Restraint of Trade Legal Update

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Will the Supreme Court’s “blue pencil test” make restraint of trade clauses easier to enforce?

It could do and that would be good news for employers. We’ve noticed a marked increase in the number of employers seeking to enforce the restrictive covenants in the employment contracts of departing employees. Also known as post-termination restrictions or restraints of trade, these are clauses in a contract which seek to limit an employee’s activity for a period of time after their employment ends. Most typically these clauses seek to prevent ex-employers from trying to poach former clients or staff, providing goods or services to former clients or even working for a competitor all together.  The length of the typical restriction is between 6 to 12 months depending on the seniority and role of the departing employee.

Restraint of trade clauses are contrary to public policy when they seek to stifle competition or prevent an ex-employer from earning a living. However the courts will be prepared to enforce those clauses which have been drafted narrowly enough so that they only go as far as is necessary to protect “the legitimate business interests” of the employer.

Striking the balance between drafting restrictions effective enough to protect legitimate business interests but narrow enough to be legally enforceable is a tricky business.

So what if an employer has erroneously drafted a clause too widely? Can offending words be struck out of clauses to save an otherwise invalid restraint of trade?

Yes, held the Supreme Court in Tillam v Egon Zehnder Limited, overturning a century of Court of Appeal authority.

On leaving her employment Ms Tillam agreed to comply all with the covenants in her employment contract expect the non-compete restriction preventing her working for a competitor for six months. She argued that because the clause restricted her from (among other things) “being interested in” a competitor, as she be would be if she held shares, the clause was unreasonably wide and unenforceable.

Egon Zehnder Ltd issued proceedings in the High Court seeking an interim injunction to prevent Ms Tillman breaching her non-competition covenant. The injunction was granted which Ms Tillman successfully challenged at the Court of Appeal.

Whilst the Supreme Court agreed that the clause was unreasonably wide it held that the words “being interested in” could be struck out making the rest covenant enforceable. The Supreme Court highlighted two tests to apply to the question of whether words can be struck out:

i) The “blue pencil test” – that is can words be struck out without having to amend existing words,  or add words into the sentence,  in order for the sentence  to make sense;
ii) Removing the words should not generate any major change in the overall effect of all the post termination restrains in the employment.

The injunction originally granted by the High Court was formally restored even though the period of restraint had long since expired.

Cartwright King’s experienced employment team act for both businesses and individuals. We can assist whether you are an employer looking to introduce restrictive covenants into your employment contracts; or seeking to enforce restrictions on departing employees through undertakings or high court action; or if you are an employee wanting to understand or challenge your restrictions, or you need to defend yourself in litigation.

Click here to read more about Restrictive Covenants.

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All advice is correct at time of publication.