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An unenforceable non-compete clause does not later become enforceable, even if circumstances change

If a non-compete clause is unreasonable, and therefore unenforceable when the employment contract is signed, it does not later become enforceable if circumstances later change making it reasonable, the High Court has ruled.

In 2000, an employee was recruited at a salary of £35,000, and his employment contract required him to give one month’s notice if he left. It also contained a non-compete clause to the effect that he could not work for a competitor within 12 months of leaving.

In 2005, following various promotions, he signed a variation of his terms of employment stating his new salary to be £80,000 and increasing his notice period to three months, but otherwise stating that “all other terms and conditions outlined in my original documentation remain unchanged”.

In April 2012, he gave three months’ notice that he was leaving to work for a competitor. His employer summarily dismissed him and applied for an injunction to stop him working for the competitor for 12 months, relying on the non-compete clause.

A non-compete clause is not legally enforceable unless it is reasonable. Whether or not it is reasonable should, under current law, be decided by reference to the circumstances at the time it was entered into.

The employee argued that when the non-compete clause had been entered into, a 12-month prohibition against working for a competitor was unreasonable given his relatively junior status. The employer countered that his acknowledgement in 2005 (that terms and conditions in the original documentation remained unchanged) meant the non-compete clause was agreed to afresh and, given his seniority at that time, the 12-month prohibition was reasonable and enforceable.

The High Court ruled that if a non-compete clause is unreasonable and therefore unenforceable at the time it is entered into, that is the end of the matter. The fact that the clause would have been reasonable if the employee had agreed to it at some later date, when his circumstances had changed, does not mean it is then revived or resurrected as on that date. That the employee had agreed his ‘original terms and conditions remain unchanged’ did not help the employer because, under that wording, a term or condition that was ineffective and unenforceable in the original documentation remained so.

Recommendations

Employers should review the reasonableness of non-compete and similar clauses every time an employee’s duties change and/or they are promoted, to ensure they remain enforceable in the new circumstances. If in doubt, the employee should be asked to agree to new clauses.

Case ref: PAT Systems v Neilly [2012] EWHC 2609 (QB)

Jonathan Waters is the founder of Helix Law. Before qualifying as a Solicitor he worked in industry and in investment banking for over a decade. He was also the Partner in charge of Commercial Litigation, Employment Law and Property Litigation at Stephen Rimmer LLP. Jonathan has wide experience of helping and advising businesses to avoid or to deal with commercial disputes.

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