restrictive covenant is void when initially entered into, it is wrong that it should be, so to speak, revived save where that is unequivocally the contractual intention”.
In any event, the judge held that the clause went further than was reasonably necessary to protect the legitimate interests of the company. Having regard to the nature of the market in which the company operated, neither the trade connections which Mr Neilly had developed nor the confidential information of which he was aware required protection for that length of time. Instead a period of six months would have been sufficient.
As contracts are often varied over their lifetime, the court pointed out that it would be “very undesirable” if every change could revive a defunct restrictive covenant. Employees, it said, are entitled to know their position when they agree to a restrictive covenant and should not have to keep reassessing their situation.
Likewise, employees should not have to survey their whole employment history when they start thinking about changing their job in order to figure out whether an initially unreasonable contract could have “changed its character”.
The court added that: “If this conclusion means that employers will have to take more care in considering whether promotion or some other substantial change in an employee's terms or circumstances require an explicit reconsideration of what restrictive covenants are reasonable, that is probably a healthy discipline”.