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The Court of Appeal held that a post-termination restrictive covenant was in unreasonable restraint of trade because it prevented the Appellant from acquiring any shareholding in a competitor, and set aside an injunction granted to the Respondent in the High Court preventing the Appellant from working for a competitor. The case re-states the principles relevant to construction and severance and serves as a useful reminder of the need for caution when drafting restrictive covenants.

The facts

The Appellant commenced her employment with the Respondent in January 2004 and was appointed co-Global Head of its Financial Services Practice Group in January 2012. On 23 January 2017 she gave notice and was put on garden leave. On 30 January 2017 the Respondent terminated her employment with immediate effect. The Appellant sought to take employment with a US firm, arguing that a restrictive covenant in her employment contract with the Respondent preventing her from doing so for a six-month period post termination was in unreasonable restraint of trade [1]. The relevant clauses of the Appellant’s contract provided:

Clause 4.5: “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 per cent of the total equity in issue of that company” [3].

Clause 13.2: “You shall not without the prior written consent of the Company directly or indirectly, either alone or jointly with or on behalf of any third party and whether as principal, manager, employee, contractor, consultant, agent or otherwise howsoever at any time within the period of six months from the Termination Date...[13.2.3] directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the Company or any Group Company which were carried on at the Termination Date or during such period” [3].

The law and issues

As set out in Chitty on Contracts, 32nd edition at [16-085], cited by Mann J and in the Court of Appeal judgment [9], “All covenants in restraint of trade are prima facie unenforceable at common law and are enforceable only if they are reasonable with reference to the interests of the parties concerned and of the public. Unless the unreasonable part can be severed by the removal of either part or the whole of the covenant in question, its inclusion renders the covenant or the entire contract unenforceable.”

The key issue concerned the construction of the words “interested in” in Clause 13.2.3. It was common ground that if they covered the acquisition of any shareholding, however minor, the clause would be wider than necessary and thus unreasonable. The Respondent contended that they did not [8]: “engage or be concerned or interested in” meant “actively participate in” [23]. The second issue was whether the words “interested in” could be severed from Clause 13.2.3.

The judgment

In the High Court ([2017] IRLR 828) Mann J held that Clause 13.2.3 did not cover the acquisition of any shareholding because “the presence of Clause 4.5, which expressly deals with shareholding…and yet permits a limited shareholding, demonstrates that the non-compete clause was not intended to deal with shareholding at all”. The alternative construction would result in the anomaly that the post-termination covenant would be wider than that applicable during employment, in prohibiting all shareholding. He noted that “on normal principles of construction it would be right to favour a construction which does not gives rise to an anomaly, and in addition it would be right to favour a construction which validated rather than invalidated the clause” [9].

On appeal the Respondent submitted Mann J had rightly favoured a “validating” construction. Ambiguity was not a precondition to this “saving the document” principle, which required only the availability of an “alternative…legitimate” construction [11] (citing Turner v Commonwealth and British Minerals Ltd [2000] IRLR 114 at [14]).

Longmore LJ (with whom Patten and Sales LJJ agreed) rejected these submissions, holding that only where there is “a genuine ambiguity” can the principle apply. The starting point was the language used, and the key question was what “interested in” in Clause 13.2.3 meant. As to this, it was “impossible to say of a person holding shares in a company that he or she is not “interested in” the business of the company. Conventionally those words have that meaning not merely in common parlance and in dictionaries but also in authority” [13]. Having reviewed the relevant authorities, he held that there was no true ambiguity in Clause 13.2.3 [21].

Longmore LJ also noted that Mann J’s approach would not avoid an anomalous result since “it would be just as anomalous for Ms Tillman to be restrained during her employment from taking any shareholding greater than 5%, yet be free to take any size of shareholding she liked once her employment is over” [22]. Further, the Respondent’s construction was “inherently unsatisfactory because debatable matters would have to be considered before it could be determined whether there was any breach (or threatened breach) of the clause and before any injunction should be granted” [24]. He thus concluded “that clause 13.2.3 does prohibit shareholdings and is impermissibly wide and in restraint of trade unless it can be severed in some way” [25].

Severance was, however, held not to be permissible for two reasons. First, even if the words “or interested” were omitted the clause would still be too wide, because any shareholder would still be caught by the word “concerned” (and the Respondent had not argued that the words “concerned or interested” could be severed together) [28].

Second, Clause 13.2.3 was “a single covenant preventing Ms Tillman from engaging or being concerned in a competing business in any one of several capacities, has to be read as a whole and cannot be severed” [29].  The Court reiterated the principle in Attwood v Lamont [1920] 3 KB 571 at [593] that “parts of a single covenant cannot be severed; it is a requirement of severance that it can only take place where there are distinct covenants … and, perhaps, not even then” and stated that the three-fold test set out in Sadler v Imperial Life Assurance Company of Canada [1988] IRLR 388 at [391-392] had not replaced this requirement [29-33].  

Finally, it was immaterial that the Appellant in fact had no intention of acquiring a shareholding in a competitor, given the wide public policy justification for the avoiding of contracts in unreasonable restraint of trade [35].

The full judgment can be read here.  

Clerks

Staff