Restrictive Covenants ARE worth the paper they are written on
Restrictive covenants have long been perceived as not being worth the paper that they are written on, especially if they are too wide and prevent an individual from earning a living.
Earlier this month the Supreme Court ruled that where restrictive covenants prevented an employee from being “concerned or interested” in a competitor for 6 months post termination, were not too wide to be enforceable. All employers breathe a sigh of relief!
Now for the story
Ms Tillman worked for a recruitment firm called Egon Zehnder Limited (“EZ Ltd”) and had signed a contract which included a restrictive covenant that prevented her from working for a competitor. When her employment came to an end in January 2017, she alleged that she intended to be bound by her restrictions, save for the following:
She had agreed for a 6 month period post termination not to:
“directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the business of EZ Ltd within a twelve-month period prior to the termination date ‘and with which [she was] materially concerned during such period’
Ms Tillman argued that the words ‘interested in’ meant that operation of the restriction prevented her from holding even a minor shareholding in a competing business, which was her intention.
What did EZ Limited do?
To protect their business, they issued proceedings in the High Court seeking an injunction to stop Ms Tillman from breaching the restrictive covenant which they said she willingly entered into when she commenced her employment with them (11 years ago!).
The High Court granted the injunction, agreeing with EZ Ltd that the words ‘interested in’ did not preclude Ms Tillman from holding a minor shareholding in a competing business but that the other parts remained in force and therefore she could not work for a competitor. There was no finding as to whether the word ‘interested’ should be removed.
The Court of Appeal overturned the injunction and held that “interested in” would preclude a minor shareholding and the offending part could not be removed. The whole clause was rendered void and therefore unenforceable. The Court said it was not possible to remove the word ‘interested’. EZ Ltd’s argument was always that the restriction did not prevent a minor shareholding, but if it did, that the word ‘interested’ should be struck out but the rest of the clause remain in force.
The Supreme Court considered (as the period of the restriction has already been spent by this point) whether it was possible to amend an unenforceable restrictive covenant clause to make it enforceable, and confirmed by applying the well versed ‘blue pencil test’ that yes it could. As long as it was possible to remove the unenforceable part without changing or adding to the remaining clause; and as long as the overall effect of all the restrictive covenant clauses in the contract were not changed, the word ‘interested’ could be removed.
The case sets the precedent that restrictive covenants can be broadly enforceable even if there are elements of the contract a court might deem to have gone “too far”, and that offending words can be removed from a contract if the removal does not substantially change the overall effect of the restraint.
What are Restrictive Covenants?
Why are they used
Employees that leave a business are often a risk to the business as they have been exposed to a host of valuable information such as:
- confidential information
- strategic plans
- customer and client details
It is often the case that departing employees try and use the information that they have acquired to set up a completing business or, work for a rival which is common in certain industry sectors.
Whilst all employees are bound by ‘implied terms’ in their contracts of employment which extend to a general duty of confidentiality, the scope is limited and very often non specific. Bespoke restrictions ensure maximum protection to the business when an employee’s appointment terminates. Usually, by operation they can:
- limit the employee’s conduct and prevent damage to the business of a former employer;
- prevent / deter employees from joining competitors;
- deter potential new employers from poaching staff / confidential information.
It is noteworthy to mention that restrictive covenants are also used in shareholders agreements (outside the scope of this briefing).
When considering whether restrictive covenants should be enforceable, a court will look restraint of trade. Terms that restrict an employee’s activities after termination will be void for being in restraint of trade.
In order for a restrictive covenant to be enforceable an employer has to (in simple terms) show that:
- It has a legitimate proprietary interest;
(ii) It is reasonable in scope;
What if they are breached
Post-termination restraints are enforced by means of equitable remedies such as injunctions, which are granted at the discretion of the Court by reference to what it regards as fair in the circumstances. Cases in this area therefore turn on their own facts, and the citation of precedent is not generally of assistance.
Good news for employers
If a restrictive covenant in a contract of employment is deemed too restrictive to be legally valid, then it does not render all remaining restrictive covenants void. To avoid a court holding part of the restrictive covenant is severable and therefore void, is to ensure that all parts of restrictive covenants are reasonable and appropriate.
For advice on restrictive covenants, whether it is ensuring they adequately protect your business or as an employee, advice on whether restrictions you have entered into are likely to be deemed enforceable please contact Kaajal Nathwani of the employment team on 020 8363 4444 or via email on firstname.lastname@example.org.
This briefing is for guidance purposes only and we recommends that appropriate legal advice be taken having regard to specific factual circumstances.