Non-compete clause unenforceable as it included a restriction on holding a minor shareholding in a competing business

Posted by Heather Welham on
Restrictive covenants are a useful tool for employers to protect their competitive edge and to reduce the risk of 'star employees' leaving to join competitors. However, failure to draft restrictive covenants carefully can leave both employer and employee in limbo. Inadequately drafted clauses risk being deemed to be too wide when in fact the original intention of the clause was much narrower. The recent case of Tillman v Egon Zehnder [2017] highlighted some of the issues that can arise where there is an uncertainty in the drafting.

Facts in the case

Egon Zehnder Ltd is an executive level headhunter business which is part of an international group of companies. Ms Tillman was employed by Egon Zehnder from 5 January 2004 until 30 January 2017 when her employment was terminated. Ms Tillman's contract of employment with Egon Zehnder contained restrictive covenants. Clause 13.2.3 restricted Ms Tillman 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.

Following termination, Ms Tillman wanted to start working for a competitor, Russell Reynolds Associates (RRA). Ms Tillman considered that she was able to do this because clause 13.2.3 was unreasonably wide (and therefore unenforceable), not on the basis that it would prevent her entering employment with RRA, but because it would prohibit her from gaining a minority shareholding in RRA which she would have been permitted to do during the course of her employment with the company.

Egon Zehnder applied to the High Court for an injunction to prevent Ms Tillman from starting employment with RRA.

Decision at first instance

In June 2017 the High Court upheld the non-compete restriction in Ms Tillman's contract and granted an injunction to prevent her from starting employment at RRA. The court held that clause 13.2.3 of the contract did not prohibit Ms Tillman from holding a minor shareholding in a competitor for investment purposes. This conclusion was reached because the court considered that the wording "directly or indirectly ... interested in any business" was ambiguous and therefore it could not be said that the restrictive covenant was unreasonably wide.

Ms Tillman appealed the decision against her on grounds that the Judge was incorrect in his interpretation of clause 13.2.3.

Court of Appeal decision

The Court of Appeal upheld the appeal and reversed the earlier decision. The Court ruled that clause 13.2.3 did prevent Ms Tillman from owning a shareholding in a competitor company and that this was unreasonably wide; as a result the restrictive covenant was void and unenforceable.

The Court of Appeal was particularly clear that they could not construe well-understood words or phrases in a manner contrary to their natural meaning (ie the words "interested in") and that the principle that a court should only favour the construction of a clause that would be enforceable (if valid) only applies where there is "genuine ambiguity".

The Court of Appeal also looked at whether it would be possible to sever some of the wording to enable the rest of the covenant to operate as intended, essentially to prevent Ms Tillman from working for competitors. However, the Court of Appeal stated that firstly, even if words were omitted the covenant would still be overly wide, and secondly, pointed to the accepted principle that parts of a single covenant cannot be severed, only distinct covenants.

The Court of Appeal therefore set aside the injunction despite acknowledging the potentially unmeritorious situation it created.

Aside from the legal arguments, the Court of Appeal also highlighted that by the end of the appeal proceedings the 6 month period had nearly concluded, after which Ms Tillman would have been free to start working at RRA in any event.

Points to note

The recent decision in Egon Zehnder is a timely reminder of some of the risks posed by restrictive covenants. Many restrictive covenants will include wording very similar to that in Ms Tillman's contract and could therefore be found to be unenforceable.

Non-compete clauses in many employment contracts are deliberately drafted to deal with a wide variety of potential scenarios, however, it is important that each scenario is carefully considered and assessed as to whether it is reasonable to project a legitimate business interest.

It is important to review the restrictive covenants in your contracts of employment to identify whether they may be at risk of being deemed invalid. If these issues can be addressed prior to an employee joining the company then this is clearly better. This is particularly important as whether a non-compete clause is deemed to be unreasonable is based on the context when the contract is signed, not the point at which it is terminated.

Contracts should also be reviewed for existing employees to identify any clauses which may be at risk of being deemed unreasonable. This is particularly the true for employees who have been with the company for a number of years under the same contract. This is a tricky area, because any changes to restrictive covenants to make enforceability more likely will need to be accompanied by adequate "consideration" (some kind of benefit to the employee, monetary or otherwise) and may not always be agreed to by the employee. 

If you have any concerns about your existing restrictive covenants or are planning to revise them please get in touch with your usual Employment team contact or one of the authors below.

About the Authors

Heather is an Associate in the Commercial Litigation team specialising in contractual disputes.

Heather Welham
Email Heather
023 8085 7493

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Oliver heads up the London Employment, Pensions & Benefits and Immigration Team.

Oliver Weiss
Email Oliver
020 7814 5494

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