Legal update: “blue pencilling” restrictive covenants post Tillman v Egon Zehnder238月2019
The UK Supreme Court handed down judgment in Tillman v Egon Zehnder  UKSC 32 on 3 July 2019. This judgment is important as it clarifies the principles of “severance” applicable to post-termination restrictive covenants under which the Court is able to sever or remove parts of an unenforceable covenants in order to allow the balance to be considered lawful and enforceable.
Ms. Tillman was a senior employee formerly engaged by Egon Zehnder (“EZ”), a multinational recruitment agency under an employment contract which contains post-termination restrictions. When Ms. Tillman resigned in 2017, she sought to become employed by a competitor. EZ argued that this would be in breach of the 6-month non-compete restriction in her contract. The wording of the non-compete clause included a restriction on being “interested” in a competitor. Ms. Tillman argued that this restriction is void at common law because the word “interested” meant she could not hold any shares in a competitor if she choose to and is therefore an unreasonable restraint of trade.
At first instance, EZ successfully obtained an interim injunction preventing Ms. Tillman from working for a competitor. Ms. Tillman appealed to the Court of Appeal and successfully set aside the lower court’s injunction. The Court of Appeal rejected the lower court’s constructions upon the word “interested” in the non-compete clause and held that its effect would be excessively wide as it would prohibit Ms. Tillman from holding a minority shareholding in any competing business, and as such the covenant was in unreasonable restraint of trade. The Court of Appeal also refused to sever or “blue pencil” the offending word from the remainder of the clause to render the remainder of the restriction valid, on the basis that words within a covenant could not be severed.
Supreme Court Decision
EZ appealed to the Supreme Court. The Supreme Court allowed the appeal and held that:
- The word “interested” in the non-compete covenant includes being a shareholder of a competing business, whether large or small. The non-compete purports to restrain Ms. Tillman from holding shares in the competing business and was therefore an unreasonable restraint of trade.
- The word “interested” could be severed and removed to remove the unreasonable effect such that the remaining parts of the covenant could survive. The Supreme Court overruled the Court of Appeal’s decision in Attwood v Lamont  3 KB 571 from nearly a century ago and upheld a more recent approach adopted by the Court of Appeal in Beckett Investment Management Group Ltd v Hall  EWCA Civ 613.
- The Supreme Court set out the three-step test followed in Beckett as the correct test for permitting and applying severance. The criteria in the three-step test are:-
- That the unenforceable provision capable of being removed without the necessary of adding to or modifying the wording of what remains. This is known as the “blue pencil” test which can work capriciously, but could only operate where words were severed, not extended or added in.
- That the remaining terms continue to be supported by adequate consideration. The Supreme Court noted that this requirement can be ignored in the usual situation.
- That the removal of the unenforceable provision does not so change the character of the contract that it becomes “not the sort of contract that the parties entered into at all”.
As regards the above third criterion, the Supreme Court stated that it would be better expressed in the following manner:
“… whether removal of the provision would not generate any major change in the overall effect of all the post-employment restraints in the contract. It is for the employer to establish that its removal would not do so. The focus is on the legal effect of the restraints, which will remain constant, not on their perhaps changing significance for the parties and in particular for the employee.”
Applying the above severance principles, the Supreme Court held that the words “or interested” are capable of being removed from the non-compete covenant. Secondly, removal of the prohibition against her being “interested” would not generate any major change in the overall effect of the restraints and as such the words should be severed and removed. Accordingly, the Supreme Court held that EZ was entitled to the injunction, subject to the removal of the words “or interested”.
Although this Supreme Court decision has not yet been applied in Hong Kong, it is expected that this decision will be influential and will be adopted by the Hong Kong courts in cases where disputes arise in respect of the possible severance of words within covenants that render them excessively wide and void and in turn the enforceability of restrictive covenants.
In the concluding paragraph of the Supreme Court judgment, there is a suggestion that an employer’s ability to recover some or all of its costs may be affected in cases where the Court considers the restrictions should have been more tailored in the first place, in order to avoid the need for the court to intervene to sever parts of restrictions that are excessively wide. In doing so the Supreme Court referred to the case of Freshasia Foods where the deputy judge described as “legal litter” the unreasonable and excessive parts of post-termination restrictions, and commented that they “cast an unfair burden on others to clear them up”. When inviting submissions on proper costs order, the Supreme Court suggested that there may be a costs-based “sting in the tail”. Therefore even though it is now more likely that a covenant will be saved by the Court severing excessive parts of it, employers should be still cautious to ensure that the restrictive covenants are narrowly focused tailored to the employees as there may be adverse costs consequences for employers who draft wide clauses with the aim of relying on the intervention and assistance of the court in applying severance principles.
Russell Bennett / Ken Ng
The above is not intended to be relied on as legal advice and specific legal advice should be sought at all times in relation to the above.
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Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.