Supreme Court decision in Tillman v Egon Zehnder: new test for severance

Background

Tillman was engaged by Egon Zehnder Ltd (EZ) under an employment contract containing post-termination restrictions from 2004 in various roles before becoming Global Head of Financial Services in 2012. When she resigned in 2017, she sought to become employed by a competitor firm. EZ argued that this would be in breach of the non-compete restriction in her contract.

In short, Tillman argued that because the words “interested in” in the non-compete restriction prevented her from holding even a minority shareholding in a competitor, the covenant was wider than necessary to protect EZ’s interests and therefore void as an unreasonable restraint of trade.

On EZ’s application, the High Court granted an interim injunction. This was subsequently set aside by the Court of Appeal (see here), which agreed with Tillman that the words “interested in” covered a shareholding and were impermissibly wide. The CoA also held that severance could not be applied and therefore the non-compete restriction was deemed unenforceable.

Supreme Court decision

EZ appealed against the Court of Appeal decision. There were three key issues:

Whether the restraint of trade doctrine applied

Assuming it was correct to construe the words “interested in” as prohibiting any shareholding in a competing business, EZ argued that the doctrine against restraint of trade does not apply to a prohibition against holding shares. Adopting a “broad, practical and rule of reason approach”, the Supreme Court took the view that the restraint on shareholding was part of the restraint on Tillman’s ability to work following termination of employment and it did fall within the doctrine.

Whether the words “interested in” prohibit shareholding in a competing business

EZ argued that, taking the employment contract as a whole, the words “interested in” did not cover a shareholding - for example, by referring to another express provision in the contract allowing for minority shareholdings during employment. However, the Supreme Court disagreed, finding that the natural construction of the word “interested”, consistent with long-standing authority, covers a shareholding and that the features of the contract were insufficient to require any different construction. It was therefore deemed an unreasonable restraint of trade.

Whether the words “or interested” could be severed and removed from the rest of the clause

Finally, EZ argued that even if the wording does fall within the doctrine and is an unreasonable restraint of trade, it should be severed such that the rest of the covenant should survive. The Supreme Court agreed, overturning the decision of the CoA and said that, although the words “interested in” stretch EZ’s protection too far, they could be severed out of the covenant to rescue it. In doing so, the Supreme Court overruled existing case law and developed a new test for severance:

1. first, the words must be capable of being removed without the need to add to or modify the remainder, and
2. second, the removal of the words should not generate any major change in the overall effect of the restraints.

Of course, the new test will be scrutinised in future litigation and is likely to lead to debates about what constitutes a “major change”. The decision is largely academic given that the time period of the non-compete has long since elapsed, but is nonetheless significant for post-termination disputes and the drafting of non-competes in employment contracts.

Interestingly, the Court referred to the unreasonable parts of post-employment restrictions as “legal litter” that “cast an unfair burden on others to clear them up”. When inviting submissions on costs, the judgment concludes “in my view the company should win… but there might be a sting in the tail”.