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‘Promoting’ restrictive covenants – the start of a new direction of travel post Egon Zehnder Ltd v Tillman

‘Promoting’ restrictive covenants – the start of a new direction of travel post Egon Zehnder Ltd v Tillman

Jacques Algazy QC and Nathaniel Caiden consider whether the case of Egon Zehnder Ltd v Tillman [2017] EWHC 1278 (Ch) marks the start of a trend whereby restrictive covenants against employees will be increasingly upheld owing to an employer’s ‘future intention’ of the employees’ progress (that is promotions and increasing seniority).

 

 Background cases: the time for judging validity of a restrictive covenant

For a restrictive covenant to be upheld by a court it would need to be satisfied that, once properly construed, there is both a legitimate interest requiring protection and that covenant is no wider than reasonably necessary (see TFS Derivatives Ltd v Morgan [2004] EWHC 3181 (QB); [2005] IRLR 246 at [36]-[38]).  However, the court should judge the validity of the restrictive covenant as at the time it was entered into, and, as such, a covenant that is unenforceable owing to a junior employee’s role/status cannot later become enforceable due to that employee being of much higher standing as at the date of departure so that the protection is later arguably merited (Pat Systems v Neilly [2012] EWHC 2609 (QB); [2012] IRLR 979 at [33] and [36]-[38]).

This has meant that, as in Pat Systems itself, employers are often advised to tailor carefully restrictive covenants and ensure that where there are promotions (often involving increasing salary and so obvious consideration for insertion of further restrictive covenants) new appropriate covenants should be added to a contract setting out the new role and terms. The policy rationale is well illustrated by Underhill J (as he then was) having rejected the notion that an initially unreasonable covenant could be revived by a change in the employee’s circumstances in Pat Systems at [38]:

“If this conclusion means that employers will have to take more care in considering whether promotion or some other substantial change in an employee’s terms or circumstances require an explicit reconsideration of what restrictive covenants are reasonable, that is probably a healthy discipline. I note that this is in any event recommended in both the leading practitioner works in this field – see Brearley and Bloch: Employment Covenants and Confidential Information at field – see Brearley and Bloch: Employment Covenants and Confidential Information at para. 12.10, and Employee Competition (ed Paul Goulding QC) at para. 9.11.”

 

Johal contained to its facts or wider impact?

Notwithstanding the above, the court in Allan Janes LLP v Johal [2006] EWHC 286 (Ch) upheld a restrictive covenant (non-dealing covenant specifically) as the employee (a solicitor) was recruited as a potential partner and the parties were found to always contemplate that she would be introduced to the employer’s pool of clients.  This has often been viewed as contained to its own facts, a junior employee or any employee who progresses would not be thought to fall within Johal as a matter of course.

 

Egon Zehnder Ltd v Tillman

The employee in Tillman was not junior per se, she was seen as being a ‘considerable prize’ when first hired as a consultant (judgment at [11]).  She had been employed since January 2004, and obtained two promotions without the need for signing any further agreements.  Her role which gave notice of resignation in January 2017 was Co-Head of the Financial Services Group.  The difficulty was that the non-compete clause in her initial contract, if enforced, prevented her doing similar work in New York for a competing firm.

In Tillman specific reference is being made to Johal and it was stated

First, and of some significance to this case, the question of reasonableness has to be judged as at the time the contract was agreed, and not at some later point of time, whether the point of time at which the question has arisen or some intermediate time. This point was made by Diplock LJ in Gledhow Autoparts Ltd v Delaney [1965] WLR 1366 at p1375….That is not to say that one only looks at the actual position as at the date the employment started. If one looked at that position alone few covenants would be valid because in most cases the employee will not have engaged fully enough with the business to justify it. One has to go further and look at what was in the contemplation of both parties. That contemplation can include promotion. Diplock LJ made plain the appropriateness of looking at the contemplated future, and the question of promotion was dealt with in Allan Janes LLP v Johal …[the comments in Johal at [38]-[39]] were made in the context of an attempt by the defendant to narrow the view taken of reasonableness by reference to what actually happened after the employment started, which was that the defendant did not perform as well, or generate as many new clients, as was anticipated. The judge rejected that submission on the basis of the above principles.”

 

Unsurprisingly, the employee tried to rely upon Pat Systems (counsel having succeeded in Pat Systems itself on a similar point) but this argument failed.  It  appears to have been distinguished on the basis that there was no ‘reviving fresh contract’ but her contract apparently remained the same (Tillman at [29]).

In the end on the facts it was accepted that both the employee and the employer had ‘high hopes’ of her future progress.  So whilst it was not accepted that one could say the employee was hired with a view to attaining ‘partner’ status, she was not a ‘run of the mill’, or rather contemplated as being, consultant employee on joining. 

The Judge held at [50]:

“I consider first the question of what the parties contemplated, with a sufficient degree of unanimity and certainty, at the date the contract was made, which is what has to be done – Gledhow, Allan Janes (supra). The question is what level of interaction with the protectable interests was it considered she would have. It is against that one has to go on and consider whether a restraint is reasonable.”

 

In considering whether the clause was wider than necessary to protect the employer’s legitimate interests, the Judge went on to say at [52] :

“…[it] is likely to have been anticipated by the parties from the outset because of the contemplations of the parties as to how she would progress. That is how one legitimately takes into account future expectations in this case. One does not assume a promotion and the level of engagement that would accompany a promotion. One looks at the assumptions of the parties and the level of engagement that occurred as a matter of fact in anticipation of that promotion, and (in any event) at the exploitation of the attributes that the claimant (and, I would assume the defendant) thought she had. I think that those expectations produce an anticipated higher level of engagement with protectable matters.”

 

Extrapolating from Tillman and the future

Does Tillman show a changed approach to assessing reasonableness?  As a matter of technical law no, the orthodox legal principles remain.  Johal does not constitute a new norm. However Johal and Tillman are perhaps illustrative of the Court taking broad account of the prospective contemplation of the parties at the time of contracting. So for run of the mill employees the usual approach will apply.  But if the evidence can justify a particular reason to contemplate advancement and therefore a legitimate interest needing protection, the covenant may be upheld. The simple failure to issue ‘fresh’ contracts as the employee progresses may be saved by earlier (and potentially doubtful) restrictive covenants.

We observe that the approach taken in Tillman, and which one assumes may develop in the future, is particularly relevant to junior employees and trainees in certain professional fields.  The very nature of these jobs is that the employee will eventually qualify and in the training there will be exposure to various clients.  Pickwell v Pro Cam CP Ltd [2016] EWHC 1304 (QB); [2016] IRLR 761 (in which both Jacques Algazy QC and Nathaniel Caiden appeared) is an example of this and also a further illustration of this trend.

In Pickwell the argument was that the covenants were in the ‘trainee’ contracts and so were not enforceable at the time (as trainees) and could not be rendered enforceable by the later qualification and progress of these individuals who worked several years at the firm (and were later offered work at a competitor).  At [77] the point was made that:

“On the 'timing' point raised by counsel for the Claimants, in my judgment any restrictive covenant in a contract of employment involves an attempt by the employer to reach an agreement regulating the activities of the employee after he or she leaves its employment: it is ex hypothesi an attempt to deal with future events, and must therefore involve an exercise in foresight. For it to be enforceable the law confines the exercise to matters which are in the reasonable contemplation of the parties at the time they made the contract. The suggestion that a new contract should have been proffered to the Claimants at the point at which as trainee agronomists they were about to become qualified agronomists is in my view untenable for at least two reasons. First, it would still be a prospective exercise: the employees would not have had any of their 'own' customers at the time such a contract could have been proposed. Secondly, however legally prudent it might have been, it would have been unnecessarily mechanistic: the point at which Pro Cam decided that the trainees could be allowed to deal on their own with customers was a matter for the judgment of their day-to-day superiors, who could not be expected to judge the appropriate moment to require a new form of contract from the personnel department.”

 

What stance should employers take?  As always the best approach is still to ensure appropriately tailored covenants and to revisit, and issue fresh covenants with new contracts with appropriate consideration upon promotions.  However, in initially drafting covenants it might be useful to spend more time setting or including language specifically dealing with ‘parties future contemplation’

It remains to be seen what attitude the Courts will strike to express language purporting to express the state of mind of the parties, at time of contracting, as to future intentions and expectations. It is to expected that the mere inclusion of such language will not suffice. There would have to be cogent evidence to underpin and support any such clause(s). The prudent drafter would be well advised to consider the insertion of a suitably worded, properly appropriate, clause.

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