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Mark Greaves, a barrister at Matrix Chambers, comments on the decision in Tillman (Respondent) v Egon Zehnder Ltd (Appellant) [2019] UKSC 32 which was handed down on 3 July 2019. The judgment is the first employee competition case to be heard by the Supreme Court in 100 years and provides important clarification on the “validity principle” in construing agreements and the correct approach to severance in restraint of trade cases.

 Background

The Appellant company, Egon Zehnder (“EZ UK”) is the UK arm of a global executive search and recruitment company (“the EZ Group”). The Respondent, Ms Tillman, was a high-profile employee hired to work in the financial services team. She was employed in 2004 as a consultant, rising through the ranks to become joint global practice head in 2012.

Ms Tillman was always employed under the same contract of employment. This contract included a non-compete clause (“the NCC”) whereby Ms Tillman covenanted that she would not, for a six month period following the end of her employment, “directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of [EZ UK or the EZ Group]”.

Shortly after Ms Tillman’s employment came to an end on 30 January 2017, she informed EZ UK that she intended to start working for a competitor. She made clear that she did not intend to comply with the NCC as it was, she alleged, an unreasonable restraint of trade and thus void.

EZ UK issued proceedings seeking an interim injunction to enforce the NCC. The injunction was granted by the High Court but subsequently set aside by the Court of Appeal. EZ UK appealed to the Supreme Court.

The Issues

In the Supreme Court (“the SC”) the issues as to the enforceability of the NCC were:

  • Whether a prohibition on holding shares falls outside of the restraint of trade doctrine altogether (“Issue 1”);
  • Whether the words “interested in”, properly construed, unreasonably prevented Ms Tillman having a minority shareholding in a competitor business (“Issue 2”); and
  • if so, whether the offending words could be severed (“Issue 3”).

 

The Decision

Issue 1: The scope of the restraint of trade doctrine

However, the SC declined to rule on the boundaries of the restraint of trade doctrine, merely approving the adoption of the “broad, practical, rule of reason approach” proposed by Gross LJ in Proactive Sports Management Ltd v Rooney [2011] EWCA Civ 1444, [2012] IRLR 241.

The SC held, on the facts, that the restriction on shareholding did fall within the doctrine. The Court noted that employment of a top executive such as Ms Tillman is often subject to a requirement to hold shares.  Thus, in substance as well as in form, the restraint on shareholding was part of the restraint on Ms Tillman’s ability to work.

 

Issue 2: Proper construction of the words “interested in”

This issue turned on the proper understanding of the “validity principle” in construing agreements. This principle provides that if a clause can be given one construction which renders it void and another construction that renders it valid, the parties are taken to have intended the valid construction.

However, prior to Egon Zehnder, the authorities differed on the circumstances in which the principle is engaged: adopting a narrow approach, in In re Baden’s Deed Trusts [1969] 2 Ch 388 Harman LJ said that the valid interpretation should be preferred when the two competing interpretations were “evenly balanced” or “equally plausible”; however, more broadly, in Continental Educational Group (GB) Ltd v Capital Homes (Southern) Ltd [2009] EWCA Civ 218, [2009] CP Rep 30, Arden LJ (as she the was) observed that “if the agreement is susceptible of an interpretation which will make it enforceable and effective, the court will prefer that interpretation to any interpretation which would result in its being void” (emphasis added).

In Egon Zehnder, the SC held that the point at which the validity principle is engaged lies between these two extremes: the test is whether the alternative construction is “realistic”, even if it is the “less natural construction”.

On the facts, the validity principle did not apply as EZ UK was unable to advance a realistic alternative construction of the word “interested” which did not cover a shareholding. Thus, subject to severance, the NCC was void as an unreasonable restraint of trade.

 

Issue 3: Correct approach to severance in restraint of trade cases

Prior to Egon Zehnder, the law on severance was unsatisfactory: there were two different approaches found, in particular, in the decisions in Attwood v Lamont [1920] 3 KB 571 (CA) and Beckett Investment Management Group Ltd v Hall [2007] ICR 1539 (CA) [57-73].

On the Attwood approach, severance of a covenant is permitted only where the covenant was, in effect, a combination of several different covenants rather than a single covenant.

The Beckett approach requires three criteria to be satisfied for severance:

  • The unenforceable provision is capable of being removed without the necessity of adding to or modifying the wording of what remains (the so-called “blue pencil” test);
  • The remaining terms continue to be supported by adequate consideration;
  • 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 SC overruled Attwood, noting that the inquiry as to whether a covenant was, in effect, one covenant or more than one had “proved to be of elusive application, largely dependent on the eye of the beholder.”

The reformulated test following Egon Zehnder maintains the first two criteria from the Beckett approach but with the crucial third criterion now being that “the removal of the provision would not generate any major change in the overall effect of all the post-employment restraints in the contract.” The employer bears the burden of proof to show that it would not do so. The focus is on the legal rather than the practical effect of the restraints.

On the facts of the case, the SC concluded that it was able to take the blue pencil to the words “or interested” in the NCC without generating any major change in the overall effect of the restraints. Severance was therefore permitted and EZ UK’s appeal was allowed.

 

Comment

The clarification provided in relation to the validity principle and severance is welcome, although the lack of guidance as to what constitutes a “major change” in the overall effect of the restraints means that there may well be further litigation in this area . It also to be hoped that the important issue as to the scope of the restraint of trade doctrine will be considered in another case before too long, given that the SC largely sidestepped the issue in Egon Zehnder.

Although the judgment has been welcomed by employers, there is a “sting in the tail”, as the SC noted, since employers may be penalised in costs for requiring the assistance of the courts to tidy up their “legal litter”. It remains to be seen how the sting will operate in practice and whether the first instance courts may, in certain cases, go so far as to order the employer to pay some of the employee’s costs where extensive severance was required to enable the restraints to be enforceable.