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Court upholds Egon Zehnder’s use of restrictive covenants

Court upholds Egon Zehnder’s use of restrictive covenants

Published: 5 July 2019

Andrea London spoke to Recruiter to advise on a landmark decision handed down by the Supreme Court.

The decision relates to a case involving executive search firm Egon Zehnder, who hired consultant Mary-Caroline Tillman back in 2003 to work in its financial services practice division.

Court documents reveal Tillman, who was subsequently promoted to principal in 2006, partner in 2009 and joint global practice head in 2012, was employed largely on the terms of her original contract.

Clause 13 of that contract provided for five restraints upon her activities following the end of her employment, all limited to a period of six months from leaving the firm.

Part of that clause – clause 13.2.3 – included a non-competition covenant in which Tillman agreed that she would not “directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of [Egon Zehnder]” within a 12-month period before the termination date “and with which [she was] materially concerned during such period”.

On 30 January 2017, Tillman left Egon Zehnder and shortly after told them she planned to start work at a competitor firm, adding that she intended to comply with all her covenants in the agreement, apart from the non-competition covenant in clause 13.2.3. She conceded it would prevent her proposed employment within the restricted six-month period but alleged that it was in unreasonable restraint of trade and thus void.

On 10 April 2017, Egon Zehnder took legal action against Tillman, applying for an interim injunction to stop Tillman starting her new role, which was subsequently granted.

While Tillman appealed, with the Court of Appeal allowing that appeal and setting aside her injunction, this week’s Supreme Court judgement reversed that decision restoring the injunction, although the original contractual period of restraint has since expired.

Commenting on the implications of the ruling for recruitment agencies, Andrew Taggart, partner and head of law firm Herbert Smith Freehills’ EMEA employment practice, told Recruiter the judgement assists recruiters and their clients who want to get out of post-termination restrictions.

“The judgement is good news for employers seeking to enforce restrictive covenants, but not such good news for employers and recruiters who want to try and challenge those covenants.

“The Supreme Court has confirmed that, where extra words extend the scope of a restrictive covenant too far, English Courts can still sever those words to make the restrictive covenant enforceable.

“However, the judgement does not permit English Courts to add in words or modify the remaining words of a restrictive covenant or materially change the overall effect of the restrictions.

“Of course, recruitment consultants often include non-compete restrictions in the employment contracts of their own employees, so this judgement is helpful if some of the words in those restrictions take them too far, but can be severed.”

Meanwhile John Hayes, owner at law firm Constantine Law, called the ruling an important decision as it is the first time in over 100 years that the Supreme Court has decided an important restrictive covenant case.

“The case is very significant in a recruitment context because it demonstrates the willingness of the upper courts in this country to uphold restrictive covenants. In my view, it is easier for a recruitment business to get an injunction in the UK to enforce a restrictive covenant than anywhere else in the Western world. An employer has to prove that there is a serious issue to be tried and, on the balance of convenience, that the covenant should be enforced. This case proves that courts will uphold restrictive covenants and client should assume that they can be enforced if they are drafted reasonably.”

Andrea London, partner & head of employment at law firm Fletcher Day, said the implications of the case could potentially be far reaching for business.

“While employers that use non-competition covenants can to a certain extent breathe a sign of relief, the case serves as an important reminder that great care must be taken when drafting such covenants because the use (or misuse) of certain words could be significant.”

Clare Gilroy Scott, a partner in the employment team at law firm Goodman Derrick, said: “The judgement provides welcome clarity as to the court’s ability to fix a restriction that is too wide by severing the offending words (the ‘blue pencil test’) and resolves previous doubt as to the correct approach to severance in restraint of trade cases. Here, the offending words ‘interested in’ (given their natural meaning as including any shareholder interest, whether large or small) were capable of being removed without changing the overall effect of the restriction.

“Whilst businesses may be keen to restrict post-termination shareholder interest in competing businesses, they should be mindful that such restraints fall within the restraint of trade doctrine and therefore should go no further than is reasonable to protect their legitimate business interests.”

Julian Cox, head of employment at London law firm iLaw, said the case could have fundamentally affected the majority of employment contracts and restrictive covenants that are currently in place.

“It may have looked like the outcome of the case would hang on the use of a simple phrase – concerned or interested in – in regards to shareholding in another company, but it would seem that the Supreme Court, while agreeing with their unreasonableness, does not feel that they significantly change the clause enough to merit the injunction being removed.”

Cox added the decision would provide some clarity to those concerned about existing employment contracts and should help with the drafting of future employment contracts when onboarding new members of staff.

“There were certainly fears that this appeal could lead to a need to review all existing employment contracts, if the judge had found that the phrase somehow invalidated the restraint on working for a competitor, but now we are likely to just see a change in practice when creating new employment contracts to avoid any language that a court may decide is unreasonable.”

But Ivor Adair, partner at law firm Fox & Partners, adds in its ruling the Supreme Court also held that the words “or interested” could be deleted from the offending clause to remove the unreasonable effect and rescue the covenant and doing so, it reversed longstanding Court of Appeal authority and provided new guidance on the circumstances in which courts should permit deletion of an unenforceable provision, namely:

  • the objectionable words must be capable of being removed without the necessity of adding to or modifying the wording of what remains
  • the removal of the objectionable words would not generate any major change in the overall effect of all the restraints, which is for the employer to demonstrate.

Adair added: “In future employers may be arguing more frequently that a bad covenant can be rescued by the deletion of words where that does not change the effect of all the restraints. However, uncertainty remains as to what proportion of costs a winning employer ought to recover, if any, where a Court is asked to carry out surgery on a covenant to make it enforceable.

“The ruling will refocus attention on the commercial importance of ensuring that restrictive covenants are carefully tailored to the particular employee. Covenants should also be reviewed on a regular basis, particularly on a change of role, when a new business line is acquired or when there is a change in the law.”

Recruiter contacted both Tillman and Egon Zehnder for comment. Egon Zehnder said: “We are pleased the UK Supreme Court concurred with our position in this matter.”

This article was first published by Recruiter on 4 July 2019

Andrea London | Partner | Head of Employment

For further advice, or to discuss your case, please contact Andrea London at andrea@fletcherday.co.uk or on 020 7632 1442

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.