Earlier this month the Supreme Court overturned a Court of Appeal decision, which has stood for almost 100 years, in relation to the interpretation and enforceability of restrictive covenants, also known as post-termination restrictions, in contracts of employment.
The general legal principle is that any contractual term restricting an employee’s activities post-termination of employment is void for being in restraint of trade contrary to public policy, unless the employer can show two elements. Firstly, that the employer has a legitimate business interest that is appropriate for it to seek to protect. Secondly, that the protection sought does not go beyond what is reasonable to protect that business interest. Legitimate business interests include the stability of the workforce (protected by non-solicitation of employees clauses), trade connections (protected by non-competition and non-solicitation of clients clauses) and confidential information.
The Supreme Court in Tillman v Egon Zehnder Limited overturned the principle in the case of Attwood v Lamont (1920) that where a post-termination restriction (PTR) is drafted too widely, it cannot be severed from the rest of the restriction to render it enforceable. The initial principle was designed to stop employers purposely drafting PTRs so broadly that they extended beyond what was necessary to protect their legitimate business interests, and in doing so considerably restricting employee’s ability to trade post-termination, only to then have it rescued by the Courts or Tribunals upon challenge.
The Supreme Court preferred the more recent approach of the lower Courts and clarified the position that unreasonably wide wording within PTRs can be deleted whilst retaining the rest of the restriction if:
- There would then be no need to add to or modify the remaining wording;
- The deletion must not change the nature or meaning of the contract which the parties initially entered into; and
- The rest of the PTRs continue to be supported by adequate consideration.
The first part of this approach is known as the ‘blue pencil test’ and the Court used it in the Tillman case to delete the words “or interested” from a non-competition clause as this wording sought to restrict the employee from holding a minor shareholding in a competing business. The rest of the non-competition clause remained enforceable.
Employees and employers alike should now be aware that there is little scope for an employee to challenge the enforceability of a widely drafted PTR and render the entire clause enforceable thus releasing themselves from their restrictions. The Courts and Tribunals will be looking at whether words can be deleted from the clause to retain the meaning and enforceability of the restriction. Employers should however still be wary of taking a catch-all approach when drafting PTRs to limit uncertainties and potential disputes as to enforceability.
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