UK: Reasonableness Of Restrictive Covenant Must Be Judged At The Time It Was Entered Into

In Patsystems Holding Ltd v Neilly the High Court has reaffirmed the principle that the reasonableness of a restrictive covenant must be judged at the time it was entered into, rather than at the time an employer seeks to enforce it.

In 2000 Mr Neilly began work as an account manager for Patsystems, which sells financial trading software. He was on £35,000 per annum, and his contract contained a one month notice period and a 12 month non-compete clause. Five years later, Nr Neilly was promoted to the role of Director of Global Accounts. His salary was increased to £80,000 and his notice period extended to three months.

Mr Neilly signed a letter agreeing to these changes and acknowledging that all the other terms and conditions in his original contract remained unchanged. In April 2012, Mr Neilly resigned in order to take up employment with a company which Patsystems regarded as a competitor. Shortly afterwards, Patsystems summarily dismissed him and sought an injunction to enforce the non- compete clause entered into in 2000.

The High Court held that the non-compete clause was not enforceable since it was not reasonable at the time it was entered into, given Mr Neilly's status and responsibilities in 2000. The covenant would only be enforceable if Patsystems had asked for his express acceptance of the restriction in 2005 when he was promoted, or required him to sign a new agreement. Mr Neilly's acknowledgement that his previous terms remained unchanged was not enough to validate the previously invalid non-compete clause.

It is likely that the 12 month non-compete clause would have been unenforceable in any event, as a period of 6 months would have been sufficient. However, this case is a useful reminder for employers to review restrictive covenants as a matter of course when employees are promoted, and to agree any new covenants with individual employees using the correct legal procedure.

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