Supreme Court Reformulates the Test for Severance

3 July, 2019

On 3 July the Supreme Court handed down judgment in Egon Zehnder v Tillman [2019] UKSC 32. Tillman is the first employee competition case to be considered at the highest level in more than a century. The Supreme Court judgment, which reformulates the test for severance, is likely to be of considerable practical importance for employers, employees and commercial parties litigating restrictive covenants.

The non-compete clause in issue in Tillman provided that, following the termination of her employment, the employee must not “engage or be concerned or interested” in a competing business. The clause was enforced at first instance. That decision was overturned by the Court of Appeal holding that the clause prevented Ms Tillman holding shares in a competing business, that it was (for that reason) unreasonably wide, and that it could not be severed. Ms Tillman appealed to the Supreme Court.

The Supreme Court judgment addresses three issues:

(1) First, the employer argued that the restraint of trade doctrine did not apply at all to a prohibition on ownership interests such as shareholdings. This was rejected by the Supreme Court, holding that a clause of this type is classically caught by the doctrine of restraint of trade. There was no basis for the company’s proposition that a particular word in a covenant otherwise subject to the doctrine could nevertheless fall outside it (paragraphs 30-31).

(2) Secondly, the employer argued that the so-called ‘validity’ principle meant that the clause should be construed so that it was valid, and that construed on that basis the phrase “interested in” did not extend to ownership interests such as a shareholding. This second ground of appeal also failed. The Supreme Court held that the natural construction of the phrase “to be interested in”, consistent with long-standing authority, includes to hold shares. The company failed to establish a realistic alternative construction of it so as to engage the ‘validity’ principle (paragraph 53).

(3) Thirdly, the employer argued that the phrase “interested in” could be severed. This third ground of appeal succeeded. The Supreme Court formulated a new touchstone for severance, including “whether removal of the provision would not generate any major change in the overall effect of all the post- employment restraints in the contract”. It held that on that test the phrase “interested in” was severable (paragraphs 85-88).

Finally, the Supreme Court noted that the severance of “unreasonable parts of post-employment restrictions” was akin to the clearing up of “legal litter” which cast an unfair burden on others and which might therefore have consequences in costs.

Daniel Oudkerk QC acted for Ms Tillman, leading Amy Rogers of 11 KBW, instructed by Julian Taylor of Simmons & Simmons.