195: Supreme Court clarifies law on severance of restrictive covenants
Post-termination restrictive covenants will be void for being in restraint of trade unless an employer has a legitimate business interest to protect and the covenants are reasonable in scope. In some cases, the courts may allow ‘severance’ of unlawful words from a restrictive covenant that is otherwise too wide in order to create an enforceable restriction (known as ‘blue pencilling’).
The Supreme Court recently gave its judgment in the case of Tillman v Egon Zehnder Ltd. Overturning the decision of the Court of Appeal, the Supreme Court allowed what it considered to be unreasonably wide words to be severed from a non-compete covenant. The remainder of the clause was deemed reasonable in scope, and therefore enforceable.
Ms Tillman joined Egon Zehnder, a firm of headhunters, in 2004 and was promoted unusually quickly, becoming co-Global Head of the Financial Services Group in 2012. She left in January 2017 to join a competitor. A dispute arose over the enforceability of the noncompete clause in her contract of employment, which stated that she could not ‘directly or indirectly engage or be concerned or interested in’ any competing business for six months after termination of her employment. Ms Tillman argued that the words ‘interested in’ would prevent her from acquiring even a very small shareholding in a competitor (such as one share in a publicly quoted company) and were therefore unreasonably wide. She also argued that these words could not be severed from the remainder of the clause.
The High Court had granted an injunction preventing Ms Tillman from working for the competitor on the basis that the words ‘interested in’ did not prohibit her from being a minority shareholder. The Court of Appeal then overturned this finding, ruling that the words did restrict her from holding any shareholding in a competitor and were therefore an unreasonable restraint on trade. It also refused to sever the words ‘or interested’ from the covenant because they were included in a single covenant which had to be read as a whole.
On appeal, the Supreme Court has now restored the High Court injunction. The Supreme Court agreed with the Court of Appeal that the non-compete clause did restrict Ms Tillman from having any shareholding in a competitor and therefore amounted to an unreasonable restraint on trade. However, it also held that the Court of Appeal had been wrong to conclude that the offending words could not be severed from the remaining reasonable parts of the covenant.
The most interesting part of the Supreme Court’s judgment is its clarification of the law on severance of restrictive covenants. A court can remove wording from a covenant if three criteria are satisfied: the unenforceable provision can be removed without needing to add to or change the wording which remains; the remaining terms must continue to be supported by consideration; and removal of the offending clause must not generate any major change in the overall effect of all the post-termination restraints in the contract. Applying this test to the facts of the case, the words ‘or interested in’ were severable since they could be removed without changing the remaining wording, and this would not generate any major change in the overall effect of the restraint.
This is a welcome decision for employers which signals a move towards a more relaxed approach to the severance of restrictive covenants. In many cases, it should be relatively straightforward to show that removal of a provision would not generate any major change in the overall effect of all of the post-employment restraints in the contract. Employers may therefore be tempted to draft some restrictive covenants more widely. However, it is important to note that applying blue pencilling is a notoriously arbitrary process. In addition, the Supreme Court strongly implied that there may be a ‘sting in the tail’ for employers, since they may have to bear the costs of clearing up the unreasonable parts of post-employment restrictions which they have sought to impose on employees.
It is also worth noting that Ms Tillman only had the contract she was given when she first joined the company. Since the enforceability of restrictive covenants is judged at the time they were entered into, they should always be reviewed when an employee is promoted or changes role.