Tillman -v- Egon Zehnder; The Supreme Court Decides

July 3rd, 2019

1. The Supreme Court handed down its judgment in this case today; [2019] UKSC 32. It has not heralded quite the sea change in the law that some commentators had anticipated.

2. Ms Tillman had a contract that precluded her from being engaged, concerned or interested in a competing business (post termination), but omitted the conventional saving allowing her to hold a minority shareholding in a publicly quoted company. At first instance, the Judge (Mann J) held that properly construed, the restraint did not bite on a passive shareholding and made an injunction enforcing it.  The Court of Appeal set aside the injunction, on the basis that the prohibition on being ‘interested in’ a competing business plainly extended to a passive shareholding and that part of the covenant could not be severed or blue-pencilled, applying Attwood –v- Lamont [1920] 3 KB 571 (severance of an apparently unitary covenants only possible where as a matter of grammer/construction it comprised two or more discrete restrictions).

3. The Supreme Court allowed the appeal and reinstated the injunction, although on slightly different grounds to Mann J. It had to consider there discrete challenges to the CA’s judgement.

4. First, it was suggested that even if the PTR extended to prohibit the holding of a passive shareholding, this did not offend the restraint of trade doctrine at all, because it imposed no inhibition on the employee’s ability to trade, only to hold shares. The Supreme Court rejected this argument; in substance as well as form, the restraint on shareholding was part of the restraint on the employee’s ability to work after her employment ended and the doctrine applied on the facts.

5. Secondly, it was argued that (properly construed) the words ‘interested in’ did not preclude a minority shareholding, applying the principle that if a covenant is capable of two constructions, one of which leads to a finding of validity and the other not, the law does not assume that the parties intended to make an unlawful bargain and chooses the construction that saves the document. The Supreme Court said that this argument turned on the proper understanding of the ‘validity principle’ in construing agreements.  When was the principle engaged – only when the two meanings are equally plausible or even when the meaning which would result in validity is to some extent less plausible?  According to the Supreme Court, the test is whether the alternative construction is ‘realistic’ – to require a measure of equal plausibility of the rival meanings is to make unnecessary demands on the court and to set access to the principle too narrowly; but, on the other hand, to apply it whenever an element of ambiguity exists is to countenance too great a departure from the otherwise probable meaning.   On this basis, the inclusion of the words ‘interested in’ extended to a mere passive shareholding, and there was no realistic alternative construction.  This meant that the covenant was in unreasonable restraint of trade, subject to severance.

6. So thirdly, could the words ‘interested in’ be severed? The Supreme Court said that they could – over-ruling Attwood –v- Lamont and adapting the more modern three stage test proposed in Beckett Investments –v- Hall [2007] ICR 1539.  On this basis, severance is possible/permissible where: (i) the offending words are grammatically severable, without the need to add to or modify the wording of what remains; (ii) the covenant remains supported by adequate consideration (which will not normally be in dispute); and (iii) the removal of the offending words would not generate any major change in the overall effect of all of the post-employment restraints in the contract (the burden being on the employer to establish this, and the focus being on the legal effects of the restraint, not their changing significance for the parties).  On the facts, the words ‘or interested’ were capable of being severed from the present clause, and the balance of what remained was enforceable.

7. Whilst this is an important clarification in this area of the law and is good news for those seeking to enforce covenants, the Supreme Court concluded its judgment by saying that there might be a sting in the tail for the employer, even though he had won. The Supreme Court endorsed the description of the severed parts of a covenant given in Freshasia Foods –v- Lu  [2018] REHC 3644 (Ch) – ‘legal litter’, casting an unfair burden on others to clear it up.  This could be reflected in the appropriate costs orders.

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