A win with a sting in the tail

Mon, 08 Jul 2019

The severability of post-employment restrictive covenants

Tillman v Egon Zehnder Limited [2019] UKSC 32 contains everything you would expect from a judgment of the Supreme Court (Or Opinions of the House of Lords previously) – a side lecture on the doctrine of precedent, thorough review of the case-law from as far back as 1414 and leading counsel being caught out by a question from Lady Hale that he “struggled to find an answer” for.

Ms Tillman worked for Egon (adopting Lord Wilson’s defined terms, “the company”), eventually becoming global head of a department at the company. Her contract of employment contained, as usual, post-employment restrictive covenants. The main clause restricting her from working for competitors for 12 months also prevented her from being “interested” in any competitor.

Ms Tillman wished to take up employment with a competitor. She asserted that the word “interested” prevented her from even owning shares in a competitor, amounted to a restraint of trade, was unreasonable and so the whole clause void as a result.

The company asserted that if the word “interested” did prevent her from holding shares, that it was outside of the doctrine of restraint of trade entirely so its enforceability did not depend upon its reasonableness. It also asserted that “interested” did not in the context of the employment contract actually cover holding of shares. If it was wrong on both issues then the company said that the word could be severed from the clause, leaving the rest enforceable.

Mann J initially agreed with the company that the word “interested” did not prohibit holding shares and so was not a restraint of trade. The Court of Appeal disagreed and went on to hold that the word could not be severed. The Supreme Court agreed with the Court of Appeal on the construction but overturned its decision of severability, severing the words “or interested” and enforcing the remainder of the restrictive covenant. Needless to say the restriction had long since expired in any event.

For those involved with drafting, advising on or litigating issues arising from restrictive covenants, Tillman provides a handy consolidation of much of the main issues into one, single, authoritative case. In particular the question of the issue of severability is confirmed to depend upon the factors identified the Court of Appeal in the earlier decision of Beckett Investment Management Group Ltd v Hall [2007] ICR 1539. They are that:

“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”, which Lord Wilson noted “in the usual situation...can be ignored”; and

“whether the removal of the provision would not generate any major change in the overall effect of all the post-employment restraints in the contract”. This third factor was re-cast by Lord Wilson from how it was originally expressed in Beckett.

Which brings us, as in all civil litigation, to the question of costs. Rather interestingly, before hearing submissions on costs, Lord Wilson finished his judgment by noting how another judge had “described as “legal litter” the unreasonable parts of post-employment restrictions to which employers extract the agreement of prospective employees; and he added that they “cast an unfair burden on others to clear them up”. It is a neat metaphor. In my view the company should win … but there might be a sting in the tail.”. One wonders, therefore, whether employers who require the court’s indulgence by way of severance of offending terms to enforce a contract will find it difficult to also recover the costs of enforcing those severed post-employment covenants. Whilst severability is confirmed to be more widely available as more recent first-instance decisions had suggested, it will still be in an employer’s interest to ensure it thinks carefully about the wording of its restrictive covenants.

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