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Restrictive covenants

Restrictive covenants

Restrictive covenants are clauses in employment contracts which protect a legitimate business interest by restricting what the employee can do both during and after their employment. The clause must be reasonable and not go further than is necessary to protect the business interest. ‘Non-compete’ restrictions are the strongest form of restraint – where an employee is prevented from competing with the business for a limited period after their employment ends. The recent case of Tillman v Egon Zehnder looked at whether words can be deleted from a restrictive covenant which is otherwise too wide, to make it enforceable.

The employee’s contract contained a term which prevented her from being engaged, concerned or ‘interested in’ a competing business for 6 months after termination. She wanted to work for a competitor in that period so sought to challenge the clause. She said the restraint went further than necessary to protect a legitimate business interest because the term ‘interested in’ was too wide. It stopped her from holding an investment of even one share in a competing company and was therefore unenforceable. The company asked for an injunction to stop her working for the competitor. The High Court granted the injunction, saying the clause was valid and did not stop her owning a minor investment shareholding. The Court of Appeal disagreed and said the words ‘interested in’ did prevent any shareholding. The clause was therefore too wide and was unenforceable. The Court refused to erase the words ‘interested in’ to make it enforceable.

The Supreme Court agreed the clause was too wide but said the offending words could be erased provided it made sense without further alteration and the deletion did not change the overall effect of the restraints. The words ‘interested in’ could be removed and the remaining clause was enforceable. The clause prevented the employee from working for a competitor after termination.

This decision is a good one for employers. However, businesses should continue to guard against drafting restrictive covenants too widely. The Supreme Court indicated that employees should not have to bear the cost of paring down an employer’s unreasonably wide restraint of trade clauses. Better to have tightly drafted clauses which everyone understands and which genuinely protect the business.

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