In Patsystems Holding Ltd v Neilly, the High Court has confirmed the principle that whether or not a restrictive covenant is reasonable (and therefore, enforceable) must be judged as at the time it was entered into.
There is nothing new in this assessment. In fact, it has been settled law for decades that this is the correct test. However, there are some interesting clarifications in this case. Importantly, the Court held that a general acknowledgement that existing employment terms will continue is not sufficient to establish that a fresh restriction was being entered into at that time.
In this case, Mr Neilly joined the business of Patsystems in 2000 as a relatively junior employee; he was an account manager who was paid £35,000 (gross) per year. The contract he signed at the time contained a one month notice period and a 12 month non-compete provision. When the case was heard, everyone (including Patsystems) agreed that this non-compete clause was too onerous to be enforceable against an employee of the seniority that Mr Neilly held in 2000.
However, in 2005, Mr Neilly was promoted to Director of Global Accounts. The promotion came with a significant pay rise and an increased notice period of three months. At the time of the promotion, Mr Neilly signed a letter via which he, "acknowledged and agreed" that the previous terms of his contract (including, therefore, the restrictions) remained "unchanged".
When Mr Neilly eventually left the business and joined another, potentially competitive, firm, Patystems sought to enforce the restrictions. Mr Neilly argued that the restrictions were invalid, as they were too wide when he entered into them. Patsystems relied on the promotion letter to argue that Mr Neilly had restated the non-compete restriction at the time of his promotion and so its reasonableness should be judged in the context of his seniority at that stage.
The High Court disagreed. They held that a restriction of this type is either valid at the start or invalid at the start. Later changing circumstances will not effect its validity. If invalid, there is little point in saying that it continued to apply unchanged. In effect, the Court's reasoning went, the parties simply confirmed that the void restriction continued to be void.
The High Court suggested two ways in which Patsystems may have used the promotion as a valid way of introducing enforceable restrictions:
- by asking Mr Neilly to give his fresh acceptance of the covenant previously contained in his contract and acknowledging that this consent was given regardless of whether it was enforceable up until that point (and the language suggested by the Court really was precise and was not something you would normally include in a promotion letter); or
- by asking Mr Neilly to sign a fresh employment contract, containing the covenant, without necessarily specifically drawing his attention to the covenant.
Employers need to be very careful to ensure that any restrictive covenants are appropriate for the level of employee signing them, and that if an employee is being promoted, it may be sensible to require them to enter into a new contract or, at least, new restrictions. Restatement of the terms will not, on its own, be sufficient to protect an employer if the terms were unenforceable from the start.