The case of Re-use Collections Ltd v Sendall and May Glass Recycling Ltd [2014] EWHC 3852 provides a helpful reminder that restrictive covenants cannot be enforced against a former employee, if they are introduced during the employment relationship without the employee receiving specific consideration in the form of an appropriate monetary payment or another substantial benefit.

Background

There are four main types of restrictive covenant that usually appear in a contract of employment:

  • Confidentiality provisions designed to identify and protect information considered by the employer to be confidential.
  • Non-solicitation/non-dealing provisions relating to clients or customers, the aim being to prevent an ex-employee from interfering with the established business interests of the organisation, by preventing the employee from poaching its clients or customers for a defined period of time.
  • Non-solicitation of employees, to avoid an ex-employee from poaching important members of staff during the defined period.
  • Non-competition provisions, to prevent an ex-employee from competing with the organisation, usually within a defined area or in respect of particular activities or clients, for a defined period.

Such provisions require ‘consideration’ to be enforceable. In other words, the employee must receive something in return for agreeing to the restrictions. If they appear in a contract of employment that is provided when the employment commences, the consideration is the offer of that employment. If however restrictive covenants are introduced during the employment, the employer needs to provide separate consideration. If consideration is not provided, the employer will not be able to insist that the employee complies with the express restrictions when the employment ends. The law provides some protection to an employer who does not have restrictive covenants in place but it is very limited as compared with the protection available if enforceable restrictions have been agreed.

Facts

Re-use took over the operation of what had been a family run glass re-cycling business originally founded by Mr Sendall’s grandfather. Mr Sendall continued as an employee when the business was acquired by Re-use. After two of Mr Sendall’s relatives had left Re-use to work in a competing business, Mr Sendall was asked to sign a written contract of employment that contained provisions relating to confidential information and post-termination restrictions.

After signing the contract Mr Sendall left Re-use and became involved in a competing business known as May Glass. Re-use sought to rely on the confidentiality provisions and post-termination restrictions in the employment contract Mr Sendall had signed, which sought to prevent him from setting up a competitive business for a 12 month period and from soliciting or dealing with clients or prospective clients of Re-use for a six month period. It also sought £750,000 in lost revenue from May Glass.

Re-use obtained an interlocutory injunction against Mr Sendall and May Glass, which remained in force for a year before the case progressed to trial to consider the damages claim on the part of Re-use, a claim for damages by May Glass (pursuant to the cross undertaking given in return for the injunction) and a claim by Mr Sendall in respect of his notice period.

High Court decision

The judge sought to establish whether consideration had been provided by Re-use in return for imposing the restrictions on Mr Sendall at the time the employment contract was signed. In particular he noted that, as the restrictions relating to Mr Sendall had been introduced during the course of the employment relationship, Re-use needed to give specific consideration for his agreement to the restrictions in order to be able to insist that he comply with them after the employment had ended. He confirmed that the consideration needed to amount to “some real money or other benefit”, which had to be “substantial and not nominal”.

Re-use argued that the restrictions formed part of a package of benefits including a pay rise, alternatively that Mr Sendall’s continued employment provided consideration for his agreement to the new terms. Mr Sendall agreed that he had received a pay rise but insisted that it had nothing to do with his agreement to the restrictions. He also argued that continued employment could not, in the circumstances of the case, amount to consideration.

The package of benefits Re-use claimed to have provided were found to amount to no more than Mr Sendall had enjoyed prior to the introduction of the new contract and the pay rise was not referred to in the new contract, nor did any related documentation state that it was in return for Mr Sendall’s agreement to the new contract. The judge therefore did not find it difficult to conclude that Re-use had failed to establish that the pay rise was conditional upon Mr Sendall agreeing to the new contract.

The continued employment of Mr Sendall was also found not to be sufficient as consideration for his agreement to the new contract. He was noted to be a long serving employee, who was asked to accept substantial restrictions without there being any suggestion that he would be dismissed if he did not agree to do so.

Mr Sendall was found to have acted in breach of the implied duty of good faith, as a result of the nature of his activities whilst still employed by Re-use, and May Glass was found to be guilty of conspiring to injure Re-use. The decision enabled Re-use to obtain damages for some of the loss it had suffered as a result of having lost 14 of its suppliers, but only for a three month period.

Comment

Re-use was fortunate in that it had access to documents that gave some indication of the nature of Mr Sendall’s activities in the latter stages of his employment with Re-use. Without this it is unlikely that Re-use would have succeeded in its claim and may have had to compensate May Glass for the impact the injunction had on its business.

If the restrictions had been enforceable, Re-use would have avoided the risk of having to compensate May Glass in respect of the adverse effect of the injunction and would have been able to claim compensation for a much longer period, in an amount that more closely reflected the amount of the loss it had suffered.

The case reminds employers of the importance of ensuring there is clear evidence that links the consideration to the employee’s agreement to enter into the restrictive covenants.