UK: Restrictive Covenants - Unsigned Contract

Last Updated: 13 November 2012
Article by Alison Wallace

FW Farnsworth Ltd and another v Lacy and others 2012 EWHC 2830

Mr Lacy was employed as a graduate by Northern Foods from 2000 and worked for its subsidiary Farnsworth. He was later promoted. His first contract of employment was in 2003 which did not contain any post restrictive covenants. In April 2009 he was formally promoted to site technical manager and five months later he was provided with a new contract which did contain post termination covenants and certain new benefits. He did not sign or return the contract nor raise any objections about the terms but he joined the company pension scheme which was an additional benefit not provided to him earlier.

In March 2012 he left to join a competitor and Northern Foods brought proceedings to enforce the post termination restrictions. An interim injunction was granted but at a return hearing Mr Lacy argued that he was not bound by the 2009 contract because he had not signed and returned it. Although he had joined the defined contribution pension scheme and applied for PMI cover, he was entitled to do so because he was an employee not because of the contract. The High Court held that he was bound by the contract from the date he applied for PMI cover for him and his family and not when he moved to the defined contribution pension scheme. His acceptance of the contract could not be inferred by this latter step. As the source of the PMI cover was contractual he had impliedly accepted the new contract and he was therefore bound by the covenants.

Key point: Employers should ensure that existing employees sign and return any new contractual terms issued following a change in role or otherwise.

Deferred Bonus Scheme

Singh v Cargill TSF Asia Pte Ltd 2012 SGCA 42

In this Singapore case Mr Singh was eligible for an annual discretionary bonus based on his previous year's performance. Half of the bonus was paid in cash, the other was deferred for three years. However, there was a non compete clause in place under which the deferred bonus would be forfeited if he left during that period and joined a competing business within two years of leaving. When Mr Singh left and set up in competition, he was not paid his deferred bonus and he commenced proceedings which, on appeal, were successful. He was entitled to the bonus plus interest. Cargill appealed.

The Court of Appeal was concerned with whether the non compete payment was there to incentivise the employee not to compete or whether it was taking away something the employee would otherwise have received because he had competed. The Court of Appeal decided that the non compete was a restraint of trade on the basis that the benefit which it purported to take away, being the deferred bonus, had already vested in the employee.

Key point: Incentive arrangements may be drafted and still be enforceable if the restraint is reasonable in the circumstances. In the alternative, incentive payments which lapse if the employee leaves within say a 3 year period are more likely to be enforceable in Singapore than an arrangement whereby the payment is forfeited if he engages in certain conduct after the employment terminates.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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