How enforceable are restrictive covenants?
December 10, 2014
(Re-use Collections Limited v Sendall & May Glass Recycling Ltd)
The case looked at the enforceability of post termination covenants. Re-use Collections took over a family run recycling business in 2000. The family run business had been in operation since 1922. Mr Sendall joined the company in 1980. He was the grandson of the founder. When Re-use took over, and right up until 2012, Mr Sendall had no written contract of employment. In October 2012 Re-use provided Mr Sendall with a draft contract of employment that contained, among other things, post termination covenants. Mr Sendall was not happy with the contract but signed it on 22 February 2013.
Shortly after signing the contract of employment, in March 2013, Mr Sendall gave Re-use 3 months’ notice of termination. It was alleged that Mr Sendall along with his two sons (who were formerly employed by Re-use) set up a business in direct competition with Re-use and began working for them and poaching customers whilst he was with Re-use and when his notice had expired. Re-use alleged that this was done in breach of his post termination covenants. Mr Sendall denied this allegation and argued that as there had been no consideration, the covenants were not enforceable.
It was common ground that consideration was required as this was a variation to Mr Sendall’s contract. Re-use argued that the consideration was further contractual benefits and a pay rise. In the alternative they sought to argue that consideration was Mr Sendall’s continued employment.
Mr Sendall denies that any consideration was given. He accepts that he was given a pay rise in January 2013 but this had nothing to do with the restrictive covenants. He also argued that his continued employment did not amount to consideration.
The Court concluded that the pay rise was not consideration for the restrictive covenants as the contract reflected Mr Sendall’s pay before the payrise, Mr Sendall was not told that the pay rise was conditional upon him signing the contract and the payrise was not personal to Mr Sendall. The Court concluded that all of the benefits asserted by Re-use were in force before the contract was signed and again were not given as consideration for the restrictive covenants. They then found that Mr Sendall’s continued employment did not amount consideration. The reason was that it was not clear on the facts that refusal to sign the draft contract would amount to dismissal or any other sanction. Consequently, in the absence of consideration it was held that the post termination covenants were unenforceable.
Stephen Calderbank says: This is a stark reminder of the taboo that is post termination covenants. Not only do they have to be proportionate and protect a legitimate business aim, where they are incorporated part way through employment, consideration must be given. If you have employees who are not currently bound by post termination covenants, and you want them to be, make sure that some form of consideration is given. This can be by way of a pay rise, change in status or some other benefit such as a bonus payment, company car, private health insurance etc. Most importantly make sure that when you provide an updated contract with new covenants the employee is told that they are being given the pay rise, change in status etc. as a condition of their acceptance.