Restrictive Covenants – Restraint of Trade Clauses

The Supreme Court recently heard the case of Tillman v Egon Zehnder Ltd. The first case of its kind to come before the Supreme Court in a hundred years, it considered the validity and construction of non-compete restrictive covenants. The decision has wide ranging repercussions as to how the Courts will deal with restrictive covenants from now on.

Facts

The Claimant, Caroline Tillman, worked for Egon Zehnder for 13 years. She resigned from her senior role in January 2017. Her contract contained a range of restrictive covenants, including a non-competition cause which prevented her from being directly or indirectly engaged or concerned or interested in any business carried on in competition of Egon Zehnder for a period of six months.

The Claimant contended that the clause was unenforceable as the phrase ‘interested in’ amounted to a unreasonable restraint on trade as it would prevent her from holding shares in a competing business.

Law

When considering if a restraint on trade clause will be enforceable, it is for the employer to establish that the restriction is reasonably necessary in the protection of their business. The longstanding Court of Appeal case law provided that an unreasonable clause would be held to be unenforceable in its entirety. This has now been altered by the Supreme Court.

Decision and comment

The Supreme Court clarified how unreasonable aspects of clauses should be dealt with;

• Can the clause be construed using a realistically alternative interpretation, so as to be valid? In this case it was held that the phrase ‘interested in’ could not be construed so as not to include shareholding.
• Can the phase which results in the clause being unreasonable be severed? Severance is permitted where:
  1. Removal of the words results in no need to add or modify what is left behind
  2. Removal should not generate any major change in the overall effect of all the post termination restraints in the contract.

In this case it was held that the words ‘interested in’ could be severed and the rest of the clause be preserved.

This case reinforces that all restrictive covenant clauses should be specifically tailored to the business and to the individual in question.

Whilst the Supreme Court’s approach to severance should be of comfort to employers, the Supreme Court also noted that the severance of unreasonable parts of the post-employment restrictions was akin to clearing up “legal litter”. It went on to say that such a process should not cast an unfair burden on the employee and there could be cost consequences for the employer in the adjudication of any such dispute.

If you need further advice on how this case may impact on your employees’ restrictive covenants, please get in touch with a member of the employment team.