Supreme Court rules that restrictive covenants can be made enforceable by removing unreasonable parts
Any clause in an employment contract that seeks to restrict what an employee can do after their contract comes to an end is invalid from the outset for being a restraint of trade.
It will only be enforceable if the employer can show that:
- it has a legitimate proprietary interest that it is appropriate to protect; and
- the protection that is sought by having that clause in the employment contract, and the extent to which the employee is restricted by that clause, goes no further than is necessary to protect the business.
In the recent case of Tillman v Egon Zehnder Limited, an employee (Ms Tillman) sought to extricate herself from a six-month non-compete restrictive covenant. She argued that the clause, restricting her from being ‘concerned or interested’ in a competitor for six months after her employment came to an end, was unreasonable on the basis that the words ‘or interested’ prevented her from even being able to have a minor shareholding in a competitor company. Ms Tillman argued that this clause should therefore be unenforceable as it was far too restrictive. The Court of Appeal agreed with her and set aside the interim injunction that was in place preventing her from going to work for a competitor. Her former employer (Egon Zehnder Limited) appealed to the Supreme Court.
What did the Supreme Court say?
Up until now, the authority on these types of cases has been Attwood v Lamont, which is a case that was decided in 1920. In Attwood v Lamont, the court held that severance could only take place where there are several distinct covenants, rather than severing part of a single covenant to make it less restrictive. The court also found that, for words to be severable, they should be no more than ‘trivial or technical’.
In Tillman, the Supreme Court agreed that the covenant was too restrictive but held that the words ‘or interested’ could be removed from that clause so as to make it less restrictive and therefore enforceable. This case has overruled the decision in Attwood by making it possible to use severance to make an otherwise unenforceable covenant, enforceable.
What does this mean for employers?
Courts have the authority to ‘sever’ a clause, or parts of a clause, where they find it goes further than is necessary, to protect the business. Essentially, what this means is that they can remove the offending part and leave something more reasonable behind. However, the courts will not redraft contracts. There are many factors that the courts need to consider when deciding whether severance is appropriate and, in many cases, the courts will decide that it is not possible and therefore, the entire clause fails, leaving the employer without any protection. One of the factors that the courts had to consider up until now, was the decision reached in Attwood.
In Tillman, the Court of Appeal ruled that the clause restricting Ms Tillman went too far, i.e. it did more than was necessary to protect a legitimate proprietary interest. The Court held that it was therefore unenforceable because it was a restraint of trade and it wasn’t justified.
However, the Supreme Court held that although the words, ‘or interested’ did seem to go too far than was necessary to protect a legitimate proprietary interest; if these words were removed from that clause, what was left behind was entirely reasonable and therefore enforceable.
Employers should be very pleased with this decision. Often, employers have post-termination restrictions in employment contracts that are difficult to enforce for exactly this reason. However, Tillman provides a bit more flexibility in using the principle of severability to remove the offending part of a clause, leaving behind a reasonable restriction, rather than finding that the entire clause fails.
The three key factors in severing restrictive covenants
In Tillman, the Supreme Court focused on three key factors to consider when looking at the issue of severability. These factors were taken from a previous case, Beckett Investment Management Group Limited v Hall.
The first factor was that the court can only remove a word/s if doing so would not then require it to amend or alter the rest of the wording that is left behind. So in this case, the clause was that Ms Tillman wouldn’t:
“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.”
By removing the words ‘or interested’, the rest of this clause still makes sense and is much more reasonable.
The second factor was that whatever is left behind after severance must still be supported by adequate ‘consideration’. This is the principle that both parties under a contract must be getting something in exchange for something by entering into that contract. This is necessary for the contract to be enforceable.
The third factor was that severing the offending word should not cause any major change in the overall effect of the post termination restrictions that are in the contract of employment.
How we can help
Even though this case does offer some flexibility to employers, it’s vital to take legal advice on employment contracts when using restrictive covenants because if those clauses aren’t drafted properly, they may end up being unenforceable.
Our employment solicitors in Bristol and South Gloucestershire are able to advise employers and business owners on a range of employment matters, including contracts and clauses.
If you’ve got questions about contract law or would like advice on writing a contract of employment for a new employee, our experienced employment solicitors in Bristol and South Gloucestershire can help.