Saving restrictive covenants with a blue pencil: Analysis of Tillman

Tillman v Egon Zehnder Ltd [2019] UKSC 32 was the first case on restrictive covenants in employment contracts to come before the Supreme Court, and the House of Lords before it, for many years.  In this case, the Court considered the principle of severability, whereby an unnecessarily wide covenant may be saved from unenforceability by removing parts of it.  In doing so, it set out a new, more liberal but also more predictable test for severability.  Adam Ohringer looks closer at this judgment below.

The arguments

The employee argued that a post-termination non-compete clause in her contract of employment was unenforceable applying the principle that a provision in restraint of trade can only be enforced if it is reasonable. 

The covenant stated:

You shall not without the prior written consent of the company directly or indirectly, either alone or jointly with or on behalf of any third party and whether as principal, manager employee, contractor, consultant, agent or otherwise howsoever…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.

It was argued that the covenant was, as a whole, unreasonably broad in that, while it prevented employment with a competitor, it also purported to prevent her from owning a minority shareholding in such a business (where she was expressly permitted to hold up to 5% during the course of her employment).

In response to this the employer argued that:

  • A restriction on shareholding was not a restraint of trade, so the doctrine of reasonableness did not apply;
  • In any event, the covenant did not prevent the employee from owning shares in a competitor and so no part of the covenant was too broad; and
  • Alternatively, that this part of the covenant could be severed, and the remainder enforced.

It was accepted by the employer that, if the covenant restricted Ms Tillman from having a minority shareholding in a competitor and the restraint of trade doctrine applied to that element of the covenant, it was unreasonable. 

The Judgment

On the first point, Lord Wilson, giving the Judgment of the Court, reviewed the history of the law on restraints of trade.  He concluded that, for a top executive, it was not surprising that the company wanted to prevent her from holding shares in a competitor and this was an aspect of the employer’s measures to prevent Ms Tillman from competing post-termination.  All parts of the covenant were therefore within the doctrine of restraint of trade.

On the second point, Lord Wilson found that the word ‘interested’, both on the basis of its natural usage and on authority, covered shareholding.  Had there been a realistic alternative construction then that might have been preferred, on the assumption that the parties intend their contracts to be valid; but there was no realistic alternative.

On the third point, Lord Wilson concluded that the decision of the Court of Appeal in Attwood v Lamont [1920] 3 KB 571 should be overruled.  In Attwood, it was stated by Younger LJ that severance should not generally be permitted.  Severance of part of a covenant was only available if the covenant was, in reality, a combination of several distinct covenants and that the part to be severed was trivial or technical.    Subsequent cases variously followed Attwood, purported to follow Attwood but arrived at very different destinations or did not follow it at all.

In Beckett Investment Management Group Ltd v Hall [2007] ICR 1539, the Court of Appeal marked a departure from Attwood which the Supreme Court has now taken to its conclusion.  As a consequence, the courts will now more readily sever parts of a covenant to make the remainder enforceable.

Lord Wilson approved a three-step test as follows:

  • The unenforceable part of the covenant should be capable of being removed without the necessity of adding to or modifying the wording that remains.  This is the so-called ‘blue pencil’ test.  As Lord Wilson observed, the test can work arbitrarily but it does have legal purity and ease of application on its side.
  • The remaining terms must be supported by adequate consideration.  This will rarely be an issue.  However, it arises if the severance of part of a covenant might also result in the removal of the consideration passing under the contract.
  • The removal of the provision should not generate any major change in the overall effect of all the post-employment restraints in the contract.  The burden of establishing this is on the employer and the issue is of legal effect of the covenants, not the practical effect on the parties at any particular time. 

The outcome

So what did this all mean for Ms Tillman? 

Having set out the principles, Lord Wilson observed that their application to the present case was straight-forward.  The words ‘or interested’ were capable of being removed without affecting the wording of the remainder of the covenant.  And doing so would not change the overall effect of the covenants.

But a word of caution

Having given a Judgment which favoured freedom of contract over the regulation of restraints of trade, Lord Wilson concluded with a word of caution.  He suggested that the employer, although the successful party, might not be awarded all of its costs.  It seems that if an employer can only enforce a restrictive covenant in the courts by butchering the wording of its own contract, it might be expected to pay the bill.