Employment Law Speed Read – 08/07/19

Background

Ms Tillman was employed by Egon Zehnder Ltd (Egon Zehnder), an executive search and recruitment company. She was first employed as a consultant and after various promotions was appointed as joint global head in 2012. She was always employed largely on the terms of her original contract.

Ms Tillman’s original contract included five post-termination restrictions which lasted for a period of six months from her termination date. The clause which was the subject of this case was the non-competition covenant. This particular clause restricted her from being “interested in” a competitor business.

In January 2017, Ms Tillman’s employment with Egon Zehnder came to an end and she informed them that she intended to start work with their competitor. She agreed to abide by her restrictive covenants, but not the non-compete clause. Ms Tillman argued that the clause was an unreasonable restraint of trade and therefore void.

High Court

Egon Zehnder applied for an interim injunction to prevent Ms Tillman from working for their competitor, which was granted by the High Court. The High Court considered whether the words “interested in” unreasonably precluded Ms Tillman from holding a minor shareholding and if it did, whether that part of the clause could be severed. Ultimately the High Court held that the clause did not prevent her from holding a minor shareholding, but did not reach a final view on severance. Ms Tillman appealed.

Court of Appeal

The Court of Appeal allowed the appeal and set aside the injunction. The Court of Appeal disagreed with the High Court and considered that the clause did prohibit even a minor shareholding and refused to sever those words. The clause was therefore an unreasonable restraint of trade.

Supreme Court

The Supreme Court allowed the appeal, restoring the injunction granted by the High Court (although the contractual period of restraint had since expired).

The Supreme Court held that severance will be possible if:

• Applying the “blue pencil” test – the unenforceable provision is capable of being removed without the necessity of adding to or modifying the wording of what remains;
• The remaining terms continue to be supported by adequate consideration; and
• The removal of the unenforceable provision does not change the character of the contract so that it becomes “not the sort of contract that the parties entered into at all”.

Although Egon Zehnder “won”, submissions were invited as to a costs order in respect of the costs incurred in each of the three courts. The Court noted that although Egon Zehnder “should win…there might be a sting in the tail” suggesting that employers should be held responsible for the unreasonable parts of post-employment restrictions which create an “unfair burden on others to clear them up”.

Comment

This case is useful guidance for employers, as it is the first time in 100 years that the Supreme Court has considered restrictive covenants. It is helpful for employers that a more liberal approach to severance has been re-established, but highlights the importance of drafting restrictive covenants appropriately to adequately protect your business.

If you have any questions on the above and how it will affect you, please do not hesitate to get in touch with a member of our employment team.