UK: Supreme Court Finds That Offending Words Can Be Severed From Non-Compete Restrictive Covenants

Last Updated: 28 August 2019
Article by David Collins, Richard Barham, Candice Chapman and Anna Janik

The Supreme Court has considered the law on severance of restrictive covenants, and further developed the test to allow unreasonably wide words to be severed where this would not generate any major change in the overall effect of the covenants.

Background

A restrictive covenant will be void for being in restraint of trade unless the business has a legitimate proprietary interest to protect and the covenant is reasonable (having regard to public interest and the parties' interests). It may also be possible to "sever" unlawful words or provisions from a restrictive covenant that would otherwise be too wide, in order that the remaining part of the covenant would still be enforceable. Various cases have previously considered the circumstances in which severance could be applied in this context, and it was the Supreme Court's findings on this point that are of particular interest.

Facts

Ms Tillman was hired by Egon Zehnder (EZ) under an employment contract which included a six-month post-termination non-competition restriction in which Ms Tillman covenanted 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 the Company or any Group Company which were carried on at the Termination Date or during the period of 12 months prior to that date and with which you were materially concerned during such period."

Ms Tillman was quickly promoted but was never required to sign a new employment contract. She resigned from EZ in January 2017 and subsequently notified EZ that she wished to start working for a competitor in New York on 1 May 2017. EZ issued proceedings and sought to enforce Tillman's non-competition restrictive covenant.  One of Ms Tillman's legal arguments was that the restrictive covenant was void as it was wider than reasonably required (and therefore a restraint of trade).  In particular, being "interested in" a competing business was too wide as it could prevent her from having even a minor shareholding in the competing business for investment purposes.

High Court and Court of Appeal decisions

The High Court upheld the non-competition covenant and granted EZ an injunction restraining the breach: on the facts, the protection sought by EZ was no more than was reasonable.  Moreover, "interested in any business" should be construed so as not to capture a minor shareholding, and therefore the clause was not void for being wider than reasonably necessary.

The Court of Appeal overturned the High Court's decision, finding that the restriction was too wide and therefore void: it was impossible to say that a shareholder in a company was not "interested in" that company, so any restraint including that phrase would be too wide to be enforceable. Severance of the words "or interested" from the covenant (leaving a valid restriction) was not possible as (amongst other reasons) it was a single covenant to be read as a whole.

Supreme Court decision

The Supreme Court allowed EZ's appeal.  In particular, it held that:

  • a contractual prohibition on Ms Tillman's ability to hold shares after termination of her employment with EZ fell (along with all the other restrictions in the sub-clause) within the restraint of trade doctrine;
  • the phrase "engaged or concerned or interested" has often been included in standard precedents for drafting non-competition covenants throughout the last century and covers any size of shareholding (no realistic alternative construction of the word in this context was put forward); therefore the restrictive covenant would be an unreasonable (and void) restraint of trade unless the word could be severed and removed from the rest of the clause;
  • a threefold approach (based primarily on a Court of Appeal decision in 2010) should apply when considering whether severance is possible, namely:
    1. the words to be severed must be capable of being removed from the non-competition covenant without the need to add to or modify the wording of the remainder;
    2. the remaining terms must continue to be supported by adequate consideration (this will not normally be an issue in the usual post-employment situation); and
    3. removal of the unenforceable provision must not generate any "major change" in the overall effect of all the post-employment restraints in the contract.  The employer must establish that its removal would not do so.  The focus is on the legal effect of the restraints, not on their perhaps changing significance for the parties.

Applying this severance principle to the facts of the case, the court held that the words "or interested" were capable of being severed and that therefore the remaining, reasonable parts of the covenant were enforceable against Ms Tillman.  

Comment

Restrictive covenants along these lines are often found in the context of share or business sales where departing sellers may sign up to certain post-completion restrictions. The Supreme Court's decision may be helpful for entities seeking the benefit of such restrictions by confirming that a court may sever impermissibly wide restrictions and yet find the remaining, reasonable provisions enforceable. However, the position is not yet crystal clear as case law may develop around the meaning of "major change" in limb three of the severance test; furthermore, all restrictive covenants will continue to be void as restraints of trade unless the business has a legitimate proprietary interest to protect (and does so reasonably). The Supreme Court advised that courts must continue to adopt a cautious approach to the severance of post-employment restraints, and warned that companies which are victorious on severance tests may still encounter adverse costs implications - so caution must continue to be exercised when drafting in this area.

Tillman (Respondent) v. Egon Zehnder Ltd (Appellant) [2019] EWCA Civ 1054

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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