In Tillman v Egon Zehnder Ltd, the Supreme Court held that the offending words of an unreasonably wide restrictive covenant could be severed so that the employer could enforce the remaining parts of its non-compete clause. The senior employee, Ms Tillman, had agreed not to ‘directly or indirectly engage or be concerned or interested in’ any competing business of her employer for a period of 6 months after the termination of her employment. The Supreme Court held that the words ‘or interested in’ were severable, as they could be lifted from the contractual wording without modifying the remainder of the clause, and that this would not generate any major change in the overall effect of the restriction.
Ms Tillman’s employment contract with Egon Zehnder (EZ) contained several restrictions on her activities post-termination of the contract. This included the non-compete clause quoted above which Ms Tillman, upon her resignation, informed EZ that she would not be adhering to. EZ brought proceedings in the High Court who upheld the non-compete clause, granting an injunction to prevent Ms Tillman from breaching the covenant. Indeed, the High Court made no ruling with regard to severability, finding instead that the words “or interested in” did not restrict Ms Tillman from holding a minor shareholding in a competing company.
Ms Tillman appealed the decision, leading to the Court of Appeal overturning it. The Court of Appeal found that it would be inconceivable that even a minor shareholder of a company was not “interested in” that company. Regarding the matter of severance, the Court of Appeal refused to sever the offending words as it was a single covenant requiring that it be interpreted all together. EZ appealed to the Supreme Court.
Supreme Court Decision
The Supreme Court overturned the Court of Appeal’s decision. It began by hearing arguments on an issue that had not been raised in the previous courts, i.e. that a covenant prohibiting the shareholding of shares in another company falls outside the restraint of trade doctrine. The Supreme Court held that the covenant under discussion was within the restraint of trade doctrine, finding that the employment contract between the two parties contained numerous other restrictions which EZ had already acknowledged were a restraint of trade.
Turning to the issue of the proper meaning of the words “interested in”, the Court concurred with the Court of Appeal’s understanding that the phrase “engaged or concerned or interested” is well established in standard non-competition clauses and is seen as prohibiting shareholding. Therefore, it was held that the current wording of the covenant was unreasonable restraint of trade, barring Ms Tillman from having anything whatsoever to do with a competing business.
Regarding the matter of severability, the Supreme Court held that the offending words, “or interested in” were capable of being severed from the rest of the clause and so they restored the High Court’s original injunction.
The Supreme Court has substantially reduced the severance test threshold and it is undoubtedly a major victory for employers. Nevertheless, it remains to be seen whether this will have an effect on how employers draft restrictive covenants in the future. On the one hand they may be tempted to draft such clauses more widely in the knowledge that they can still be enforced after severance. However, the Supreme Court has also made it clear that employees should not be liable for the costs associated with severing unreasonable parts of post-employment restrictions. So employers may be left to foot a major part of the legal costs in any dispute.