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Are your new restrictive covenants enforceable?

Posted on 30 January 2017

Are your new restrictive covenants enforceable?

The High Court appears undecided as to when an employer can enforce restrictive covenants that have been introduced part-way through an employment relationship. The case of Decorus v Mr Penfold and Procure Store Limited at the end of last year contradicts another recent judgment with remarkably similar facts, that of Re-Use Collections Limited v Sendall.

Mr Penfold was employed by Decorus as a Sales Account Manager. He was required to develop close relationships with Decorus' clients.

In 2013, part-way through his employment, Mr Penfold entered into a new employment contract which contained post-termination restrictions. A month prior to this, he had been awarded a payrise following an appraisal. Decorus argued that this was part of a three phase process: an appraisal; a resulting payrise; and the issuing of an updated contract.

At the beginning of 2016, Mr Penfold resigned. He told Decorus that he planned to set up a new business. Two days later, Mr Penfold was appointed as a director of Procure Store Limited, a company set up by his friend in September 2015.

While still employed by Decorus, Mr Penfold accessed Decorus' purchase logs, which were password protected and contained commercially sensitive information about clients' order history and invoicing, in order to assist him to establish his own business in competition. He diverted business orders from an existing client to his new business, and reached an agreement with a client whereby the client would provide him with information to enable him to compete with Decorus.

Following his departure, Mr Penfold and his new business were able to undercut Decorus' prices and poach its clients using the information that Mr Penfold had misappropriated.

Mr Penfold had plainly breached his duty of good faith and fidelity. The High Court also held that Mr Penfold had misused trade secrets and confidential information. Further, his new business was in breach of its equitable duty not to use the information that Mr Penfold had misappropriated.

Decorus also sought to rely on the post-restrictive covenants in the 2013 contract. Mr Penfold argued that the 2013 restrictions did not bind him; he signed the contract a month after his payrise and this could not therefore be consideration for entering into the restrictions.

It is a well-established principle that restrictive covenants must be supported by adequate consideration. This means that an employer must give something meaningful to the employee in return for the imposition of the new restrictions. Examples include a promotion, payrise, enhanced benefit, or a change in hours or other contractual term that is beneficial to the employee. This problem tends to arise when new covenants are introduced for existing employees: it is not enough to consult with employees and obtain the employee's signature in these circumstances. In the case of new hires, as long as contracts containing restrictions are signed prior to or at the commencement of employment, the remaining terms of the initial contract will be valuable consideration.

The High Court in the Decorus case held that the restrictions on soliciting and dealing with clients were enforceable: when taken together, the appraisal, the new contract and the payrise amounted to valid consideration, despite the payrise being awarded after the contract was signed.

The Court awarded damages of almost £30,000, final injunctive relief and costs in Decorus' favour.

Conversely, the previous Re-Use decision held the opposite: that a covenant introduced around a month after a payrise (and again, not expressly identified as consideration for the covenant), was not good consideration, rendering the covenant useless.

While the Decorus decision will be heavily relied upon by employers faced with this predicament, the contrasting decision in the Re-Use case will assist exiting employees and new employers to argue their way out of restrictive covenants. As neither case has been appealed, we may be waiting some time for further clarity from the appeal courts. In the meantime it remains important to ensure that, when implementing or amending existing employees' restrictions, good consideration is provided. The employer should set out, in writing, that the payrise, bonus or other benefit is conditional upon, and provided as consideration for, the employee agreeing to the new restrictions.

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