Two recent cases have emphasised the importance of ensuring that your contracts are up to date and fit for purpose.
You probably know that a restrictive covenant must be reasonable in order for a court to consider enforcing it. But did you know that the reasonableness of a restriction will be assessed by reference to the date it was entered into, rather than the date you try to enforce it?
So a court is unlikely to consider that the 12 month non-compete you imposed on the office junior 20 years ago is enforceable, even if he is now the Managing Director with access to all your confidential information.
Similarly, that junior Account Manager who is now your Head of Sales but has not had a new contract in 10 years, she might be able to walk off to a competitor with half of your clients if you have not amended her post-termination restrictions (or asked her to affirm her original covenants).
The judgment in Patsystems v Neilly emphasises the importance of considering restrictive covenants carefully and updating them regularly. Here, a covenant imposed on a junior employee in 2000 which would have been unenforceable at the time was not saved, when it came to be tested five years later, by the employee’s subsequent promotion to a more senior position.
The importance of updating contractual terms as an employee’s role develops was also emphasised in Ranson v Customer Systems . Here, a Divisional Manager who had made a rapid rise through the ranks (to the extent that he was responsible, one way or another, for 59% of the group’s total revenue) was not prevented from telling clients during his notice period that he was leaving and that he intended to compete with the company. He also had no duty to report his approaches to the company.
The court held that the contract is the appropriate starting point for determining the duties and obligations which apply to an employee. In this case, Mr Ranson was, despite his importance to the business, not subject to any such duties.
Get protected: lessons from Patsystems and Ranson:
- Think carefully when imposing restrictive covenants to ensure they are fit for purpose at the time
- Review existing contracts regularly to ensure that restrictions and duties remain appropriate
- Use salary increases, promotions, contract variations and departures as an opportunity to affirm existing or impose new covenants/duties
- Review the contracts for employees below director level (who will not be subject to implied fiduciary duties) carefully and ensure that their contracts are appropriate
- If appropriate, include express fiduciary and fidelity duties (for non-directors) which are appropriate to the employee’s individual role