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Severance Principles Settled – Robert Mundy

Robert Mundy

Egon Zehnder Ltd v Tillman [2019] UKSC 32

Unreasonable restrictive covenants are void at common law. But what if only part of a covenant is unreasonable? Can the bad be severed and the good enforced?

In Egon Zehnder Ltd v Tillman, the Supreme Court settled the uncertainty about the rules which govern this question. After a thorough review of the development of the prohibition of covenants in restraint of trade and the development of the severance rules, it restored the threefold test applied by the Court of Appeal in Beckett Investment Management Group v Hall [2007] EWCA Civ 613, [2007] ICR 1539. The bad part of a covenant may be severed if:

  1. the unenforceable provision can be removed without the need to add to or modify the wording of what remains;
  2. the remaining terms continue to be supported by adequate consideration (a criterion that can be ignored in run-of-the-mill cases); and
  3. the removal of the unenforceable provision does not so change the character of the contract that it becomes not the sort of contract that the parties entered into at all.

The rule was then applied to the facts. Egon Zehnder Ltd, a head-hunter, employed Ms Tillman. She began work as a “consultant” but was soon promoted to be a “principal” and later a “partner”. Her employment contract said:

You [Ms Tillman] 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 or any Group 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.

She left her employment in January 2017 and took up new employment with a competitor in May 2017. She contended that the non-competition covenant went further than was reasonably necessary to protect Egon Zehnder’s interests. She argued (among other things) that prohibiting 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 this restriction was an unreasonable restraint of trade and refused to sever the words “or interested” from the remainder of the clause.

The Supreme Court held that the offending word ought to be severed. The words “or interested” could be removed without the need to add or modify the wording of the remainder. And doing so generated no major change in the overall effect of the restraints.

Lord Wilson’s judgment (with whom the other justices agreed) ended with a warning to drafters of contracts. He approved Daniel Alexander QC’s description (in Freshasia Foods Ltd v Lu [2018] EWHC 3644 (Ch)) of the unreasonable parts of post-employment restrictions as “legal litter” which “cast an unfair burden on others to clear them up”. Lord Wilson warned that the employer might have to bear some of the costs of the litigation, even though it had succeeded: “In my view the company should win … but there might be a sting in the tail.”

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