Restrictive Covenants: First Supreme Court case for 100 years upholds post-termination restriction

Reassuringly for employers, the Supreme Court upheld a ‘non-compete’ clause imposed by the company on a senior executive.

Introduction

In Tillman v Egon Zehnder Ltd the Supreme Court has, for the first time in a century, considered the issue of the scope and enforceability of post-termination restrictions in an employment contract. It is very unusual for this issue to reach the very top of the legal appeal ladder, as disputes are usually resolved by the lower courts.

Reassuringly for employers, the Supreme Court upheld a ‘non-compete’ clause imposed by the company on a senior executive. Although part of the clause, which effectively prevented the Claimant from owning a minor shareholding in a competing business, was unacceptably wide, this part could be ‘severed’ from the rest of the restriction. The remainder of the restriction still operated to prevent her from working for a competitor.

What happened?

Ms Tillman was employed by the respondent, a specialist executive search and recruitment business, in a very senior role. After her employment came to an end on 30 January 2017, she informed the respondent that she intended start work for a competitor business around three months later.

She told her employer that she was happy to comply with all of the numerous post-termination restrictions in her contract, except for a ‘non-compete’ clause which stated that she would not “directly or indirectly engage or be concerned or interested in any business carried on in competition with” her former employer. She argued that the words “or interested in” were unreasonably wide and prevented her from owing even a minor shareholding in a competitor business. As many businesses require senior executives to hold company shares, this was effectively a barrier to her finding a new post. She argued that this rendered the whole ‘non-compete’ clause unenforceable and she should be released from it completely.

Her employer disputed this on two counts. Firstly, it argued that the wording of the clause did not prevent Ms Tillman taking a minor shareholding in a competitor company. Secondly, if the Court found that it did, the words “or interested in” could be ‘severed’ from the clause and the remaining restrictions should remain binding on Ms Tillman.

The decision

The Supreme Court’s Judgment is extremely detailed and discusses a long history of cases on restrictive covenants dating back to the 1400s.

However, the core of the decision is relatively straightforward. The Supreme Court agreed with Ms Tillman’s construction of the “non-compete” clause, holding that the words “or interested in” did in fact prevent her from taking a minor shareholding in a competitor business and, for that reason, were unreasonably wide.

However, the Court went on to uphold her employer’s argument that these words could be ‘severed’ from the clause. The rest of the clause remained valid and Ms Tillman remained restricted from working for a competitor.

In making this finding, the Court clarified that there are two key questions:

  • Can the words to be ‘severed’ from a clause be removed without having to add to or modify the words that remain?
  • Can the words be removed without generating any major change in the overall effect of the post-employment restrictions in the contract? Applying these criteria, the controversial words “or interested in” could, in this case, be effectively removed from the rest of the “non-compete” clause.

What does this mean for me?

Clients often ask us whether it is worthwhile including post-termination restrictions in employment contracts, as the courts appear reluctant to allow contractual provisions that are in any way ‘in restraint of trade’ and so often find them to be unenforceable?

The answer is yes. The Supreme Court acknowledged in its decision that “high-ranking employees can do particular damage to the legitimate interests of their employers following termination of their employment”. This case confirms that restrictive covenants can still provide effective protection for your business when such employees leave, provided that these provisions are carefully drafted.

Comment

This judgment confirms that post-termination restrictions may be enforced, even if a few words need to be deleted from a provision for them to be effective. That is reassuring. However it is always best to ensure that the restrictions are as well drafted as possible in the first place. The most effective restrictions are well written, clear, and not vulnerable to semantic argument. This is one area where the detailed wording of your contracts is all important. If you have not already done so, please do talk to us about your restrictions and what it is you need to protect. If you need to enforce them, we are happy to help.

Claire Hollins is a Principal Associate in the employment, pensions and immigration team based in Manchester. If the content of this alert raise any issues for you, please liaise with your usual contact or speak to Claire Hollins on claire.hollins@weightmans.com or 0161 214 0518.

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