Legal

Changes afoot for restrictive covenants

3 Jun 2019 By Sarah Armstrong

Sarah Armstrong looks at whether a forthcoming Supreme Court case could impact the enforceability of restrictive covenants

Employers still await the Supreme Court’s decision in Tillman v Egon Zehnder Ltd (argued in January) – a high-profile dispute between a global executive search company and its former employee which could impact on the enforceability of post-termination restrictions in the employment contracts of thousands of senior executives.

Background

Mary-Caroline Tillman had worked for Egon Zehnder Ltd since 2004. She began her employment as a consultant and was later promoted to partner and finally to co-global head of the financial services practice group. Her employment terminated in January 2017 and her employer sought to restrain her from working for a competitor during the six-month period after termination. 

Her contract of employment, dated 16 December 2003, contained a routine post-termination restrictive covenant which read:

‘You shall not without the prior written consent of the Company directly or indirectly, either alone or jointly with or on behalf of any third party and whether as principal, manager, employee, contractor, consultant, agent or otherwise howsoever at any time within the period of six months from the Termination Date 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 such period.’

Enforceability 

It is well-established that post-termination restrictive covenants will only be enforceable if the employer can show:

  • They have a legitimate business interest which requires protection. 

  • The covenants go no further than is reasonably necessary for the protection of that interest.


Prohibition on being ‘interested in’ a competing business

Tillman alleged that the covenant was unenforceable because it went further than was reasonably necessary to protect Egon Zehnder’s legitimate business interests. She argued the covenant prevented her from being engaged or concerned or interested in any business carried on in competition with any business of Egon Zehnder. If she acquired a shareholding in a competitor, she would, she argued, be ‘interested in’ a competing business. 

Egon Zehnder agreed that, if the word ‘interested’ covered the acquisition of a shareholding, the clause would be wider than was necessary for the protection of the company’s legitimate business interests and would be in unreasonable restraint of trade. Egon Zehnder however argued that, on its proper construction, the clause did not cover the acquisition of a shareholding at all. 

The judge agreed with Egon Zehnder and granted an injunction restraining Tillman from working for the competitor. She appealed.

The Court of Appeal said the words ‘interested in’ must be interpreted in accordance with conventional usage. It is impossible to say of a person holding shares in a company that she/he is not ‘interested in’ the business of the company. Therefore, they concluded the covenant did prohibit shareholdings and, therefore, was too wide and was in unreasonable restraint of trade.

Severance

The Court of Appeal considered whether it was possible to save the rest of the covenant by deleting (severing) the words ‘or interested’. It held it was not possible, so the covenant was therefore unenforceable, and the injunction was set aside.

The reasons why there could be no severance were:

  • Even if the words ‘or interested’ were omitted, the covenant would still have been too wide (it could still have covered shareholdings because a shareholder in a company carrying on business is arguably ‘concerned in’ that business, which was also prohibited by the clause).

  • Parts of a single covenant cannot be severed; severance can only take place where there are distinct covenants.

  • It is no business of the courts to come to the assistance of an employer who has demanded an unreasonably wide covenant.


Egon Zehnder appealed to the Supreme Court. The judgment is awaited.

Commentary

Tillman was able to rely on the fact that the covenant theoretically prevented her from holding shares in a competitor even though she did not intend to acquire any shareholding in any competitor. She could legitimately have been restrained from working for a competitor if the covenant had been more carefully drafted. This is a reminder for employers that the consequence of including wide covenants in your contracts may be that you end up with no protection at all. 

While the Supreme Court judgment is awaited, employers should nevertheless check employment contracts to ensure they do not contain post-termination restrictions which may be too wide, particularly if they would prevent former employees from holding shares in a competitor. They should also consider whether restrictions need to be redrafted as a series of separate independent covenants so that, if necessary, the court could be asked to delete any which are found to be too wide.

Sarah Armstrong is an associate at HRC Law LLP and specialises in restrictive covenant disputes

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