Restrictive Covenants and Severance: Supreme Court’s decision in Tillman v Egon Zehnder

Facts

Ms Tillman was employed as a consultant by head hunters, Egon Zehnder, in January 2004. She was subsequently promoted to principal in 2006, partner in 2009 and joint global head of its Financial Services Practice Group in 2012. Clause 13.2.3 of her contract of employment contained a six-month non-compete covenant that she would not:

“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 the period of 12 months prior to that date and with which you were materially concerned during such period.” 

On 30 January 2017, Ms Tillman’s employment with Egon Zehnder came to an end. She sought to take employment with a US firm, contending that the non-compete covenant was an unreasonable restraint of trade and therefore void.

Ms Tillman argued that if she acquired even a minority shareholding in a competitor, she would be “interested in” the competing business for the purposes of clause 13.2.3. Egon Zehnder’s response in the courts below was as follows:

1. Clause 13.2.3, on a proper construction, did not prohibit her from holding a minority shareholding in any of the competing businesses; and
2. If clause 13.2.3 covered the acquisition of a minority shareholding, it would be an unreasonable restraint of trade, but the words (“or interested”) could be severed.

Mann J ([2017] IRLR 828) accepted Egon Zehnder’s first submission that “interested in” did not prohibit Ms Tillman from acquiring a minority shareholding and therefore did not reach a final view on severance. The Court of Appeal ([2018] ICR 574) disagreed with Mann J’s interpretation and upheld Ms Tillman’s appeal, concluding that “interested in” prohibited shareholdings and was impermissibly wide and in restraint of trade. It refused to save the remainder of the covenant by severance.

The Supreme Court allowed the appeal. Lord Wilson, giving the leading judgment, restored the injunction granted by Mann J (even though the contractual period of restraint had since expired).

Issues for the Supreme Court

The Supreme Court considered the following issues [2]:

1. If, as argued by Ms Tillman, clause 13.2.3 prohibits shareholding, does that part fall outside the doctrine of restraint of trade?
2. If not, do the words “interested in”, properly construed, prohibit any shareholding?
3. If so, can the words “or interested” be severed to save the non-compete covenant?

Supreme Court's Decision 

(1) Scope of the restraint of trade doctrine

Egon Zehnder raised a new argument that the doctrine does not apply at all to a prohibition against holding shares [18-19].

Lord Wilson rejected Egon Zehnder’s argument as follows: (1) the terms of the covenant (particularly clause 13.3 and 13.4) represented a clear acknowledgement that the restraints fell within the doctrine [31-32]; and (2) it was not surprising for Egon Zehnder to have sought to prohibit Ms Tillman from holding shares in a potentially competitive business [33].

(2) “Interested in”

Lord Wilson held that the natural construction of “interested in”, words which had been included in standard drafting precedents of non-compete covenants and considered in several cases, is that it covered a shareholding. The features relied on by Egon Zehnder, and accepted by Mann J, were not sufficient to require a different construction to be placed on the words. Accordingly, “interested in” covered a shareholding, whether large or small and, on that basis, was an unreasonable restraint of trade [33].

(3) Severance

Severance was identified as the “most difficult and important issue raised in the appeal” [3]. The Court considered the distinct approaches in Attwood v Lamont [1920] 3 KB 571 (that, amongst other things, severance was only available where it was “not really a single covenant but [was] in effect a combination of several distinct covenants”) and the three-fold test in Sadler v Imperial Life Assurance Company of Canada [1988] IRLR 388, as applied in Marshall v NM Financial Management Ltd [1995] 1 WLR 1461 [57-73]. The Supreme Court overruled the Attwood approach [91].

Lord Wilson set out the three-fold test as follows [85-87]:

1. “the unenforceable provision is capable of being removed without the necessity of adding to or modifying the wording of what remains” (i.e. the “blue-pencil” test);
2. “the remaining terms continue to be supported by adequate consideration”;
3. “whether removal of the provision would not generate any major change in the overall effect of all the post-employment restraints in the contract”, focusing 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.”

On the facts, the Supreme Court concluded that the words “interested in” should be severed: they were capable of being removed without the need to add to or modify the wording of the rest of the clause and the removal of the prohibition would not generate any major change in the overall effect of the restraints [88].

The full judgment can be read here.

A summary of the Court of Appeal’s decision in a previous Bulletin is found here.