Are restrictive covenants enforceable if introduced by deed during employment?
In this article John Mehrzad KC and Matthew Sheridan review lines of authority on introducing a restrictive covenant in an employment context by way of deed.
Ordinarily, a contract contained in a deed need not be supported by consideration. However, contracts which are in restraint of trade are an exception.
This has been treated as an established legal principle since Mitchel v Reynolds (1711) 24 ER 347: see Employment Covenants and Confidential Information: Law, Practice and Technique by Bloch & Brearley (4th Ed.) (a leading practitioner textbook) at 13.93:
“…it is a well-established principle that restrictive covenants contained in a deed must still be supported by adequate consideration: Mitchel v Reynolds (1711) 24 ER 347.”
In Mitchel, Parker CJ conducted a general review of the law of restraint of trade. In doing so, he held that, irrespective of whether the restraint of trade was in a deed (such as the ‘conditioned bond’ in issue in the case) or a simple contract, it must be supported by consideration:
“…the true distinction of this case is, not between promises and bonds, but between contracts with and without consideration; and that wherever a sufficient consideration appears to make it proper and an useful contract, and such as cannot be set aside without injury to a fair contractor, it ought to be maintained” (para.182)
“Particular restraints are either, 1st, without consideration, all of which are void by what sort of contract howsoever created…Or 2ndly, Particular restraints are with consideration. Where a contract for restraint of trade appears to be made upon a good and adequate consideration, so as to make it a proper and useful contract, it is good” (paras.185-186)
Those remarks are obiter, but have been followed in England and Wales ever since. In Davis v Mason (1793) 5 Term Rep 119 (Court of King’s Bench), another case concerning a ‘conditional bond’, Lord Kenyon CJ held:
“This question has been at rest ever since the case of Mitchell v Reynolds. A bond in restraint of trade cannot be arbitrarily taken and without consideration; some consideration must appear.”
The issue has also been considered at appellate level. Chesman v Nainby (1727) 2 Str. 793 (Court of King’s Bench) concerned another claim for a debt arising from breach of a ‘conditional bond’. The key issue in the case was whether good consideration had been given. The claim was started in the now defunct Court of Common Pleas. The case was (in error) argued without reference to Mitchel. In order to correct the error, the matter was appealed to the Court of King’s Bench, where the court held (having full regard to Mitchel) that there was good consideration for the bond. The case was then appealed to the House of Lords (David Chesman, et Ux v Margery Nainby (1727) I Brown 234) where the judgments of the courts below were upheld. The House of Lords implicitly approved Mitchel and the proposition that consideration is required even if the restraint of trade is contained in a deed: if the House of Lords had thought that consideration was unnecessary then the appeal would have been futile.
Very recently, in Quantum Actuarial LLP v Quantum Advisory Ltd [2021] EWCA Civ 227, the Court of Appeal (per Carr LJ at paras.55-56) referred to Mitchel as authority for the proposition that, without good consideration, a covenant in restraint of trade would be “oppressive”. In other words, the need for consideration is not merely about demonstrating that there was a properly formed contract; rather, the need for consideration arises because public policy dictates that it would be oppressive for a person to be bound by restrictive covenants if they receive nothing in return. The Court of Appeal commented that Mitchel had been described recently as a “seminal judgment” by the Supreme Court in Egon Zehnder Ltd v Tillman [2020] AC 154 (per Lord Wilson at para.25) and that it “remains authoritative”.
However, there is a curiosity about Egon Zehnder in that Lord Wilson added (at para. 86) that:
“It goes without saying that an employer who sues on a covenant made otherwise than under seal [ie. as a deed] must show that he provided consideration for it.”
Respectfully, it is suggested that Lord Wilson’s comment is wrong. Moreover, it was on any view obiter. The issue in Egon Zehnder was not whether consideration had been provided for the relevant covenant. Rather, the issues at stake were the proper construction of the covenant and the relevance of consideration to the test for severance.
It is not only in England and Wales where it has been held that the usual rule that consideration is not required for a deed does not apply to agreements in restraint of trade.
The Court of Appeal of British Columbia in Rosas v Toca [2018] BCCA 191 appeared to put the cat amongst the pigeons in that jurisdiction. The case concerned a limitation period for a debt claim. The court held that consideration is not required where the parties agree variations to an existing contract (per Chief Justice Bauman at 183):
“When parties to a contract agree to vary its terms, the variation should be enforceable without fresh consideration, absent duress, unconscionability, or other public policy concerns, which would render an otherwise valid term unenforceable. A variation supported by valid consideration may continue to be enforceable for that reason, but a lack of fresh consideration will no longer be determinative.”
The case gave rise to obvious scope for arguing that variations which sought to vary employment contracts by introducing restrictive covenants or varying existing covenants need not be supported by consideration. However, the Canadian courts have rejected such arguments and have refused to apply Rosas in the employment context, recognising the detrimental nature of a restrictive covenant to an employee and holding that continuing employment is not enough of a benefit to an employee to constitute good consideration: Moffatt v Prospera [2021] BCSC 2463 (at paras.38-44); see also Verigen v Ensemble Travel Limited [2021] BSC 1934 (at paras. 30-34), Maijczak v Homewood Health Inc [2021] BCSC 1658 (at paras. 30-32) and the Court of Appeal of Ontario decision in Braiden v La-Z-Boy Canada Limited [2008] ONCA 464.
Turning back to the position under English law, there is all the more reason to ensure that consideration of some real (and more than nominal) value is provided to the employee given that the preponderance of appellate authority suggests that, in assessing the enforceability of covenants, the ‘adequacy’ or ‘quantum’ of the consideration will be relevant to the assessment of reasonableness: see most recently Harcus Sinclair LLP v Your Lawyers Ltd [2022] AC 1271 (SC) per Lord Briggs, Lord Hamblen and Lord Burrows JJSC (with whom the other JSC agreed) at paras.48, 72, and 78-79; and Quantum (per Carr LJ at para.65(vii)(a) and (x)).
In conclusion, the authors’ firm view is that the introduction of a restrictive covenant (whether entirely new or by way of variation to an existing contract) by way of deed is very unlikely to result in an enforceable restraint in the absence of consideration. Employers therefore remain best advised to offer consideration which is both substantial and expressly tied to the employee’s acceptance of the restraint, such as a pay rise, extra holiday or increased notice.
