Legal lowdown: Post-termination restrictions
Andrea London, July 23, 2019
A recent case in the Supreme Court has shown how far courts can command employers to amend the wording of contracts and restrictive covenants
On 3 July the business world gave a palpable sigh of relief as the Supreme Court finally handed down its unanimous decision on the first restraint of trade case to reach it in more than a century.
In the case of Egon Zehnder Limited (EZL) v Tillman, Tillman was hired by EZL in 2004 and worked her way up to head of global financial services. In 2017 she left to join a competitor. Her employment contract contained a number of restrictions, one of which was a non-competition covenant for six months, worded as follows:
[Tillman would not] 'directly or indirectly engage or be concerned to interested in any business carried on in competition with any of the businesses of [EZL] within a 12-month period prior to the termination and with which [she was] materially concerned during such period.'
Tillman contended that this covenant was an unreasonable restraint of trade and so void. EZL applied to the High Court and was initially successful, in that it obtained an interim injunction to prevent her entry into her proposed new employment. She appealed and the Court of Appeal found in her favour, set the injunction aside, and determined that (notwithstanding that Tillman had no intention of obtaining a shareholding in the competing business) the clause in question was not enforceable.
There were just two central issues to the enforceability of the covenant. These were (a) whether the words 'interested in' unreasonably prevented even a minor shareholding in a competitive business (by Tillman), and (b) if so could the offending part of the covenant be severed?
EZL appealed to the Supreme Court. Had the Supreme Court then made a decision that affirmed the position of the Court of Appeal, many companies across the UK could have been in significant difficulty preventing their employees from leaving and competing, at least until they had been able to hurriedly amend the wording of their restrictive covenants.
Fortunately, however, common sense has prevailed and a balanced decision was given by the Supreme Court, which has now stated that in essence:
- The wording 'interested in' in a non-compete clause would indeed preclude a shareholding in a competitive business, and would render that clause unenforceable unless there was otherwise also included in those obligations a 'carve out' permitting such shareholding post-termination;
- However, the question then fell to whether the offending words could viably be deleted. The position on severance of parts of a post-termination obligation was previously set down in the Court of Appeal case of Attwood v Lamont. A court's ability to 'blue pencil' a restraint clause has been permitted only on a very restricted basis since then. In the current judgment this guidance has now been overruled. Going forwards, the test will be that if an offending word can be removed from the clause without changing the character of the contract or the overall effect of the restraints then it will be allowed. The Supreme Court determined that such a deletion in this instance was viable, and accordingly the clause was enforceable by EZL (against Tillman).
In practical terms this means the courts now have a significantly wider remit to reduce the scope of some restrictions to what they consider to be reasonable. This does not mean, however, that the courts can rewrite a clause. But they can (and we suspect will) be permitted to correct some elements of poor drafting to remedy a defective covenant.
While this may be good news for employers in the short term, this case perhaps serves as a warning to ensure that post-termination protections are regularly assessed, tailored to those they relate to, and drafted as narrowly as possible. Only then will employers reduce the risk of such drafting being tested in litigation.
Andrea London is a partner and head of the employment team at Fletcher Day