King George V sat on the throne when our highest court last considered post-employment restrictive covenants (1). Pervasive wartime controls were in place to regulate labour. Employment protection legislation was non-existent. The world was a very different place.

Over the intervening 100 years, the law on restrictive covenants developed and changed but no case made it beyond the Court of Appeal.

Fast–forward to 2019. The last vestiges of the master/servant labour model are firmly consigned to the history books. The individual contract of employment is without doubt the cornerstone of modern labour relations in the UK. Supplementing this relationship is a rich tapestry of statutory employment protections woven over some 60 years. Our working world is global, competitive and increasingly digital. Now, more than ever, information, goodwill and trade connections are a highly prized commodity for almost every business.

Background to a landmark case

In Tillman v Egon Zehnder Ltd [2019] UKSC 32, one such business asked the Supreme Court to reconsider the law and to change it to be fit for modern day purposes. In its landmark judgment handed down in July, the Supreme Court has done so.

The core facts of the case are not unusual. Egon Zehnder (EZ) is a global specialist executive search and recruitment business. EZ recruited Mary-Caroline Tillman in 2004. As the High Court judge observed, the company regarded Ms Tillman as “a bit special”. She was recruited into a senior role on a salary of £120,000 and first year bonus of £100,000 and then rose steadily through the ranks of the organisation. By 2012, Ms Tillman was joint global head of the company’s financial services practice and a shareholder in the Swiss holding company.

What did Ms Tillman promise?

Reflecting the nature of her work and the risks to the interests of the business, Ms Tillman’s contract of employment contained a number of restrictive covenants. The particular covenant which became the subject of the dispute was a six-month non-compete clause under which Ms Tillman promised 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…“

Was Ms Tillman’s promise valid?

Times moved on and, on 30 January 2017, Ms Tillman and EZ parted ways. Ms Tillman then informed EZ that she intended to join Russell Reynolds Associates (RRA), a competitor of EZ. She planned to start work on 1 May 2017, when the non-compete covenant would still be running.

To square this circle, Ms Tillman alleged that her non-compete promise was void in restraint of trade, arguing that the words “interested in any business“ captured a minority shareholding in a company and that this made the covenant too broad. Interestingly, Ms Tillman had no intention of holding shares in RRA but this, of course, was irrelevant to the legal construction of the theoretical reach of the covenant on its face.

In any event, the High Court disagreed with Ms Tillman and granted EZ an injunction restraining her from joining RRA for the life of the covenant. Mann J held that “interested in“ in the restriction did not capture a shareholding in RRA and, therefore, the clause was not too broad.

On appeal, the Court of Appeal disagreed with Mann J and decided that a minority shareholding was indeed caught. EZ argued that, in that case, the offending words should be severed from the clause so that the parties’ bargain that Ms Tillman would not work for RRA for six months could be upheld. The Court of Appeal refused severance. The whole covenant would fall.

EZ appealed to the Supreme Court.

Role of severance in holding parties to their bargain

Having decided that the restraint of trade doctrine was engaged and agreeing with the Court of Appeal’s construction of the clause, the Supreme Court turned to the question of severance to determine whether the covenant could be saved.

The decision would stand or fall on the outcome of three interrelating doctrines:

  • Ordinary canons of contract law dictate that parties will be held to their bargain.
  • However, the doctrine of restraint of trade places a significant limitation on that principle by holding restrictive covenants void unless they reasonably protect a legitimate business interest. This is a fairly blunt instrument in redressing the real (or, sometimes, perceived) power imbalance between employer and employee.
  • Militating against this “all or nothing“ outcome is the doctrine of severance, allowing ancillary objectionable provisions to be removed from a contract without affecting the overall enforceability of the core bargain.

The balance between these principles is delicate and crucial.

Striking too far one way risks condoning employers deliberately drafting overly wide covenants.

But striking too far the other way risks the draconian effect of bulldozing legitimate promises between parties. As Lord Wilson observed: “High-ranking employees can do particular damage to the legitimate interests of their employers following termination of their employment; and it may be that, when they enter into their post-employment covenants, they are able to negotiate with their employers on nearly an equal footing.“

Severance: a different approach in employment cases?

Severance is a doctrine of general contract law, not specific to the employment field. However, over the last century, a body of case law had built up which placed a more restrictive, employee-friendly approach to severance in employment contracts. The high watermark was the Court of Appeal‘s judgment in Attwood v Lamont [1920] 3 KB 571. Younger LJ, whose judgment became the leading judgment, held that severance in the post-employment context was only available where a covenant was “not really a single covenant but in effect a combination of several distinct covenants” and where the part severed was merely trivial or technical.

In contrast to Attwood, the Court of Appeal in Beckett Investment Management Group Ltd v Hall [2007] EWCA Civ 613, took a different approach and agreed to sever wording in circumstances where it could not be regarded as a separate covenant.

The Court of Appeal in the EZ case had followed Attwood in refusing to sever “interested in” from the covenant because “it must be doubtful whether parts of a single covenant can be deleted without the contract becoming ‘not the sort of contract that the parties entered into at all'”.

Supreme Court makes new law

In overruling the Court of Appeal, Lord Wilson, with whom the other judges agreed, decided to overturn Attwood and allow the words “interested in” to be severed from the covenant, upholding the remainder in EZ’s favour.

Following Egon Zehnder, the three criteria for severance are:

  • That the unenforceable provision can be removed without adding to or modifying the remaining wording (the “blue pencil test”).
  • That the remaining terms continue to be supported by adequate consideration.
  • That the removal of the unenforceable provision would not generate any major change in the overall effect of all the post-employment restraints in the contract.

The right balance

The Supreme Court has endorsed a modern approach to severance. This is not, as some commentators have perhaps suggested, a charter for employers to draft sloppily with impunity. On the contrary, severance is only available if the court is satisfied that what remains makes sense, has consideration and is still (in all major senses) the promise the parties entered into. The burden remains on the employer to prove its legitimate business interest and that the covenant (absent any offending words) is reasonable and not a different promise. This strikes the right balance between the competing doctrines and sensibly reflects the changed (and changing) nature of the working world.

RPC represented Egon Zehnder Ltd in the High Court, Court of Appeal and Supreme Court in this case.

This blog was first published on PLC's Employment and Discrimination Blog.