Contracts for senior executives: Legal hotspots and potential disputes

Senior executives’ contracts of employment – including service agreements – are critical documents that define the rights and obligations of both the executive and the company they serve.

These agreements are complex, often containing a range of clauses aimed at protecting the interests of both parties involved. However, due to their intricate nature, the high stakes involved, and despite careful drafting, the agreements are prone to disputes that can lead to protracted legal battles.

This guide is written for UK senior executives. It explores some key contractual issues that are likely to ignite legal conflicts between you and your employer and offers some practical guidance on how best to prevent such conflicts from occurring.

See also our overview for employees on employment contracts and separate guide on changing your contract. Our other related guides are highlighted throughout.

1. Remuneration and benefits

Among the primary sources of contention arising from the contracts of senior executives are remuneration and benefits. For example:

• The inclusion of performance-related bonuses, stock options, pension schemes, and termination clauses can create ambiguity and trigger disputes between you and your employer. 
• Disagreements may arise over the interpretation of performance measures, triggering claims by you of unfair treatment or wrongful denial of incentives. 
• Ambiguously worded termination clauses can also spark litigation if you think you are being unfairly treated/dismissed or unjustly denied your contractual entitlements.

Practical suggestions when negotiating your remuneration package

• Clearly define your base salary, bonuses, commission structure, and any other forms of remuneration, ensuring they are competitive and aligned with industry standards.
• Include a provision for regular performance reviews and potential salary increases based on predefined criteria.
• Discuss and negotiate any specific benefits or perks you value, such as healthcare, stock options, retirement plans, or relocation assistance.

 

2. Performance evaluation and measures

The criteria set out in your contract and used to evaluate your performance can also lead to disputes. If the metrics for assessing your performance are unclear, or subjective, or if you perceive them as unfair, you may challenge their appraisal and related consequences, such as bonus awards or promotions. 

A robust and transparent performance evaluation mechanism is crucial to avoid potential legal disputes which may arise if you feel that your contributions have been undervalued or unfairly assessed.

Practical steps for performance evaluation clauses

• Request clarity on how your performance will be evaluated and what metrics will be used. This can help prevent subjective evaluations
• Propose regular performance discussions with your supervisor or an appointed mentor to ensure ongoing feedback and support.
• Consider including a provision for a performance improvement plan (PIP) to address any performance concerns before they escalate.

3. Restrictive covenants clauses

Restrictive covenants, such as non-compete and non-solicitation clauses, are designed to protect the company’s interests after you have left their employment, and to prevent you from joining rival companies or poaching key employees and clients.

While these provisions are enforceable in the UK if they are reasonable in scope and duration, it can be challenging to strike the right balance between protecting the company’s legitimate business interests and not unduly restricting your future career prospects. Disputes often arise when you believe these covenants are too restrictive or onerous and may limit your ability to work in your chosen industry, potentially resulting in contested claims and injunctions against you.

Practical tips on restrictive covenants

• Understand any existing non-compete, non-solicitation, or non-disclosure agreements and their potential impact on your future employment.
• Request clarity on the scope, duration, and geographic limitations of any proposed restrictive covenants.
• Negotiate reasonable limitations to ensure they do not unduly restrict your career opportunities or professional growth.

4. Termination and severance

Termination clauses are pivotal components of executives’ employment contracts, specifying the circumstances under which your employment may be terminated, along with your corresponding severance entitlements. Ambiguities in these clauses can lead to disputes, particularly if you challenge your dismissal on grounds such as unfairness, discrimination, or breach of contract.

You may also contest the enforceability of certain termination clauses that you believe are not in line with statutory employment rights or industry norms. Disputes can also arise if you make allegations of wrongful termination or constructive dismissal, claiming that your employer made working conditions intolerable, effectively forcing you to resign.

Additionally, severance packages, including notice periods, pay in lieu of notice, and post-employment restrictive covenants, can become contentious points of negotiation and potential litigation.

Practical guidance on termination clauses

• Understand any existing non-compete, non-deal, non-solicitation, or non-disclosure provisions/agreements and their potential impact on your future employment.
• Request clarity on the scope, duration, and geographic limitations of any proposed restrictive covenants.
• Negotiate reasonable limitations to ensure they do not unduly restrict your career opportunities or professional growth.

5. Change in control and mergers

Senior executive contracts often include provisions that address the impact of change in control or corporate mergers. These clauses usually outline your rights and obligations when a company undergoes a merger or change in control, and can become a focal point of dispute. 

Change-in-control clauses often trigger certain benefits or entitlements for you, such as accelerated vesting of equity or enhanced severance pay. However, disagreements may occur over the interpretation of these provisions, particularly if your role or responsibilities are altered significantly following the transaction. Contractual language that is clear and concise is crucial in mitigating potential conflicts.

Practical steps on change in control issues

• Understand the implications of a change in control on your position, remuneration, and job security.
• Discuss and negotiate provisions that address your concerns in case of a merger, acquisition, or significant organisational change.
• Consider requesting protections such as severance packages or accelerated vesting of stock options in the event of a change in control.

6. Confidentiality and intellectual property

Protection of sensitive information and intellectual property (IP) is essential in executive contracts, especially in roles where your access to proprietary knowledge is commonplace. Your contract is likely to include robust confidentiality provisions to protect sensitive business data. 

It is advisable to question the breadth or enforceability of these clauses. This is particularly important if they are likely to hinder your ability to pursue future employment opportunities, or if you are accused of breaching confidentiality obligations by sharing sensitive information with competitors or using company resources to develop personal intellectual property.  

Similarly, conflicts can arise over ownership and protection of intellectual property developed during your tenure and in this respect, it’s vital clearly to define rights and responsibilities in order to avoid disputes.

Practical tips on confidentiality clauses

• Ensure that your contract includes robust confidentiality provisions.
• Clarify the scope and enforceability of the definition of confidential information and the obligations regarding its protection during and after your employment.
• Discuss any concerns or potential conflicts with existing confidentiality obligations you may have from previous employers.

Practical tips on intellectual property clauses

• Ensure that your contract includes a clear outline of the specific types of intellectual property that may arise during your tenure, e.g patents, copyrights, trademarks, trade secrets, or any innovations you create. It should also specify who will own the rights to these creations.
• Negotiate to retain ownership of any intellectual property that is not directly related to your role, or was created outside your working hours, or that you created/owned before joining the company.
• If the company is to own the IP, negotiate fair compensation for transferring those rights. This can be in the form of royalties, bonuses, or other monetary benefits.

7. Dispute resolution mechanisms

Determining the appropriate mechanism for resolving disputes is another critical aspect of senior executives’ contracts. The inclusion of arbitration or alternative dispute resolution (ADR) clauses can significantly impact the resolution process. You or your employer may dispute the enforceability or fairness of such mechanisms, leading to legal challenges that can potentially delay or hinder the resolution of conflicts.

Practical tips on dispute resolution clauses

• Discuss your preferred method of dispute resolution, such as mediation, arbitration, or litigation, and negotiate clauses that align with your preferences.
• Consider including a provision for alternative dispute resolution methods before resorting to legal action.
• Consult an experienced employment lawyer to ensure the dispute resolution provisions are fair and reasonable.

 

Next steps

Senior executives’ contracts in the United Kingdom are complex legal instruments outlining the terms of your employment. However, if the intricacies of such contracts are not addressed adequately at the drafting stages, such a failure may lead to legal disputes between you and your employer.

Key issues such as those outlined in this guide, are among the most common sources of contention. Monaco Solicitors can advise you on them and draft relevant contractual clauses on your behalf to minimise the risk of legal disputes.

For a confidential consultation with one of our Senior Solicitors, get in touch:

• via this link
• by phone: 020 7717 5259
• by email: communications@monacosolicitors.co.uk