Can words be severed from a restrictive covenant to make an otherwise unreasonably wide and unenforceable covenant enforceable?
A contractual term restricting a departing employee’s activities is generally in restraint of trade unless an employer has a proprietary interest that it is appropriate to protect (e.g. trade connections with customers and suppliers) and the restriction is no wider than reasonably necessary to protect that interest.
In Tillman v Egon Zehnder Ltd the Supreme Court severed words from a clause to rescue an otherwise invalid restraint and in doing so reversed Court of Appeal authority which had been applicable for 99 years.
In the case before the Supreme Court, Ms Tillman was an investment banker with Egon Zehnder (EZ). Her contract of employment contained restrictive covenants, including a six month non-compete clause. She left EZ on 30 January 2017 and informed EZ that she intended to start working for a competitor. She made clear that she intended to comply with all her covenants, bar the non-compete clause. She argued that the non-compete clause requiring her to not ‘engage or be concerned or interested in any business carried on in competition’ was an unreasonable restraint of trade, as being “interested in” prevented her from having a minor shareholding in a competing business, for example.
EZ issued proceedings in the High Court, seeking an interim injunction to prevent Ms Tillman from breaching her non-competition covenant. The High Court granted the injunction, holding that the words “interested in” did not preclude her from holding a minor shareholding. The Court of Appeal disagreed. The Court refused to sever the words “or interested” from the rest of the clause, partly on the basis that it was a single covenant which had to be read as a whole.
The Supreme Court agreed that the ‘natural construction of the word “interested”, consistent with long-standing authority, is that it covers a shareholding’. However, it held that the words could be removed from the clause as it did not generate a major change in the overall effect of the restraint. Consequently, the injunction was restored.
The decision is good news for employers as the Supreme Court has confirmed that the courts will sometimes come to the rescue of employers where restrictive covenants have been drafted too widely.
However, it is worth noting that the Supreme Court’s strong indication was that the employer may not be able to recover some or all its legal costs.
The starting point remains that restrictive covenants are void unless they go no further than necessary to protect an employer’s business. An employer would be in a better position to carefully draft any restrictions and tailor these to each employee as necessary, with the possibility of severance being used as a last resort.