04 July 2019

Post termination restrictions: are you exposed?


Christina Morton
Professional support lawyer | UK

Supreme Court judgments on post termination restrictions that apply to a departing employee are few and far between. The decision in Tillman v Egon Zehnder Limited, handed down on 3 July revisits and clarifies some critical guidance for those caught up in disputes about these provisions.

The case concerned the following clause in the contract of Ms Tillman, joint global head of financial services for Egon Zehnder (‘EZ’):

‘You shall not 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’.

The restriction applied for six months following termination of Ms Tillman’s employment.

Wording like this is commonplace in employment contracts – particularly those of senior or business critical employees. Ms Tillman left her job, then announced that she planned to start work for a competitor within the six month non-compete period. EZ applied for an injunction to prevent her doing so, relying on the restriction. Ms Tillman acknowledged that her actions would put her in breach of the restriction, but argued that the clause was unenforceable.

Her argument was ingenious. She said that the inclusion of the words ‘or interested’ meant that any ‘interest’ in any competitor, even a minority interest, would put her in breach of the provision even if it gave her no individual influence in the competitor and no opportunity to adversely affect the interests of EZ. That, she argued, went further than was necessary to protect her former employer’s legitimate interests meaning the clause would be unenforceable as an unreasonable restraint of trade.

EZ disputed that that was what the clause meant. But even if it did mean that, it argued, you could simply take the words ‘or interested’ out of the clause and what remained would be an enforceable covenant. The High Court accepted EZ’s argument that the clause did not mean what Ms Tillman suggested and granted it an injunction to prevent Ms Tillman breaching the clause. Ms Tillman appealed to the Court of Appeal.

The Court of Appeal found in favour of Ms Tillman. It agreed that the clause effectively prevented her from holding a minority interest in a competitor and was therefore an unreasonable restraint of trade. It refused to take the words ‘or interested’ out of the clause to avoid that effect. EZ appealed to the Supreme Court.

The Supreme Court first considered whether the issue of share ownership was part of the law on restraint of trade at all. After considering the long history of restraint of trade cases (the first case, which involved a dyer called John Dyer, was decided in 1414), it concluded that share ownership was covered by the law on restraint of trade. It then looked at the clause itself and whether there was anything in the drafting that helped Ms Tillman. The Court said not.

There was one further issue – could the words ‘or interested’ simply be taken out of the clause in order to make the restriction enforceable after all? The Court decided that in this case the words ‘or interested’ could be taken out without any other words having to be changed and without the meaning of the rest of the clause being altered. In doing so it clarified the approach that courts should take when deciding whether to amend the drafting of a contract to save an otherwise unenforceable clause.

What employers and employees should do

The case invites both parties to an employment contract that contains provisions designed to protect the employer’s business to review the wording. Employers will be keen to know that their standard wording is in line with the Supreme Court’s guidance and to think about what to do if it is not. Employees will want to know whether they can be held to wording to which they have signed up.

The Supreme Court’s guidance in this very tricky area is very welcome. But to sound a note of caution, the judgment acknowledges that in many cases employer and employee are not in an equal bargaining position. It reminds the courts to take a cautious approach to applications by employers to amend the drafting of a clause that would otherwise be unenforceable.

There really is no better way to protect a business than to get the drafting as good as it can be from the start.

Christina Morton Professional support lawyer | London

Category: Article