PAT Systems v Neilly

A restrictive covenant is assessed for reasonableness when it is made. If it was void from the outset, later changes to employment terms do not revive it unless the employee explicitly re-agrees to the covenant. A general agreement that existing terms remain unchanged is insufficient. A non-compete covenant must protect a legitimate business interest and go no further than reasonably necessary. A twelve-month restriction on competing employment was excessive on the facts, where six months would have provided adequate protection. An employer’s summary dismissal for an intended breach of an unenforceable covenant is wrongful.

PAT Systems sought to enforce a twelve-month non-compete covenant against its former senior sales employee, Graeme Neilly, who intended to join Trading Technologies, a competing business. The covenant had been contained in the employee’s 2000 contract. In 2005, his promotion and changes to remuneration and notice were recorded in a letter stating that all other terms remained unchanged.

The claimant dismissed the defendant summarily after he announced his intention to join the competitor. The defendant counterclaimed for wrongful dismissal. The central issues were whether the covenant applied, when its reasonableness fell to be assessed, whether it was enforceable, and what effect the summary dismissal had on enforcement.

1. Construction and competition. Clause 8.1 applied to employment with Trading Technologies. The two businesses sold competing trading systems to substantially the same classes of customer. Differences in products, pricing and end-users did not mean that they did not compete.

2. Date of assessment. The covenant was a restraint of trade and had to be assessed when made. The authorities, including Commercial Plastics Ltd v Vincent [1965] 1 QB 623 and Gledhow Autoparts Ltd v Delaney [1965] 1 WLR 1366, established that a covenant unreasonable when entered into was void from the outset. A later promotion or variation could justify a fresh assessment only if the covenant was explicitly re-agreed. The 2005 acknowledgment that the earlier terms remained unchanged did not unequivocally revive a covenant that was already a nullity.

3. This conclusion was reinforced by certainty and practical policy. Employees should be able to identify the point at which restrictive obligations are assumed, without reviewing their entire employment history. Employers should expressly reconsider such covenants when promotion or other substantial changes occur.

4. Alternative reasonableness conclusion. Even if the covenant had fallen to be assessed in 2005, twelve months was more than reasonably necessary to protect trade connections and confidential information. Six months would have been sufficient. The market was relatively transparent, and the claimant generally sought closer relationships with existing customers rather than access to wholly new customers.

5. Because clause 8.1 was unenforceable, the claimant’s summary dismissal on the ground that the defendant intended to breach it was wrongful. The defendant’s counterclaim therefore succeeded. The claim for enforcement was dismissed, and assessment of damages was referred to a Master if necessary. The undertaking concerning confidential information was preserved.

6. The court expressed no concluded view on the difficult questions concerning good-faith repudiatory breach or whether an employer accepting an anticipatory breach may nevertheless enforce a restrictive covenant. If the covenant had been enforceable, injunctive relief would have been granted.

The judgment records that Nicola Davies J ordered a speedy trial. No appellate decision is stated.