Supreme Court offers clarity on restrictive covenants

The Supreme Court has dismissed an earlier decision of the Court of Appeal that a company’s restrictive covenant was too wide to be enforceable.

In the case of Tillman v Egon Zehnder Ltd, a senior member of staff at a management consultancy and executive recruitment agency was prevented from seeking new employment with a competing US firm in New York due to a restrictive covenant that contained a six-month non-compete clause.

Within this clause was a line that stated that Ms Tillman must 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 such period.”

Much of the focus in the case was on whether the phrase ‘concerned or interested in’, included or relied upon her being a shareholder.

The Appellant, Tillman, claimed that although she had no shareholding, she wanted to rely upon this restriction rendering the covenant as a whole, unreasonably wide, which meaning it was unenforceable and that she could take up employment with the competitor overturning an injunction put in place by her employer – even though the period

The Court of Appeal allowed the appeal against the grant of the injunction, but the Supreme Court has since overturned the appeal and agreed with the original clause, stating that the “removal of the prohibition against her being ‘interested’ would not generate any major change in the overall effect of the restraints” as laid out in the covenant.

Julian Cox, Head of Employment at iLaw, said: “Employers and HR professionals across the UK will have been waiting with baited breath for the outcome of this case, as it could have fundamentally affected the majority of employment contracts and restrictive covenants that are currently in place.

“It may have looked like the outcome of the case would hang on the use of a simple phrase – concerned or interested in – in regards to shareholding in another company, but it would seem that the Supreme Court, while agreeing with their unreasonableness, does not feel that they significantly change the clause enough to merit the injunction being removed.”

Julian said that the decision would provide some clarity to those concerned about existing employment contracts and should help with the drafting of future employment contracts for new members of staff.

“There were certainly fears that this appeal could lead to a need to review all existing employment contracts, if the judge had found that the phrase somehow invalidated the restraint on working for a competitor, but now we are likely to just see a change in practice when creating new employment contracts to avoid any language that a court may decide is unreasonable.”

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