Ms Tillman wished to join a competitor within six months of leaving Egon Zehnder Ltd. A covenant barred her from being “interested” in a competing business. The Supreme Court held that this word unreasonably prohibited even a minority shareholding, but that it could be severed so the remainder of the covenant survived and restrained her proposed employment.
Egon Zehnder Ltd employed Ms Tillman from January 2004 under a written agreement of December 2003. She was regarded as a special recruit, was promoted to principal and then partner, and later became joint global head of its financial services practice. The original agreement was never replaced. Clause 13 restrained her activities for six months after termination. The non-competition covenant in clause 13.2.3 provided 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 the Company or any Group Company” carried on at termination or in the previous 12 months and with which she had been materially concerned.
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Her employment ended on 30 January 2017. She said she would join a competitor on 1 May 2017 and would observe the other covenants, but contended that clause 13.2.3 was void. She argued that “interested” prohibited even a minority shareholding and therefore went beyond any legitimate protection of the company’s interests. She did not herself propose to take shares; that was treated as irrelevant. The company issued proceedings for an interim injunction. Because the covenant could have no effect after 30 July 2017, the application was treated as disposing of the claim and the merits were examined more closely than on an ordinary interim application.
The decisions below
Mann J construed “interested” as not covering a shareholding and granted the injunction. He did not need to decide severance, though he found the company’s alternative argument unappealing. The Court of Appeal, in a judgment of Longmore LJ with which Patten and Sales LJJ agreed, rejected that construction. It held that the covenant prohibited even a minority shareholding, was an unreasonable restraint of trade, and could not be saved by severing “or interested”. It set aside the injunction and dismissed the claim.
Whether shareholding falls within the doctrine
Lord Wilson, with whom Lady Hale, Lord Kerr, Lord Briggs and Lady Arden agreed, took three issues. On the assumption that “interested” prohibited any shareholding, the company argued that a prohibition on holding shares lay outside the doctrine against restraint of trade, so that its unreasonableness did not matter. The point had not been decided below. Earlier cases had assumed rather than determined that such wording fell within the doctrine, and an assumption does not bind later courts.
Lord Wilson held that no wide survey of the doctrine’s boundaries was required. This was a classic employment contract containing a restraint within the doctrine, valid only if reasonable. It would be curious to treat one word in that restraint as valid even if unreasonable. Clauses 13.3 and 13.4 acknowledged that the restraints in clause 13 had to be reasonable and provided for deletion if they were not. A shareholding restraint was also part of the restraint on working: a controlling holding could direct a competitor, a substantial minority holding could influence it, and senior employment is often linked to shares or options. On the assumed construction, the word therefore fell within the doctrine. The company conceded that it was then unreasonable, particularly because employment clause 4.5 had allowed a limited investment shareholding.
The meaning of “interested”
The company argued that, in context, “interested” did not cover shares at all. It relied on the express shareholding restriction in clause 4.5, the list of capacities introducing clause 13.2, which did not include “shareholder”, and the link between “interested” and “any business”, said to connote active rather than passive involvement. It also invoked the validity principle, under which a construction that saves a provision is preferred.
Lord Wilson held that the principle is engaged only where the alternative construction is realistic. Equal plausibility is too strict a threshold, but mere ambiguity is too loose. The natural meaning, recognised for more than a century, is that “interested” covers a proprietary or pecuniary interest, including a shareholding of any size. The company could not sensibly say that the word caught a large holding but not a small one. The three contextual features did not displace the natural meaning, and the company offered no realistic alternative. The word therefore covered shareholdings and, as conceded, was an unreasonable restraint unless severed.
Severance
The Court of Appeal refused severance because it treated the covenant as a single covenant whose parts could not be cut out, following Attwood v Lamont. Lord Wilson reviewed the history. Restraints of trade were originally void without qualification. Reasonableness later qualified that rule, so that an employer might protect legitimate interests such as trade secrets and customer connection, but not the employee’s own skill. Early authority allowed a bond to be enforced as to its lawful parts. In the early twentieth century, observations of Lord Moulton in Mason v Provident Clothing and Supply Co Ltd, and of Neville J, produced a much stricter approach. The majority in Attwood required, in effect, separate covenants and confined severance to trivial or technical excess.
Those requirements proved unsatisfactory. Asking whether a clause was one covenant or several depended largely on the eye of the beholder, and triviality sidelined severance altogether. Later authority, including Beckett Investment Management Group Ltd v Hall, applied three criteria associated with Sadler: the offending provision can be removed without adding to or modifying what remains; what remains is supported by adequate consideration; and removal does not so change the character of the contract that it is not the sort of contract the parties made at all.
Lord Wilson held that Attwood should no longer be followed. Caution remains necessary. Many employees cannot negotiate precedent restraints and face the cost of challenging them. The blue-pencil test is nevertheless an appropriate limit: severance means cutting words out, not rewriting the covenant or adding a reasonable restriction the parties did not express. A power to rewrite would require legislation. The consideration criterion matters where the employee seeks to enforce the contract after removing an obligation imposed on himself. It does not arise where the employer seeks to enforce what remains of the employee’s covenant. The third criterion is whether removal would generate any major change in the overall effect of all the post-employment restraints. The employer must establish that it would not. The focus is the legal effect of the restraints, not their changing practical significance.
Those criteria were met. “Or interested” could be deleted without adding or modifying words, and deletion would not generate any major change in the overall effect of the restraints.
The Court of Appeal had also said that deletion would achieve nothing, because a shareholding would still make Ms Tillman “indirectly concerned” in the business. Lord Wilson disagreed. Read with “engage” and “interested”, “concerned” denotes working in or otherwise actively involving oneself in the business, not a passive shareholding. Each word should be given value if possible. Severance does not change the meaning the remaining words had at the outset. There was therefore no need also to remove “or be concerned”, although the company accepted that those words could go if necessary.
Verdict: The Court unanimously allowed Egon Zehnder’s appeal. It severed the words “or interested” and formally restored the injunction on that narrower basis. The six-month restraint had already expired. Costs were left for further submissions.
