KNOWLEDGE

Supreme Court considers the law relating to restrictive covenants

Morton Fraser_Innes Clark
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Innes Clark
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PUBLISHED:
15 July 2019
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The Supreme Court provides guidance on the criteria used to establish when words can be severed from restrictive covenants and overrules a 99 year old case.

In Tillman v Egon Zehnder Ltd the Supreme Court has considered when it is appropriate to sever words from within a restrictive covenant in circumstances where, if the words were to remain, the covenant would be void as an unreasonable restraint of trade. 

Ms Tillman, who had been promoted quickly during her employment with Egon Zehnder Ltd, was subject to a number of restrictive covenants which lasted for 6 months following the termination of her employment.  The non compete clause was the one at issue before the Supreme Court.  It said that Ms Tillman could 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…….".

Within a week of her employment terminating Ms Tillman indicated she intended to start work for a competitor.  When Egon Zehnder applied for an interim injunction preventing Ms Tillman from taking up her new employment she argued that the non compete clause was an unreasonable restraint of trade and thus void.  This argument focused on the words "or interested in any business" which Ms Tillman said prevented her from holding even a minor shareholding in a competitive business.  Mr Justice Mann in the High Court did not accept this and granted the injunction.

However, the Court of Appeal allowed an appeal, agreeing that the words "interested in" unreasonably prevented Miss Tillman from holding even a minor shareholding in a competitor.  This was despite the fact that Ms Tillman's arguments were theoretical only - she had no intention of taking a minor shareholding in a competitor - her intention was to go and work for a competitor and she simply used this argument as a means to an end.  Egon Zehnder, having lost on the principal point, argued that the words at issue could be severed from the terms of the non compete rendering it enforceable, however the Court of Appeal did not accept this. 

The Supreme Court agreed that the words "interested in" did preclude even a minor shareholding rendering the clause, as drafted, an unreasonable restraint of trade. However, it disagreed on the issue of severance of those words.  Two approaches to severance were considered by the Court.  The first approach set out in a Court of Appeal case dating from 1920, Attwood v Lamont, limited severance to situations where the covenant was "not really a single covenant but [was] in effect a combination of several distinct covenants".  The second, again set out in a Court of Appeal case but this time in Beckett Investment Management Group Ltd v Hall in 2007, used three criteria for severance.  The criteria were:-

  • Whether the unenforceable provision can be removed without the need to add or modify the wording that remains;
  • That the remaining terms continue to be supported by adequate consideration; and
  • That the removal of the unenforceable provision does not so change the character of the contract that it becomes not the sort of contract the parties entered into at all.

The Supreme Court preferred the use of the three criteria in the Beckett case and overruled the Court of Appeal in Attwood.  The third criteria was the crucial one in the view of the Supreme Court, and was better expressed as "whether the removal of the provision would not generate any major change in the overall effect of all the post-employment restraints in the contract". 

On that basis the words "or interested" could be removed from the non-compete clause and the injunction granted by the High Court could be restored.  Something of a pyrrhic victory for Egon Zehnder given the restricted period had long since expired but a useful clarification of when unreasonably broad words can be severed from the remaining reasonable parts of a restrictive covenant.

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