Beware the blue pencil!

Posted
AuthorTony Hughes

The recent Supreme Court case of Tillman-V-Egon Zehnder [2019] UKSC Number 32 has clarified the correct approach to “severance” in restraint of trade cases. The revised guidelines are helpful to employers who seek to impose wide restrictions on departing employees but wish to fall back on their ability to “sever” those parts of a restraint of trade clause which might otherwise make the restraint too wide and thus unenforceable.

Background

Egon Zehnder Limited was an executive search and recruitment company and by the time of her departure on 30th January 2017, Ms Tillman was joint Global Practice Head. Her contract of employment included a non-competition covenant in which she agreed that she would not, for a period of six months, “directly or indirectly engage or be concerned or interested (my emphasis) in any business carried on in competition with any of the businesses of [Egon Zehnder]” within a 12 month period prior to the termination date “and with which “she was” materially concerned during such period”.

Ms Tillman informed Egon Zehnder that she intended to work as an employee of a competitor firm and that she intended to comply with all her covenants apart from the non-competition covenant. She alleged that although, on its wording, it would have prevented her from working for that competitor, she argued it was an unreasonable restraint of trade and thus void as a whole.

Even though she was not due to become a shareholder of the competitor company, she argued that the words “interested in” would have prevented her from owning even a very small shareholding in a competitor company (even if she had not been employed by it) and that this was unreasonable.

At first instance the judge disagreed with this approach and granted an injunction. Ms Tillman appealed, and the Court of Appeal set aside the injunction accepting that the words “interested in” unreasonably prevented even a minor shareholding by her and refused to sever those words from the remainder of the clause.

The Supreme Court allowed the company’s appeal on the basis that even though the inclusion of the words “interested in” would have otherwise rendered the clause unenforceable, the employer was entitled to sever those words. In doing so, it confirmed that in deciding whether or not to sever the “offending” words, the correct approach uses three criteria for severance.

The first criterion is whether the unenforceable provision is capable of being removed without the necessity of adding to or modifying the wording of what remains – this is the so-called “blue pencil” test;
The second criterion is that the remaining terms continue to be supported by adequate consideration. This will not usually be in dispute;
The third criterion is that the removal of the unenforceable provision does not so change the character of the contract that it becomes not the sort of contract that the parties entered into at all. This is often the crucial criterion and the court stated that it preferred to express that criterion as being “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”. It is for the employer to establish this, and the focus is on the legal effect of the restraints and not their perhaps changing significance for the parties.

Therefore, a highly technical challenge raised by Ms Tillman was not, in the end, upheld by the Supreme Court. The decision was issued some 2.5 years after her departure in respect of a restrictive covenant that was only expressed to last for 6 months.