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Restrictive covenants need consideration to be enforceable

20 January 2015

It is common practice for employers to periodically review their contracts of employment and update them in line with a change in the law and best practice. Often, one of those changes is to seek to introduce restrictive covenants (non-competition and non-solicitation obligations after the termination of the employment) into the contract of employment with the employee’s consent.

However, a recent decision by the High Court has held that consent is not enough for those restrictions to be enforceable. Specific consideration is also required.

In Reuse Collections Limited v Sendall & May Glass Recycling Ltd, Mr Sendall had been employed by Reuse Collections since 1980. The company had changed hands during the course of his employment, and turned from a family-run business to a subsidiary of an Australian company. In October 2012, the company had presented Mr Sendall with a contract of employment to replace his existing written statement of employment particulars.Mr Sendall took legal advice and with great reluctance signed the new contract in February 2013. The new contract contained new provisions relation to confidential information and restrictive covenants.

In early 2013, Mr Sendall sent up his own, competing company – Sendall & May Glass Recycling Ltd – tendered his resignation in March. Shortly afterwards, Mr Sendall was suspended on the grounds of attempting to solicit Reuse’s customers for the benefit of his own company and his employment terminated in May 2013.

Reuse sought to enforce the restrictive covenants in the contract of employment that Mr Sendall had signed in February 2013 in respect of his conduct post-termination. Mr Sendall defended the claim on the basis that the company had not given him any specific consideration for the additional obligations placed upon him. The High Court found in favour of Mr Sendall on this point and held that the restrictive covenants were not
enforceable.

Employers must learn from this case and ensure that the later introduction of restrictive covenants is accompanied by some tangible consideration. This can be an increase in salary, the introduction of a new benefit or a promotion.What is important is that the consideration is dependent upon, rather than a coincidence of, the employee’s agreement to sign up to the restrictive covenants.