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29 January 2015

Restrictive covenants and the need for consideration

Post-termination restrictive covenants are express contractual terms restraining ex-employees from working in a particular industry, geographical location or for a competitor, for a specified period after leaving employment.

They are used to prevent employees from using knowledge or expertise gained from working with the employer either to set up in competition or for a competitor's benefit.

Such covenants are only enforceable if the ex-employer has a legitimate interest to protect and the restriction imposed is proportionate in the circumstances. In addition, the employee must receive adequate 'consideration' in return for agreeing to the restriction. In the case of a new employee, this would normally be the new position. However, where an employer is seeking to revise an existing restrictive covenant or introduce new restrictions by way of a variation to an employee's existing contract of employment, the agreement will only be valid if the employee receives some real consideration in return, as was illustrated by the High Court's decision in Reuse Collections Limited v Sendall and May Glass Recycling Limited.

Reuse Limited had taken over the operation of what had once been a family- run glass recycling business, founded by Keith Sendall's grandfather. Mr Sendall had been a director of the company until it left family control and continued to be employed by Reuse after the change of ownership.

Prior to 2013, Mr Sendall did not have a written contract of employment and no post-termination restrictions applied to his employment. In late 2012, he was asked to sign a new contract containing specific provisions in relation to confidential information and post-termination restrictions. This he did, somewhat reluctantly, in February 2013.

When Mr Sendall left to assist his sons in setting up a business dealing in the recycling of plate glass, Reuse sought to prevent him from competing in the same market and sought an undertaking that he would abide by his express post-termination obligations. However, Mr Sendall denied being actively involved in the rival business and argued that the restrictions were not binding on him because Reuse had provided no consideration for his agreeing to them.

As regards enforcing the restrictive covenant, the High Court found in favour of Mr Sendall. There was no evidence that he had received 'some real monetary or other benefit' in exchange for agreeing to substantial new obligations. A pay rise given to him in January was not dependent on his signing the document, nor had there been any suggestion that a refusal to sign would lead to his dismissal or any other sanction.

Employment senior associate Kathryn Fielder commented that "Restrictive covenants should be tailored to suit the individual circumstances of your business and should be reviewed regularly to ensure they are suitable given the employee's current role within the organisation. We can advise you to ensure that agreements are legally enforceable."

For advice regarding restrictive covenants, please contact senior associate Kathryn Fielder on 01753 279029 or email employmentlaw@bpcollins.co.uk

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