Stronachs Logo

I want to break free – good news for employers on enforceability of restrictive covenants

There is an inherent conflict between an employer’s desire to prevent key personnel from competing with them after their employment terminates, and an employee’s right to carry out their trade and earn a living once they have left a job. As early as the 1700s, courts were deciding to what extent clauses in contracts of employment could and should be permitted to restrict employees’ actions post termination of their employment.

Over the years, there has been a growing recognition that the power imbalance between an employer and an employee requires to be a consideration in this context. Furthermore, as a matter of public policy, restrictions which go beyond what is reasonable and necessary to protect an employer’s legitimate interests will not be enforceable on the grounds of being unreasonable restraints of trade.

Restrictive covenants are notoriously difficult to draft. It is clearly important that the post termination restriction is sufficiently wide to protect the employer’s business interests, while not going beyond what is reasonably necessary and thereby rendering it unenforceable. A clause frequently inserted in post termination restriction provisions states that where it is decided that any part of the restriction goes beyond what is reasonable and necessary, then such part is to be “severed” from the other restrictions in the contract and the remainder are to remain in force and therefore to be read as if the unenforceable portion was not there. For the first time, the extent to which unenforceable portions of clauses can be “severed” in this manner was recently considered by the Supreme Court and the decision will be welcomed by employers.

Tillman v Egon Zehnder Ltd [2019] UKSC 32

Mrs Tillman was a senior business executive who was described by the judge at first instance as being “a bit special” with regard to her skills and abilities. She was promoted a number of times by her employer and in view of her abilities and skills, her contract of employment contained a clause which stated that she would not, among other restrictions, within 6 months of termination of her employment “directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the Company or any Group Company which were carried on at the Termination Date or during the period of 12 months prior to that date and with which [she was] materially concerned during such period.” The contract also stated that if any of the restrictions were held to be invalid as going beyond what was reasonable for the protection of the company’s goodwill and interests, then the section that went beyond what was reasonable should be severed and the remainder should remain in force.

Mrs Tillman began employment with a competitor of her former employer within 4 months of the termination of her employment. She contended that the restriction above was unreasonably wide as the term “interested in” not only prevented her from working for a competitor but also from holding even a minority shareholding in such a business, and was therefore an unenforceable restraint of trade. Her former employer disagreed. They argued that the clause was enforceable, and in the alternative, that the unenforceable section should be severed from the clause.

At first instance, the judge agreed with the company and granted an interim order preventing Mrs Tillman from working at her new job. The Court of Appeal overturned this decision. It held that the words “interested in” went too far to be enforceable and that it could not be severed to make the remainder of the clause enforceable. The matter was then considered by the Supreme Court.

In a unanimous judgement, the first Supreme Court level authority on restrictive covenants gave clear directions on when it is acceptable to sever wording from a covenant to render it enforceable. The Court agreed with Mrs Tillman that restricting Mrs Tillman from being “interested” in any business went too far, as this would prevent her from holding even a minority shareholding in any company which was in competition with her former employer. However, it upheld the appeal of the company in respect of its argument that the words “or interested” could be severed from the clause and that the remainder could remain in force.

Giving guidance on when it is possible to sever wording from a post-termination restriction, Lord Wilson stated that the test had two parts:

  • whether the unenforceable provision is capable of being removed without needing to add to or modify the remaining wording (known as the “blue pencil test”); and
  • whether the removal of the words would generate any major change to the overall effect of all the post-employment restraints in the contract.

On the basis of the test, it was clear that the unenforceable section of Mrs Tillman’s covenant could be easily removed without the requirement to alter the rest of the clause and without any major changes to the overall effect of the restriction.

Comment

This case will be welcomed by employers as it gives some reassurance as to enforceability of restrictions, a notoriously difficult area. However, it is important to remember that the court specifically made reference to Mrs Tillman’s level of seniority in making its decision. The less senior the employee in question is, the harder it will be to enforce post-termination restrictions. Furthermore, although the employer was ultimately successful, the Court noted that the question of costs remained to be considered. Given that the employer’s drafting had caused the issue which required to be “cleaned up” by the courts (Lord Wilson quoted another decision which described this type of drafting as “legal litter”), it is likely that the costs will be borne by the company. In circumstances where contracts with particularly key individuals with unique skills are in dispute, this may be a price worth paying. However, clear drafting and careful consideration of the scope of covenants at the point of drafting is still preferable than relying on sections of drafting to be severed in the course of litigation after the fact.

If you have any queries about the issue discussed above, please do not hesitate to contact a member of our Employment Team.

Annika Neukirch, Senior Solicitor

Chambers Leading Firm 2019

Contact Info

ABERDEEN OFFICE
28 Albyn Place, Aberdeen AB10 1YL
Tel: +44 1224 845845

 

INVERNESS OFFICE
Camas House, Fairways Business Park,
Inverness IV2 6AA
Tel: + 44 1463 713225