Adequacy of Consideration for Restrictive Covenants: Decorus Ltd v Daniel Penfold and Procure Store Ltd

The facts of Decorus

Mr Penfold (“D1”) was employed as a sales manager at Decorus Ltd (“C”), an IT reselling company. He resigned to establish his own company, Procure Store Limited (“D2”), with the objective of competing with Decorus. D1 admitted accessing confidential information during the course of his employment. He approached C’s existing clients, informed them he was setting up his own business, and deliberately undercut his employer’s prices in order to secure their custom. Unsurprisingly, the Judge concluded this conduct breached the employee’s duty of fidelity (at §52), and that there was an equitable duty upon D1 and D2 not to use the information to their benefit (at §94). More significantly however, C sought to enforce a post-termination restrictive covenant (“PTR”) in D1’s employment contract, and claimed damages for breach.

The post-termination restrictive covenant

When D1 joined C in 2012 he signed a contract with relatively onerous non-compete and non-solicitation clauses. It is trite law that clauses in restraint of trade are prima facie unenforceable unless the employer can show that they do no more than is reasonably necessary to protect the employer’s business interests, and are in the public interest (Herbert Morris Limited v Saxelby [1916] 1 AC 688, per Lord Atkinson at 706). The clause in the 2012 contract may not have met that standard, and as such, may have been unenforceable against D1. However, in May 2013 D1 signed a new contract with amended terms, including a more nuanced PTR. Significantly, the duration of the non-compete and non-solicitation clauses in the 2012 contract was reduced from nine months to six. An HR consultant to C gave evidence that the nine-month clause in the 2012 contract was longer than the industry standard, and she had advised C that a six-month restraint was more likely to be enforceable (at §66). It is well established that, where a restrictive covenant is sought to be introduced or amended during an employment relationship, the change must be supported by consideration. The critical issue was therefore whether there was good consideration for the 2013 amendment. 

A similar issue was considered in Sendall. In that case, the employee was not initially subject to a written contract. A written contract was eventually introduced which included, among other terms, a restrictive covenant. It was argued for the employer that "the covenants contained in the contract of employment were supported by consideration, because they were introduced as part of a package under which benefits were conferred upon [the employee], including a pay rise. Alternatively, it is said that consideration can be found in his continued employment in the months after the contract of employment was produced" (at §72). Rejecting that argument, HH Judge Stephen Davies (sitting as a Judge of the High Court) held in Sendall that there was insufficient evidence that the new contractual terms and the pay rise were linked, and that it had not been “made clear to [the employee] that the increase was conditional upon his accepting the contract of employment” (at §81). The Judge held that the PTR was not supported by consideration.  

The circumstances in which the contract was varied in Decorus were very similar to those in Sendall. In both cases, there was a gap of around three weeks between the new contract and the employee receiving a pay rise. In both cases, the bulk of thecontractual terms remained unchanged both before and after the variation. And in both cases, a period of consultation had preceded the introduction of the new terms. Yet, in HH Judge Molyneux’s judgment, the combination of circumstances in Decorus constituted valid consideration (at §72). A similar outcome was reached in Pickwell & Anor v Pro Cam CP Ltd [2016] IRLR 761, where HH Judge Curran QC (sitting as a Judge of the High Court) distinguished Sendall and found that there was good consideration for a newly introduced restraint clause.

The judgment in Sendall was cited in passing in Decorus (at §57), but without reference to the similarities between them. Are the two cases necessarily inconsistent, or can they be reconciled? Although the initial PTR in Decorus may have appeared more onerous than its successor provision, it would probably have been less onerous in practice. This is because the more onerous the PTR, the less likely it is to be enforceable. Thus, a variation to an employment contract which introduces an ostensibly less onerous PTR, may have the paradoxical effect of becoming more onerous for the employee. It replaces an unenforceable PTR with an enforceable one. Decorus can perhaps be distinguished from Sendall on the basis that the contractual amendment in Sendall included a PTR for the first time, whereas the variation in Decorus simply amended an existing PTR. Since neither judgment has been appealed, however, we are unlikely to find out for some time.

The full judgment can be read here.