Restrictive covenants: complete ban on outside interests rendered covenant unenforceable

A restrictive covenant will be void for being in restraint of trade unless the employer has a legitimate proprietary interest to protect and the protection sought is no more than is reasonable. If, having construed a post-termination restriction, a court finds it to be unreasonable, the restriction will be unenforceable in its entirety unless the courts may be able to sever the unreasonable part without affecting the enforceability of the remaining restriction.

The Court of Appeal has recently considered a non-compete covenant, which prevented an employee from taking a minor shareholding in a competitor after her employment had ended, and rendered it unenforceable.

T, a headhunter in the financial services industry, resigned from her employment and sought to begin work with a competitor. T’s employer placed her on garden leave and applied for an injunction to enforce post-termination restrictions contained in the contract of employment, which prevented T from working for a competitor for a period of six months from the termination of employment. The employer succeeded in securing the injunction.

T appealed to the Court of Appeal on the grounds that the covenant was an unreasonable restraint of trade in that it also prevented her from becoming a shareholder in a competitor as it prevented her from being ‘directly or indirectly engage[d] or be concerned or interested in’ a competitor for this period. T did not have intentions of becoming a shareholder in a competitor but argued that this was irrelevant to the covenant’s enforceability.

The Court of Appeal agreed and set aside the injunction on the basis that on a proper reading the covenant did prevent T from holding one share in a publicly quoted company, and that this made the restriction too wide. The Court of Appeal held that it was not possible in this case to sever the unreasonable part of the covenant and therefore the entirety of the restriction was unenforceable.

Comment: This case is a useful reminder that post-termination restrictions should be carefully drafted and reviewed on a regular basis. Further, the courts’ powers to sever unreasonable parts of covenants are extremely limited.

Tillman -v- Egon Zehnder Ltd [2017] EWCA Civ 1054