Case update (2): Contracts of employment – consider consideration

Summary: Can an employer enforce restrictive covenants against a former employee where there has been no specific consideration?

No, held the High Court in Re-use Collections Limited v Sendall & May Glass Recycling Ltd available here.

Facts: The employee, Mr Sendall, was employed by Re-use Collections as a depot manager. He had signed a contract which included restrictive covenants part way through his employment when the employer was revising its standard contract and implementing a salary review. Whilst employed Mr Sendall was involved in setting up a competing business, May Glass. Mr Sendall resigned and the employer claimed that he had acted in breach, amongst other things, of the restrictive covenants.

The High Court held that Mr Sendall was not bound by the restrictive covenants. The employer did not provide any consideration (payment/benefit) for agreeing the new terms and the length of the covenants was unreasonable. Therefore, they could not be enforced, despite having been signed by the employee. The High Court rejected the employer’s argument that the consideration was either the pay rise, some new benefits offered under the revised contract or the employee’s continued employment. The High Court found that the employee was actually already entitled to the majority of the new benefits set out in the revised contract and the employer had also failed to make clear that either the pay rise or the employee’s continued employment was conditional upon his acceptance of the new restrictive covenants.

Implications:  Employers introducing new contract terms, especially those that do not take immediate effect such as covenants, must ensure there is appropriate consideration for the change. Relying on continued employment as consideration is riskier than offering a cash or non-cash benefit. Employers should also make employees aware that the consideration is offered in return for their acceptance of the restrictive covenants. In this case, neither a pay rise that would have been awarded anyway nor his continued employment provided appropriate consideration.