Can restrictive covenants survive a repudiatory breach of contract by the employer?

Can restrictive covenants survive a repudiatory breach of contract by the employer?

In the recent case of Brown v Neon Management Services Ltd, the High Court has considered whether the employees’ restrictive covenants were enforceable following a repudiatory breach of contract by their employer. The wording of the relevant employment contracts stated that the restrictions would remain in effect following a lawful termination of the contract. By implication, the unlawful termination of the contract by the employer meant that the restrictions were not contractually preserved. A review of relevant case law, together with the wording of the contract, led the court to find that the employer could not enforce the restrictions following its repudiatory breach of contract.

Facts

The claimants in this case were employed by Neon Management Services Ltd (Neon). They tendered their resignations, giving their full notice, following alleged repudiatory breaches of contract by Neon, including failing to pay salary increases and removal of profit commission. After serving their notice, Neon committed further alleged repudiatory breaches of contract by, amongst other things, making unjustified findings of misconduct and reporting that conduct to their regulator, Lloyds. The claimants accepted these subsequent breaches and treated their employment as terminated with immediate effect.

The claimants brought claims in the High Court seeking damages and declarations that they were wrongfully dismissed with the effect that their post termination restrictions would fall away.

The decision

The court found in favour of the claimants and made three key findings:

Affirmation by resigning on notice

Firstly, the court found that the claimants had affirmed their contracts of employment by resigning on notice the first time. In one case, this involved the employee working for a further 12 months. The court held that it was not possible to keep the right to claim constructive dismissal alive for this period of time.

However, the court found that in this case, the affirmation was irrelevant because the subsequent breaches of contract by Neon, their employer, constituted a repudiatory breach which they had not affirmed.

Reporting to the regulator was a repudiatory breach

The court found that the employer’s conduct in raising concerns with Lloyds was without proper foundation and was done in the knowledge that it would harm the claimants’ professional reputations. This action by itself could amount to a repudiatory breach of contract. This, together with the employer’s other acts, entitled the employees to treat themselves as constructively dismissed in response. 

The post termination restrictions fell away

The court reviewed the established case law principle that restrictive covenants fall away where the employer has repudiated the contract of employment and the employee has resigned as a response to this breach. The court found that none of the cases that it considered justified setting aside this rule. However, there was some support for looking to the contract terms to establish the treatment of the restrictions. In this case, the contract specifically preserved the restrictions where there was a lawful termination. The court found that the corollary of that provision was that the restrictions would not survive the unlawful termination of the contract.

Comment

Employers frequently fall foul of principle that restrictive covenants cannot survive a fundamental breach of contract. For example, a dismissal without notice for alleged gross misconduct risks restrictions falling away where it is subsequently found that summary dismissal was not justified. Simply paying in lieu of notice, where there is no contractual right to do so, also risks the restrictions falling away.

This case leaves open the question of whether an employer could preserve restrictive covenants in the event of a repudiatory breach by having a specific contractual provision making the restrictions bite in the event of any termination, however it occurs, whether lawful or unlawful. On the basis of this case, employers may wish to review their employment contracts to provide for this.

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