Legal update - Providing consideration for the imposition of additional restrictive covenants on existing employees

29 January 2015

Re-use Collections Limited v Keith Sendell and May Glass Recycling

We have had an important decision on the question of providing consideration for the imposition of additional restrictive covenants on employees.

The case concerned a company called Re-use Collections Limited, for whom an employee, Keith Sendell, had worked for many years. He had done so without having been given a written contract of employment. More recently he was given a draft contract, and after a four month delay, he duly signed it. That contract contained restrictive covenants which were in issue in the case.

When Sendell subsequently sought to challenge the enforceability of these covenants he said he had not been provided with any consideration for them. The Company’s response was to suggest that there had been consideration on one of three grounds, namely:

  1. Because the covenants were introduced as part of a package, under which benefits were conferred, including a pay rise.
  2. Through Sendell’s continued employment in the months following production of the contract of employment.
  3. Because consideration passed, through the Company continuing to employ Sendell, after the draft contract of employment was issued, and/or after he signed.

In the event the Judge was having none of it. He did not believe Sendell received any consideration either for his agreeing to enter into the contract of employment, or in return for his accepting the contractual restrictions they contained.

To be learned from this case, is that in future, when revising contracts of employment for existing employees, employers must look to identify what benefit the employee is actually receiving in return for entering into new restrictions. In that context, a good example of a benefit for this purpose might be a promotion. Other possibilities include a pay rise or health insurance, but because such benefits may have been afforded anyway, it will be important to identify the fact that these were specifically offered in return for the restrictions.

There has been discussion over the years as to how “much” consideration is required. It is a moot point, with little specific authority to guide us on this particular issue. Best practice is to ensure that consideration involves real monetary or other benefit, and that consideration is substantial rather than nominal. The judgment did not come down one way or the other in this respect, save to say that if it had been a point for the Judge to decide, he said he thought the “adequacy” or otherwise of any consideration would have been a “factor relevant to the reasonableness of the restrictive covenant”.

For practical purposes, I would suggest that if an employer is concerned to maximise its prospects of successfully enforcing a restrictive covenant, it makes sense to provide significant consideration, so that the Court can be assured both parties recognised at the time they were entered into, that the covenants were of importance to the employer, and by corollary, if they are to be enforced, to the employee as well.

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