In the recent case of Patsystems Holdings Limited v Neilly [2012] EWHC 2609 (QB) the High Court has confirmed the principle that the reasonableness of a restrictive covenant in an employment agreement must be judged at the time the covenant is entered into and not at the time when the employer seeks to enforce it. 

Under general principles, a restrictive covenant will be void for being in restraint of trade unless the employer can show:

  1. a legitimate proprietary interest that is appropriate to protect; and
  2. that the protection sought is no more than is reasonable having regard to the interests of the parties and the public interest. 

When the employee in this case commenced his employment as an Account Manager he entered into an employment contract containing a one month notice period and a twelve month non-compete clause (the “non-compete covenant”).

In 2005 he was promoted to Director of Global Accounts and his salary was significantly increased and his notice period was increased to three months.  In July 2005 the employee endorsed a letter confirming the changes to his employment contract and confirming that all other terms and conditions remained unchanged.

In April 2012 the employee resigned and the employer sought to enforce the non-compete covenant. 

The High Court held that the non-compete covenant was not enforceable because it had not been reasonable at the time when the employee was originally employed in 2000 in a relatively junior position, as an Account Manager. 

The only basis on which the non-compete covenant may have been enforceable would be if a fresh covenant had been entered into in 2005 when the employee was promoted.  However the Court held that the employee’s general acknowledgement that his previous terms remained unchanged could not be construed as an agreement to reinstate a clause which was a nullity. 

Glovers’ Comment

This case underlines the importance of regularly reviewing the terms and conditions of employees that are promoted or redeployed.  This case is authority for the proposition that where an original restrictive covenant is unenforceable, it will not be “cured” when the employee is promoted to a senior position where the covenant would otherwise have been reasonable.