Restriction against holding any ‘interest in’ a competing business was too wide but could be severed

In Tillman v Egon Zehnder Ltd, the Supreme Court held that a restrictive covenant which prevented a business executive from being directly or indirectly engaged, concerned or interested in any competing business for six months after the termination of her employment was too wide to be enforceable.  However, it was possible to remove the wider wording from the clause to leave a narrower, and enforceable, restriction.

Post-termination restrictions are a form of restraint of trade and, as such, they will only be enforceable if they protect a legitimate proprietary interest (such as ensuring the protection of customer connections) and they go no further than is necessary to protect that interest. 

In this case the words ‘or interested in’ were unreasonably wide as they would restrict the employee from holding even a minority share in a competing business.  However, the Supreme Court held that it would be possible to remove the words so that the restriction was narrower and enforceable.  In doing so, it held that it was crucial for three criteria to be satisfied (and found that they were in this case):

  1. The unenforceable provision is capable of being removed without the necessity of adding to or modifying the wording of what remains;
  2. The remaining terms continue to be supported by adequate consideration; and
  3. The removal of the unenforceable provision does not so change the character of the contract so that it becomes ‘not the sort of contract that the parties entered into at all’

This case is a reminder of how important it is to ensure careful consideration is given to the interest that the business is seeking to protect and that a proportionate approach is adopted.  Restrictions are assessed as at the time they are entered into and so it is vital that advice is sought at the time of drafting.  It is now increasingly common for employment restrictions to contain an express carve out for minority shareholding to try to avoid some of the issues encountered in this case.