News & Views

Not so restrictive covenants

HL
BY Hannah Lynn
Employment law

Drafting restrictive covenants can be notoriously tricky; any clause must not be so wide that it is unenforceable, yet not so narrow that it does not achieve the desired restriction on competition.

As you can imagine, this is a difficult balance to strike.

The general legal principle is that restrictive covenants must be drafted so as to protect the business’ legitimate interests and not in a way that is overly restrictive on the employee. When establishing whether a restrictive covenant is enforceable, a court will also consider whether a lesser form of protection could achieve the same aim.

The Supreme Court has recently ruled on restrictive covenants for the first time in 100 years with a case that may give some contract wordsmiths hope. In the case of Tillman v Egon Zehnder (EZ) Ltd. Mary-Caroline Tillman started working for EZ in 2004, a recruitment company which focused on executive searches. Ms Tillman worked her way up the Company until she became co-Global Head of the Financial Services Practice Group in2012. This case revolved around wording about a restriction imposed on a departing employee owning shares in a competitor’s business.

In 2017 Ms Tillman was offered a role with a competitor and resigned. She told EZ that she wanted to start working for the competitor on 1 May 2017 but her contract of employment contained a number of restrictions that would be in force until 30 July 2017. These included non-solicitation, non-dealing and confidentiality terms.

Of particular significance was the non-compete clause which stated that she must not ‘directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the business of the Company or any Group Company’. EZ were successful in receiving an interim injunction from the High Court to prevent Ms Tillman from commencing work with their competition, but she appealed this decision in July 2018.

The Court of Appeal found in her favour focusing on the interpretation of the phrase ‘interested in’ which they found included being a shareholder. Ms Tillman was not a shareholder and provided no evidence that she wished to become one but used this phrasing to argue that the covenant was unreasonably wide, thus making it unenforceable. EZ denied that the clause covered the acquisition of a shareholding but agreed that if it had, it would be too wide. The Court of Appeal refused to edit the restrictive covenant to sever the words ‘or interested in’ from the rest of the clause, holding that the covenant should be read as a whole.

This case was appealed to the Supreme Court which unanimously ruled that the words ‘interested in’ did cover the acquisition of a shareholding but that these words could be severed from the rest of the covenant. This meant that the remainder of the restriction would be enforceable. In considering whether a provision can be severed from the covenant, the Supreme Court found that the key question is whether removing the provision would result in a major change in the overall effect of the post-employment restraints. This test focuses on the legal effect and not the impact on the employee. Here, the Supreme Court found that removing ‘interested in’ would not result in major change and the rest of the covenant could remain unmodified.

This may encourage employers to start drafting restrictive covenants more widely in the hopes that provisions may be severed to ensure enforceability. However, employers should still focus on being reasonable in drafting any post-termination employments, especially where this might impact whether an individual is willing to sign the contract of employment. Relying on severance should likely be viewed as a last resort and not a drafting tool.

If you have any questions on drafting restrictive covenants or the impact of this decision, get in touch with your Employment Solicitor today.

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