Restrictive Covenants

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Restrictive Covenants

Restrictive Covenants

Not worth the paper they’re written on? Supreme Court decision supports employers seeking to enforce restrictive covenants

Whilst we often report on restraint of trade cases involving the recruitment sector, Tillman v Egon Zehnder Ltd [2019] was the first UK restraint of trade case to reach the Supreme Court in a century, and will significantly impact the enforceability of restrictive covenants in employment contracts. We often hear the myth that “restrictive covenants aren’t worth the paper they’re written on”. According to the Supreme Court’s decision, they are, even if that paper is covered in red pen.

What was it about?

A former employee of a recruitment company sought to escape the grip of a widely drafted restrictive covenant which the recruitment company was seeking to enforce. The clause required that she would not “directly or indirectly engage or be concerned or interested in” any competing business.

An injunction was granted which was overturned on appeal when the employee argued that the wording “interested in” was too wide as it prevented her from having even a nominal shareholding in a competing business and therefore the whole clause was void. The recruitment company appealed to the Supreme Court against that decision.

What was decided?

The Supreme Court allowed the appeal, after editing the clause to remove the words “interested in”, and held that the recruitment company was entitled to its injunction.

The rule from the case of Attwood v Lamont was overruled. Instead, the “Blue Pencil Test” from the case of Beckett Investment Management Group Ltd v Hall was affirmed.

According to the Blue Pencil Test, a provision in a restrictive covenant may be severed if it can be removed without:
• adding to or modifying the wording of the remaining clause; or
• generating a major change in the overall effect of the post-termination contractual restraints.

Why is this significant?

This new ‘no major change test’ has relaxed the criteria for severance of unreasonable provisions from restrictive covenants.

This is good news for employers seeking to rely on restrictive covenants who may be wary of their former employees asserting that the wide drafting deems the entire clause void.

What effect will this have?

Whilst this judgement provides more certainty for employers, the general rule remains that clauses should not be wider then necessary to protect legitimate business interests. Courts will continue to be cautious to edit a clause and, if a clause does need to be amended, an employer may still be penalised on costs, even if they get the benefit of the clause being enforceable.

In particular, employers should still ensure that restrictive covenants are clearly and precisely drafted, separate out provisions and use sub-clauses for extra clarity wherever possible.

For more information on this topic, please contact Olivia Morton, or you can give us a call on 0345 070 6000.

This article was prepared by Sophie Gladwell.