Introduction

In July 2019 the Supreme Court handed down its judgment in Tillman v Egon Zehnder Ltd [2019] UKSC 32 being the first case on restrictive covenants in employment contracts to be heard by the Supreme Court in more than 100 years.  The Court took the opportunity to clarify the scope of such clauses and consider the application of the ‘blue pencil test’.

What are Restrictive Covenants?

Restrictive covenants are often included in the contracts of senior employees in an attempt to protect business secrets, trade connections or maintain a stable workforce.  As a starting position, restrictive covenants are void as being in restraint of trade, unless the protection sought goes no further than is reasonable and necessary to protect the employers’ legitimate business interests.

Facts

Ms Tillman was hired by Egon Zehnder Ltd, a professional services firm specialising in executive search and recruitment, in January 2004.  Ms Tillman’s written employment contract included a restrictive covenant clause which prevented her, for six months following the termination of her employment with the Company, from being “directly or indirectly engage[d] or […] concerned or interested in any business carried on in competition with any of the businesses of [the Company]”. 

Ms Tillman resigned in 2017 and gave notice of her intention to start work as an employee at a rival firm.  Ms Tillman argued the non-compete clause was void and that being ‘interested in’ a competing business was too wide as it would prevent her from holding a minor shareholding in a competitor (where the contract permitted her to hold up to a 5% shareholding during the course of her employment).

The Company issued proceedings and applied for an injunction to restrain Ms Tillman from commencing employment and holding shares in her new employer. 

The Decision

The High Court granted the injunction deciding that the clause was not an unreasonable restraint of trade.  The Court of Appeal then set the judgment aside finding that such a clause was unreasonable and therefore unenforceable.

The case went to the Supreme Court.  The Supreme Court restored the injunction on the following basis:

·      it was not surprising that the Company wanted to restrict Ms Tillman from holding shares in a competitor after termination, noting the employment of a top executive is frequently subject to conditions that she should hold shares or be remunerated in shares or options to purchase them. Restraining her ability to hold shares was part of the restraint on her ability to work in the immediate aftermath of her employment. The covenants were therefore within the doctrine of restraint of trade;

·      the use of the words “interested in” prevented Ms Tillman from holding any shareholding and was therefore considered to be too wide and an unreasonable restraint of trade.  Consequently, unless the court was willing to sever it, the clause would be void and the restrictive covenant deemed unenforceable;

·      the words “or interested in” were capable of being severed therefore negating any unreasonable effect they may have.

Consequently, the Court, in reversing longstanding Court of Appeal authority which says that the court will not alter, delete or re-write a clause to make it reasonable, deleted this wording from the offending clause resulting in Ms Tillman being fairly restrained from entering into employment with the competitor whilst not being prevented from holding shares in the same.

Commentary

This decision will undoubtedly open the door for employers to argue that a bad covenant can be rescued by the deletion of words but the court was clear that this would only be possible in circumstances where (1) the objectionable words are capable of being removed without the necessity of adding to or modifying the wording of what remains; (2) the remaining terms must be supported by adequate consideration (unlikely to be an issue in the usual post-employment situation); and (3) the removal of the objectionable words would not generate any major change in the overall effect of all the restraints – a point which is for the employer to demonstrate.

It remains to be seen what proportion of its costs the winning employer will recover in circumstances where the court was effectively asked to amend the covenant to make it enforceable.  However, whatever the outcome, the decision is a reminder for all employers to ensure that restrictive covenants are carefully tailored to their respective employees and kept under regular and ongoing review.