Contract of employment: restrictive covenant

A clause relied on by the employee in her contract did prohibit shareholdings in any business carried on in competition with the former employer and was impermissibly wide and in restraint of trade, unless it could be severed in some way. The Supreme Court held that applying the severance principle, namely that the words were capable of being removed without the need to add to or modify the wording of the remainder and the removal would not generate any major change in the overall effect of the restraints, the words should be severed and removed.

On termination of her employment, the appellant employer sought to restrain the respondent employee from becoming employed by a rival firm, relying on a clause containing restrictive covenants in her contract of employment. The employee objected, stating that the restrictive covenant was an unreasonable restraint of trade since it prevented her from becoming a shareholder in a competitor (even though she had not wanted to become a shareholder). The trial judge held that, on its true construction, the words ‘interested in’ in cl 13.3 of the contract of employment (the clause) had not unreasonably prevented even a minor shareholding by the respondent in a competing business and, was not in unreasonable restraint of trade and was therefore enforceable. The judge granted an injunction restraining the employee from working for the rival firm for the six month period in the clause. The employee appealed. The Court of Appeal, Civil, Division, allowed the appeal, holding that the clause had prohibited shareholdings in any business carried on in competition with the former employer and was impermissibly wide and in restraint of trade and, further, could not be severed. The appellant appealed. 

Appeal allowed. 

Issues and decisions

(1) If cl 13.2.3 prohibited shareholding, whether that part of the covenant fell entirely outside the restraint of trade doctrine and it was therefore irrelevant that, had it fallen within the doctrine, it would have been an unreasonable restraint of it. 

The appellant contended that the word ‘interested’ in the  covenant fell outside the doctrine of restraint of trade but that the remainder of the covenant fell within it. 

The doctrine of restraint of trade epitomised a nation that ascribed central importance to the freedom to work, however, the law came to recognised that the employer had legitimate interests which might justify his placing limited restrictions on his employee or vendor (see [22], [24], [26] of the judgment).

The present case was of the classic type between employer and employee and it had provided for a restraint of trade which fell within the doctrine and which was therefore void unless reasonable. The only question was whether an assumed prohibition against holding shares formed part of the restraint (see [30] of the judgment). 

Applying a ‘broad, practical, rule of reason approach’ to determining the applicability of the doctrine, the proper determination of the first issue was that, on the assumption that the word ‘interested’ purported to restrain the respondent from holding shares in the specified businesses, it fell within the doctrine of restraint of trade (see [30], [34] of the judgment). 

Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1967] 1 All ER 699 applied; Proactive Sports Management Ltd v Rooney [2011] All ER (D) 08 (Dec) applied.

(2) Whether the words ‘interested in’, properly construed, prohibited any shareholding. 

The appellant argued that when properly construed, the word ‘interested’ in the non-competition covenant had not prohibited the respondent from holding shares in the businesses there specified. 

The natural construction of the word ‘interested’, consistent with long-standing authority, was that it covered a shareholding and on that basis was in unreasonable restraint of trade. Unless it could be severed and removed from the rest of the clause, the Court of Appeal had been right to set aside the injunction granted against the respondent (see [53] of the judgment). 

CEF Holdings Ltd v Mundey [2012] EWHC 1524 (QB) considered; Smith v Hancock [1894] 2 Ch 377 applied; Tradition Financial Services Ltd v Gamberoni and others [2017] All ER (D) 89 (Apr) applied.

(3) Whether, if it was an unreasonable restraint of trade, the impugned part of the clause should be severed and removed from the remainder of the clause, which would therefore survive so as to prohibit the respondent’s entry into the proposed employment. 

There were, and remained, good reasons of public policy for the law to take a cautious approach to the severance of a post-employment restraint. Under Attwood v Lamont [1920] 3 KB 571, two restrictive requirements had been made. The first was that the covenant should in effect be a combination of different covenants and, second, the part proposed to be removed should be no more than trivial or technical in Beckett Investment Management Group Ltd v Hall[2007] EWCA Civ 613 three criteria were used (see [63], [73] of the judgment). 

The requirements which were shoe-horned into the law by Attwood  proved controversial and ultimately unsatisfactory. An inquiry whether the covenant proposed to be severed was indeed one covenant or whether in effect it was more than one covenant proved to be of elusive application, largely dependent on the eye of the beholder. The second requirement - of triviality or technicality - reflected an attempt to sideline application of the entire severance principle to post-employment restraints (see [83] of the judgment). 

Even if the Attwood case was still to be regarded as authoritative, that court took a narrow view of its effect in appearing to discern a single covenant by reference to nothing other than the form of its words (see [81] of the judgment). 

It therefore became appropriate to analyse the effect of each of the three criteria endorsed in the Beckett case (see [84] of the judgment). 

The first was that the unenforceable provision was capable of being removed without the necessity of adding to or modifying the wording of what remained; the second was that the remaining terms continue to be supported by adequate consideration and finally that the removal of the unenforceable provision does not so change the character of the contract that it becomes ‘not the sort of contract that the parties entered into at all’ (see [85]-[87] of the judgment). 

 The third criterion was rightly imported into the general jurisprudence by the Beckett case and had rightly been applied by our courts ever since then, otherwise than in the decision under appeal. However,  it would be better expressed as being 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 was for the employer to establish that its removal would not do so. The focus was on the legal effect of the restraints, which would remain constant, not on their perhaps changing significance for the parties and in particular for the employee (see [87] of the judgment). 

Application of the severance principle to the respondent’s restrictive covenants became straightforward. First, the words ‘or interested’ were capable of being removed from the non-competition covenant without the need to add to or modify the wording of the remainder. And, second, removal of the prohibition against her being ‘interested’ would not generate any major change in the overall effect of the restraints. So those words should be severed and removed (see [88] of the judgment). 

The court would set aside the Court of Appeal’s order and would overrule the decision in the Attwood case. It would  formally restore the injunction granted subject only to the removal of the words ‘or interested’ (see [91] of the judgment). 

Carney v Herbert [1985] 1 All ER 438 considered; Attwood v Lamont [1920] All ER Rep 55 overruled; Beckett Investment Management Group Ltd v Hall [2007] All ER (D) 375 (Jun) applied.

Decision of Court of Appeal  [2017] EWCA Civ 1054 Reversed.

Daniel Oudkerk QC and Amy Rogers (instructed by Simmons & Simmons LLP) for the appellant. 

James Laddie QC and Adam Solomon QC (instructed by Reynolds Porter Chamberlain LLP) for the respondent. 

Tara Psaila - Barrister.