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Restrictive Covenants in the Supreme Court
- AuthorVictoria Schofield
Post termination restrictive covenants are sometimes included in employment contracts in order to prevent employees from competing with their employer upon their departure from the business.
They can be used to restrain employees from competing directly and/or indirectly, and/or dealing with key clients and/or suppliers as well as to prevent poaching of vital staff.
The general principle is that Restrictive covenants will be void for being in restraint of trade, unless they are no wider than reasonably necessary to protect a legitimate business interest. The proper drafting of these covenants is therefore extremely important as they are often subject to challenge by departing employees who argue that they ought not to be upheld/enforceable. Generally, if covenants are confined to, for example, a reasonably short length of time and a narrow geographical scope a court may be more willing to uphold them than if they are wide ranging for a period of, say, years.
In Tillman -v- Egon Zehnder Limited, the employee argued that her post termination restrictive covenants were too wide to be enforceable because, included amongst the covenants was a non- compete clause which stated that she could not have “an interest in” a competitor’s business. The offending clause of the contract stated “you shall not, during the course of your employment, directly or indirectly, hold or have any interest in, any shares or other securities in any company whose business is carried on in competition with any business of the company or any group company, except that you may hold or have an interest in for investment only, shares or other securities in a publicly quoted company of up to a maximum of 5% of the total equity in issue of that company”. There were also other clauses that stated that the employee may not compete for six months or be concerned or interested in any business with which she had had dealings in the twelve months prior to her termination date.
Ms Tillman argued that the clauses were too wide to be reasonably necessary for the protection of legitimate business interests and in particular that being prevented from being “interested in” a competing business to the extent that she was even prohibited from owning shares in a competitor company, meant that the clauses were drafted too widely.
In the High Court the employer was successful in obtaining an injunction against Ms Tillman and the non- compete restriction was upheld.
In the Court of Appeal, this injunction was set aside as the Court of Appeal said that the phrase “interested in” included even holding one share which meant that the restriction was too wide and therefore void for being in restraint of trade.
The Supreme Court decision restored the injunction and upheld the restriction. The Supreme Court found that it was possible to “sever” the offending phrase from the restriction without affecting the natural construction or meaning of the words and without damaging the remainder of the covenant.
"On the face of it, this decision means that, if restrictive covenants are drafted too widely, then a Court may be able to apply what is known as the “blue pencil” test and remove “offending” words whilst keeping the meaning of the original clause of the contract, thus making the restriction enforceable." Said employment solicitor Victoria Schofield
"Employers should not take this case as a licence to include unreasonable covenants in contracts of employment hoping that, if they are subject to legal challenge upon termination/enforcement, that a Court will naturally amend the drafting so as to render the covenants enforceable. This case is particular on its facts and is interesting because it is the first case in a century to have reached the Supreme Court on the matter of restrictive covenants. It confirms that defective drafting will not always be fatal to the enforceability of a restrictive covenant. Employers can take heart from this decision," she added.
However, it is vital that post-termination restrictions are carefully and expertly drafted with the aim of protecting the employer’s precise legitimate business interest that the employer is seeking to preserve. It is also important that post-termination restrictions are only included in contracts of employment of employees who may in fact pose a risk. We have expertise and experience in drafting, advising on and enforcing post-termination restrictions. Carefully drafted post-termination restrictions in employees’ contracts of employment make employees aware of what restrictions they are subject to once their employment has ended and gives employers the best possible chance of being able to enforce them thereby protecting their legitimate business interests through the courts if necessary.
It is also important to note that the Supreme court in this case indicated its agreement with a previous view expressed by a Chancery judge in a recent injunction case, that employees ought not necessarily be fixed with the costs of clearing up the “litter” of unenforceable drafting, and, therefore, even though the employer has been successful, it may face adverse costs consequences against it. This type of litigation (enforcement of Restrictive covenants and injunction applications) is notoriously expensive and court actions are best avoided, if at all possible.
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Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers LLP or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.