Consideration for Covenants

The recent UK High Court decision in Re-use Collections Limited v Sendall & May Glass Recycling Ltd, highlights to employers that new restrictive covenants will not be enforceable against employees unless substantial consideration is provided to the employee in return for agreeing to the new covenants. For the employee just to continue working will not be sufficient for the individual to be bound by the new covenants. 

Introduction 

Employers are well advised regularly to review the restrictive covenants in their employees’ employment contracts to ensure that they remain appropriately drafted and enforceable. This may be particularly appropriate in relation to businesses which employers acquire. Any contract review exercise needs to be carefully managed to ensure that employees validly agree to any changes proposed. One trap for the unwary can be where new restrictive covenants are introduced in re-issued contracts and without any specific payment or other benefit being offered in return. Where covenants are not introduced as part of a revised package involving new benefits such as a pay rise, employers have often argued or assumed that continued employment provides the benefit which constitutes the "consideration" needed for the contract amendment of the introduction of new covenants to be valid and effective. Re-use Collections Limited v Sendall & May Glass Recycling Ltd demonstrates the dangers for employers in this area. 

Background 

Mr Sendall worked for a glass making business, Re-use Collections Limited (“Re-use”). He had been employed since 1980 and until 2000 the business had been in the ownership of his family. Prior to 2012, Mr Sendall did not have a written contract of employment. However, in October of that year he was asked to sign a contract by Re-Use containing specific provisions protecting confidential information as well as new post-termination restrictive covenants. After some discussion, Mr Sendall signed the contract in February 2013. Soon after signing the contract in March 2013, he gave notice of his resignation, which was soon followed by the resignation of his two sons. Re-use launched an investigation and discovered that Mr Sendall and his sons were involved in setting up a competing business, May Glass Recycling (“May Glass”). 

Re-use claimed, among other things, that Mr Sendall had breached his express and implied obligations to Re-use by setting up a competing company and by contacting Re-use customers and that May Glass had induced Mr Sendall’s breaches and/or had unlawfully conspired with him to do so. 

Mr Sendall argued that he had only agreed to provide finance to enable his sons to set up May Glass, which they were entitled to do as they were not subject to any post- termination restrictive covenants under their contracts with Re-use. Mr Sendall also argued that the post-termination restrictive covenants in his new 2013 contract were not binding upon him on the basis that no consideration was provided to him when he signed that new contract. 

Is consideration required for new covenants 

A key element of the formation of a binding contract or a valid and binding amendment to an existing contract imposing revised obligations on an employee is the provision of “consideration” i.e. some benefit provided in return for the obligation which the employee accepts. Re-use argued that the covenants to which Mr Sendall agreed in his new contract in 2013 were supported by consideration on the basis that Mr Sendall received a pay rise in connection with agreeing to the covenants and that the covenants were introduced as part of a package under which new benefits were conferred on Mr Sendall including life assurance, medical insurance and a company car. In the alternative, Re-use argued that consideration was provided by the continued employment of Mr Sendall. 

Decision 

The High Court rejected the argument that the pay rise and new additional benefits were provided as consideration for the covenants to which Mr Sendall agreed. The majority of the benefits in question were in fact already enjoyed by Mr Sendall. Also, although Mr Sendall had received a £3,500 pay rise, this was not reflected in the new contract and the Court held on the evidence that the pay rise was not awarded in connection with his acceptance of the new contract and its terms. 

The Court also rejected the alternative argument that Mr Sendall’s continued employment by Re-use constituted consideration for his agreement to the new covenants. The Court considered that continued employment would only be sufficient consideration if his future employment had been conditional on him signing the contract (which it was not). 

The Court therefore ruled that on the evidence no consideration had been provided by Re-use and therefore it was not entitled to enforce the post-termination restrictions in the contract. The Court did, however, find that Mr Sendall was in breach of his duty of fidelity and good faith by virtue of his conduct during his employment and awarded Re-use damages of £51,822.20 recoverable from Mr Sendall and May Glass. 

Comment 

This case provides an important reminder to employers that, when seeking introduce new restrictive covenants for their employees, substantial consideration must be provided in return. Such consideration may consist, for example, of a promotion, a salary increase, new benefits or a bonus. It should also be made clear that the consideration is conditional on acceptance of the covenants. 

Continued employment will only be sufficient consideration if it is dependent on acceptance of the covenants. To rely on this argument the employer would need to be willing to dismiss the employee if the individual does not agree to the covenants and this may be an inappropriate tactic in relation to the introduction of new covenants, not least given the consequent risk of dismissal claims and the loss of key employees. 

To summarise, if an employer wishes to introduce new restrictive covenants it should ensure that valuable consideration is provided in return and the link between the consideration and the covenants should be clearly communicated to the employee and supported by documentary evidence.