Reasonableness of non-compete clause


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The Supreme Court has handed down its decision in Tillman v Egon Zehnder, and restored the High Court's injunction to uphold a non-compete restriction.

The clause in question sought to prevent Ms Tillman from being concerned or interested in any competing business for a period of six months from termination. It did not contain an express limitation allowing her to hold a minor shareholding in a competing business for investment purposes. As the phrase "interested in" included holding one share in a publicly quoted company, this rendered the restriction impermissibly wide (in the Court of Appeal's view), and therefore void. The Court rejected the argument that the words "or interested" could be deleted or severed from the relevant provision in order to leave a valid restriction, and set aside the injunction. Following the decision of the Court of Appeal it has been common practice to exclude any minor shareholdings (typically by up to 5%) held by the employee in a competing business, However the Supreme Court has now overturned this decision.

The Supreme Court disagreed with the Court of Appeal, holding that the words "or interested" could be removed in order to remove the unreasonable effect without the need to add or modify the wording of the rest of the clause, and that the removal of this prohibition against being "interested" would not generate any major change to the effect of the restraints. The wording "engaged or concerned or interested" has been standard in precedents for the drafting of non-competition covenants and treated as including a shareholding prohibition. The natural meaning of the word, which includes a shareholding therefore applied. Although the High Court's injunction was restored, the contractual period of restraint has since expired.

Take note: The exclusion of shareholdings held by an employee in a competing business from a non-compete clause will be good practice. However, following the decision in Tillman, it is no longer necessary to explicitly exclude them to ensure that such a clause is enforceable.

Whilst it is possible for the courts to sever parts of a restrictive covenant and still leave a valid restriction it is advisable for employers to review their restrictive covenants to ensure that they are enforceable. In doing this it's important to remember that you must have a legitimate interest that it is appropriate to protect, and that the protection sought is no more than is reasonable having regard to the interests of the parties and the public interest.

This article is taken from HR Law – July 2019

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