In recent years, there have been conflicting authorities as to whether it is possible to sever parts of restrictive covenants which are unreasonable, if the balance of the covenant is reasonable. The starting position is that unreasonable restrictive covenants are void and unenforceable. The grey area was what happened if only part of a covenant is unreasonable. Can the unreasonable element be severed and the balance of the covenant enforced?
The recent case of Egon Zehnder Ltd vs Tillman the clarified the position. The Supreme Court has restored the old test that was originally set the Court of Appeal in 2007. The position now is that the unreasonable part of a covenant may be severed if:
- The unreasonable provision can be removed without the need to add or to modify the wording of what remains;
- The remaining terms continue to be supported by adequate consideration (which will normally apply in run-of-the-mill cases); and
- The removal of the unreasonable provision does not change the character of the contract so that it becomes the sort of contract that the parties had not intended to enter into at all.
In this case the company, a headhunter, employed Ms Tillman. Her employment contract said:
“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…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.”
Ms Tillman’s employment finished in January 2017. She commenced employment with a competitor in May 2017. She argued that the non-competition covenant went further than was reasonably necessary to protect her former employer’s interests. She argued that it prohibited her being “interested” in a competing business unreasonably stopped her from holding even a minority shareholding in a competing business.
The Court of Appeal held that the restriction was in unreasonable restraint of trade, refused to severe the words “or interested” from the remainder of the clause, and therefore the whole clause was unenforceable.
The Supreme Court held that this was the wrong approach. Adopting the test above, the words “or interested” could be severed without the need to add or modify the wording of the remainder. The balance of the clause was therefore enforceable because the removal of those two words generated no major change in the overall effect of the restraint.
If you have any queries regarding restrictive covenants, their enforceability, or the drafting of the same, please do not hesitate to contact one of our experts, Mark Hirst or Rachael Frankland.
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