In an important and helpful judgment, the Supreme Court has provided guidance, for the first time in 100 years, on the controversial question of whether unenforceable wording can be removed from a restrictive covenant, allowing the rest of the restriction to remain valid and enforceable.
The issues at stake
Post termination restrictions are commonly used when an employer wants to prevent a senior, or influential, employee from undermining the employer's business by leaving and joining a competitor – taking with them valuable client contacts or commercially sensitive information.
Restricting an individual in this way is, however, generally viewed by courts as an unlawful 'restraint of trade' - contrary to public policy.
The courts, therefore, have to strike a balance between allowing businesses to protect their legitimate commercial interests by constraining an ex-employee's activities; and protecting an individual's right to contract or trade freely.
In doing so, courts will generally find restrictive covenants void, unless the employer can show that it
- has a legitimate interest to protect
- the protection it has sought is no more than necessary; and
- no other form of protection (such as confidentiality provisions) would achieve the same result.
The factual background
In Tillman v Egon Zehnder Limited (2019), the covenant in question required that Ms Tillman 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 employer]….”
Ms Tillman argued that this clause was void and unenforceable because the phrase "interested in" was too wide and would prevent Ms Tillman from even holding one share in a public limited company.
Ms Tillman said this meant that the whole clause should fall away, and she should not be prevented from working for a competitor of Egon Zehnder, her former employer.
Egon Zehnder argued that the wording was not void and, even if it was, then only the offending words should be ignored and the rest of the restriction should still apply.
The Supreme Court's decision
The Supreme Court had three questions to consider.
- Does a clause preventing an employee from holding shares in a competitor fall within the rules regulating restraint of trade? The Supreme Court found that the answer was yes: senior employees' employment is often dependant on them holding shares in the company for which they work and, therefore, a restriction on shareholding equates to a restriction on the ability to work.
- Does the phrase 'interested in' include holding shares in a competitor company? The Supreme Court found that the answer to this question was also yes: the natural meaning of this phrase is understood to include a shareholding, and this is too wide to be a valid restraint on an employee.
- Given that the inclusion of 'interested in' was void as an unreasonable restraint of trade, could Egon Zehnder still rely on the rest of the clause, to prevent Ms Tillman from working for a competitor? The Supreme Court found that the answer to this question was yes. The offending phrase could be removed from the rest of the clause, without the remaining wording losing its meaning. Therefore, the Court could apply its metaphorical 'blue pencil' to the unenforceable wording, and the rest of the restriction would remain valid and enforceable.
In making this finding, the Supreme Court clarified previous case law on this question and confirmed that employers can 'sever' unreasonable restrictions from a contractual clause, and still rely on the remaining terms.
This decision will be welcomed by employers seeking to enforce restrictive covenants, as the Supreme Court has loosened the requirements that apply in order for an employer to rely on a restrictive covenant.
In the light of this ruling, employers may be tempted to draft wide restrictive covenants, hoping that they will have a deterrent effect on employees – reassured that if the unreasonable parts of a clause are found to be void, then it is likely that the remaining parts will still apply
Following this strategy may, however, put employers at risk of additional costs. In the Supreme Court's judgment, it commented disapprovingly on parties relying on courts to clear up their contracts' "legal litter" – and that although the employer won in this case, there may be a "sting in the tail" for them in respect of the costs incurred in each of the three courts involved in bringing these proceedings to conclusion.