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Supreme Court Guidance on Restrictive Covenants

Supreme Court Guidance on Restrictive Covenants

The Supreme Court has allowed the appeal in the case of Tillman v Egon Zehnder Ltd, in what may be welcome news to employers.

Egon Zehnder (EZ), a professional services firm, specialises in executive search and recruitment. Ms Tillman was employed by them until January 2017. On commencing her employment, her contract contained various post-termination restrictions, one of which was an undertaking not to become involved with a competitor for a period of six months following the end of her employment.

The non-compete stated that Ms Tillman could not:

“directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the Company or any Group Company which were carried on at the Termination Date”

In another clause in Ms Tillman’s contract, the one relating to a prohibition on competition during her employment, there was an exception carved out which allowed Ms Tillman to possess a small holding of shares in a competitor (up to a 5% interest). Crucially, this carve out for a small shareholding was not present in the post-termination restriction.

Ms Tillman’s employment with EZ came to an end on 30 January 2017. She told EZ that she intended to start work for a competitor, and that she would adhere to the restrictive covenants in her contract, except for the non-compete clause, because she felt it was void as it essentially prevented her from working (was a restraint of trade) for the six month restricted period. Cue heated litigation…

The sequence of court proceedings was as follows:

Step one, EG asks for, and is granted, an injunction preventing Ms Tillman from taking up employment with a competitor.

Step two, Ms Tillman appeals to the Court of Appeal. The Court of Appeal held that the words ‘or interested in’, where present in the non-compete, prevented Ms Tillman from holding even a mere passive shareholding in a competitor company for a period of 6 months. This, they held, was unreasonably overreaching, and the effect was that the entire clause was unenforceable.

The Court of Appeal also took the view that it was not possible to read-out, or sever, these words, and leave the rest of the clause as enforceable. This was because “parts of a single covenant cannot be severed; it is a requirement of severance that it can only take place where there are distinct covenants… and perhaps, not even then”. They followed the mechanistic approach laid down in the historic case of Attwood v Lamont, which states that single covenants cannot be severed. The effect of that decision was that any part of a covenant that went too far could undermine the whole covenant – in this case meaning EZ couldn’t enforce the non-compete.

Step three, EZ takes the case to the Supreme Court.

The Supreme Court allowed EZ’s appeal. While they agreed with the Court of Appeal that the words “or interested in” did indeed prevent Ms Tillman from holding a passive shareholding in a competitor, they disagreed with their refusal to sever (or “blue pencil”) the words “or interested in”.

They have held that the correct approach is to sever these words, and leave the rest of the clause (which, in its view, was reasonable) as enforceable by the employer.

They have stated that their analysis is that the law allows words to be severed/blue pencilled if:

  • Without adding anything, the words can simply be crossed out; and
  • If to do so would not generate any substantive change in the wording.

Here, the words “or interested in” could and should have been severed from the covenant, and the remaining restrictions could and should have been enforceable against Ms Tillman. In reaching this conclusion, the Supreme Court has overturned the historic case of Attwood v Lamont, which had held that a restrictive covenant cannot be severed to take out an unenforceable component part.

This decision will be welcome news for employers, as this definitively allows for blue pencilling in the circumstances outlined above.

All of that said, when drafting covenants, the best way to maximise the chances of enforceability is to make sure none of the parts of any covenant goes further than is absolutely necessary to protect the business, taking account of the specifics of the individual’s role and the parts of the business in which he or she is involved.

If you’d like any advice on the business protection mechanisms you have in place, or would like to put in place, just let us know.

By Jennifer Skeoch,
Partner

Burness admin