Consideration For Restrictive Covenants
Many people might be aware of the basic contractual principles, including the rule that you must provide consideration for a contract to be enforceable, however when contracting to restrict a person’s right to work (such as including restrictive covenants in a contract of employment), the situation becomes more complex.
What is Consideration?
Consideration is one of the five key elements that a contract requires in order for it to be legally enforceable. Consideration is fundamental because contract law is based on the notion of reciprocity – in other words, a contract cannot be enforceable without something being promised in exchange.
In most cases the consideration does not need to be adequate, meaning that it does not normally matter if the consideration has very little value – meaning that theoretically you could buy a house for £1 if the owner were willing to sell it to you for that price!
However, when considering restrictive covenants in employment contracts, consideration becomes a more important and more complex element.
What are Restrictive Covenants?
Post-termination restrictive covenants are usually found in employment contracts as the employer may seek to prevent solicitation of customers, clients, suppliers, other employees, or general competition for a defined period after termination. The purpose of this type of clause is to protect the employer’s confidential information, customer connections and its workforce.
Consideration for Restrictive Covenants
The contract at the start of an employment relationship usually does not require specific consideration to restrictive covenants the employee’s salary and any other benefits that they may receive from their employer will be considered sufficient consideration.
However, consideration can become an issue when restrictive covenants are introduced later in the employment relationship. When attempting to introduce new covenants during the employment relationship, you must pay close attention to the need for consideration. In this scenario, the employee already receives their salary and benefits, so the employer needs to offer some sort of consideration alongside the new contractual obligation.
In many cases, the employee may be being promoted when a new contract is introduced and thus the consideration could be found in an increase in salary and/or the introduction of new benefits – but not always! It must be clear that receipt of the new benefits/salary increase is conditional upon the employee agreeing to the new covenants and they must not receive them if they fail to do so. For this reason it is also important to finalise the contract before the employee starts the new role, and before they receive the increased salary.
Does consideration need to be adequate?
It is not clear if consideration for entering into restrictive covenants needs to be adequate. However, in a case heard in 2015, the High Court suggested that the adequacy of consideration is relevant with regard to the reasonableness of the restrictive covenant but is not necessary to validate a change to the terms and conditions of a contract. This means that whilst the new terms of the contract may be valid, the covenants may still be unenforceable as a result of a failure to provide adequate consideration.
What about signing the contract as a deed?
If there is any doubt over whether consideration has been provided in many types of contractual arrangements, the most common solution is to execute the relevant document as a deed as this can be enforced without consideration. However, this solution isn’t available when entering into restrictive covenants. No matter how the contract is formulated, it is necessary to show that there has been consideration for a restraint of trade covenant, even when it is contained in a deed. This is particularly important when requiring an existing employee to enter into new or updated restrictive covenants.
Introducing new or amended terms for existing employees is a highly complex matter, particularly when you are trying to introduce new or updated restrictive covenants. We would always recommend that you seek specific, tailored legal advice before attempting to do so, lest you put yourself in a situation whereby you have breach the employee’s contract of employment and left yourself open to claims for breach of contract and, potentially, constructive dismissal.
If you have any queries regarding restrictive covenants, amending employees’ terms and conditions or indeed any other employment related queries, please contact our expert Charlotte Braham on 01494 521 301 for further advice.