Summary

In PAT Systems Holdings v. Neilly, the High Court held that a non-competition restrictive covenant that had been unenforceable at the time it was entered into, remained unenforceable regardless of the employee’s promotion to a senior role for which the covenant might be more reasonable, unless it was explicitly re-agreed. The employee’s agreement that his previous terms would “remain unchanged” cannot be construed as an agreement to reinstate an unenforceable covenant.

Background

Mr. Neilly was originally employed by PAT Systems in June 2000 as an account manager. His contract of employment contained a 12-month non-competition clause. Mr. Neilly received various promotions and increases in responsibilities. In 2005, he was promoted to “Director – Global Account Management.” He signed an endorsement agreeing that all his previous terms of employment would remain unchanged apart from his remuneration and notice period (which increased from one month to three months for both sides). After his resignation in April 2012 to join a competitor, Mr. Neilly was summarily dismissed. PAT Systems applied to the High Court for an injunction to enforce the 12-month non-competition clause.

The Court refused to enforce the 12-month non-competition clause. It reaffirmed the principle that the reasonableness of a restrictive covenant must be judged at the time it was entered into, not at the time when the employer sought to enforce it. A promotion did not “revive” a previously invalid covenant. Although Mr. Neilly expressly acknowledged and agreed that all his previous employment terms would remain unchanged, this was not sufficient to turn an unenforceable covenant into an enforceable one. It was necessary for the employer to show that a fresh covenant was entered into at the time of the promotion in one of two ways: 1) fresh acceptance by the employee of the restrictive covenant in his previous contract, regardless of whether it was enforceable up until that point; or 2) a new employment contract containing the new covenant. The Court also commented that a period of 12 months for a non-competition clause was simply too long in this case. Instead, the Court considered that a period of six months would be more appropriate.

Conclusion

When an employee is promoted, the employer should consider whether the existing restrictive covenants are valid and whether they are still adequate for the promotion. This case confirms that a change of circumstances, such as a promotion, cannot turn an invalid covenant into a valid one.

The employer should seek fresh acceptance of a covenant when an employee is being promoted, either by seeking the employee’s explicit agreement to the covenant or by asking the employee to sign a new employment contract containing the valid covenant, which should be drawn to his attention. It may be more appropriate to introduce new covenants on a promotion.