Restrictive Covenants – Can an Invalid Restraint of Trade Clause be Rescued?
As you will be aware employers are able to prevent unfair competition after an employee’s employment ends in the form of restrictive covenants. Restrictive covenants which restrain an ex-employee from working in a competing business will be prima facie void as they will be a restraint of trade.
For a restrictive covenant to be enforceable the employer must have a legitimate business interest to protect and the restraint must be reasonable and no wider than necessary to protect their interest. The latest case on this area, namely Tillman v Egon Zehnder Limited saw the Supreme Court determine what should happen when such a clause is drafted too wide and is invalid.
In the case of Tillman, the Supreme Court held that part of the restrictive covenant could be severed, leaving the remainder of the clause as enforceable. In reaching its decision, the Supreme Court overturned previous authority which was applicable for 99 years.
In this case, the Claimant argued that the use of the words “interested in” which were contained in a non-compete clause were too wide and had the effect that she would not be able to hold shares in a competitor’s business. The Court of Appeal agreed with the Claimant holding that these words were too wide making the clause unenforceable.
Whilst the Supreme Court agreed that the words “interested in” rendered the clause an unreasonable restraint of trade and therefore, unenforceable, it held that these words could be removed from the invalid clause. In doing so this would remove the unreasonable effect and ensure that the remainder of the clause was enforceable.
In reaching its decision the Supreme Court confirmed a three stage test for severance:
- That the unenforceable provision is capable of being removed without adding or modifying the remaining wording. This is commonly known as the “blue pencil test”;
- The remaining terms continue to be supported by adequate consideration. In the usual post-employment situation this should not be an issue; and
- The removal of the unenforceable provision doesn’t create a major change in the overall effect of the restraints.
For employers, this decision can be seen as a victory as the Supreme Court have confirmed that wording in offending clauses can be severed. Although it is important to note that the remainder of the clause must be able to stand alone following the severance.
Given that the Supreme Court held that the severance must not create a major change in the overall effect of the restraints, determining what amounts to a “major change” could be the next battleground in this area. Therefore, employers should watch out for future litigation in this area.
This bulletin is for general guidance only and should not be used for any other purpose. It does not constitute, and should not be relied upon as legal advice.
JMW Solicitors is a Limited Liability Partnership.
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