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Important Supreme Court Decision on Restrictive Covenants

The Supreme Court has overturned the decision of the Court of Appeal in the case of Tillman v Egon Zehnder Ltd.

Background

Ms Tillman started work for Egon Zendher (“the Company”) in 2004 as a consultant and was quickly promoted to partner. In 2017, she resigned with notice to work for a competitor. The Company issued proceedings against her for breach of contract, alleging that she was in breach of a non-compete restrictive covenant in her contract of employment with it.

The non-compete clause provided that for six months from the termination of her employment, Ms Tillman would not:

“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 the non-compete restriction was void as it was too wide and went further than reasonably required to protect a legitimate business interest. Ms Tillman argued that the words “or interested in” made the clause unenforceable as it could even prevent her from having a minor shareholding in a competing business (although this was not her intention).

The High Court originally upheld the non-compete restriction and granted an injunction to restrain the breach. However, the Court of Appeal disagreed.

The Court of Appeal agreed with Ms Tillman and held that the words “or interested in” prevented Ms Tillman from holding even a minor shareholding in a competing company and this rendered the non-compete restriction impermissibly wide and therefore void. This was despite the fact that Ms Tillman’s capacity in the new business was as an employee and presumably this was what the clause was intended to restrict her from.

Supreme Court Decision

The Supreme Court disagreed with the Court of Appeal decision. It held that the words “or interested” could be severed to rescue the non-compete clause. Deletion of words that would otherwise make the clause unenforceable is permitted so far as:

  • it does not result in a major change to the overall effect of the clause; and
  • other words do not need to be added or modified for the clause to make sense.

Comment

This is the first Supreme Court decision on restrictive covenants in 100 years and will come as a relief to employers who had been concerned, following the Court of Appeal decision, that some existing post termination restrictions would be rendered ineffective. Nevertheless, it is still the case that post-termination restrictive covenants must be designed to protect a legitimate business interest and go no further than is reasonably required to protect that interest. Therefore it is always advisable to have carefully drafted and tailored restrictions.

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