How to Manage Unenforceable Restrictive Covenants – Tillman v Egon Zehnder Ltd
Restrictive covenants can be an effective way to safeguard a business following the termination of an employee’s contract. To be enforceable, the employer must have a legitimate business interest to protect, such as trade secrets, confidential information and connections and the restraint must be reasonable in both time and location. Where it is deemed that a restrictive covenant goes further than is necessary to protect the interests of the employer and is too wide in scope, it will be void and unenforceable.
Tillman v Egon Zehnder demonstrates the Courts’ ability to extract or sever words from restrictive covenants which are too onerous and would otherwise void the clause entirely, so as to create a valid, enforceable clause.
Ms Tillman was hired by Egon Zehnder Ltd as a consultant in 2004 and was promoted to partner in 2009. Her partnership role was conditional upon her holding shares in Egon Zehnder’s Swiss holding company. Over her tenure, Ms Tillman was promoted higher up the ranks to co-Global Head of the Financial Services Practice Group, although her original contractual agreement with Egon Zehnder, signed in 2003, was never replaced (albeit perhaps updated according to salary increases).
On 23 January 2017, Ms Tillman resigned on notice from her role as co-Global Head of the Financial Services Practice Group at Egon Zehnder. In accordance with her contract, the following week Egon Zehnder terminated her employment with immediate effect and made a payment in lieu of notice. Shortly after the termination of her employment, Ms Tillman notified Egon Zehnder that she intended to start work with one of the company’s competitors, which would be acting in contravention of the non-compete clause in her contract. Ms Tillman, acknowledging that there would be a breach of the clause if it was enforceable, contended that the non-compete clause was designed to prevent her employment with a competitor and therefore constituted an unreasonable restraint on trade. Egon Zehnder issued proceedings on the basis that Ms Tillman had breached her restrictive covenants and sought an injunction against her.
The Offending Restriction
The non-compete clause in Ms Tillman’s contract included the following wording, that she would not
"…directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of [the employer]….”.
Ms Tillman defended the proceedings and argued that the clause was void and unenforceable because the wording “interested in” was too wide and would have included a minority shareholding in a public limited company.
Matters for the Supreme Court
The lower Courts granted the injunction against Ms Tillman, which was subsequently overturned by the Court of Appeal. Egon Zehnder sought to have the injunction reinstated by the Supreme Court.
The Supreme Court’s discussion focused around three issues:
- The doctrine against restraint of trade;
- The construction of the wording; and
With respect of issues (1) and (2) the Court held that the word “interested” did intend to restrain Ms Tillman from holding shares in specified businesses and therefore was considered to fall within the scope of the doctrine against restraint of trade. Further, the natural construction of the word “interested” is that it should include a shareholding.
When dealing with issue (3), severance, it was necessary for the Court to consider the following:
- Can the unenforceable wording can be removed from the clause without the need to add to or modify the remaining text?
- Is the remaining wording supported by adequate consideration?
- Does the removal of the unenforceable wording change the overall character of the clause?
In this case, the words “or interested” were removed from the clause so that the remainder of the terms could be enforced against Ms Tillman and the injunction against her was restored (although the contractual period for restraint had expired).
Did you know that through AXA, you can insure against the breach of post-termination covenants mentioned in this case study, as well as other employment claims brought by your own staff and your temps?
If you would like further information please contact Paul Chamberlain at JMW on email@example.com and he will then be able to refer you to one of TEAM’s Service Providers who can provide you with a no obligation quotation.
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