Enforceability of restrictive covenants – the devil is in the detail

Enforceability of restrictive covenants – the devil is in the detail's Tags

Tags related to this article

Enforceability of restrictive covenants – the devil is in the detail

Published 4 July 2019

The judgment on 3 July from the Supreme Court is the first decision in a century that the highest court has considered employee restrictive covenants.

Its decision is that an employer’s non-compete clause which stated that an employee could not ‘directly or indirectly engage or be concerned or interested in’ any competing business for six months after termination was capable of being enforced.

Although the words ‘interested in’ were unreasonably wide because they prevented even a minor shareholding in a competing business, the Supreme Court came to the employer’s aid and decided that the words “interested in” could be deleted from the remaining, reasonable parts of the covenant.

The facts of the Tillman case

Mrs Tillman was recruited at consultant level by Egon Zehnder Ltd, an executive search and recruitment company (the Company). Mrs Tillman was quickly promoted from consultant to principal, and again rapidly promoted to partner. Within eight years, she was co-Global Head of the Financial Services Practice Group. She was always employed largely on the terms of her original contract.

Mrs Tillman’s employment with the Company terminated in January 2017, and shortly thereafter she told it that she intended to start working for a competitor, from 1 May 2017. She informed the Company that she intended to abide by her other restrictive covenants, simply not the non-compete restriction, alleging it was unreasonable and void. The Company issued proceedings, seeking an injunction to uphold the covenant.

The wording of the non-compete covenant was standard:

"You shall not…at any time within the period of six months from the Termination Date…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 twelve months prior to that date and with which you were materially concerned during such period."

Separately, Mrs Tillman's employment contract included a clause restricting her from holding more than 5% shareholding in a competitor. However, that clause was not linked to her restrictive covenants.

The High Court granted the employer’s application for an injunction. The High Court judge did not believe that the non-compete clause was too wide. His view was that it did not prevent Ms Tillman from holding shares in a competing business. Ms Tillman, unhappy to be restrained by a court order from starting her new job, successfully appealed to the Court of Appeal.

The Court of Appeal disagreed with the High Court. It upheld the covenant and released Ms Tillman from the injunction so she was free to work. The Court’s view was that the covenant prevented Ms Tillman from holding as little as one share in a publicly quoted company, meaning it was too wide. The Court of Appeal went on to decide that it could not ‘sever’ the unreasonable part of the covenant and therefore the whole of the restrictive covenant was void and unenforceable.

What did the Supreme Court say?

The Supreme Court agreed that the natural meaning of the non-compete restriction prevented Ms Tillman from owning any shares at all in a competitor.

However, reversing the Court of Appeal’s decision, the Supreme Court held that the words “interested in” could be crossed out and the remainder of the non-compete clause could stand. Coming full circle therefore, the effect was to uphold the original injunction, even though the period of restraint had long since expired.

The decision helpfully clarified the correct approach to Courts deleting words so that a covenant is enforceable. Severance is permitted where the unenforceable provision can effectively be crossed out (without the need to add to or modify the wording of what remains) and provided that removal of the offending word(s) does not generate any major change in the overall effect of all the post-employment restraints in the contract.

What does this mean for employers?

Although this is a welcome decision for employers trying to enforce restrictive covenants because it gives a green light to the court to remove problem wording, it does not diminish the need to draft covenants precisely in the first place, not least to avoid going through litigation to rely upon the court perfecting the covenant.

Template documents should be checked to ensure that modest shareholdings are not prohibited by blanket wording.

Employers should remember that tailored covenants, drawn up by reference to the individual signing up, are more likely to be enforceable than "one size fits all" standard covenants.

Non–compete clauses

Non-compete clauses are designed to stop an employee from joining a direct competitor or setting up in competition themselves for a limited period.  The starting position with restrictive covenants is that they are void because they prevent an individual’s right to trade. They will be enforced only if the employer can demonstrate that, at the time they were entered into, the protection was necessary and goes no further that is reasonably necessary to protects the employer’s legitimate business interests.

Where a court finds that the non-compete clause is too imprecise or even marginally overreaches, the covenant is rendered void and the employer ends up with no protection at all unless the courts are able to sever the unreasonable part without affecting the enforceability of the remaining restriction.

 

Authors

Georgina Rowley

Georgina Rowley

London - Walbrook

+44 (0)20 7894 6997

Joanne Bell

Joanne Bell

Manchester

+44 (0) 161 934 3179

< Back to articles