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Signing a new contract does not mean restrictive covenants are binding absent proper consideration

Craig Rajgopaul 

Many
large employers (particularly those who acquire other businesses over time) are
faced with employees (often senior and important employees) on ‘old’ contracts
with unenforceable, inappropriate or even no restrictive covenants. Quite aside
from the potential difficulties posed by TUPE, remedying that problem often
proves difficult in practice, and requires careful management.

In Re-Use
Collections Limited v Keith Sendall & Ors [2014] EWHC 3852,
handed down on 19 November 2014, the High Court (HHJ Davies sitting as a
Deputy) considered whether Mr Sendall – a senior employee with many years’
service – was bound by restrictive covenants in a contract he signed just over
a year prior to his resignation. It
provides a salient reminder to employers of what (not) to do.

Mr
Sendall did not fare well in judgment generally – he was found to be a “wholly unreliable witness” who had
deliberately concealed documents from the Court, committed serious breaches of
his implied obligation of good faith and fidelity to the Claimant in setting up
a competing business whilst still employed, and entered into an unlawful means
conspiracy.

Notwithstanding
those robust findings against Mr Sendall, the Court held that he was not bound
by the restrictive covenants in a contract of employment he had signed, because
there was no consideration for those covenants.
The result was that he had no post-termination restrictive covenants at
all.

What is required by way of consideration?

The
Court emphasised that, when an employer seeks to impose substantial new
obligations on an existing employee “the consideration
must compromise some real monetary or other benefit (promotion for example)
conferred on the employee for the purpose of causing the employee to agree the
restrictive covenant and that it must be substantial and not nominal”.

Why was there an absence of consideration
here?

The
Claimant here said that the covenants contained in the signed contract of
employment were supported by consideration, because they were introduced as
part of a package under which benefits were conferred upon Mr Sendall,
including a pay rise, or alternatively that Mr Sendall continuing in employment
after he had signed the contract amounted to good consideration.

The
reasons that those arguments failed provide a good lesson for employers on what
is required in order effectively to introduce new covenants:

1. Whilst Mr Sendall received a pay rise around the
   time that he signed the contract, there was no evidence that acceptance of that
   pay rise was expressly or impliedly made conditional on signing the new
   contract (indeed, the contract itself referred to the ‘old’ salary, a pretty
   fatal error!)
2. Whilst Mr Sendall was told about a new
   (enhanced) bonus structure during a meeting when he was asked if he was going to
   sign the new contract he had been sent, there was no evidence that Mr Sendall
   had been told that the bonus would only be payable if he signed the new
   contract. In the circumstances, there
   was “no connection, other than temporal” between the new bonus and the contract of employment.
3. Many of the other ‘new’ benefits relied upon by
   the Claimant were already enjoyed by Mr Sendall prior to him signing the new
   contract.
4. The argument that consideration was found in Mr
   Sendall’s continuing employment after the contract was signed failed because
   the contract was not put forward, expressly or implicitly, on the basis that a
   refusal to sign it would, or might, lead to dismissal, or any other lesser
   sanction. Things might have been
   different if the Claimant had given Mr Sendall a deadline, after which specified
   consequences might flow.

So what should employers do?

What
employers must not do is assume that simply issuing a new contract – even if it
is signed by the employee – will mean that the employee is bound by its terms.

The
best bet is expressly to tie acceptance of a new contract containing
enforceable covenants to a new benefit for the employee. Promotions offer a good opportunity to get
new contracts signed up. Where an
employer wishes to introduce new covenants more widely, pay rise time can be a good
opportunity.

However,
as this case makes clear, in addition to the usual consultation that good
employers will wish to carry out, the process requires careful management. Administrative mistakes trip many employers up
(as an aside, nearly 10 years in practice and am I still amazed by how often
employers realise after a senior employee has left that they don’t have a
signed contract, or any evidence that one was even issued!):

1. The pay rise should expressly be made conditional
   upon acceptance of the new contract.
2. Not only must the employee be told that the pay
   rise is conditional upon acceptance, employers need to ensure that that is
   actually followed through by the HR/payroll departments. It is no good if pay rises are given to
   employees who object to the new contract/refuse to sign it, if pay rises take
   effect before the contracts have been issued, or if the contracts are not
   actually issued to some employees. That
   requires careful management of the administrative function, and often
   co-ordination between those receiving the contracts and the payroll department.

Where
there is no new benefit on offer, the employer will need to decide whether or
not they are prepared to threaten to dismiss employees who do not sign up to
the new contract in order to run the argument that continued employment
amounted to good consideration. In many
circumstances, that will be unpalatable: given that the affected employees
likely have invalid/inappropriate/no restrictive covenants, the last thing the
employer will want is for those employees to walk and take their clients with
them. However, where it is considered
appropriate, the process of course requires careful consultation and a
reasonable process to be followed, bearing in mind the potential for unfair dismissal (and other)
claims.

Whatever
approach is followed, the key thing is to ensure that the employer has all
their ducks in a row, and keeps clear records, with an eye to having to prove
what happened in Court if the worst happens.