Restrictive convenant rule made enforceable

Restrictive Covenants: unreasonable restriction made enforceable with deletions

10th July, 2019 by Alex Payton

In the case of Tillman v Eghon Zehnder Ltd, the Supreme Court has confirmed that words can be deleted from a restrictive covenant in order to make an otherwise void restriction enforceable.

Ms Tillman’s employment contract contained a non-compete restrictive covenant which, amongst other things, prevented her being directly or indirectly engaged, concerned or interested in any business which competed with Eghon Zehnder for six months after termination of her employment. Mrs Tillman challenged the enforceability of that restriction, primarily on the basis that the inclusion of the words “interested in” had the effect of preventing her holding a minority shareholding in a competing business. She argued such a restriction was unreasonable and therefore unenforceable.

One of the issues to be determined by the Supreme Court was whether the words “interested in” could be deleted from the clause, therefore removing the unreasonable element and making the clause enforceable – commonly referred to as the “blue pencil test”.

The Court confirmed that the words could be removed therefore making the restriction enforceable. The Court also gave guidance on the application of the blue pencil test confirming that: 1) if words are removed, the clause must remain effective without modification or additional words being added; and 2) the removal of words must not fundamentally change the nature of the contract entered into by the parties.

Alex Payton comments:

This case is good news for employers. Although it remains best practice for restrictive covenants to be carefully drafted and tailored to specific circumstances, there is a potential fall-back argument if a restriction is found, on the face of it, to be unreasonable. Employers should use this case as an opportunity to review their employment contracts, particularly those including restrictive covenants, to ensure they are legally compliant. If you need assistance with this, please contact the team.

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