Insights

Our thoughts on the latest developments in our specialist sectors and services.

Restrictive covenants and severance: the Zehnder Judgement

15 July 2019

The Supreme Court has carried out a very thorough review of the approach the Courts should take where a restrictive covenant contains wording which might render it too wide in scope to be enforceable.

The case in question, Egon Zehnder Limited v Tillman, concerned an individual working for a firm of head-hunters, who was restrained under her contract from working with the competitors for a period following termination of her employment. The restriction involved being “concerned or interested in any business carried on in competition with any of the businesses of the Company… during the period of 12 months prior to [the termination date] and with which [she] was materially concerned during such period.” The restriction did not include an exception for an interest relating to a small holding of shares in a publicly quoted Company. Such a provision is common and indeed appeared in this contract in the restriction on what Ms Tillman could do during the course of her employment.

The High Court Judge granted an injunction against Ms Tillman but the Court of Appeal overturned it on the basis that the clause was rendered unenforceable by the failure to exclude small shareholdings.

The Supreme Court has taken the opportunity to review the circumstances in which the Courts can ‘sever’ an unenforceable part of a restriction from a contract, leaving the rest of the clause to be enforced. The Doctrine of Severance has, in recent years, been narrowly interpreted, with the Courts appearing reluctant to exercise any power to ‘correct’ a covenant drawn up by an employer which would, without the severance, be unenforceable.

After a detailed analysis of the history of the doctrine, the Court concluded that if the words causing the problem are capable of being removed from a covenant without the need to add or modify the wording of the remainder, and the removal would not generate any major change in the overall effect of the restraints, then the words should be severed and removed so as to render the covenant enforceable. In this case, they were able  to remove the words “or interested” from the covenant. This negated the argument that the covenant was unenforceable and so an order was made that the restriction should be upheld, with the offending words removed from it.

The Supreme Court gave particular consideration to the fact that there is considerable pressure placed on an employee in dealing with an attempt by an employer to enforce restrictive covenants, particularly in relation to the cost of litigation and recognition of this pressure that had, perhaps, led to a very narrow application of the right to seek severance. This decision, however, emphasises that Courts can and will take  steps to ‘correct’ a restrictive covenant, thus allowing the employer to enforce what might otherwise be unenforceable.

There are limits on the extent of this doctrine. The courts will not re-write covenants and will not substitute enforceable terms where what is prepared by the employer is too long or too wide in geographical scope to be enforced. If, however, specific words or a clause can be removed without radically changing the intention behind the covenant, then the Courts will be able to do that.

In recent years, the Courts have moved to a pragmatic view of covenant enforcement, based on balancing  all of the relevant facts, avoiding rigid rules which mean that a particular form of words will ‘always’ or ‘never’ be enforceable. This case will give heart to employers seeking to rely on covenants and similarly, will give employees and those advising them pause for thought in terms of weighing up the risks involved in seeking to challenge a covenant which might be capable of correction by the Courts. There remains a risk for employers, however, who include unreasonable elements in post employment restrictive covenants. The Court warned that they may succeed in obtaining an injunction, but there may be a ‘sting in the tail’ in the form of a costs award. Ordinarily, the successful party in High Court litigation will recover a substantial part of their costs from the other party. In circumstances where, in the words of a previous Judge quoted with approval in this case, the employer “casts an unfair burden on others to clear [ ] up” the terms of a covenant, this case would suggest that the employer is likely to have to bear the cost of the exercise itself.

 

Back to blog

Share this page