Case on restrictive covenants at Supreme Court (22/23 January 2019)
Tillman v Egon Zehnder Ltd was appealed to the Supreme Court last week.
The case concerns an employee, Ms Tillman, who sought to work for a direct competitor of Egon Zehnder before the expiry of her non-compete restrictive covenant. Egon Zehnder sought an injunction from the High Court, which was granted, but later set aside by the Court of Appeal on the basis that the non-compete restriction was ‘impermissibly wide’.
What are restrictive covenants?
Restrictive covenants are put in place to protect an employer’s legitimate business interests. Restrictions which are too wide, too long or are otherwise in excess of what is required to protect those legitimate business interests run the risk of being void for being a restraint on the employee’s trade. A careful assessment needs to be made in each instance as to exactly what you need to restrict the relevant employee from doing post-termination. This will involve consideration of matters such as the employee’s seniority, their influence within the business and the industry, the role that they undertake and their interaction with key customers/suppliers – to name a few.
The Tillman case
In the Tillman case, the relevant restriction at issue states:
- You shall not without the prior written consent of the Company directly or indirectly, either alone or jointly with or on behalf of any third party and whether as principal, manager, employee, contractor, consultant, agent or otherwise howsoever 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.
Ms Tillman argued that this clause was too wide and therefore unenforceable. The Court of Appeal agreed with her argument that the phrase “interested in” could include holding one share in a publicly listed company (referring to the case of CEF Holding Ltd v Munday ) and therefore goes much further than is necessary to protect Egon Zehnder’s legitimate business interests.
This case is particularly interesting because in coming to its decision, the Court of Appeal had to consider two important legal doctrines, namely:
“The Blue Pencil Test” – Egon Zehnder argued that in the event that the restriction (as drafted) was too wide, that the offending words “interested in” could be “struck out with a blue pencil” to make the clause enforceable. The Court of Appeal reiterated the rules around the “blue pencil test”, asserting that it is not the role of the courts to create a valid covenant to be imposed upon the employee by striking out offending wording. They confirmed that the constituent parts of a single covenant cannot be severed; it is a requirement of severance that it can only take place where there are distinct covenants. In other words, the court can strike out a whole covenant and leave the remaining covenants intact, but it cannot strike out parts of a covenant to make it enforceable. In the present case, the non-compete restriction is a single covenant, which could not be severed.
“The Contra Proferentem Rule” – it is long established case law that the drafter of a contract cannot seek to rely on their own bad drafting. However, the recipient of a poorly drafted contract is entitled to rely upon the drafter’s mistakes. In this case, it was confirmed that the fact that Ms Tillman was “exploiting” Egon Zehnder’s defective drafting had no bearing on the Court’s decision.
What does this mean for businesses in the future?
This case and the exploration of the two legal doctrines provides useful guidance and clarification for employers. It is often tempting for an employer to take a ‘blanket approach’ to restrictive covenants, e.g. subjecting all employees to a single set of restrictions, but this case highlights the importance of giving sensible consideration to the effect of those restrictions on an individual basis, and whether in reality, they will unduly restrict an employee to undertake their profession. The Court of Appeal has made very clear in its judgment that if the drafting of restrictive covenants is not correct in the first place, the court will not step in to ‘create’ a new position which corrects an employer’s error. If the restriction is void, injunctive relief will not be granted. If the Court of Appeal’s decision is overturned by the Supreme Court, this will be very interesting indeed from a costs perspective, given that injunctive relief (as granted by the High Court) is only granted in circumstances where the court is satisfied that damages would not be an adequate remedy…
For advice on drafting and enforcing restrictive covenants and other contractual issues, please contact Claire or Rebecca in our employment team. Please also keep an eye on our twitter feed for updates on the Tillman v Egon Zehnder case.