Worth the Paper It’s Written On?
If there is one employment law issue that is guaranteed to puzzle employers and employees alike, it is the status of an unsigned employment contract. I know this because I get asked the question, by both types of client, on a surprisingly regular basis. The surprising part is not that the question is asked (the position very much depends on the facts), but that businesses and individuals bypass this crucial stage in the recruitment or promotion process. Whatever the reason for that, neither party can safely assume that an unsigned agreement will give them the rights and protections that they would otherwise have had. In some situations, it will. Where an employee works under their contractual terms (they carry out their role, comply with their obligations, receive their salary), it will be difficult to argue that they are not entitled to a particular benefit contained in their unsigned contract, or that the contract has no legal effect. To all intents and purposes, the employee by working under their contract – and the employer by paying the employee for that work – agrees to the terms. Their conduct amounts to acceptance, as though they had signed the paperwork. However, that does not apply in all respects. One of the big issues when it comes to enforcing an unsigned contract is where that contract imposes post-termination restrictions on an employee; terms that do not apply immediately, or do not apply during the course of the employee’s employment. Can an employer rely on restrictive covenants in an unsigned employment contract to prevent a former employee from competing, poaching colleagues, or approaching customers? That was the issue decided inTenon FM Limited v Cawley, heard at the High Court this summer. Ms Cawley was Operations Director at Tenon. She had joined the business in 2008 and worked under a contract (‘the May 2008 contract’), which she didn’t sign and which contained some limited restrictive covenants. The company said that that contract was superseded by a new contract (‘the 2011 contract’), which was also unsigned. The 2011 contract contained more extensive restrictive covenants than the May 2008 contract and was said to be effective from the date of signature. Subsequently, another contract – ‘the 2012 contract’ – came to light. The restrictions in that contract mirrored those of the 2011 contract. Again, it was said to be effective from signature. And, again, no signed copy could be found. After Ms Cawley resigned from Tenon, the company was concerned that she may be in breach of her obligations. It issued injunction proceedings, relying on restrictive covenants which it claimed were enforceable against her. Ms Cawley countered this by saying that because the contract remained unsigned the restrictions contained within them were unenforceable. The High Court held that Tenon could not rely on the restrictive covenants. Key to its decision was:
- The absence of a signed contract; and
- The absence of evidence of ‘consideration’ (some benefit, such as a small pay rise) having been given to Ms Cawley in return for her entering into agreements (the 2011 and 2012 contracts) containing more onerous restrictions than appeared in the May 2008 contract.
While acceptance of specific terms can be inferred from conduct, and doesn’t have to be by signature, the position is different when it comes to post-termination restrictions. An unsigned contract can give a good indication of the agreed terms, but any restrictive covenants in that contract are unlikely to be enforceable. Similarly, where an employee has not received some benefit (consideration must be ‘adequate’) for agreeing to more onerous terms, then that too will significantly weaken an employer’s case. It is not enough that the employee simply continues to work for the employer; that will not mean that the employee has accepted the variation to her contract – especially where restraint of trade is concerned. Significantly, the Court also took account of the company’s conduct during the litigation. It considered, for example, that serving proceedings on Ms Cawley the day before her father’s funeral was unnecessary. The Court also took a dim view of the ‘wholly inadequate opportunity’ given to the defendants (including the competitor business) to take legal advice during the early stages. What does this decision mean for employers? The case hasn’t established any new law, but it has brought into focus the perils of not being on top of what is sometimes considered to be ‘mere’ administration. The Court found it remarkable that in an organisation as large as Tenon, with a dedicated HR department and an experienced HR manager at the helm, no signed contract could be found for this senior employee. This is a stark reminder to all employers to ensure that personnel files and HR processes around recruitment and promotion are up to scratch.