Saving restrictive covenants with a blue pencil: Analysis of Tillman
Adam Ohringer
Tillman v Egon Zehnder Ltd [2019] UKSC 32 was the first case on restrictive covenants in employment contracts to come before the Supreme Court, and the House of Lords before it, for many years. In this case, the Court considered the principle of severability, whereby an unnecessarily wide covenant may be saved from unenforceability by removing parts of it. In doing so, it set out a new, more liberal but also more predictable test for severability. Adam Ohringer looks closer at this judgment below.
The arguments
The employee argued that a post-terminationnon-compete clause in her contract of employment was unenforceable applying theprinciple that a provision in restraint of trade can only be enforced if it is reasonable.
The covenant stated:
You shall not without the prior written consent of the companydirectly or indirectly, either alone or jointly with or on behalf of any thirdparty and whether as principal, manager employee, contractor, consultant, agentor otherwise howsoever…directly or indirectly engage or be concerned orinterested in any business carried on in competition with any of the businessesof the Company or any Group Company which were carried on at the TerminationDate or during the period of 12 months prior to that date and with which youwere materially concerned during such period.
It was argued that the covenant was,as a whole, unreasonably broad in that, while it prevented employment with acompetitor, it also purported to prevent her from owning a minorityshareholding in such a business (where she was expressly permitted to hold upto 5% during the course of her employment).
In response to this the employer argued that:
A restriction on shareholding was not a restraint of trade, so the doctrine of reasonableness did not apply;
In any event, the covenant did not prevent the employee from owning shares in a competitor and so no part of the covenant was too broad; and
Alternatively, that this part of thecovenant could be severed, and the remainder enforced.
It was accepted by the employerthat, if the covenant restricted Ms Tillman from having a minority shareholdingin a competitor and the restraint of trade doctrine applied to that element ofthe covenant, it was unreasonable.
The Judgment
On the first point, Lord Wilson,giving the Judgment of the Court, reviewed the history of the law on restraintsof trade. He concluded that, for a topexecutive, it was not surprising that the company wanted to prevent her fromholding shares in a competitor and this was an aspect of the employer’smeasures to prevent Ms Tillman from competing post-termination. All parts of the covenant were thereforewithin the doctrine of restraint of trade.
On the second point, Lord Wilsonfound that the word ‘interested’, both on the basis of its natural usage and onauthority, covered shareholding. Hadthere been a realistic alternative construction then that might have beenpreferred, on the assumption that the parties intend their contracts to bevalid; but there was no realistic alternative.
On the third point, Lord Wilsonconcluded that the decision of the Court of Appeal in Attwood v Lamont [1920]3 KB 571 should be overruled. In Attwood,it was stated by Younger LJ that severance should not generally bepermitted. Severance of part of acovenant was only available if the covenant was, in reality, a combination ofseveral distinct covenants and that the part to be severed was trivial ortechnical. Subsequent cases variouslyfollowed Attwood, purported to follow Attwood but arrived at verydifferent destinations or did not follow it at all.
In Beckett Investment ManagementGroup Ltd v Hall [2007] ICR 1539, the Court of Appeal marked a departurefrom Attwood which the Supreme Court has now taken to its conclusion. As a consequence, the courts will now morereadily sever parts of a covenant to make the remainder enforceable.
Lord Wilson approved a three-step test as follows:
The unenforceable part of the covenant should be capable of being removed without the necessity of adding to or modifying the wording that remains. This is the so-called ‘blue pencil’ test. As Lord Wilson observed, the test can work arbitrarily but it does have legal purity and ease of application on its side.
The remaining terms must besupported by adequate consideration. This will rarely be an issue. However, it arises if the severance of part of a covenant might alsoresult in the removal of the consideration passing under the contract.
The removal of the provision shouldnot generate any major change in the overall effect of all the post-employmentrestraints in the contract. The burdenof establishing this is on the employer and the issue is of legal effect of thecovenants, not the practical effect on the parties at any particular time.
The outcome
So what did this all mean for MsTillman?
Having set out the principles, LordWilson observed that their application to the present case wasstraight-forward. The words ‘orinterested’ were capable of being removed without affecting the wording of theremainder of the covenant. And doing sowould not change the overall effect of the covenants.
But a word of caution
Having given a Judgment whichfavoured freedom of contract over the regulation of restraints of trade, LordWilson concluded with a word of caution. He suggested that the employer, although the successful party, might notbe awarded all of its costs. It seemsthat if an employer can only enforce a restrictive covenant in the courts bybutchering the wording of its own contract, it might be expected to pay thebill.