UK: Supreme Court upholds non-compete covenant, overruling Court of Appeal's restrictive approach to severance

This morning the Supreme Court has handed down judgment in Tillman v Egon Zehnder, ruling that the 'blue pencil' test permitting severance of words that extend the scope of a covenant too far can be applied to parts of a single covenant, even where it is not in effect a combination of several distinct covenants.

In this case a non-compete covenant prohibited an individual from being directly or indirectly engaged, concerned or ‘interested in’ competing businesses.  The Supreme Court agreed with the Court of Appeal that 'interest' must include minor shareholdings, and that this would be an unreasonable restraint of trade had it not been capable of severance. However, the Supreme Court overruled the Court of Appeal on the correct approach to severance.  Severance of words in a single covenant is not limited only to situations where the covenant is in effect a combination of different covenants.  Severance will be possible if:

1. the words can be removed without needing to add to or modify the remaining text,
2. the remaining terms continue to be supported by adequate consideration, and
3. the removal of the words does not generate any major change in the overall effect of all the post-employment restraints in the contract, focussing on the legal effect of the restraints rather than their significance for the parties.

These three criteria were satisfied in this case.  The Supreme Court therefore allowed the appeal and restored the injunction granted by the High Court (with the words 'or interested' removed). Submissions were invited as to the proper costs orders, with a suggestion that 'there might be a sting in the tail' for the employer given its responsibility for including unreasonable drafting in the covenants.

The case is the first time in over 100 years that the Supreme Court has examined the rules on restrictive covenants, and employers will breathe a sigh of relief that the Court has re-established the more liberal approach to severance.  Although the decision does not give carte blanche to employers to impose whatever restrictions they choose, it does provide a useful safety net should the drafting include the odd word or two which take the extent of the covenant too far.