Enforceability of Restrictive Covenants – as at inception

4 October 2012

The recent case of Patsystems v Neilly [2012] EWHC 2609 (QB) confirmed that the enforceability of restrictive covenants should be assessed as at the date they were entered in to. Furthermore, if the restrictions were void from the start then they cannot simply be resuscitated by a general endorsement of updated terms and conditions.

Here Graeme Neilly was employed by Patsystems in 2000 as an ‘Account Manager’. At that time he was on £35,000 with a contract requiring one month’s notice. The contract contained a 12-month “non-compete” clause. Neilly was promoted to ‘Director ­ Global Account Management’ in 2005. His remuneration reached £80,000 plus bonus and he was then on three months’ notice. Within his promotion letter, Neilly was asked to sign and return an endorsement agreeing to the variation in terms; it also stated that all other terms and conditions outlined in his original documentation would remain unchanged ­ he did so.

In 2012 Neilly resigned and informed Patsystems that he would be going to work for Trading Technologies (TT). Patsystems considered that Neilly’s intention to work for TT would breach the non-compete restriction and brought a claim in the High Court. Pending the outcome of the speedy trial Neilly signed up to certain undertakings.

The High Court concluded that the 12-month non-compete was void from the start as it could not have been deemed necessary to protect Patsystems’ legitimate business interests as at the date it was entered in to (2000). Furthermore, the change in terms in 2005 and accompanying endorsement from Neilly could not ­ based on the words used (as above) ­ have meant to reinstate a term which was already a nullity. Justice Underhill added that employment contracts are frequently varied and it cannot be the case that each time the terms are altered an otherwise “defunct restrictive covenant” is revived.

The High Court opined on two ways in which the restriction could have been made enforceable in 2005: (1) by drawing attention to the restrictions in the endorsement of amended terms i.e. “I am entering in to these restrictions despite their enforceability to date”; or (2) by entering in to a fresh contract (without expressly drawing attention to the restrictions).

Whilst it did not come down to this point, Justice Underhill noted that, in his opinion, the 12-month non-compete was too long and six months would have sufficed.