Employers’ relief at Supreme Court decision regarding the enforceability of post-termination restrictions

3rd July 2019, 11:26 am

Many employers are breathing a large sigh of relief, after the Supreme Court today overturned a shock 2017 Court of Appeal decision that had threatened to render the wording of the post-termination non-compete restrictive covenants in thousands of executive contracts unenforceable.

Ms Tillman, a headhunter in the financial services industry, had resigned from her employment and sought to begin work with a competitor. Her employer, Egon Zehnder, applied for an injunction to enforce a non-compete covenant in her contract, which prevented Ms Tillman from engaging or being concerned ‘or interested’ in any business carried on in competition with the employer’s business for six months from the termination of employment.

The judge granted the injunction, but Ms Tillman successfully appealed to the Court of Appeal. In a shock ruling, which sent shock waves throughout the world of employment law, the Court of Appeal held that the covenant was unenforceable because it prevented Ms Tillman from holding as little as one share in a publicly quoted company, meaning it was too wide. Ms Tillman did not intend to hold such a shareholding; she merely sought to rely on the way the non-compete provision was drafted to render the clause too wide to be enforceable, meaning that she did not need to abide by it. In a further blow to the employer, the Court of Appeal held that it was unable to ‘sever’ the unreasonable part of the covenant and therefore the entirety of the non-compete covenant was unenforceable. The Court of Appeal’s decision cast into doubt the enforceability of similar restrictions contained in the contracts of thousands of executives across the country.

However, in a decision likely to be universally welcomed by employers, the Supreme Court has today [3 July 2019] overturned the Court of Appeal’s decision, and held that, while the wording ‘or interested’ contained in the post-termination non-compete covenant did prevent Ms Tillman from holding a nominal shareholding in a publicly quoted company, the offending part of the wording could be severed from the remainder of the clause to leave an enforceable non-compete restriction.

Severance of unreasonable wording, or wording which is too wide, is permitted provided the court can amend a clause by crossing words out (not by adding new words) and provided doing so does not result in a major change in the overall effect of all the post-employment restraints in the contract

David Parry, a partner in the commercial employment team at Hill Dickinson LLP says:

‘This is one of the most important decisions relating to restrictive covenants in over a century. The Supreme Court’s decision will come as a relief to employers who were worried that the previous Court of Appeal decision rendered their non-compete covenants as worthless.

‘However, this case should also act as a reminder to employers that the reasonableness of restrictive covenants is assessed as at the point at which the covenants were entered into (which is normally at the time the employee signed the employment contract or service agreement). This means that restrictive covenants need to be reviewed periodically, (perhaps prior to salary reviews and promotions) to ensure that they provide suitable protection, having regard to any changes in the role and level of seniority of employees. This will ensure that restrictive covenants are fit for purpose and have the best possible chance of being enforced by a court if necessary.’

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