Patsystems Holding Ltd v Neilly [2012] EWHC 2609 (QB)

Mr Neilly began employment with Patsystems in 2000 as an Account Manager on a salary of £35,000. His contract contained a one month notice period and a 12 month post-termination non-compete covenant.

Mr Neilly was later promoted to Director of Global Accounts. His pay increased to £80,000 and his notice period increased to three months. No other changes were made to his contractual terms.

In April 2012 Mr Neilly left Patsystems to go to work for a competitor. Patsystems sought an injunction to enforce the non-compete clause.

Mr Neilly argued that the non-compete clause was unenforceable as it was not reasonable at the time the contract was entered in to in 2000. Patsystems argued that Mr Neilly entered in to the covenant again in 2005 when he accepted the other changes to his terms on promotion.

The Court rejected Patsystems’ argument and held that the covenant was unenforceable as an unreasonable restraint of trade. The relevant test was whether the terms of the covenant were reasonable at the time the agreement was entered in to in 2000. The covenant was not reasonable by reference to Mr Neilly’s status at that time and it could not subsequently be saved by a change in circumstances that might render it reasonable at the time when it was relied upon.

Implications

While the principle set out in this case is not new, the facts are a good example of a very common situation and demonstrate that unless restrictive covenants are:

  • reasonable at the time they are entered into; and
  • relevant at the time the employee leaves;

they will not be enforceable. Employers must draft and review the terms of restrictive covenants with reference to the changing circumstances of the business and the employee throughout their employment.

In this case, Patsystems might have saved itself by taking steps in 2005 to have Mr Neilly sign a new contract containing the same terms, or by asking him to expressly accept the covenants in his original contract regardless of their enforceability up to that point.