In the first Supreme Court restrictive covenant case in 100 years, the Supreme Court has overturned the decision that a restrictive covenant under which a senior employee agreed not to ‘directly or indirectly engage or be concerned or interested in’ any competing business for six months after termination was enforceable as a restraint of trade.
In Tillman v Egon Zehnder Ltd, Ms Tillman left employment with executive search company Egon Zehnder Limited and sought to extricate herself from a six-month non-compete restriction by arguing that a clause restricting her from being ‘interested in’ a competitor business restrained her from even holding a shareholding in a competitor which was unreasonable.
The Supreme Court held that the approach laid down by the Court of Appeal in the case of Beckett Investment Management Group Limited v Hall was preferred over a more recent decision and the approach uses three criteria to determine whether words can be severed from the clause to make it enforceable. The first, known as the ‘blue-pencil test’ is whether the unenforceable provision is capable of being removed without the necessity of adding to or modifying the wording of what remains. The second is not normally in dispute and the third is that the removal of the unenforceable provision doesn’t change the character of the contract such that it becomes not the sort of contract that the parties entered into at all.
The Supreme Court held that the words ‘or interested’ could be removed from the clause in order to remove the unreasonable effect and render enforceable the remainder of the clause.
The case potentially widens the ability for a restrictive covenant to be found to be enforceable by allowing words to be severed from a clause in order to make it enforceable under some circumstances. This will be welcome news for employers and mean that employees should carefully check that they are comfortable to enter into restrictions when signing a contract of employment. Further decisions will offer clarity on this.