Covenants Fall Away After Repudiation: Brown v Neon Management Services Ltd [2018] EWHC 2137 (QB)

Three arguments are commonly relied on by employees seeking to resist the enforcement of restrictive covenants: (i) the covenant is unenforceable as an unreasonable restraint of trade; (ii) the employee’s proposed employment would not involve a breach of the covenant; and (iii) the covenant is no longer enforceable (if it ever was) because the employer has repudiated the contract. It is argument (iii) that is sometimes referred to as the General Billposting Rule after the 1909 House of Lords case of that name. The continuing validity of the rule had been called into question in later cases, but a challenge to the rule has recently been rejected by the High Court in Brown. Nevertheless, questions about whether the rule has survived later developments in the law are likely to remain until the Supreme Court considers the issue.

The General Billposting Rule

In General Billposting Co Ltd v Atkinson [1909] AC 118, Mr Atkinson successfully sued his employer for damages, representing a year’s salary and bonus, after he was dismissed without notice. When the company later sued Atkinson for damages for breaching a restrictive covenant in his contract, the House of Lords dismissed the claim. Lord Collins said that because the company dismissed Atkinson in deliberate disregard of the terms of the contract, the employee was justified in “treating himself as absolved from the further performance of it on his part”.

Developments in the law after General Billposting v Atkinson

The strongest criticism of the General Billposting Rule was advanced by Phillips LJ (as he then was) in Rock Refrigeration Ltd v Jones [1997] ICR 938. He declared: “I have concluded that the rule in General Billposting accords neither with current legal principle nor with the requirements of business efficacy”. He did not accept that it is unreasonable for an employer to seek to impose restraints on his employee that will subsist, even should the employment come to an end as a consequence of a repudiation by the employer. On the contrary, it seemed to Phillips LJ commercially desirable that it should be possible to achieve this end. He added: “I think it at least arguable that, having regard to the subsequent development of this area of the law, not every restrictive covenant will be discharged upon a repudiatory termination of the employment”. However, it was not necessary to resolve that issue in Rock Refrigeration. Later cases have echoed this trend. In Croesus Financial Services Ltd v Bradshaw [2013] EWHC 3685 (QB), Simler J (as she then was) said at [88]: “The time may have come to revisit the [General Billposting Rule] but in light of my findings, this is not the appropriate case to do it”.

The facts in Brown

Three employees complained that their employer breached their contracts of employment by, amongst other things, failing to pay salary increases and discretionary bonuses that had been awarded to them, making the salary increases and bonuses conditional upon acceptance of detrimental new contractual terms and the removal of profit commission agreed at the time of their recruitment [2]. The employees commenced proceedings seeking (i) damages, and (ii) declarations that they were wrongfully dismissed, with the effect that contractual post-termination restrictions (“PTRs”) fall away in accordance with the General Billposting Rule [3].

The decision in Brown

The trial of the claim was expedited and heard in July 2018. The judgment of Choudhury J was handed down in August 2018. The judge held that (i) Neon was in repudiatory breach of the claimants’ respective contracts of employment; (ii) the claimants accepted that repudiatory breach and were thereby wrongfully dismissed; and (iii) the claimants no longer owed obligations under those contracts, including the PTRs, which fell away as a result of the repudiation [186]. He also awarded damages to the claimants.

The General Billposting Rule applied in Brown

The defendants invited the judge to reject the General Billposting Rule [170]. It was argued on their behalf that there had been significant judicial comment to the effect that the General Billposting Rule should be revisited, citing Croesus, Geys v Société Générale [2013] 1 AC 523 at [141] (Lord Sumption), [68] (Lord Wilson) and Rock Refrigeration.

In Choudhury J’s judgment, none of these judicial comments, all of which were obiter, provides a firm foundation for setting aside such a long-established rule as the General Billposting Rule, particularly where, as in this case, it is the repudiator who seeks to enforce the PTRs against the innocent parties [171].

Apart from the fact these authorities come nowhere close to setting aside the General Billposting Rule, a further difficulty for Neon was that the Restrictive Covenant Agreement did not contain any provision seeking to preserve the PTRs in the event of repudiation. Rather, it provided “Notwithstanding the lawful termination of the employment contract, this agreement will remain in full force and effect” (emphasis added) [173]. The natural corollary of that provision was the recognition that the PTRs would not survive the unlawful termination of the employment contract. Thus, both on the construction of the relevant provision and on the basis of the General Billposting Rule, the PTRs in this case fell away as a result of the defendants’ repudiation of the contracts of employment [174].