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The Supreme Court has recently considered the law relating to the severance of wording within restrictive covenants in Tillman v Egon Zehnder Ltd [2019] UKSC 32.
The court held that offending words could be removed in order to render the remainder of the clause enforceable provided that there would be no need to add to or modify the rest of the wording of the covenant and that this would not result in a major change in the effect of the restriction.
Ms Tillman, hired by Egon Zehnder Ltd ("EZ") in 2004, was promoted quickly during her employment and by 2012 was joint global practice head. Her employment contract contained restrictive covenants which were to last for six months following termination of her employment, as well as confidentiality provisions. These were not updated abreast of promotions.
On 23 January 2017, Ms Tillman resigned on notice. One week later, EZ terminated her employment with immediate effect and made a payment in lieu of notice, in accordance with her contract. Following this, Ms Tillman notified EZ that she would like to start working for a similar business on 1 May 2017. There was agreement that Ms Tillman was bound by the non-solicitation, non-dealing and confidentiality terms in her contract. Nevertheless EZ brought proceedings applying for an injunction, alleging that Ms Tillman would be in breach of the non-compete clause in her employment contract should she join the competitor. Ms Tillman, however, asserted that the non-compete clause was wider than needed to protect EZ's legitimate business interests and was therefore unenforceable, particularly as being "interested" in a competing business would prevent her from having a shareholding in a competitor.
The High Court initially upheld the non-compete restriction and granted an injunction. However, the Court of Appeal overturned this decision, holding that the non-compete restriction was impermissibly wide and agreeing that the words "interested in" unreasonably prevented Miss Tillman from holding even a minor shareholding in a competitor. Additionally, the Court of Appeal did not accept EZ's secondary argument that the offending words could be severed from the terms of the clause in order to make it enforceable. EZ appealed.
The appeal was unanimously allowed.
The Supreme Court considered the construction of the non-compete clause and agreed with the Court of Appeal that a restriction on being "interested in" a competitor (without any carve out relating to a shareholding) was essentially a blanket bar on Ms Tillman having any dealing with a competitor in any capacity which was unreasonably restrictive.
In turning to EZ's second argument, the Supreme Court conducted a thorough analysis of the jurisprudence on the principle of severance of restrictive covenants, electing not to follow the 99 year old Court of Appeal decision in Attwood v Lamont [1920] 3 KB 571(CA) and preferring the approach taken by the Court of Appeal in Beckett Investment Management Group Ltd v Hall [2007] ICR 1539 where three determinative criteria for assessing the appropriateness of severance were identified:
Point one was answered in the affirmative. Point two was deemed not to present any barrier to severance in the present case. In relation to point three, the Supreme Court held that no such major change would be generated. As such, the words "interested in" could be removed and the remainder of the non-compete clause was then determined to be enforceable.
This decision is clearly employer friendly given that it broadens the severance test significantly from that stated in Attwood, allowing for restrictions to be enforced in situations where they once may not have been. Interestingly, it permitted the removal of a single word found in the heart of the restrictive covenant rather than in a distinct clause.
That being said, employers would be ill advised to regard this decision as allowing them to impose unreasonable restrictions safe in the knowledge that the court would simply sever any unreasonable portion of a post-termination restriction.
Firstly, the position remains that such covenants will be void if they go further than is necessary to protect the employer’s legitimate business interests.
Secondly, the Supreme Court specifically stated that "the courts must continue to adopt a cautious approach to the severance of post-employment restraints" and emphasised that any costs associated with determining unreasonable parts of post-employment restrictions should not be borne by employees, thereby potentially providing a "sting in the tail" even for successful companies.
This case does, however, serve as a useful reminder for employers to keep their employees' restrictive covenants under review to ensure they remain appropriate after a change in a role or responsibilities. Further, employers should take care when drafting post-termination restrictions to expressly carve out restricting the employee from holding a minor shareholding in another company (to avoid the need to seek severance in relation to "interested in" wording and associated costs for companies).
For more information on this topic, please contact me on 0117 915 4915 or [email protected].
