News | October 31, 2018

Restrictive covenants: why it is important to get employment contracts signed (and other vital lessons)

Tenon FM Limited v Susanne Cawley (and others)

Tenon applied for an interlocutory injunction against Ms Cawley, seeking to enforce restrictive covenants in her contract of employment in order to prevent her from working for a competitor, and also to prevent her new employer from inducing a breach of contract by employing Ms Cawley.

Tenon’s application failed completely:

(i) The main reason was that, although they evidenced three examples of a contract of employment for Ms Cawley, dated 2008, 2011 and 2012, the contracts that they relied upon, namely those dated 2011 and/or 2012, stated that they were to be “effective from the date of signature”. However, Tenon could not produce any evidence that Ms Cawley had signed the contracts, nor did they have any evidence to counter Ms Cawley’s assertion that, when presented with the contracts, she refused to sign them because of the restrictive covenants contained within them.

(ii) Furthermore, Tenon did not present any evidence that there was any valuable, let alone adequate, consideration given to Ms Cawley in relation to new restrictive covenants introduced in the 2011 and 2012 contracts (which were the covenants they were trying to enforce). This was the case even though Ms Cawley was promoted and received salary increases that came with the additional seniority and responsibility. By the date on which Ms Cawley’s employment came to an end, she was a senior employee, namely Operations Director. She started her employment on a salary of £45,000 per annum, in 2008, and was being paid £90,000 per annum when she left.

As a result, the Judge was able to conclude, without any hesitation, that Tenon failed to establish that there was a serious issue to be tried (which is the first legal hurdle in most injunction applications).

Although the Judge confirmed that:

“An unsigned contract may be the best evidence of the terms agreed between employer and employee where there is no evidence to the contrary“.

He also held that:

An exception to this is in relation to the restrictive covenants where an unsigned contract may mean the restrictive covenants will not be enforced by the Court“.

Another nail in Tenon’s coffin was an email in December 2012 from Tenon’s then HR manager to Ms Cawley, saying that she needed to sign her new contract, attaching a copy of it and asking her to print off two copies and to sign both of them.  Unfortunately, there was no evidence that Ms Cawley had ever replied to this email, nor any evidence that the email, or the contract attached to it, was on Ms Cawley’s personnel file. Furthermore, the HR Manager had left Tenon’s employment only a matter of months before they commenced the legal action against Ms Cawley and yet Tenon failed to contact her to ask her to give a witness statement to counter Ms Cawley’s evidence that she had specifically refused to sign because of the covenants. This failure allowed the Judge to infer that the HR Manager’s evidence may not have supported Tenon’s case.

Key lessons

  1. It is basic HR practice to ensure that employees, particularly senior people, sign documentation – there should be no compunction about chasing them to do so.
  2. If an employee objects to signing a new contractual document, it is vital to have a record of the reasons why in a file note or email.
  3. Contracts that are stated to be “effective from the date of signature” are not ideal in an employment context.
  4. In the absence of a signed contract, the employer must be able to produce clear evidence that the employee impliedly accepted the terms of the contract containing the restrictive covenants, e.g. by accepting a promotion and pay rise.
  5. Introducing new restrictive covenants during employment requires the employer to give consideration in the legal sense i.e. a valuable promise in return. Merely promising continued employment is not enough.  A pay rise or promotion may also not be enough if not specifically linked to the new restrictions.