4 July 2019
Can Courts ‘Edit’ Restrictive Covenants To Make Them Valid?
Employment contracts often contain clauses which affect an employee’s working life after they leave. These restrictive covenants will prevent the employee working in competition with the old employer. They try to limit who the employee works for, or where, or which customers they can do business with. If the clause is not effective, can courts ‘edit’ restrictive covenants to make them valid?
The validity of restrictive covenants – or not
The clauses are often struck out by the courts as invalid. If an employee challenges the covenants, the courts might say that they are a restraint of trade. So can the courts simply remove part of a covenant which is too restrictive, leaving the rest intact and effective?
That was the question that came before the Supreme Court in the case of Tillman v Egon Zehnder (2019). The Claimant left her job at an executive search firm, but her contract had a six-month non-compete restriction which said she could not be “interested in” a competitor business. She argued that this would prevent her from even holding a shareholding in a competitor. She said it was an unreasonable restraint of trade.
There was good news and bad news for the Claimant from the Supreme Court. On the one hand the court agreed with her that the clause was unreasonable. But on the other, it decided that the offending words can simply be removed from the document. This would then allow the rest to be enforced.
The court’s decision overturned a previous authority that had stood for 99 years.
The limits of the court’s powers
One important factor in the case was that the court would only remove words, not add or modify what remained – the so-called blue pencil test. Also, the removal of certain words should not make any major change in the overall effect of all the post-employment restraints.
In practice it is difficult to restrict employees from competing when they leave a job. But this case is a victory for employers, because it shows that the courts will sometimes come to their rescue where they have drafted very broad restrictive covenants.
Notes
To find out more about restrictive covenants, click here.
Case note: Tillman v Egon Zehnder