Tillman v Egon Zehnder Ltd [2019] UKSC 32

A senior executive at Egon Zehnder sought to join a competitor despite a six-month non-competition covenant. She argued the word 'interested' unreasonably barred even minor shareholdings. The Supreme Court held the clause was in unreasonable restraint of trade but severed the offending words, restoring the injunction.

Facts

Ms Tillman was employed by Egon Zehnder Ltd, a specialist executive search firm, from January 2004 under an employment agreement dated 10 December 2003. She was initially engaged as a consultant and, owing to her seniority and promise, was promoted to principal (2006), partner (2009), and eventually joint global head of the financial services practice area (2012). Despite her promotions, the original 2003 agreement was never replaced.

Clause 13.2.3 of the agreement contained a non-competition covenant prohibiting her for six months post-termination from directly or indirectly engaging, being concerned, or being ‘interested’ in any business carried on in competition with the company’s businesses with which she had been materially concerned. Clause 4.5 permitted her, during employment, to hold up to 5% of shares in a publicly quoted competitor.

Her employment ended on 30 January 2017. She informed the company of her intention to join a competitor on 1 May 2017, conceding breach of clause 13.2.3 but alleging it was void for unreasonable restraint of trade. The company sought and obtained an interim injunction from Mann J. The Court of Appeal reversed that decision, holding the clause void and refusing severance. The company appealed to the Supreme Court.

Issues

Lord Wilson identified three issues:

(A) Whether, assuming ‘interested’ prohibited shareholding, that part fell within the doctrine against restraint of trade at all.

(B) Whether, on proper construction, the word ‘interested’ prohibited Ms Tillman from holding shares in a competing business.

(C) If so, whether the offending words could be severed so as to leave the remainder of the covenant enforceable.

Arguments

The Company

(A) That a prohibition against shareholding fell outside the doctrine against restraint of trade. (B) That, properly construed in light of clause 4.5, the introductory words of clause 13.2, and the phrase ‘interested in any business’, the word ‘interested’ did not cover shareholding; and that the validity principle supported this reading. (C) That, if offending, the words ‘or interested’ should be severed under the three criteria approved in Beckett Investment Management Group Ltd v Hall.

Ms Tillman

That ‘interested’ on its natural meaning captured even small shareholdings; that the clause was therefore in unreasonable restraint of trade; and that severance was impermissible under the requirements in Attwood v Lamont.

Judgment

Issue (A): The Doctrine

Lord Wilson rejected the company’s contention. The agreement was a classic employment contract within the doctrine. It was incongruous to argue that one word within a covenant, otherwise falling within the doctrine, stood outside it. Clauses 13.3 and 13.4 themselves acknowledged that all restraints in clause 13 engaged the doctrine. Adopting the ‘broad, practical, rule of reason’ approach approved in Proactive Sports Management Ltd v Rooney, the restraint on shareholding formed part of the restraint on her ability to work and therefore fell within the doctrine.

Issue (B): Construction

The court clarified the validity principle. The correct threshold is whether a ‘realistic’ alternative construction exists (following Patten LJ in Tindall Cobham), not whether meanings are equally plausible nor merely whether there is ambiguity. On long-standing authority (Smith v Hancock, Gophir Diamond Co v Wood), ‘interested’ naturally covered proprietary or pecuniary interests including shareholdings. The three features relied on by the company (clause 4.5, the list of capacities in clause 13.2, and the phrase ‘in any business’) were insufficient to displace this natural meaning. The company failed to offer any realistic alternative construction. The word ‘interested’ therefore covered shareholdings, rendering the covenant in unreasonable restraint of trade.

Issue (C): Severance

This was described as the most important issue. Lord Wilson traced the history from Mason v Provident Clothing through Attwood v Lamont, where Lord Moulton’s obiter remarks had produced two restrictive requirements: (i) the impugned words must form a separate covenant; and (ii) the excess must be trivial or merely technical. Both requirements had proved unsatisfactory. The second had already been discarded in T Lucas & Co Ltd v Mitchell.

The court endorsed the three-fold test approved in Beckett Investment Management Group Ltd v Hall, derived from Sadler and Marshall:

1. The unenforceable provision must be capable of removal without adding to or modifying the remaining wording (the ‘blue pencil’ test).
2. The remaining terms must continue to be supported by adequate consideration (generally irrelevant where the employer seeks severance).
3. Removal must not generate a major change in the overall effect of the post-employment restraints. The burden lies on the employer.

The decision in Attwood v Lamont was overruled. Applied to Ms Tillman’s covenant, the words ‘or interested’ could be excised by blue pencil without rewording the remainder, and their removal effected no major change in the overall legal effect of the restraints. Those words were therefore severed.

The court also rejected the Court of Appeal’s view that ‘concerned’ itself would catch shareholding, holding (following Ashcourt Rowan Financial Planning Ltd v Hall) that ‘concerned’ denoted active involvement, not passive shareholding, particularly where ‘interested’ was used alongside it.

Implications

The decision authoritatively restates the law on severance of post-employment restraints in England and Wales. The restrictive Attwood v Lamont approach, which had required the impugned wording to form a separate covenant and be no more than trivial or technical, is overruled. The governing test is the three-stage Beckett test, as refined by Lord Wilson, with the critical inquiry being whether severance would cause a major change in the overall effect of the restraints.

The court nonetheless emphasised a continuing cautious approach. Lord Wilson accepted that employers frequently impose standard-form restraints on employees with limited bargaining power and drew attention to Lord Moulton’s historic concern about overbearing employers. He endorsed the observation that unreasonable parts of covenants are ‘legal litter’ which may cast an unfair costs burden on others, foreshadowing that costs consequences might follow against the successful employer.

The judgment is of particular importance to employers drafting restrictive covenants, and to employees seeking to leave for competitors, because it clarifies (i) that passive shareholdings will usually fall within the doctrine of restraint of trade when captured by words such as ‘interested’; (ii) that the validity principle requires a realistic alternative construction; and (iii) that courts may now more readily sever offending words from post-employment restraints, provided the blue-pencil test and the ‘major change’ test are satisfied. However, the court did not confer any power to rewrite unreasonable restraints; that would require legislation such as that found in New Zealand.

Verdict: The appeal was allowed. The Supreme Court set aside the Court of Appeal’s order, overruled Attwood v Lamont, and formally restored the injunction granted by Mann J, subject to the severance of the words ‘or interested’ from clause 13.2.3. The court invited submissions on costs, indicating there might be ‘a sting in the tail’ for the successful company.

Source: Tillman v Egon Zehnder Ltd [2019] UKSC 32