Severance of unreasonable part of a non-compete restrictive covenant allowed by the Supreme Court

The long awaiting judgment of the Supreme Court in the case of Tillman V Egon Zehnder Ltd has recently been published. The court has allowed an unreasonable part of a non-compete restrictive covenant to be severed from the remainder of the clause, allowing the clause to be reasonable in ambit and therefore enforceable.

Facts

Miss Tillman joined Egon Zehnder (EZ), a firm of head hunters, in January 2004. Over the next 13 years she became very senior in the company. She left in January 2017, to join a competitor.

Miss Tillman’s contract of employment with EZ contained a number of restrictive covenants. In particular, it contained a 6-month non-compete covenant that she would 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 or during the period of 12 months prior to that date and with which you were materially concerned during such period.” 

Miss Tillman agreed to abide by all her restrictive covenants, with the exception of her non-compete clause, which she said was an unreasonable restraint on trade and therefore void. She argued that the use of the words “interested in” would prevent her from acquiring even a minority shareholding in a competitor and this was impermissibly wide.

EZ applied for an injunction to prevent Miss Tillman from starting work with the competitor.

The High Court granted the injunction on the basis that “interested in” did not prohibit Miss Tillman from being a minority shareholder. The Court of Appeal overturned this, finding that it did restrict her from any shareholding in a competitor and was an unreasonable restraint on trade.

The Supreme Court judgment

The Supreme Court allowed the appeal and restored the High Court injunction.

The Supreme Court agreed with the Court of Appeal that the non-compete did restrict Miss Tillman from having any shareholding and agreed that as such, it was an unreasonable restraint on trade. However, the most interesting element of the Supreme Court’s decision was on the subject of what can be severed by the court to allow for an overly wide restriction to be brought within the bounds of reasonableness. Although it was made clear that courts must continue to adopt a cautious approach to the severance of post termination restrictions, a court could remove wording from a covenant if a threefold severance test was satisfied. These three criteria are as follows:

1. The unenforceable provision can be removed without needing to add to or modify the wording of what remains – this is known as the ‘blue pencil test’.
2. The remaining terms continue to be supported by consideration (one of the cornerstones of a valid contract) – this is irrelevant for a post-employment situation, as in this case.
3. The removal of the offending part would not generate any major change in the overall effect of all the post-employment restraints in the contract.

The court applied this severance test to this case and held that the words “or interested” are capable of being removed from the covenants without the need to add to or modify the wording of the remainder. Secondly, the removal of the prohibition against her being “interested” would not generate any major change in the overall effect of the restraints. Therefore the wording should be severed and removed.

Although by this point of the proceedings, the contractual period of the restraint had expired a long time before, the court formally restored the injunction, subject to the removal of the wording “or interested”.

Comment

This case is useful for employers as it signals a clear move away from a more restrictive approach to the severance of restrictions.

However, there are two points that employers should be aware of before assuming that they can rely on this case to impose or rely on more draconian restrictions than they can reasonably justify.

Firstly, the blue pencil test is notoriously arbitrary in its application. Wording can only be removed, the remainder must make sense without any addition or modification.

Secondly, the court specifically made reference to costs as a “sting in the tail” for the employer in this case. The unreasonable part of the restrictions were referred to as “legal litter” which “cast an unfair burden on others to clear up”. So, although EZ won this case, it may now be bearing substantial costs from the three hearings.