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Invalidated non-compete clause: the Tillman v Egon Zehnder Ltd Judgment.


What was this case about?

Ms Tillman began her employment with Egon Zehnder (EZ) in 2004, pursuant to a written contract of employment.  The contract included (as you would expect) post-termination restrictive covenants, which provided:

“You shall not, during the course of your employment, directly or indirectly, hold or have any interest in, any shares or other securities in any company whose business is carried on in competition with any business of the Company or any Group Company, except that you may hold or have an interest in, for investment only, shares or other securities in a publicly quoted company of up to a maximum of 5 per cent of the total equity in issue of that company”

…………………………………..

“You shall not without the prior written consent of the Company directly or indirectly, either alone or jointly with or on behalf of any third party and whether as principal, manager, employee, contractor, consultant, agent or otherwise howsoever at any time within the period of six months from the Termination Date:

…………………………………

“directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the Company or any Group Company which were carried on at the Termination Date or during such period”.

 

Injunction to enforce the restrictive covenant

On 23 January 2017 Ms Tillman gave notice to leave EZ, stating that she wished to work for a competitor of EZ.  She was placed on garden leave with the termination date of her employment being 30 January 2017.

EZ sought an injunction against Ms Tillman to enforce the post-termination restriction; namely to restrain Ms Tillman from working for a competitor for a period of six months from the termination of her employment. EZ succeeded with its application, with the Court taking the view that the restrictive covenant was valid and in turn enforceable; with the non-compete restrictive covenant being appropriate to protect the business of EZ.  The Court granted the injunction EZ sought, restraining Ms Tillman from taking up employment with a competitor for a 6-month period.  It did not consider the covenant to be wider than was reasonably needed in order to afford EZ protection.

The Appeal

Ms Tillman appealed this decision, maintaining that the restrictive covenant is in unreasonable restraint of trade, preventing her from becoming a shareholder in a competitor.  In any event, Ms Tillman did not propose to become a shareholder in a competitor.   On the construction of the restrictive covenant, Ms Tillman argued that it prevented her from being engaged or concerned or interested in any business carried on in competition with any business.  If Ms Tillman obtained a shareholding in a competitor business, she would be “interested” in that business, and therefore was in unreasonable restraint of trade; with the clause being wider than was necessary to protect the business interests of EZ.

The Court of Appeal considered the construction of the restrictive covenant, noting that:

(1) the question of validity of the covenant must be judged at the time the contract was made, and not when Ms Tillman had been promoted during her time with EZ;

(2) all covenants in restraint of trade are, on the face of it, unenforceable at common law.  They are only enforceable if they are reasonable with regard to the interests of the parties concerned and/or the public;

(3) if the covenant was unreasonable, then unless the unreasonable part can be served by the removal of either part or the whole of the covenant in questions, its inclusion would make the covenant or the entire contract unenforceable;

(4) if a covenant in restraint of trade is unreasonable it is void; meaning the Court’s will not enforce it

Conclusion

The Court of Appeal set aside the injunction, holding that the word “interested in” included Ms Tillman holding a shareholding in a competitor company, rendered the restriction too wide, and was therefore void.  Further, the Court did not accept that the words “or interested” could be deleted from the particular clause in order to leave the remainder of the restriction valid.

For any more information please contact Gemma Newing or the dispute resolution team.

 

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