A recent landmark judgment in Tillman v Egon Zehnder Ltd [2019] UKSC 32 has provided important clarification on the proper approach to restrictive covenants in restraint of trade cases. This is a significant decision, because it was been over a century since the UK’s final appeal court grappled with an employee competition case.

Egon Zehnder Limited (EZ) is a member of a global group of companies which specialize in executive search and recruitment. 

Mary-Caroline Tillman was employed by EZ as joint global head of its financial services recruitment division under a contract of employment dated 10 December 2003 (the Contract).

After joining EZ in 2004, Ms Tillman was identified as “a bit special” and she enjoyed a meteroric rise within the business, but the Contract was never replaced to reflect her successive promotions. 

The Contract contained a number of post-termination restrictive covenants. The provision in dispute, a non-competition covenant, prohibited Ms Tillman from engaging or being concerned or “interested in” any competing business for at least six months following the termination of her employment with EZ. 

On 30 January 2017, Ms Tillman’s employment with EZ came to an end. When Ms Tillman informed EZ that she wished to work for a competitor before the expiration of this restriction, the company applied for and obtained an injunction in the High Court to prevent her from doing so. 

The Court of Appeal subsequently set aside the injunction and dismissed EZ’s claim. The Court of Appeal interpreted the words “interested in” to extend to holding any shareholding in a competing business. This restriction was held to be unreasonably wide (even though Ms Tillman did not wish to acquire shares in the competitor) and therefore the entire non-competition covenant was void. The court refused to sever the clause, triggering EZ’s appeal to the Supreme Court.

The Supreme Court's decision
The key issue for the Supreme Court to resolve was in what circumstances can words be severed (i.e. deleted) from a restrictive covenant contained in an employment contract because the wording is too broad. 

The long-standing authority of Attwood v Lamont [1920] 3 KB 571(CA) was overturned, and the principles of Beckett Investment Management Group Ltd v Hall [2007] EWCA Civ 613 were adapted to apply to the present case. 

The Supreme Court formulated a three-stage test for severance:

1)    Are the offending words capable of being erased without having to alter what remains of the covenant (this is often referred to as “the blue pencil test”)?
2)    If the offending words are erased, is there still good consideration for the remaining terms of the covenant?
3)    Whether removal of the offending words would result in any major change in the overall effect of all the post-employment restraints in the contract. 

On applying this test, the court was able to remove the words “interested in” from the non-competition covenant without needing to alter the remaining wording or majorly changing the overall effect of the restraints. 

After almost a century of uncertainty surrounding the law on severance, employers should welcome the Supreme Court’s decision.

Employers have been given a lifeline: a post-employment restrictive covenant may be severed more readily to avoid the devastating effects of its unenforceability. This modernised, liberal approach to severance offers more protection to employers in an increasingly globalised and competitive employment sphere.

However, this is not a cue to draft more onerous post-employment restrictions on employees.  A restrictive covenant will still only be enforceable if it protects the employer’s legitimate business interest and goes no further than is reasonably necessary to protect this interest. The Supreme Court warned that a ‘cautious approach’ will be taken towards severance given the inequality of bargaining power between employers and employees. 

Finally, the Supreme Court gave a warning in relation to the costs implications arising from the case. The court considered that the task of severing “unreasonable parts of post employment restrictions” was similar to clearing up “legal litter” and expressed the view that there may be a “sting in the tail” in respect of costs.

In practice, this could mean that an employer who seeks the court’s assistance to enforce a poorly worded covenant is ordered to pay some of the employee’s costs where severance is needed to enable the covenant to be enforced. 

How could this affect you?
If you are an employer make sure that your standard form contracts are reviewed to ensure that any post termination covenants are clearly drafted. Restrictive covenants must also be tailored to the individual employee and reviewed throughout their employment term. 

Get expert help. Fixing any issue now could potentially save you a huge amount in legal costs and the headache of trying to enforce a badly worded covenant. 

Shears Law’s litigation expertise means we are well placed to support our clients in this area. If you require advice and support, please do not hesitate to get in touch with us.

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