1 November, 2017
At common law, a restrictive covenant is prima facie void for being in restraint of trade unless the employer has evidence to prove that the restrictions imposed are necessary and reasonable to protect its legitimate proprietary interest having regard to the interests of the parties and the public.
In the recent case of Tillman v Egon Zehnder Ltd [2017] EWCA Civ 1054, the English Court of Appeal (CA) had to consider whether a non-compete restrictive covenant extends to prevent an employee from holding a minor shareholding in a competing business. The CA allowed the appeal of the Appellant and held that a 6-month non-compete restrictive covenant was impermissibly wide, and that it was not possible to save the covenant by deleting wordings within a single covenant.
Background
The employee entered into a contract of employment as a consultant. The employment contract contained a non-compete clause restricting the employee from directly or indirectly engaging, being concerned or interested in any business in competition with any of the businesses of the employer for a period of 6 months from the date of termination of her employment (the Non-Compete Clause).
The employee resigned and joined a competitor in 3 months after her termination.
The employer issued proceedings alleging that the employee committed a breach of the Non-Compete Clause.
The employee argued in the High Court (HC) that the Non-Compete Clause was unreasonable restraint of trade as the phrase “interested in” prohibited her from having a minor shareholding in a competitor, thus being wider than necessary to protect legitimate interests of the employer.
HC decision
The HC held that the Non-Compete Clause was ambiguous. To ascertain its true meaning, the court looked for other indicia in the employment contract and identified a clause permitting a limited shareholding in the course of employment. If the Non-Compete Clause was intended to prohibit shareholding, the post-termination obligations would then be wider than obligations during employment, thereby creating an anomaly.
Based on the construction principle to favour a validating construction rather than an invalidating one, the HC held that the Non-Compete Clause was not intended to prohibit shareholding and not overly wide.
The HC concluded that the Non-Compete Clause was justified and granted an injunction in favour of the employer Claimant.
Appeal in CA
On appeal, the employee Appellant argued that the HC was wrong to rule that the Non-Compete Clause did not prohibit a shareholding as such was the natural meaning of the phrase “interested in” as supported by case law.
In its decision, the CA first held that there was no true ambiguity in the Non-Compete Clause. In common parlance, dictionaries and case law, the meaning of the phrase “interested in” incorporated the holding of shares. Therefore it was not necessary to look for other indicia as to its true meaning. The Non-Compete Clause prohibited shareholdings and was impermissibly wide. Further, the anomaly relied on in HC decision would exist whichever construction was adopted.
The Appellant submitted that the words “or interested” could be deleted or severed from the clause. However, the CA did not find this point appealing. First, the clause would still be too wide even if the words “or interested” were omitted as the court took the view that a shareholding was covered by the words “directly or indirectly engage or be concerned…in any business carried on in competition”. Second, the CA reaffirmed the doctrine of severance as applying only to separate covenants but not parts of a single covenant. Removing wordings within a single covenant may change the character of the contract, so it should not be done by the court. Hence the phrase “interested in” could not be severed to save the Non-Compete Clause.
The CA concluded that the Non-Compete Clause was unenforceable and allowed the appeal, and accordingly set aside the injunction granted by the HC.
Comment
In understanding what the parties meant regarding restrictive covenants, the court will first interpret their language according to conventional usage. The court will be reluctant to override the meaning of well-understood wordings just to render an otherwise unenforceable clause enforceable. Further, the court may no longer blue pencil wordings within a single covenant to aid an employer who has drafted an unnecessarily wide covenant. Employers should structure restrictive covenants accordingly to allow severance.
To avoid dispute, employers should tailor their restrictive covenants with an appropriate scope to suit the role into which an employee is hired and look out for unnecessarily wide wordings.
Interestingly, the employee Appellant in this case merely relied on the theoretical width of the Non-Compete Clause to include a shareholding when she did not intend to acquire shareholding in any competitor but instead wanted to work for a competitor.
For further information, please contact:
Elsie Chan, Deacons
elsie.chan@deacons.com.hk
