The High Court has found that a company was unable to rely on restrictive covenants contained in a former employee's contract of employment, as there was no evidence that it had provided consideration in return for new contractual obligations.
Re-Use Collections Limited v Sendall and May Glass Recycling
Reuse Collections Limited was a company that took over the operation of what had been a family run glass recycling business set up by Mr Keith Sendall's family, and in which he had worked for some time. Mr Sendall continued to work for the business after Reuse acquired it. In October 2012, Mr Sendall was issued with his first written contract of employment, which for the first time included specific provisions in relation to confidential information and post termination restrictions. After some negotiation, he eventually signed the contract in February 2013.
Shortly after signing the contract, he gave notice of resignation. Reuse alleged that he had, prior to his resignation, set up a competing company, May Glass Recycling. Reuse brought a number of claims against Mr Sendall and May Glass, claiming that Mr Sendall had breached his express and implied obligations to Reuse through his involvement with May Glass and his contacting of Reuse customers with a view to persuading them to transfer their business to May Glass. As against May Glass, it was pleaded that it knew that Mr Sendall was bound by contractual and fiduciary duties to Reuse, and that it had induced or procured his breaches of duty, or alternatively that it had engaged with him in an unlawful means conspiracy as against Reuse. Reuse sought a springboard injunction, as well as damages of some GBP 750,000 for loss of revenue suffered as a result of the defendants' breaches.
High Court Decision
The High Court found that Mr Sendall did not have fiduciary duties towards Reuse, but that his actions did breach his implied obligations of fidelity and good faith, and that damages should be awarded. Of particular interest is the Court's consideration of Mr Sendall's express contractual obligations, and, whether or not Mr Sendall was bound by his post termination restrictions.
In considering whether or not Mr Sendall was bound by the restrictive covenants contained in the 2013 contract, the High Court noted that the covenants had been introduced part way through employment and amounted to a variation of an existing contractual relationship. The Court went on to question whether Reuse had provided the consideration required to make that variation enforceable.
Reuse relied on a number of benefits referred to in the new contract (for example, life assurance, salary rise, company car). The High Court considered each of these in turn, but found that there was no evidence to show that these benefits had been granted in connection with Mr Sendall's acceptance of the new contract: Mr Sendall already received many of the benefits before the execution of the new contract, and the increase in salary at the start of 2013 had not been awarded in connection with his accepting the new contract.
Reuse also sought to rely on Mr Sendall's continuing employment as consideration. The High Court observed that there was no evidence that Reuse had put forward the contract on the basis that, expressly or impliedly, a refusal to sign would or might lead to dismissal. Therefore it found that Reuse could not rely on continuing employment as consideration.
The Court concluded that the requirement of consideration was not met, and that Reuse could not rely on Mr Sendall's post termination restrictions, or the express confidentiality obligation contained in the February 2013 contract.
This case is a good reminder of the need to provide consideration when introducing new contractual obligations during the course of employment. Continuing employment will rarely be enough to constitute consideration, unless it is clear to both parties that a failure to accept the new contract might result in the termination of employment. Practically, employers seeking to introduce new or updated post termination restrictions (or any new contractual obligations) should consider doing so at the same time as salary reviews or bonus announcements, and to make clear that any salary increase or bonus payment is conditional on the employee signing the new contract. It is good practice to consider whether existing covenants are fit for purpose when an employee is promoted. This case reminds us that it would be useful to conduct that exercise ahead of the formal promotion, so that any refreshed covenants can be expressly linked to the promotion.
One question which the case left open is whether there needs to be "adequate" consideration for the restrictive covenants. Although the High Court did not make any finding on the point, it did state that the adequacy of the consideration would be a relevant factor when assessing the reasonableness of the restrictive covenant. In practice, the question of "adequacy" is a difficult one to quantify in monetary terms, and it may be easier to show that consideration was adequate if that consideration was a promotion or the introduction of a valuable benefit, rather than a notional monetary amount paid to the employee at the time of signing the contract.