Restrictive covenants big news
The UK Supreme Court has upheld a clause in an employment contract which prevented Ms Tillman from working for a competing firm for 6 months, it did so after finding elements that would otherwise made it an unreasonable constraint on trade could be severed.
When she left the firm at Egon Zehnder Ltd, on 30 January 2017, she had then had the intention of taking a new job with a competitor. Ms Tillman’s contract of employment contained a non-competition clause which prevented her from “engaging, being concerned or interested in any business carried on in competition with” the firms business. She argued that the words “interested in”, meant that the clause unreasonably prevented her from holding even a minor shareholding in a competing business, and it should therefore be void.
The Supreme Court, overturning the decision by the Court of Appeal, restoring that of the High Court, granted an injunction sought by Egon Zehnder preventing her from working for the competitor for the six-month period (now expired). While it agreed with Tillman that the clause as drafted did purport to prevent even a small shareholding and that this was unreasonable, it found that the offending words “interested in” could easily be severed from the rest of the clause without “significantly changing the effect of the restriction. The clause could therefore be upheld, subject to this change.
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It is worth noting, the covenant was only found to be enforceable on the basis that the “offending words” could be removed without the need to modify any of the remaining wording of the clause, and by doing so it would not generate a major change.
The Supreme Court considered whether the “interest in” wording covered a shareholding of any size.
It concluded that it did. It ruled that preventing an individual from holding shares in a competing company was a restraint on trade.
When considering whether it was permissible to sever the unreasonable parts of the clause from the remainder in order to uphold the rest of the clause. The Supreme Court found that it was, by doing this it overturned a 1920 court of appeal decision preventing severance.
It ruled the test was in 3 parts – 1-, the unenforceable part, “capable of being removed without the necessity of adding to or modifying the wording of what remains”. This is what the courts call the “blue pencil test”. 2-, what remains of the clause must be supported by “adequate consideration”, or a fair bargain between the parties and 3-, removing the enforceable provision must not “generate any major change in the overall effect of all the post-employer restraints in the contract”
As the 3 tests were met the clause could therefore be upheld in this case once the “interested in”wording was removed.
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Restrictive covenants have for sometime been particularly troublesome and under the microscope, this ruling brings about clarity for employers, I would however still urge employers to tread carefully.
I advocate the careful drafting of the clauses in contract for employers who do seek to rely on them.
A “non-compete restrictive covenant”, which is the clause contained within the contract of
employment, prohibits the employee from competing with an ex-employer for a certain period after the employee has left the company. Other common restrictive covenants aim to prevent the ex-employee from soliciting or dealing with certain clients, customers or employees of the company after they leave the company.