SC rules on severance doctrine
Thursday 18th July 2019
In Tillman v Egon Zehnder Ltd, the Supreme Court allowed unreasonably broad wording to be severed from a restrictive covenant thereby allowing EZ Ltd to enforce the remainder.
Following the termination of her employment, Ms Tillman planned to work for a competitor. EZ Ltd sought to enforce a 6 month restrictive covenant which said that Ms Tillman must not “directly or indirectly engage or be concerned or be 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 the period of 12 months prior to that Termination Date and with which [she was] materially concerned with during such period.”
Ms Tillman argued that the restriction was unreasonable because the words “interested in” were too wide and prevented her from having even a minor shareholding in a competing business.
The High Court granted EZ Ltd an interim injunction. The CA held that the words “interested in” were not defined and did prevent Ms Tillman from holding even a minor shareholding. The CA then refused to sever the words “interested in”.
The SC noted that the phrase “engaged or concerned or interested” was standard drafting and the word “interested” should be given its natural meaning. Therefore, a restriction on shareholding was part of a restraint on Ms Tillman’s ability to work and the clause was unreasonable. It was therefore unenforceable, subject to the severance point.
On severance, the SC overturned the decision in Attwood v Lamont, preferring the three-part test set out more recently by the CA in Beckett Investment Management Group Ltd v Hall. Firstly, the “blue pencil” test is applied – is it possible to remove the unenforceable provision without needing to add to or amend the remaining wording? Secondly, the remaining terms must continue to be supported by adequate consideration. Finally, the removal of the unenforceable words must not change the overall character of the contract between the parties, meaning that there must be no major change in the effect of the covenants.
Applying this test, the SC concluded that the words “interested in” could be removed and therefore restored the interim injunction originally granted by the HC.
All information in this update is intended for general guidance only and is not intended to be comprehensive, or to provide legal advice.