Severance of a restrictive covenant – the impact of Freshasia Foods Ltd v Jing Lu [2018]


Posted by Heather Welham, 22nd February 2019
The Court of Appeal decision in Egon Zehnder Ltd v Tillman [2018] placed doubt on whether it was possible for parts of a single covenant to be deleted without changing the nature of the contract. This point has been considered again in the more recent case of Freshasia Foods Ltd v Jing Lu which was handed down in January 2019.

Mr Lu sought to reply on the Egon Zehnder case to avoid an interim injunction being awarded against him pending a trial of the issues in dispute by submitting that the clause his former employer was trying to rely on was unenforceable because it was too wide in scope.

The decision in the recent Freshasia Foods case gives an example of when it may be possible to perform a blue-pencil exercise and sever a restrictive covenant in order to allow part of it to be enforceable.

The basic rules on severance: three-fold test

When determining whether severance can take place, the courts will usually consider the three-fold test which originated in the case of Sadler v Imperial Life Assurance Company of Canada Ltd [1988].

The three fold test says that severance is possible when all of the following are present:-

  1. The unenforceable provision is capable of being removed without the necessity of adding to or modifying the wording of what remains;
  2. The remaining terms continue to be supported by adequate consideration; and
  3. The removal of the unenforceable provision does not change the character of the contract that it becomes without that provision.

Egon Zehnder Ltd v Tillman [2018]: a brief summary

In this case, Mr Tillman wanted to start working for a competitor of Egon Zehnder Ltd, his former employer, but was potentially unable to do so because his contract of employment contained a non-compete clause which said that Mr Tillman was restricted from:-

“Being directly or indirectly engaged or concerned or interested in any business carried on in competition with Egon Zehnder or a group company at any time within the period of six months from the termination date”.

The Court of Appeal decided that this clause was too wide as drafted and they could not construe well-understood words or phrases (i.e. the words “interested in”) in a manner contrary to their natural meaning. It was decided that the principle that a court should only favour the construction of a clause that would be enforceable only applies where there is genuine ambiguity.

It was not possible, in this case, to blue-pencil parts of the covenant without changing the nature of the contract so the whole covenant was void.

Freshasia Foods Ltd v Jing Lu [2018]: the impact of this case

In this more recent case, Mr Lu was employed by Freshasia Foods Ltd (a company which supplied food products to Chinese retail shops and restaurants) as the head of marketing. Mr Lu left the company to work for its competitor; Kung Fu (a company which is in the business of supplying Asian foods).

Mr Lu had non-solicitation and non-compete clauses in his contract of employment which his former employer sought to enforce and, whilst awaiting the decision on enforceability, obtain an interim-injunction to prevent Mr Lu from being employed by Kung Fu and/or working with particular customers.

The non-solicitation clause protected the customer connection and goodwill prospectively at the time the contract was made if Mr Lu were to have such contact. However, it also included potential customers in the scope of the prohibited activities. Mr Lu argued that the clause as a whole was too wide and the court should not sever parts of it because they were unreasonable to leave an enforceable covenant as they were part and parcel of one single covenant and not separate covenants.

The court agreed with Mr Lu that the non-solicitation clause as a whole was greater than reasonably necessary to protect the Freshasia Foods’s legitimate business interest and it was appropriate that protection was granted only to the extent that goodwill was built up with actual customers. The judge therefore went on to consider both the three-fold test and the Egon Zehnder case to determine whether the clause could be severed to remove the offending part of the covenant. The judge came to the conclusion that although it was doubtful whether parts of a single covenant could be deleted without the contract becoming not the sort of contract the parties entered at all, it was not impossible.

Looking at the facts of this case, the judge reached the conclusion that the terms of the clause which were invalid were likely to be severable from the clause as a whole as they are sufficiently separate to satisfy the requirements in the three-fold test. The remaining part of the clause was sufficiently certain and reasonable to be enforced. Freshasia Foods was therefore successful in obtaining an injunction in respect of a narrower wording of the non-solicitation clause.

As an aside, the non-compete clause in Mr Lu’s contract was considered too wide because of the prohibited activities included in it.

Comment

The Freshasia Foods case is perhaps the start of a different and more lenient approach towards severance of restrictive covenants which shows the courts are minded to uphold restrictions where possible. If relatively minor and reasonable surgery can be performed on a legitimate set of post termination restrictions within a restrictive covenant, that should be done and the remainder enforced, regardless of whether it is formally-speaking a “separate” covenant or equivalent to a separate covenant. In contrast, if a great deal of slimming is required or the effect is a radical change that would be regarded as not the sort of contract that the parties entered into and will not be an exercise the court is willing to undertake in order to make the restriction enforceable.

It is also worth noting that the Egon Zehnder case has been appealed to the Supreme Court so that decision is eagerly awaited to see whether covenants of this kind can be treated as severable.

This recent case also supports the view that non-solicitation clauses are considered to be enforceable more routinely than non-compete clauses. However, a prohibition on the solicitation of ‘potential’ customers, as opposed to past and existing customers, is generally likely to be held to be unenforceable.

We are often asked to give advice on the enforceability of restrictive covenants, however, the contrast of the decisions reached in the above two cases shows the different approaches which can be taken by the courts. It is therefore important that all claims are considered on a case by case basis.