Offending words in non-compete clause could be severed

The Supreme Court has reversed the Court of Appeal and decided that two words could be removed from a non-compete clause to make in enforceable. This is the first case of this nature to have reached our top Court for 100 years or so. It has therefore taken the opportunity to analyse our case law on restraint of trade and to clarify the circumstances in which words can be “severed” to convert what would otherwise be an unenforceable covenant into one that is legally effective.

Ms Tillman was a senior recruitment consultant specialising in the financial services sector. She had entered into a contract of employment in which she had promised not to “directly or indirectly engage or be concerned or interested in” any competing business for a period for 6 months after the end of her employment. Her employers sought to enforce this promise when she left to work for a competitor

It is widely accepted that “interested in” in this context means holding any kind of shareholding, even a minority stake. The Supreme Court concluded that if these words remained in the covenant, it would unenforceable as an unreasonable restraint of trade, but if they were excluded, it would be reasonable and therefore enforceable. The key question was whether the Court should accept the employer’s request to strike out the offending words.

The Supreme Court concluded that the offending words could be deleted. There were two factors to consider. Firstly, could the offending words be removed without adding to or modifying the wording of what remained? In other words, did deleting the words satisfy the “blue pencil test”? The answer to that was clearly yes.

Secondly, did the removal of the words change the essential character of the contract which the parties had entered into? The Supreme Court considered that it did not, but preferred to reformulate the question (which had emerged from previous case law).  It said that what needed to be considered was whether their removal would “generate any major change in the overall effect of all the post-employment restraints in the contract”.

So where does this leave us?  The following points can be made:

  • Given our courts are prepared to enforce reasonable post-termination restrictions, clauses of this nature remain an important safeguard for employers to protect their business from damage when an employee leaves, particularly where they are in possession of commercially sensitive information or trade secrets;
  • Employers and their lawyers need to think carefully about the way these clauses are put together: each element of each restriction will need to be defended as reasonable;
  • There is now no doubt that restraining a departing employee from being a shareholder in a competing business (even if this is a minority interest) will be regarded as a restrictive covenant, and therefore potentially unenforceable
  • It should not be assumed that a court will necessarily be prepared to convert an unreasonable obligation into a reasonable one by striking out offending words, even if the blue pencil test is satisfied. Although the Supreme Court has attempted to make the criteria which will be applied clearer, the issues will not always be clear cut.
  • Finally, while the employers “won” in this case, they are unlikely to recover their costs in full, since the contract they had drawn up was found to include “legal litter” which needed clearing up.

[Edited on 7 August to show the correct restricted period of 6 months]

Posted by

Tags

Mills & Reeve Sites navigation
A tabbed collection of Mills & Reeve sites.
Sites
My Mills & Reeve navigation
Subscribe to, or manage your My Mills & Reeve account.
My M&R

Visitors

Register for My M&R to stay up-to-date with legal news and events, create brochures and bookmark pages.

Existing clients

Log in to your client extranet for free matter information, know-how and documents.

Staff

Mills & Reeve system for employees.