Supreme Court Amends a Post Termination Non-Compete Clause in Recruiters Contract to Make It Enforceable

...such that the remaining wording was enforceable against the employee.

Background

Ms Tillman resigned from her role at executive recruitment and global management company, Egon Zehnder Ltd, in January and notified it three months later that she intended to take up a new role with a competitor. Egon Zehnder issued proceedings on the basis that this would be a breach of the six month non-compete clause in Ms Tillman's employment contract.

Ms Tillman alleged that this restrictive covenant was unenforceable because it was too widely drafted. In particular, the clause prevented her from having any "interest in" a competing business, which would prevent her even having a minor shareholding for investment purposes.

The High Court found that the "interest in" wording of the restrictive covenant did not prevent Ms Tillman having a minor shareholding in a competitor and therefore was not too widely drafted to be enforceable. The Court of Appeal overturned this decision as "interest in" should have been interpreted as including a minor shareholding. This wording could not be severed and therefore the clause breached the basic principle that a restrictive covenant must be no wider than reasonably necessary to protect the employer's legitimate interests. The Court of Appeal said it was therefore an unreasonable restraint of trade and was void and unenforceable.

Egon Zehnder appealed to the Supreme Court.

The Supreme Court's Decision

The Supreme Court agreed that the "interest in" wording encompassed a minor shareholding for investment purposes and therefore was too wide to be enforceable. However it found that the "interest in" wording was severable, meaning that the rest of the clause was valid and enforceable against Ms Tillman.

The Supreme Court applied the following tests to find that the wording was severable:

• the problematic wording can be removed without needing to add to or modify the remaining wording (the "blue pencil" test);
• the remaining provisions are still supported by adequate consideration; and
• removing the problematic wording does not generate any major change in the overall effect of the remaining provisions.

In this case, these tests were all met and so the wording was severed. However the 1920 decision of the Court of Appeal in Attwood v Lamont laid down the principle that, in the case of restrictive covenants, it is only possible to sever distinct covenants, not the wording of part of a covenant. By severing just part of the clause, the Supreme Court's decision has overturned this Court of Appeal authority.

Best Practice

Employers should not take this to mean that they can include indiscriminately wide post-termination restrictions in their employees' contracts of employment. Employers who will seek to rely on such restrictions should still ensure that these are carefully drafted.

However, in cases where post-termination restrictions are found to have been too widely drafted to be fully enforceable, employers do now have a better chance of saving a clause if they are able to meet the narrow tests to sever problematic wording.

To learn more about post-termination restrictions, please contact Bob Fahy in our Employment Law team on 020 7665 0818, or complete the form below.