Is it permissible to sever words from contractual post termination restrictions in order to enhance their enforceability?

Background

Employers often include post termination restrictions in employment contracts as a means of preventing departing employees from damaging the business’ interests, for instance by poaching clients or other employees or working for a competitor when they have been privy to confidential information.

However, post termination restrictions will only be enforceable if they are reasonable. That is, if they go no further than is necessary to protect a company’s legitimate business interests. If they are drafted too widely they can be seen to amount to an unlawful restraint of trade and, therefore, will be void.

Supreme Court decision

In the case of Egon Zehnder Ltd v Tillman [2019] UKSC 32, [2019], the Supreme Court considered a post termination restriction which purported to prevent a senior employee from being directly or indirectly engaged or being concerned or interested in any competing business for 6 months after the termination of employment.

The Court of Appeal had held that this restriction amounted to an unlawful restraint of trade as the words “interested in” were unreasonably wide as they prevented even a minor shareholding in a competing business. The Court of Appeal therefore held that the whole clause was unenforceable.

The Supreme Court acknowledged that the words were unreasonably wide BUT it held that the offending words “or interested in” could be severed (applying the “blue pencil” test) leaving the remaining, reasonable parts of the clause intact.

The Supreme Court held that the “blue pencil” test can be applied if the following conditions are met:

  • the unenforceable provision/wording must be capable of being removed without having to add or modify the wording that remains;
  • the remaining terms must be supported by adequate consideration; and
  • the removal of the unenforceable provision must not result in a major change in the overall effect of the post termination restrictions in the contract.

Comments

This is a helpful decision for employers as it clarifies that unreasonable elements of post termination restrictions will not necessarily be fatal to their enforceability as the unreasonable wording can be deleted and the rest of the clause relied upon.

However, more generally, this case is a useful reminder of the importance of having well drafted post termination restrictions which are tailored to individual roles so that it is clear the employer can rely on them in order to protect its business interests when employees leave.

If you would like any further advice on the post termination restrictions in your contracts of employment or service agreements, please contact our Employment team.

Link to Judgment: https://www.bailii.org/uk/cases/UKSC/2019/32.html