Increasing the Enforceability of Post-Termination Restrictions

Increasing the Enforceability of Post-Termination Restrictions

Increasing the Enforceability of Post-Termination Restrictions 1080 718 Adam Hugill
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There is no area of employment law vexed with more uncertainty than the enforceability of post-termination restrictions. Thankfully, the United Kingdom’s Supreme Court has recently provided some much needed guidance in Tillman v Egon Zehnder Ltd [2019].

The facts are typical:

  • a company employs an executive whose contract includes post-termination restrictions, including a noncompetition restriction;
  • she terminates her employment to move to a competitor;
  • the company argues that such employment would breach the noncompetition restriction;
  • she argues that the restriction is void because part of it is an unreasonable restraint of trade.
The Facts

Egon Zehnder is an executive search and recruitment company. Ms. Tillman was hired to work in its financial services practice area. She was promoted several times and, when her employment ended, she was employed as joint global practice head.

Ms. Tillman’s contract included various post-termination restrictions, all limited to a period of six months from the termination date which purported to restrict Ms. Tillman from soliciting, dealing or interfering with suppliers. In addition, and most relevant to the case, Ms. Tillman covenanted 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 which were carried on at the Termination Date or during the period of 12 months prior to that date and with which you were materially concerned during such period.” (“the noncompetition covenant”).

When terminating her employment contract, Ms. Tillman affirmed that she would abide by her post-termination restrictions apart from the noncompetition covenant, which she argued was an unreasonable restraint of trade and, therefore, void.

Egon Zehnder applied to the Court for interim injunction to restrain Ms Tillman from working for a competitor.

An injunction was granted in the first instance, but was subsequently overturned by the Court of Appeal. The Court of Appeal focused on the words “interested in” and determined that this would unreasonably prevent Ms. Tillman from having even a minor shareholding in a competing business.

Blue Pencil Test

Before holding that the noncompetition covenant was unenforceable, the Court of Appeal considered if the offending part of the covenant could be severed – the so-called Blue Pencil Test. This was not something that the judge at first instance paid particular attention to since he held that “interested in” did not preclude Ms. Tillman from holding a minor shareholding and, therefore, he did not need to turn his mind to the application of the Blue Pencil Test.

The Court of Appeal disagreed on the effect of the words “interested in”, considering that they did prohibit even a minor shareholding, and refused to sever those words.  The noncompetition covenant was therefore, held by the Court of Appeal to be void as an unreasonable restraint of trade.

Supreme Court Judgment

Egon Zehnder appealed to the Supreme Court, who unanimously allowed the appeal and reinstated the first instance judgment. In arriving at their decision, the Supreme Court held:

  • the noncompetition covenant is, indeed, a restraint of trade;
  • the starting point is that the phrase “engaged or concerned or interested”, adopted in the noncompetition covenant, has long been included in standard precedents for the drafting of noncompetition covenants and treated as including a shareholding prohibition;
  • Egon Zehnder was unable to advance a realistic alternative construction of the word “interested” and the natural meaning of the word includes a shareholding (large or small);
  • therefore, unless “interested” could be severed, the noncompetition restriction was void as an unreasonable restraint of trade.

On the question of severability, the Supreme Court had to reconcile the opposing precedents of Attwood v Lamont [1920] and Beckett Investment Management Group Ltd v Hall [2007]), ultimately preferring the three stage Beckett approach, which requires the employer to answer the following questions:

  1. Is the unenforceable provision capable of being removed without the necessity of adding to or modifying the wording of what remains (i.e. the “blue pencil” test)?
  2. Are the remaining terms continue to be supported by adequate consideration?
  3. Does the removal of the unenforceable provision substantially change the character of the contract?

Applying the three-stage Beckett test, the Supreme Court concluded that the words “or interested” are capable of being removed without the need to add to or modify the wording of the rest of the clause and removal of these words did not change the overall effect of the restraints.

Application in Hong Kong

United Kingdom judgments, especially those in the appellate courts, continue to have strong persuasive authority in the Hong Kong courts. This is especially so when considering the enforcement of post-termination restrictions. Indeed, the UK Court of Appeal’s judgment in this case was cited in another case that our Employment team recently handled – MBM Metalworks Hong Kong v. Nichols [2019]. It is therefore, very likely that if the Hong Kong courts are called upon to determine the application of the Blue Pencil Test, they will do so with Egon Zehnder in mind and apply the three-stage Beckett test.

 

Our team at Hugill & Ip has extensive experience in dealing with Hong Kong employment law – so kindly get in touch with us to find out how we can help.

This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.

 

Adam Hugill

Adam Hugill

Adam advises on a wide range of contentious and non-contentious legal and commercial issues, with a special emphasis on employment law in Hong Kong and the Asia Pacific region.

All articles by : Adam Hugill
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