The High Court, in Patsystems Holdings Ltd v Neilly, has reaffirmed the principle that the reasonableness of a restrictive covenant should be judged at the time the covenant was entered into, and not at the time when the employer is seeking to enforce it.
Mr Neilly entered into a 12 month non-compete restrictive covenant when he joined Patsystems as an account manager in 2000. He was promoted to the position of Director of Global Accounts in 2005, and was asked to confirm in writing that he agreed to the variation of terms relating to his promotion. He signed an endorsement which stated that he agreed that “all other terms and conditions outlined in [his] original documentation remain[ed] unchanged”.
In April 2012, Mr Nelly gave notice of his resignation, indicating that he was going to work for a potential competitor. Patsystems considered this to be a repudiatory breach and, shortly thereafter, summarily dismissed Mr Neilly. Patsystems sought an injunction to enforce the terms of the non-compete clause. It argued that the covenant should be treated as being entered into afresh when the contract of employment was varied in 2005, on the basis that the endorsement made by Mr Neilly was the equivalent to its incorporation into the varied contract of employment.
The High Court, however, refused to grant the injunction and allowed Mr Neilly's counterclaim for wrongful dismissal. It held that the covenant had not been reasonable at the time it was entered into in 2000, given Mr Neilly’s status and responsibilities at that time. An invalid covenant could not be turned into a valid one as a result of a subsequent change of circumstances, such as a promotion, even if this meant that the covenant would have been reasonable at the time it was to be enforced. A general acknowledgment by the employee, such as the endorsement given by Mr Neilly in this case, that his previous terms remain unchanged could not be construed as an agreement to reinstate a term that was void.
Impact for Employers
- This case serves as a useful reminder that restrictive covenants should be reviewed regularly, in particular when an employee is promoted, to ensure that they are appropriate to the employee’s role.
- If an employee’s role changes, employers should ask the employee to confirm their acceptance of the covenants in the context of the new role, either by way of a fresh written acceptance of the covenants (setting out the terms in full, rather than simply confirming all previous terms continue to apply) or by asking the employee to sign a new contract containing the covenants.