Freedom of Contract and the Court’s approach to Blue Pencilling after Tillman

Tillman

As is now well-known, Tillman confirmed that it is open to the Court to sever (or ‘blue pencil’) wording if to do so would render an otherwise unenforceable covenant enforceable, provided that three requirements are met:

1. The first is that “the unenforceable provision is capable of being removed without the necessity of adding to or modifying the wording of what remains” (§85).
2. The second is that “the remaining terms continue to be supported by adequate consideration” (§86).  However, this criterion arises from the “unusual circumstances” of two cases, where the  employees themselves obtained severance, such that “in the usual situation [involving an employer seeking severance] the second requirement can be ignored.”
3. The third is “whether 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 that its removal would not do so. The focus is on the legal effect of the restraints, which will remain constant, not on their perhaps changing significance for the parties and in particular for the employee.” (§87)

The third criterion rephrased the test proposed by the Court of Appeal in Beckett Investment Management Group v Hall [2007] ICR 1539 CA 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’.  Some of the post-Tillman decisions appear to refer back to that language.   The Supreme Court’s third criterion refers to a “major” change in the overall effect of “all” the post-employment restraints.  The interesting question is when that would bite and prevent wording from being blue pencilled.  

The freedom of contract principle

William Day (Fellow at Downing College Cambridge) considered the Tillman decision in The Cambridge Law Journal article “Freedom of Contract and Restraint of Trade” (CLJ 2020, 79(1), 11 – 14) and concluded that:

“the doctrine's label - "severance" - is a misnomer. It does not remove terms from the contract. The doctrine is really about partial enforcement or enforcement on terms. Put another way, the court cannot change what the parties can agree, but it can do its best to enforce all parts of the covenant which do not offend public policy. Once seen in this light, severance is a tool to be used in service of freedom of contract rather than a blight on it. [Emphasis added].”

The freedom of contract principle is an interesting lens through which to view the Court’s approach to severance.  It might suggest that it would be impermissible to sever (and therefore generate a major change in the overall effect of the covenants) by, for example: (i) blue pencilling the word ‘not’ from a covenant (thereby changing its meaning); or (ii) blue pencilling wording which had the effect of changing a non-solicitation covenant into a (more onerous) non-dealing covenant (thereby changing the nature of the obligation).  However, viewed through the freedom of contract lens, the third criterion would not generally prevent the Court from severing wording which has the effect of retaining an existing obligation.

The approach of the Courts post-Tillman

This approach to preserving existing obligations can be seen in Gemini Europe Ltd v Sawyer [2020] EWHC 3377 (QB) where Ellenbogen J could see “no reason why a defined term imported into a restraint clause cannot be severed in accordance with” the Tillman principles, and severed two limbs from the definition of “Material Interest” in a non-competition covenant (removing prohibitions on control or ownership of shares, and direct or indirect financial assistance).

In Quilter Private Client Advisers Ltd v Falconer [2022] IRLR 227 Calver J commented (obiter) at §164 that “individual words or phrases may be ‘blue pencilled’ or severed, provided that what is left makes independent sense without the need to modify the wording and that the sense of the contract is not changed.” That focuses on the sense of the contract, perhaps focusing on the test set out in Beckett. It may be said that Gemini  and Quilter accord with the freedom of contract principle by focussing on the parties’ agreement as a whole and thereby facilitating contractual enforcement (even if only partial).

In P14 Medical Ltd v Mahon [2021] IRLR 39 Cavanagh J (granting interim injunctive relief) recognised (at §111) that “The recent Supreme Court judgment in Egon Zehnder signalled a more permissive approach to severance than hitherto.”  However, in considering an express confidentiality covenant which, in addition to trade secrets, applied (without limitation in time) to “Confidential Information” as broadly defined, the Judge stated (at §111) that:

“I have considered whether the protection against the disclosure, post-termination, of trade secrets in cl 14.1 can be ‘saved’ by severing the final part of the definition of ‘Confidential Information’ in cl 1.1, which deals with trade secrets, from the other part, which deals with mere confidential information.  I don’t think that this is possible … In my judgment, the reduction of the scope of the confidential information term from covering all confidential information to covering only trade secrets would be a major change in the overall effect of the post-employment restraints.” 

Viewed through the ‘freedom of contract’ lens, it might be said that there would be no issue with blue pencilling extraneous ‘confidential information’ wording but leaving the ‘trade secrets’ prohibition intact.  If so, either Cavanagh J may have been too strict in his application of the third criterion in Tillman, or the freedom of contract principle may not be the correct lens through which to approach the severance test.  However:

 a.             It might be argued that confidential information and trade secrets comprise two different types of protectable interest, such that changing the obligation from one category to the other would have involved a change in the nature of the obligation;

b.             In P14 the refusal of severance was academic because Cavanagh J went on to find that the trade secrets were protected by the employee’s implied obligation of confidentiality (§113 to 115); and

c.         The fact that the confidentiality clause was unenforceable did not affect the enforceability of the other post-termination restrictive covenants (injunctions were granted in the terms of non-solicitation, non-dealing and non-competition covenants).  That is interesting given the Supreme Court’s reference to the effect of ‘all’ the post-termination restraints, and might suggest that in P14 the focus was on the effect on one particular restraint, rather than all of the restraints.

The non-employee competition case of Biosol Renewables v Lovering & Ors [2021] EWHC 71 (Comm) suggests that the freedom of contract principle is a helpful tool in analysing the Court’s approach to severance. HHJ Keyser QC (sitting as a Judge of the High Court) considered whether various provisions in a “Maintenance and Woodchip Agreement” were an unreasonable restraint of trade.  The Judge found that the vast majority were not, but that:

“[337] clause 3 of the contract renders the restraints unreasonable.  Clause 3 imposes on R&A [one of the Defendants] an obligation to:

“Purchase from [Biosol] all wood chip required to supply a 500 kw boiler for the purpose of maintaining its output at maximum capacity for a period of 3 years where applicable.”

That, in my view, is objectionable and unreasonable both in the interests of the parties and in the public interest, because it requires the boilers to be run at maximum capacity regardless of whether or not that is (a) justified or required by the needs of the occupiers or landlords or (b) consistent with proper considerations of environmental wellbeing…

[342] In my judgment, the mandatory covenant in clause 3 cannot be saved by deleting any of its words, such as "for the purposes of maintaining its output at maximum capacity". That would simply be to rewrite a single covenant and alter its nature; it would not merely be a case of removing one of a number of covenants without affecting the substance of the agreement.

[343] However, I consider that all necessary conditions are capable of being satisfied if clause 3 is deleted in its entirety. There is no difficulty over the "blue pencil" test. As for the third condition [i.e. the third Tillman criterion], of course the deletion of clause 3 will alter the effect of the agreement. But that is bound to be the case where one covenant is removed as being unreasonable. In my view it is obvious that the removal of clause 3 will not effect any fundamental alteration in the scope and intention of the agreement, so as to turn it into a contract quite different from that which the parties entered. It will simply mean that R&A is bound not to get woodchip or other fuel for the boilers from any other source for the term of the contract. [emphasis added].” 

That appears to accord with the freedom of contract approach: (i) the Court could not change the meaning of the covenant by severing words; but (ii) severing the offending part left the obligations that the parties had agreed, thereby promoting freedom of contract.

Conclusion 

It is still relatively early days for the Courts in applying the Tillman approach, but the possibility of severance comes up as an issue in many (if not most) of the restrictive covenant disputes I see.  No doubt the application of the third Tillman criterion will continue to give considerable scope for argument going forwards, and lead to interesting decisions on the facts.  In short, watch this space to see the extent to which the freedom of contract principle prevails.

This article was written by Craig Rajgopaul.