Severance of a non-solicitation clause

Freshasia Foods Ltd v Jing Lu [2018] EWHC 3644 (Ch)

The High Court decided that parts of a non-solicitation clause, which were unreasonable and insufficiently certain, were likely to be severable from the clause as a whole. The Court of Appeal in Egon Zehnder Ltd v Tillman [2017] EWCA Civ 1054, [2018] ICR 574, had not precluded severance in such circumstances but said only that it was “doubtful” that parts of a single covenant could be blue-pencilled without changing the nature of the contract

Overview

On 19 December 2018 Daniel Alexander QC, sitting as a Deputy Judge of the Chancery Division, granted a limited injunction preventing the Defendant (in respect of food products sold to Chinese retail shops in the UK or the EU) from soliciting the custom of, or selling or delivering to, any individual or company who, at 28 September 2018, was (a) a customer of the Claimant to whom the Defendant had personally sold and/or delivered the Claimant’s products or (b) the Defendant had introduced to the Claimant or approached on the Claimant’s behalf.

This non-solicitation injunction was in a more limited form than originally sought, leaving out a number of provisions relating to attempts to solicit, accepting work for private gain and insofar as they extended restrictions in respect of people with whom the Defendant had business dealings or knowledge in the 12 months prior to the end of employment. (The Defendant had, towards the end of the hearing, offered an undertaking not directly to contact anyone who at the termination of his employment was a customer of the Claimant and whose name was on a list, to be agreed.)

The Facts

The Claimant, Freshasia, was a UK company which supplied food products, particularly dumplings and sliced meats, to Chinese retail shops and restaurants. It had between 100 and 200 employees, 500 customers in the UK and EU and a turnover of millions of pounds.

The Defendant, Mr Lu, started work for Freshasia as a marketing assistant in January 2015 and progressed to Marketing Advertising Manager. His role involved promoting Freshasia, running its social media platforms and analysing marketing strategy. By the time of leaving he was de facto head of marketing. Mr Lu handed in his notice on 11 September 2018 and gave less than one month’s notice. He told his manager he was going to work in Hong Kong and another manager that he was leaving to work for another company in the UK. In fact, he left for Freshasia’s competitor, a company trading as Kung Fu, which was somewhat smaller than Freshasia.

Freshasia sought to enforce the non-solicitation clause in Mr Lu’s contract, as well as a non-compete clause. (The latter was refused by the Judge because the prohibited activities were too wide.)

Severance

Mr Lu said the Court should not sever parts of the non-solicitation clause on the basis they were unreasonable because they were not separate covenants but part and parcel of one single covenant. The whole clause was therefore irreparably void.

Freshasia insisted the test of severability was not that strict, and that the provisions in question were separate obligations.

The Judge, in determining the severance point, considered the cases of Beckett Investment Management Group Ltd v Hall [2007] EWCA Civ 613 and Egon Zehnder (above).

In relation to Beckett, he noted that the Court of Appeal had approved the three-fold test from other cases, originating in Sadler v Imperial Life Assurance Company of Canada Ltd [1988] IRLR 388, that severance is possible where (i) the unenforceable provision is capable of being removed without the necessity of adding to or modifying the wording of what remains; (ii) the remaining terms continue to be supported by adequate consideration, and (iii) 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”.

Mr Lu, however, relied on Egon Zehnder and the emphasis of the Court of Appeal that “it must always be doubtful whether parts of a single covenant can be deleted without the contract becoming ‘not the sort of contract that the parties entered into at all’”. The Court of Appeal, as a result, did not think the words “or interested” could be deleted from the relevant clause, and the whole covenant was void. Mr Lu submitted that Egon Zehnder precluded, as a matter of law, “internal” severance in a covenant by deletion of one or more alternatives.

The Judge disagreed (paragraph 46):

“I am not satisfied at this stage of the case that Egon Zehnder goes that far. First, it refers to and applies the approach in Beckett. Secondly, the Court of Appeal only says that it must always be ‘doubtful’ whether parts of a single covenant can be deleted without the contract becoming not the sort of contract the parties entered into at all. That does not suggest it is impossible. It is true that severance was refused in that case but that is better seen as an application of the general test in Beckett to the specific contract in that case, where the Court of Appeal took the view that the removal of the term did effect a significant change.”

He felt that Freshasia’s approach, that the Court should look at substance not form, had much to commend it and that, if relatively minor surgery could be performed to a restriction in order for the remainder to be enforced, that was one thing, but a radical change might indicate a shift in the nature of the contract.

Further, there were policy reasons for not taking too strict an approach to severance since (paragraph 54) “rendering un-salvageable all covenants which, internally to a clause or separately, contain one or other stray restriction that goes too far but which are otherwise reasonable…may lead courts to find that broader restrictions are valid, so as to avoid providing an ex-employer with no protection. That could have the paradoxical effect of making the position worse for employees since the power of surgical severance is, in part, a means by which a court is not forced into a binary decision between all-or-nothing protection…”

The Judge noted that Egon Zehnder was due to be heard by the Supreme Court this month, January 2019.