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Employee’s covenants unenforceable because employer had not provided consideration for them.

Posted by TonyBrownEmploymentSolicitor on January 20, 2015

It is vital that an existing employee who agrees to new restrictive covenants is provided with some benefit (e.g., a pay rise or bonus payment) in consideration for the variation to his/her contract.

In the next case, the High Court refused to enforce covenants against a former employee because he had not received any consideration for agreeing to the covenants.
Mr S began work in a family-run business in 1980. He was not given written contract of employment at the time so did not have any restrictive covenants. When the business was taken over in 2013, the new owners issued S with a written contract which contained restrictions on his right to join a competitive business and against him soliciting his employer’s customers. S signed his contract. restrictive_covenants.jpg

After S tendered his resignation, the employer became aware that S had been involved in setting up a competing business and he intended to work for this business at the end of his notice.

The employer applied for an injunction to hold S to the restrictions in his contract.
S argued that he was not bound by the restrictive covenants in the contract he had signed because there was no consideration for the covenants.The employer argued that the covenants were supported by consideration, because they were introduced as part of a package conferring benefits on S, including a pay rise, or alternatively the fact that S continued in employment after he had signed the contract amounted to good consideration.

Those arguments failed:
• Although S received a pay rise around the time that he signed the contract, there was no evidence that acceptance of the pay rise was made conditional on S signing the new contract;
• Although S was told about a new bonus structure at a meeting when he was asked if he was going to sign the new contract, there was no evidence that he was told that the bonus would only be paid if he signed the new contract;
• Many of the other ‘new’ benefits relied upon by the employer were already enjoyed by S prior to him signing the new contract.
• The argument that consideration was found in S’s continuing employment after the contract was signed failed because he was not told his refusal to sign it would, or might, lead to dismissal.

Without any consideration the court held that the restrictions were not enforceable against S.


Comment

S was described by the judge as a wholly unreliable witness who had deliberately concealed documents from the court and had committed serious breaches of his implied obligation of good faith and fidelity to his employer in setting up a competing business while still employed. Despite this the court ruled that S was not bound by the restrictive covenants in the contract he had signed because there was no consideration for the covenants.

Consideration in the law of contracts is something of value given by one party in return for the promises of the other party to the contract. In order to be valid, a contract must involve an exchange of one form of consideration for another. Sometimes it is money; sometimes it is a promise to do something or to refrain from doing something.

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.
So what should employers do? Preferably, they should expressly tie acceptance of a new contract containing enforceable covenants to some new benefit for the employee.

The alternative (threatening to dismiss employees who do not sign the new contract) may be unpalatable as it risks employees, who have no restrictive covenants, taking their clients with them to a competitor and, of course, unfair dismissal and other claims.

If you would like advice about how the issues in this note apply to your situation, please contact Tony Brown on 01225 740097 or by e mail to tony@bathemploymentlaw.co.uk
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