Consideration of (and for) Restrictive Covenants

The case of Re-Use Collections Ltd v Sendall & Anor [2014] EWHC 3852 is another illustration of the difficulties in enforcing restrictive covenants in a contract of employment.  The former employee was found on the facts to have been involved in a competing glass-recycling business, which he had been involved in setting up before he left.  There were post-termination restrictive covenants in his contract prohibiting him for 6 months from working for specified companies, soliciting or dealing with clients or soliciting senior employees and for 12 months from setting up a competing business.  The judge held this was too long; 3 months rather than 6 months was all that would have been reasonable, and there was no basis for the 12 month restriction on setting up post termination.

This is all pretty standard stuff, but the interesting point in this case was that the restrictive covenants were in a new contract of employment, which had (for once) actually been signed by the employee, but on 22 February 2013 (after having been with the business since 1980), and were held to be unenforceable for lack of consideration.  Arguments by the employer's counsel that there was sufficient consideration in the other provisions of the contract failed, as they essentially restated the employee's existing terms and no increased benefits or salary increase were proved.  Nor was it sufficient consideration that the employer had continued to employ Mr Sendall on these terms, as there was no real threat he would have been dismissed if he had not signed the contract.

If you are an employer, alarm bells should be ringing by now.  It is a common practice to sign senior employees up to written contracts of employment with restrictive covenants after they have started working - often some considerable time afterwards.  Typically such contracts simply record in writing the existing terms of employment, and in reality they add provisions which the employer has been advised are appropriate, such as restrictive covenants, confidentiality (which also failed in this case for lack of consideration) and ownership of intellectual property.  It is unusual for any specific payment to be made by the employer for such provisions and itemised as consideration for them.  On the basis of this decision, all such provisions must be considered to be at risk.

The simple solution is to execute the contract of employment as a deed (so no consideration is legally required) or put such provisions in a separate, US-style "unfair competition agreement" which would be executed as a deed.  Most employers are unlikely to be willing to agree to pay substantial amounts for such covenants, and providing for nominal consideration of £1, receipt of which is acknowledged but in reality is not paid, risks being held a sham.

In Re-use v Sendall, Mr Sendall was in fact caught by his implied duty of fidelity and good faith, which he was found in breach of by his involvement in setting up the competing business before he left, and was held liable to pay £51k of damages (as against some £747k claimed by Re-use).  This is a liability arising out of the employment relationship, which did not depend on the written contract of employment.  Although Re-use were able (despite some self-serving evidence) to establish it on the facts in this case, it has its limitations (in particular not applying after the termination of the employment), which is why express restrictive covenants are always advisable.  If you can establish consideration for them that is.