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SIGNING A NEW CONTRACT DOES NOT MEAN RESTRICTIVE COVENANTS ARE BINDING ABSENT PROPER CONSIDERATION

Craig Rajgopaul 

Many large employers (particularly those who acquire other businesses over time) are faced with employees (often senior and important employees) on ‘old’ contracts with unenforceable, inappropriate or even no restrictive covenants. Quite aside from the potential difficulties posed by TUPE, remedying that problem often proves difficult in practice, and requires careful management.

In Re-Use Collections Limited v Keith Sendall & Ors [2014] EWHC 3852, handed down on 19 November 2014, the High Court (HHJ Davies sitting as a Deputy) considered whether Mr Sendall – a senior employee with many years’ service – was bound by restrictive covenants in a contract he signed just over a year prior to his resignation. It provides a salient reminder to employers of what (not) to do.

Mr Sendall did not fare well in judgment generally – he was found to be a "wholly unreliable witness” who had deliberately concealed documents from the Court, committed serious breaches of his implied obligation of good faith and fidelity to the Claimant in setting up a competing business whilst still employed, and entered into an unlawful means conspiracy.

Notwithstanding those robust findings against Mr Sendall, the Court held that he was not bound by the restrictive covenants in a contract of employment he had signed, because there was no consideration for those covenants. The result was that he had no post-termination restrictive covenants at all.

What is required by way of consideration?

The Court emphasised that, when an employer seeks to impose substantial new obligations on an existing employee "the consideration must compromise some real monetary or other benefit (promotion for example) conferred on the employee for the purpose of causing the employee to agree the restrictive covenant and that it must be substantial and not nominal”.

Why was there an absence of consideration here?

The Claimant here said that the covenants contained in the signed contract of employment were supported by consideration, because they were introduced as part of a package under which benefits were conferred upon Mr Sendall, including a pay rise, or alternatively that Mr Sendall continuing in employment after he had signed the contract amounted to good consideration.

The reasons that those arguments failed provide a good lesson for employers on what is required in order effectively to introduce new covenants:

  1. Whilst Mr Sendall received a pay rise around the time that he signed the contract, there was no evidence that acceptance of that pay rise was expressly or impliedly made conditional on signing the new contract (indeed, the contract itself referred to the ‘old’ salary, a pretty fatal error!)
  2. Whilst Mr Sendall was told about a new (enhanced) bonus structure during a meeting when he was asked if he was going to sign the new contract he had been sent, there was no evidence that Mr Sendall had been told that the bonus would only be payable if he signed the new contract. In the circumstances, there was "no connection, other than temporal” between the new bonus and the contract of employment.
  3. Many of the other ‘new’ benefits relied upon by the Claimant were already enjoyed by Mr Sendall prior to him signing the new contract.
  4. The argument that consideration was found in Mr Sendall’s continuing employment after the contract was signed failed because the contract was not put forward, expressly or implicitly, on the basis that a refusal to sign it would, or might, lead to dismissal, or any other lesser sanction. Things might have been different if the Claimant had given Mr Sendall a deadline, after which specified consequences might flow.

So what should employers do?

What employers must not do is assume that simply issuing a new contract – even if it is signed by the employee – will mean that the employee is bound by its terms.

The best bet is expressly to tie acceptance of a new contract containing enforceable covenants to a new benefit for the employee. Promotions offer a good opportunity to get new contracts signed up. Where an employer wishes to introduce new covenants more widely, pay rise time can be a good opportunity.

However, as this case makes clear, in addition to the usual consultation that good employers will wish to carry out, the process requires careful management. Administrative mistakes trip many employers up (as an aside, nearly 10 years in practice and am I still amazed by how often employers realise after a senior employee has left that they don’t have a signed contract, or any evidence that one was even issued!):

  1. The pay rise should expressly be made conditional upon acceptance of the new contract.
  2. Not only must the employee be told that the pay rise is conditional upon acceptance, employers need to ensure that that is actually followed through by the HR/payroll departments. It is no good if pay rises are given to employees who object to the new contract/refuse to sign it, if pay rises take effect before the contracts have been issued, or if the contracts are not actually issued to some employees. That requires careful management of the administrative function, and often co-ordination between those receiving the contracts and the payroll department.

Where there is no new benefit on offer, the employer will need to decide whether or not they are prepared to threaten to dismiss employees who do not sign up to the new contract in order to run the argument that continued employment amounted to good consideration. In many circumstances, that will be unpalatable: given that the affected employees likely have invalid/inappropriate/no restrictive covenants, the last thing the employer will want is for those employees to walk and take their clients with them. However, where it is considered appropriate, the process of course requires careful consultation and a reasonable process to be followed, bearing in mind the potential for unfair dismissal (and other) claims.

Whatever approach is followed, the key thing is to ensure that the employer has all their ducks in a row, and keeps clear records, with an eye to having to prove what happened in Court if the worst happens.

Posted: 08.12.2014 at 14:45
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