Salient Issue(s) – Restraint of trade; Severance; and Contractual Clauses
Summary
The Supreme Court has taken the opportunity to clarify the scope of restraint of trade clauses and consider the application of the severance principle, the so-called blue pencil test, allowing the remainder of the clause to continue to be enforceable.
Background
Egon Zehnder (the Appellant), a professional services firm specialising in executive search and recruitment, hired the Respondent, Ms Tillman, pursuant to a written contract of employment. The written employment contract limited the activities of Ms Tillman following the end of her employment for a six month period following termination. In particular, 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 Appellant]".
Ms Tillman's employment came to an end in 2017 and shortly after she notified the Appellant of her intent to start work as an employee of a rival firm (the New Employment). Such New Employment would not infringe any restrictive covenants, save for the non-compete covenant (described above) where the key issue was what level of shareholding in a competitor would give rise to a breach of covenant. The Appellant issued proceedings and applied for an injunction to restrain Ms Tillman's New Employment. The High Court granted the Appellant's injunction with Mann J reasoning that the use of "interested in" did not amount to an unreasonable restraint of trade. The Court of Appeal set aside the judgement finding the wording unreasonable and unable to be severed.
Supreme Court Decision
The Supreme Court restored the High Court injunction but with distinct reasoning. The Court considered 3 primary issues:
- Restraint of Trade - As a general principle, employment contracts were permitted to impose a restraint on trade and on the facts, this had occurred.
- Meaning of "interested in" - The Court held that the scope of the words "interested in" prohibited Ms Tillman from having any shareholding, whether large or small. Such interpretation of the meaning was therefore wide and the Court concluded that this was an unreasonable restraint of trade as a result. At this point Ms Tillman's restrictive covenants would be unenforceable unless severed.
- Severance - The test used was as follows:
a. are the words capable of being removed without the need to add to or modify the remainder; and
b. will the removal of the words majorly change the overall character of the contract.
In applying this test, the Court held that the words "or interested in" were capable of being severed therefore negating any unreasonable effect which they may have.
Consequently, Ms Tillman was fairly restrained from entering further employment with a competitor, save for the now severed wording; "interested in".
Commentary
This Supreme Court has examined the scope of an employee's restraint of trade covenant and considered the application of the severance principle, the so-called blue pencil test, allowing the remainder of the clause to continue to be enforceable. The case clearly highlights the need to provide clear, unambiguous and reasonable drafting in the context of restrictive covenants so the covenants can pass the blue pencil test, or better still, not be challenged at all.
