Restrictive Covenants and Promotions

Thu, 27 Dec 2012

By Anthony Korn
Anthony Korn reviews the High Court’s ruling in Patsystems v Neilly [2012] IRLR 979 which shows the importance of agreeing new restrictive covenants when an employee is promoted.
 
In Patsystems v Neilly [2012] IRLR 979 the High Court rules that a statement in a letter to the effect that “I agree to the variation of my terms…which are stated in this letter and I acknowledge and agree that all other terms and conditions outlined in my original documentation” was insufficient to revive a ‘void’ restrictive covenant in the employee’s original contract. 
 
Background facts
 
Neilly was originally employed by Patsystems, which sold software that enables remote electronic trading on futures exchanges, as an account manager reporting to the head of sales. His contract of employment included a 12 month post termination non-compete restriction. Five years after he joined the Company, he was promoted to the position of director of global account management, although he was not a director in the company law sense. At the time of his promotion, he received a substantial increase in salary and pension and his notice period was increased from one to three months. He signed an endorsement to the letter of promotion stating that he agreed to the variation in his terms of employment and that “I acknowledge and agree that all other terms and conditions outlined in my original documentation remain unchanged”. 
 
In April 2012, Neilly gave notice of his resignation saying that he had accepted employment with a business called “TT” which operated in the same market place. His employers advised him that if he started employment within the restricted 12 month period, it would regard him as being in breach of the non-compete provision. In response, Neilly reaffirmed his intention to join TT after his notice period came to an end. The Company dismissed him with immediate effect and subsequently commenced High Corut proceeding to prevent him from working for TT.
 
Neilly argued that the original covenant was void and unenforceable, that he had not entered into a binding agreement on promotion and that if he had, that agreement was not enforceable because the company had repudiated the contract by dismissing him and the restriction was not enforceable in any event. 
 
Court declines injunction
 
Refusing an injunction, Mr Justice Underhill held that the original restriction was indeed unenforceable having regard to its length and Neilly’s original status and responsibilities. More interestingly, he held that as the original restriction was void and of no legal effect, it could not become binding on his promotion. He pointed out that “contracts of employment are very frequently varied over their lifetime, sometimes explicitly, sometimes by conduct and in a variety of different respects and using a variety of different mechanisms with varying degrees of formality. It would be very undesirable that every such change could in principle have the potential to revive a defunct restrictive covenant. That would conduce to complexity and uncertainty. Employees when they agree to a restrictive covenant are entitled to know their position; indeed in an ideal world they would take legal advice, though I accept that is not normal or indeed realistically practicable for any but those most senior and well-remunerated”. 
 
In the course of his judgment, Mr Justice Underhill acknowledged that the position would have been different if Neilly had expressly agreed to the restrictions as part of a clear revised offer of employment which explicitly referred to restriction or better still had signed a new contract of employment containing the restrictive covenants but a mere acknowledgement of the kind in the present case was insufficient. 
 
The judge declined to reach a conclusion as to whether, as a matter of construction, the covenant was enforceable following Neilly’s summary dismissal but went on to hold that even if the covenant had been binding following Neilly’s promotion, it was still unenforceable on the basis that it went further than necessary to protect the employer’s legitimate interest in accordance with the well established principle on the basis that the period of 12 months was too long. Mr Justice Underhill stated that neither the trade connections nor the confidential information acquired by Neilly in the course of his employment justified such a long restriction having regard to the nature of the market in which the Claimant operated. It was also of significance that the restrictions in the contract of other equivalent senior employees were for only six months.
 
Implications
 
This case illustrates the importance of getting an employee’s express agreement to any existing or amended restrictive covenant’s on promotion. The safest course is to enter into a fresh contract or, in appropriate cases, a service agreement. The case shows that a simple acknowledgement in a letter of promotion without any reference to the covenants will not be sufficient. It also shows the dangers of senior employees being subject to different restrictive periods unless their position justifies a longer period of restraint. 
 
Finally, in the overall context of post termination injunctions, practitioners should note the tightening up of court practice in relation to applications made without notice and in particular the comments made by Mr Justice Silber in CEF Holdings Ltd v Mundey [2012] IRLR 912 where he stated that a “without notice” application should only be granted in very limited circumstances where to give notice would enable the defendant to take steps to defeat the purpose of the injunction such as in cases of search or freezing injunctions or where there is some exceptional urgency which means there is literally no time to give notice. Furthermore, where such circumstances do apply, there should be a statement explaining why proper notice has not been given. A bland statement that the defendant may do something if warned is unlikely to satisfy this requirement without particulars. The case also includes important observations on the duty of full and frank disclosure (including the disclosure of relevant legal authorities) in such circumstances. 
 

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