In PAT Systems v Neilly, the High Court confirmed that the enforceability of a restrictive covenant must be judged by reference to the time it was entered into, rather than at termination of the employment relationship. Consequently, an over ambitious restrictive covenant entered into by a then junior employee was not enforceable even though at the time of his departure he held a senior position and could legitimately have been restrained from joining a competitor.
When Mr Neilly resigned from his role as Director of Global Accounts with PAT Systems, his employer sought an injunction to prevent him joining a competitor. His contract contained a 12 month post-termination prohibition on working for a competitor but had been entered into several years earlier when he held a junior role. On his promotion, he was simply asked to sign a letter recording his promotion but stating that otherwise his terms and conditions remained unchanged.
The High Court refused the Company's application on the basis that Mr Neilly's role and responsibilities at the time the contract was entered into did not warrant such a lengthy restriction on his activities. His subsequent promotion alone was not sufficient to render the previously unenforceable restriction enforceable.
The moral of the tale is don’t wait until a key player resigns to find that your covenants are not fit for purpose. Employers should
- Tailor covenants to the role of the employee at the time the covenants are entered into – standard form covenants should be used with extreme caution
- Conduct regular assessments of the effectiveness of covenants
- Use appropriate opportunities such as promotions to introduce new covenants
and ….ensure that if you are introducing new covenants they do constitute a new and enforceable promise; merely "rolling over" a previously unenforceable covenant will achieve nothing – an outcome PAT systems learnt to their cost.