Can restrictive covenants restrict themselves?

Posted on Aug 23, 2019

Employees come and go and often employers will want to prevent their ex-employees from working for competitors. Recently, in Tilman v Egon Zehnder there was a breakthrough in the severance of restrictive covenants.

In this case, Tilman was a senior employee and partner for recruitment business Egon Zehnder but her employment ended in January 2017 and informed them she intended to work for a competitor on 1st May. However, her employment contract included a post-termination restrictive clause which stated she could not for six months “directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of Egon Zehnder or any group company which were carried on at termination date”. Egon Zehnder applied for an injunction to enforce this non-competition clause and Tilman agreed to not work for the competitor during the pending outcome of the case. Tilman argued that the words “or interested in” were too broad and prevented her from even having a minor shareholding in a competition business meaning it was an unreasonable restraint of trade and so void.

The High Court ruled in the employer’s favour but Tilman appealed. In the Court of Appeal, it was found that “or interest in” did prevent minor shareholding. Also, they held that the phrase could not be severed. The case then went to the Supreme Court. Here they held that the non-competition clause was also void as an unreasonable restraint of trade. However, regarding severance a different outcome was reached. They overturned the previous authority, used by the Court of Appeal, in the form of Attwood v Lamont. They said the preferred approach was that in Beckett Investment Management Group v Hall. This case sets three criteria for severance: 1) the unenforceable provision is capable of being removed without the necessity of adding to or modifying the wording of what remains aka the blue pencil test, 2) the remaining terms continue to be supported by adequate consideration, 3) the removal of the unenforceable provision does not so change the character of the contract that the parties entered into at all. However, the Supreme Court changed the third criteria to whether the removal of the provision would not generate any major change in the overall effect of all the post-employment restraint in the contract. As a result of applying the updated criteria they found that “or interested in” could be removed without need to modify the remaining clause. This meant that the injunction was restored despite the period of restraint being expired.

This is a very important case for employers. The Supreme Court has reaffirmed and updated the correct test for severance. It also confirms that even if the wording of the covenant could prevent a minority shareholding in a competitor if the covenant is worded correctly it may still be enforceable if it passes the test. We would advise employers to ensure their wording of employment contracts are not vague.