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08 Jul 2019

Supreme Court upholds non-compete covenant – applying more liberal approach to severance

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In the 4th edition of the book I co-author on restrictive covenants (Bloch & Brearley -  Employment Covenants and Confidential Information: Law Practice and Technique – Bloomsbury) and at our March seminar this year I predicted that in their decision in Tillman v Egon Zehnder Limited the Supreme Court would adopt a more liberal and commercial approach to severance than that taken by the Court of Appeal. Predicting what any Court, and particularly the Supreme Court, will do can be a hazardous business. It was therefore with some trepidation that I opened the Supreme Court's Judgment. Fortuitously, my prediction was correct, and the result is undoubtedly good news for employers.

The issue

The issue in Tillman was whether a covenant under which Ms Tillman, a senior executive, could not "engage or be concerned or interested" in a competing business for six months following the termination of her employment was enforceable.

The Court of Appeal's decision

In the Court of Appeal Ms Tillman successfully argued that the covenant was unenforceable. Her primary arguments, accepted by the Court, were twofold:

  • Firstly, properly interpreted the covenant prohibited her owning any shareholding in a competing business and consequently was wider than reasonably necessary to protect the legitimate interests of her former employer, Egon Zehnder; and
  • Secondly, that the covenant could not be rescued by the principle of severance which allows, in essence, for words to be deleted to leave an enforceable covenant.

The Supreme Court's decision

The Supreme Court disagreed. Whilst accepting that the covenant prohibited any shareholding, and was therefore too wide, the Supreme Court held that the offending words "or interested" could be severed and the covenant enforced with their omission. The correct test for the application of severance in the majority of cases involving post-termination employment restrictive covenants, said the Supreme Court, is:

  1. The unenforceable provision must be capable of being removed without the necessity of adding to or modifying the wording of what remains; and
  2. The removal of the unenforceable provision would not generate any major change in the overall effect of all the post-employment restraints in the contract, which is for the employer to demonstrate.

A good result for employers. but ...

Although the decision is undoubtedly positive for employers there remain the following key take away points for employers and draftsmen of covenants:

  • Severance is not the panacea for all ills in badly drafted covenants and generally should only be used as an argument of last resort. Words can only be deleted in limited circumstances and the English courts can never add any words to save a covenant (there are, of course, other jurisdictions that do allow for some re-writing of covenants, such as certain US states and New Zealand)
  • Covenants should always be carefully tailored to the role of the employee – they are not contractual terms where a "one size fits all" approach can be taken. Covenants should also be reviewed regularly and particularly where an employee's role changes.

What next?

Many employers are taking the opportunity to review their covenants in the light of the Supreme Court's decision. Bearing in mind the commercial damage that can flow where covenants are likely to held to be unenforceable or where there are out-of-date covenants, or none at all, this is undoubtedly a prudent approach. I and the Stephenson Harwood employment team would be delighted to assist with these reviews. 

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Kate Brearley

Kate Brearley
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