For nearly a century, an Appeal Court ruling has been the main precedent in cases which involve the use of post-employment restraints in contracts.
This year, the Supreme Court was asked to consider a ruling by the Court of Appeal in the case of Tillman v Egon Zehnder Ltd.
Ms Tillman had worked for the company for several years, first as a consultant and then being promoted to principal in 2006, partner in 2009 and joint global practice head in 2012.
She was always employed largely on the terms of her original contract which included a clause providing for five restraints upon her activities following the end of her employment, all limited to a period of six months from the termination date.
By one of these, Ms Tillman agreed that she would not “directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of [Egon Zehnder]” within a 12-month period prior to the termination date “and with which [she was] materially concerned during such period.”
She eventually left the firm to start work as an employee of a competitor, agreeing to comply with all her covenants in the agreement apart from that covering non-competition.
Ms Tillman conceded that it would prevent her proposed employment within the restricted six-month period but alleged that it was in unreasonable restraint of trade and thus void.
Egon Zehnder issued proceedings and was granted an injunction by the High Court. The Court of Appeal then allowed Ms Tillman’s appeal and set aside the injunction.
The main argument
The Supreme Court noted that the lower courts had decided that the enforceability of the non-competition covenant turned on whether the words “interested in” unreasonably prevented even a minor shareholding by Ms Tillman in a competing business and, if so, whether the offending part of the covenant could be severed.
The points at issue were therefore whether:
assuming that the clause prohibits shareholding, that part of the covenant falls entirely outside the restraint of trade doctrine
the words “interested in”, properly construed, prohibit any shareholding
the correct approach to severance was applied.
Court goes against 100-year-old ruling
Unanimously allowing the appeal, the Supreme Court formally restored the earlier injunction, even though the contractual period of restraint has since expired.
It said that the “validity principle” in construing agreements proceeds on the premise that the parties to a contract or other instrument will have intended it to be valid.
The phrase “engaged or concerned or interested”, adopted in the clause under discussion, has long been included in standard precedents for the drafting of non-competition covenants and treated as including a shareholding prohibition.
The Court decided that Egon Zehnder was unable to advance a realistic alternative construction of the word “interested” and that the natural meaning of the word, which includes a shareholding (large or small), applies.
Subject to severance, the clause is thus void as an unreasonable restraint of trade.
Using what is known as the “blue pencil” test, the Court said that the words “or interested” were capable of being removed from the clause without the need to add to or modify the wording of the rest of the clause and removal of the prohibition against Ms Tillman being “interested” would not generate any major change in the overall effect of the restraints.
Comment by Peninsula Associate Director of Legal, James Potts
While the interpretation and enforceability of restrictive covenants has long been one of the greyest areas in employment documentation drafting, this decision may provide some relief to employers who routinely use these covenants to prevent their employees working in competition once they have left their role.
Although this decision went in favour of the employer, this does not give carte blanche to draft wide post-termination covenants as an unreasonable restraint of trade will remain unenforceable.
To prevent the time and expense of courts interpreting the enforceability of such clauses, employers are reminded of the need to ensure their restrictive covenants are in place to protect legitimate business interests and are no wider than reasonably necessary.
Last reviewed 9 July 2019