The Supreme Court looks at restrictive covenants for the first time in over 100 years in Tillman v Egon Zehnder Ltd  UKSC 32 SC
We often advise our clients on the enforceability of restrictive covenants and what may classify as a legitimate business interest to warrant protection e.g. confidential information or business connections.
In order to enforce a covenant, an employer may seek an injunction from the court to prevent the employee from breaching it. The court will look at the reasonableness of the covenant when assessing whether or not it is enforceable. In doing this, the reasonableness of a restrictive covenant is determined looking back to the time it was agreed between the parties, not at the time that an employer seeks to enforce it. This means that the courts will not rewrite a poorly drafted clause or add words to overcome any ambiguity.
If part of a clause is too wide, this may render the whole covenant unenforceable unless the clause can be broken up. Tillman v Egon Zehnder Ltd looks closely at severance of clauses.
The Supreme Court allowed the appeal in this case and held that a six-month non-compete clause was enforceable because the unenforceable part of the clause was capable of being severed.
Ms Tillman resigned from her position in 2017. She told Egon Zehnder that her new role was with a competitor firm however she intended to comply with the restrictive covenants in her contract of employment – apart from the six-month non-compete clause, contending that the clause was void as it was an unreasonable restraint of trade (restraint of trade is a common law doctrine relating to the enforceability of contractual restrictions on freedom to conduct business and restrictive covenants in employment contracts are worthless if they are so broad as to amount to an unlawful restraint of trade).
The clause stipulated that Ms Tillman should not “directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of [Egon Zehnder]”.
She argued that the clause prevented her from being even a minority shareholder in a competitor business and was too wide and unenforceable. Zehnder did not accept that the clause prevented her from being a shareholder but stated that that part of the clause should be severed and the remainder of it should remain enforceable. Egon Zehnder brought proceedings in the High Court for an injunction to enforce the non-compete clause.
The High Court held that the non-compete clause did not prevent Ms Tillman from being a shareholder in a competitor’s business and they granted an injunction that enforced the covenant – restraining her from working for the competitor firm for the six-month period stipulated in the clause.
Ms Tillman appealed to the Court of Appeal.
The Court of Appeal reversed the decision, concluding that the non-compete clause prohibited shareholdings and as such, was impermissibly wide and was in restraint of trade unless it could be severed.
In the Court of Appeal’s view, the words could not be severed as the clause would still be too wide, and it is “well settled” that parts of a single covenant cannot be severed.
Egon Zehnder appealed to the Supreme Court.
Supreme Court judgment
The Supreme Court looked at this in two elements.
- They construed the clause, finding that the proper construction of the words “interested in” turn on the understanding of the “validity principle” in construing agreements. The premise of this principle is that the parties to the contract will have intended it to be valid – as I mentioned earlier, the reasonableness of a restrictive covenant is determined at the time it was agreed by the parties. Unsurprisingly, the Supreme Court found that the word “interested” it covers a shareholding. The clause was therefore an unreasonable restraint of trade.
- The Supreme Court then examined the question of severance – whether or not the clause could be severed.
The Court expressed its preference for the method set out in Beckett Investment Management Group Ltd and others v Hall and others  IRLR 793 CA. Applying this method means that severance of a clause is allowed provided that three criterion are satisfied:
- The unenforceable provision must be capable of being removed without the necessity of adding to or changing what remains, known as the “blue pencil” test by lawyers.
- Are the remaining terms supported by adequate consideration?
- The removal of the unenforceable provision must “not so change the character of the contract” that it becomes “not the sort of contract” that the parties entered into at all.
The Supreme court held that the criterion were satisfied and allowed the appeal in a unanimous decision. The clause was severed therefore the non-compete covenant remained was enforceable bar the part which prevented Ms Tillman from possessing a shareholding.
What does this actually mean? Those with little interest in the legal intricacies can skip to this part!
This is an ‘employer friendly’ decision. This decision demonstrates an occasion where an employer has been able to rely on the restrictive covenant still being valid even when they have an offending term that is too wide.
It still stands that restrictive covenants will be void unless they go no further than is necessary to protect the employer’s legitimate business interests (e.g. confidential information or business connections).
Our clients will notice that contained within our restrictive covenants, is a clause that specifically defines that she clause does not prevent the employee from holding an interest – although this was a case-specific argument anyway.
Our clients will also notice the presence of an express severance clause, arguably this just mirrors the common law principle however this may have a bigger role to play than previously thought!