Unsigned Restrictive Covenants in Employment Contracts May Be Unenforceable

The recent High Court case of Tenon FM Ltd v Cawley [2018] EWHC 1972 (QB) emphasises the importance of having signed employment contracts, in particular, where they contain post-termination restrictions.

Susan Cawley was employed by Tenon in 2008 and worked her way up through the company hierarchy, eventually reaching the position of Operations Director.  In 2011 she had been given a new employment contract which contained more onerous restrictions than her original contract.  A further contract was also issued in 2012 containing identical restrictions.

After Ms Cawley resigned in May 2018, Tenon discovered that she had attempted to persuade a colleague to join her future employer and so it sought an interim injunction in the High Court to enforce the post-termination restrictions against her.

Despite searching, Tenon was unable to find signed copies of any of the contracts.  Ms Cawley gave evidence that this was because she had refused to sign them because she did not agree to the post termination restrictions they contained.

The High Court had to decide whether Tenon had established that there was a serious issue to be tried and whether they were likely to succeed at the final trial in establishing that the restrictive covenants actually applied to Ms Cawley.

His Honour Judge Bidder QC considered that Tenon fell at the first hurdle because it could not demonstrate that there was a signed contract or that it had provided any valuable consideration for the more onerous restrictive covenants in the later contracts.  He thought it remarkable that a large organisation such as Tenon, with an HR department and an experienced HR manager (who had since left the company), could not locate even one signed copy of Ms Cawley’s employment contract.  He also criticised Tenon’s failure to contact the former HR manager to give evidence to rebut Ms Cawley’s version of events.

He took into account that acceptance of the terms of a contract can be inferred from conduct, but the case law relied upon by Tenon suggested that it was only possible to infer an employee’s agreement to changes by continuing to work where those changes have immediate effect.  In this case, the changes would only take effect after Ms Cawley’s employment had ended.  He also noted that the 2011 and 2012 contracts expressly stated that they were effective from signature, suggesting that they were not binding if unsigned.

The judge further rejected Tenon’s argument that their agreement to continue employing Ms Cawley could be effective consideration for the new restrictions, because there was no authority for such an argument, particularly where the restrictions were more onerous.

Tenon’s costs in the proceedings were £200,000, a sum that in the view of the judge was ‘completely disproportionate’.  Tenon’s aggressive conduct in pursuing the application was a further factor in not granting the injunctive relief.  Therefore, this was not only an unsuccessful exercise for the employer, but an extremely expensive one.

Conclusions

Pam Sidhu comments:Employers need to ensure that employment contracts are signed by all employees, but especially by senior employees who are more likely to be able to cause damage to the business if they leave, because it will not be easy to persuade a court to enforce restrictions in a contract that has not been signed by an employee.  If a business attempts to introduce new post-termination restrictions during employment, it must also provide adequate consideration for the employee’s agreement to enter into them and ensure that it retains evidence of such consideration.

Businesses should also make sure that all employees at a similar level have post termination restrictions in their contracts because a lack of consistency could undermine the employer’s argument that it has a legitimate business interest to protect.

For advice on any employment related matter please contact Pam Sidhu on 0121 710 5815 or  psidhu@wilkes.co.uk.  You can also reach any member of the Employment Team on 0121 233 4333.