Reasonableness of a restrictive covenant must be judged from the time it was entered into

David Reid
5th Oct 2012

The reasonableness of a restrictive covenant must be judged from the time it was entered into, not when the employer seeks to enforce it.

The High Court has confirmed that the reasonableness of a restrictive covenant must be judged at the time it was entered into, and not when the employer seeks to enforce it.

 

In this case, the employee began work as an accounts manager and entered into a contract containing a 12 month restrictive covenant. He was then promoted to director and signed a letter agreeing to vary some of his terms of employment whilst acknowledging that others, including the covenant, would remain the same. He later resigned to work for a competitor.

 

The covenant was held to be unenforceable on the basis that it was not reasonable to have asked the employee to enter into such restrictions when he was an accounts manager. However, even if it was reasonable for the employee to have entered into these restrictions as a director, a general acknowledgment at the time of being promoted that some of his terms would remain unchanged was insufficient to re-establish a clause that was void at the time it was entered into.

 

In such circumstances, the correct approach is for the employer to seek fresh acceptance of the covenant, either by:

 

  • Expressly drawing the employee’s attention in the variation letter to the restrictive covenant
  • Asking the employee to sign a fresh employment contract containing the covenant.

 

This case highlights to employers the importance of ensuring that restrictive covenants are reviewed when an employee is promoted, or changes role, and to seek the employee’s fresh acceptance to these covenants in such circumstances

 

Case name: Patsystems Holding Ltd v Neilly [2012] EWHC 2609 (QB)

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