Opinion

Restrictive Covenant - Unreasonably wide

6th August 2017

In the June 2017 edition of the HR Newsletter, we reviewed and commented upon the case of Tillman v Egon Zehnder Ltd. In Tillman, the High Court upheld a non compete restrictive covenant. The High Court held that the covenant was not wider than reasonably necessary and that it did not prevent Ms Tillman from holding a minor shareholding in a competitor for the purposes of investment. The Court of Appeal (“CoA”) however recently reassessed the decision and granted the appeal of Ms Tillman. The CoA reasoned that the clause was too wide and therefore, void for uncertainty.

In Tillman, the relevant provisions included the following:

“You shall not, during the course of your employment, directly or indirectly, hold or have any interest in, any shares or other securities in any company whose business is carried on in competition with any business of the Company or any Group Company, except that you may hold or have an interest in, for investment only, shares or other securities in a publicly quoted company of up to a maximum of 5 per cent of the total equity in issue of that company”.

“directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the Company or any Group Company which were carried on at the Termination Date or during the period of twelve months prior to that date and with which you were materially concerned during such period."

Ms Tillman argued that the lack of territorial limit and the wording “interested in” a competing business, rendered the clause too wide and therefore void for uncertainty. The CoA allowed the appeal of Ms Tillman and held that the restriction was indeed, void for uncertainty. The CoA reasoned that it was impossible for a shareholder not to be interested in another company. The CoA referred to previous case law in which it was decided that the words “interested in”, could mean simply one share in another company. The CoA commented that the restrictive covenant was invalidated on the basis of its theoretical width.

Employer Considerations

The decision of the CoA in Tillman acts as a stark reminder of the need to draft restrictive covenants with precision and clearly defined terms. The risk of drafting a restrictive covenant too widely and without limitation is likely to render the clause void. The CoA seem to have upheld the general principle that prima facie, restrictive covenants will be deemed void unless they are reasonable and protect a legitimate interest. Restrictive covenants present a particularly complex area of law and should you have any concerns surrounding this area, you should contact your Higgs advisor.

 

Other news

Contact us

3 Waterfront Business Park
Brierley Hill
West Midlands, DY5 1LX

Email: law@higgsandsons.co.uk
Call Us: 0345 111 5050

Follow @HiggsandSons on Twitter  Join Higgs & Sons on Facebook  Join Higgs & Sons on LinkedIn

Newsletter

Keep up to date with all the latest here.