Employment Law Update - Restraints of trade, severance and costs: Tillman v Egon Zehnder Ltd [2019] UKSC 32

Employment & Industrial
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Promises in restraint of trade are void unless they can be shown to be reasonable.

Ms Tillman had agreed with her employer that she would not, at the conclusion of her employment:

“… directly or indirectly engage or be concerned or interested in any business carried on in competition …”

with her employer for a six month period.

Litigation of over this clause ensued when Ms Tillman resigned and sought to commence employment with a competitor, Russell Reynolds Associates. The matter went all the way to the United Kingdom’s highest court.

The case is important given that restraint litigation is not often pursued in the appellate courts. Principles are not often clarified, and this was the first time severance principles had been considered by the UK’s highest court in a century.

Restraining “interests” was too broad

In the proceedings below, Ms Tillman pointed to the fact that being “interested in” a competitor could extend to trivial and unreasonable situations - such as holding a minor shareholding in a competitor. She argued that the clause was unreasonably broad as a consequence, and therefore she should not have to comply with it.

The UK Supreme Court agreed with Ms Tillman. To the unaware, that might seem as a contrived outcome - Ms Tillman had no intention of acquiring an 'interest' in a competitor, but instead, employment with a competitor. But this is often not the point in restraint cases: whether or not a clause is unreasonable is to be judged by asking whether the clause protected the employer’s legitimate business interests as they existed on entry into the contract. What happens on cessation of employment often does not matter.

Out comes the blue pencil

The key issue then was whether the 'interest' prohibition in Ms Tillman’s clause could be severed. The previous rule in Attwood v Lamont [1920] 3 KB 571 was that words in a restraint could be severed only if the severed words formed a separate promise divorced from other promises in the restraint. The courts below refused to sever the 'interest' prohibition from Ms Tillman's clause.

What constitutes a separate promise from other promises in clauses of this nature? Cases seem to either justify severance based on syntactical or grammatical arrangements within a clause, or refuse severance based upon a wholistic construction of a clause.   

As Lord Wilson’s judgment demonstrated, the Attwood test had become too difficult for judges and lawyers alike. Thus, his Honour has posed a new test. Severance of unreasonable words will be allowed if:

(1)          the words can be crossed out without adding or modifying anything, and

(2)          that is done, there will be no “major change” in the effect of the promise.

On this approach, “or interested in” should have been severed from Ms Tillman’s clause.

But if you come to the Court to clean up your contract, it will cost you

The Court of Appeal’s judgment was reversed and Egon Zehnder’s injunction was restored. Most interestingly, the Court has invited submissions as to whether Egon Zehnder should pay Ms Tillman’s costs incurred in respect the entire litigation, noting the unfair burden placed on her when the Court is required to clean up the “legal litter” in her contract.

Implications

The UK Supreme Court has rewritten the test to be applied in that jurisdiction, and in so doing, has relaxed the principles of severance in that jurisdiction.  

It is of interest to Australian lawyers because the test applicable in our courts[1] rests somewhat on Attwood v Lamont [1920] 3 KB 571 and the subsequent judgments that have attempted to apply the rule expressed therein. Applying Lord Wilson’s simplified test does seem to bring about different results to clauses considered in some of the Australian cases.[2]

Relaxing the rules of severance is a logical step if Courts are concerned with giving effect to commercial bargains. It might be said that Courts should presume that parties do not wish to make unreasonable and unenforceable bargains, and accordingly, severance should have a greater role to play. This is not necessarily the approach to construction adopted in Australia.[3]

Equally logical, though, is the likely costs order in favour of Ms Tillman. If you've gone too far and your clause requires the Court’s surgery, then it seems fair to pay for it.  

[1] See: SST Consulting Services Pty Ltd v Rieson (2006) 225 CLR 516, [43]. Note that NSW has its own statutory severance regime.

[2] For example, apply the Lord Wilson’s test to the clause considered in Wallis Nominees (Computing) Pty Ltd v Pickett (2013) 45 VR 657, [94] – [98].

[3] See for example Just Group Limited v Peck (2016) 344 ALR 162, [38].

Note: This post is an educational/academic discussion on matters of law. It should not be considered as legal advice.

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Leigh practices in industrial relations, regulatory and public law litigation, contract, equity and tort

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