Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: EGON ZEHNDER LTD VS Respondent: TILLMAN
Court Name: Supreme Court of United Kingdom Judge(s): Lord Briggs, Lady Hale, Lord Wilson, Lord Kerr, Lady Arden Title: EGON ZEHNDER LTD vs TILLMAN Case No.: On Appeal From: [2017] EWCA Civ 1054 Date of Judgment:2019-07-03 Reported As: 2019 SCMR 1837 Result: Appeal allowed
JUDGMENT
JUDGMENT LORD WILSON: (with whom Lady Hale, Lord Kerr , Lord Briggs and Lady Arden agree) Introduction 1. A company employs a business executive pursuant to a written agreement. Following the termination of her employment she wishes to become employed by a firm whose business is in competition with that of the company . The company contends that her proposed employment would breach a covenant in the agreement. She answers that the covenant is void at common law because part of it is in unreasonable restraint of trade. Before this court the company replies with three contentions, each of which she disputes. 2. Each of the company's contentions raises an issue with a dif ferent hypothesis, as follows: (A) The hypothesis in Issue (A) is that the employee's construction of the part of the covenant alleged to be in unreasonable restraint of trade is correct. Here the company contends that the impugned part falls outside the doctrine against restraint of trade ("the doctrine") and that it is therefore irrelevant that, had it fallen within the doctrine, it would have been in unreasonable restraint of it. (B) The hypothesis in Issue (B) is that the employee's construction of the impugned part is incorrect. Here the company contends that, upon a correct construction of it, it is not in unreasonable restraint of trade. (C) The hypothesis in Issue (C) is that, as in Issue (A), the employee's construction of the impugned part is correct; but that, contrary to the company's contention in Issue (A), it does fall within the doctrine. Here the company contends that, although it is in unreasonable restraint of trade, the impugned part should be severed and removed from the remainder of the covenant, which would therefore survive so as to prohibit the employee's entry into the proposed employment. One can argue that Issue (B) is logically anterior to Issue (A). But, since Issue (A) purports to test the very boundaries of the doctrine, a balance of convenience favours consideration of it first.
---
## Page 2
3. I will explain why in my opinion the most difficult and important issue raised in the appeal is Issue (C): when part of a post-employment covenant is in unreasonable restraint of trade, in what circumstances should the court sever and remove it so as to leave the employee bound by the remainder of it? The Facts 4. Egon Zehnder Ltd ("the company"), the appellant, is the UK subsidiary of a Swiss company and part of a worldwide group which is in the business of specialist executive search and recruitment. The group has nine practice areas into one of which it will place each of its recruiting customers. 5. Ms Tillman, the respondent, had previously been employed by JP Morgan as European Managing Director . The company considered that she would be ideally placed in the financial services practice area of its business. It employed her as a consultant, with effect from 5 January 2004, pursuant to the terms of an employment agreement dated 10 December 2003. It agreed to pay her a salary of 120,000 pa and, at the end of the first year, a bonus of 100,000 provided that she then remaine d in its employment. Mann J, at first instance, observed that the company regarded Ms Tillman as "a bit special" and that it expected to promote her. It duly promoted her to be a principal in 2006 and to .be a partner in 2009. A condition of her becoming a partner was that she should hold shares in the Swiss holding company; and she began to do so. In 2012 she became joint global head of the company's financial services practice area. The agreement made in 2003 was never replaced in order to reflect her promotions although no doubt a few of its terms, in particular relating to her remuneration , then changed. In any event, however , resolution of the issues raised by the appeal requires the court to address the terms of the original agreement. 6. Clause 13 of the agreement was entitled "COVENANTS" and it provided for five restraints upon the activities of Ms Tillman following the end of her emplo yment, all limited to the six months which would immediately follow it. By the first, in clause 13.1, she covenanted not to endeavour to entice away from the company any of its employees in specified senior positions. 7. The other four restraints were included in clause 13.2. Its introductory words, arguably relevant to Issue (B), are as follows: "You [Ms Tillman] shall not without the prior written consent of the company directly or indirectly , either alone or jointly with or on behalf of any third party and whether as principal, manager , employee, contractor , consultant, agent or otherwise howsoever ..." By the first of the other four restraints, set out in clause 13.2.1, Ms Tillman covenanted not to solicit the custom of, nor to deal with, specified suppliers of services to the company . By the second, set out in clause 13.2.2, she covenanted not to seek to interfere with supplies to the company . By the fourth, set out in clause 13.2.4, she covenanted not to use any name likely to be confused with any name recently used by the company . 8. The third of the restraints in clause 13.2, set out in clause 13.2.3, is central to all the issues in the appeal. There Ms Tillman covenanted that she would not "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 12 months prior to that date and with which you were materially concerned during such period." I will refer to this as "the non-competition covenant". 9. By clause 13.3, Ms Tillman acknowledged that the provisions of clause 13 were fair, reasonable and necessary to protect the goodwill and interests of the company . Clause 13.4 provided: "If any of the restrictions or obligations contained in this clause 13 is held not to be valid as going beyond what is reasonable for the protection of the goodwill and interest of the Company ... but would be valid if part of the wording were deleted, then such restriction or obligation shall apply with such modifications as may be necessary to make it enforceable." 10. As I will explain, the question raised in Issue (B) relates to whether the word "interested" in clause 13.2.3 purports to prohibit Ms Tillman from holding any shares in a company conducting business in competition with such businesses there specified as were condu cted within the company's group. To that question an earlier clause of the agreement, casting a restraint upon her during the period of her employment is arguably relevant:
---
## Page 3
"4.5. 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 ..., 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% of the total equity in issue of that company ." 11. On 30 January 2017 Ms Tillman's employment by the company came to an end. Shortly thereafter she informed it that she intended to start work, on (as she later added) 1 May 2017, as an employee of a firm which was in competition with the company . She made clear that she intended fully to comply with all her covenants in the agreement apart from that in clause 13.2.3. She conceded that, by its terms, this last clause prevented her entry into the proposed employment but alleged that it was in unreasonable restraint of trade and therefore void. 12. On 10 April 2017 the company issued proceedings in which it applied for an interim injunction to restrain Ms Tillman's entry into the proposed employment. On the undertaking of the company to compensate her in damages if the court were later to hold it not to be entitled to the injunction, she undertook not to enter into the proposed employment until the court had determined the application. 13. The lower courts were impressively accommodating to the fact that the issue related to a covenant which on any view had no effect beyond 30 July 2017. On 15 and 16 May 2017 Mann J heard the company's application and on 23 May he delivered a substantial judgment in which he granted the injunction: [2017] EWHC 1278 (Ch), [2017] IRLR 828. On 11 July the Court of Appeal heard Ms Tillman's expedited appeal and on 21 July, by a judgment delivered by Longmore LJ with which Patten and Sales LJJ agreed, it upheld it, set aside the injunction and dismissed the company's claim: [2017] EWCA Civ 1054, [2018] ICR 574. It is against the Court of Appeal's order that the company brings the present appeal. 14. The temporal limitation of the dispute and therefore the reality that determination of the company's application would dispose of the whole claim also led the parties to agree, and Mann J to accept, that the grant of the injunction should depend on a closer inquiry into the merits of the company's claim than whether it merely raised "a serious question" apt to the conventional determination of an application for an interim injunction: NWL Ltd v Woods [1979] 1 WLR 1294. 15. By her Defence, Ms Tillman alleged that the non-competition covenant exceeded the company's need to protect its legitimate interests, and was therefore void, for no less than five different reasons. But, by the time of the hearing before Mann J, the substantial focus was on one argument alone. It was that the effect of the part of the non-competition covenant not to be "interested" in any of the competing businesses there specified was unreasonably to prohibit her from holding even a minority shareholding in such a business. She did not allege that she aspired to hold any shares in the business which proposed to employ her or in any other of the competing businesses there specified; but such was agreed to be irrelevant. The company's response to her argument was (a) to dispute that, on its proper construction, the covenant prohibited her from holding even a minority shareholding in any of the competing businesses there specified; and (b) to concede that, if, contrary to (a), the covenant did prohibit her from doing so, the whole of it was in unreasonable restraint of trade but to contend that a word or words (which the judge took to be the words "or interested") should be severed and removed from the remainder of the clause, with the result that she would remain prohibited from entering into the proposed employment. 16. Mann J upheld the company's response at (a) above. He so construed the word "interested" in the non- competition covenant as not to prohibit Ms Tillman from holding shares in any of the competing businesses there specified. He therefore had no need to address what he took to be the company's alternative contention that, together of course with the word "or", the word should be severed and removed from the remainder of the clause; he added however that, although it had not been developed at any length, he did not find that contention appealing. 17. In upholding Ms Tillman's appeal, the Court of Appeal rejected the construction placed by Mann J upon the word "interested" in the non-competition covenant. It held that its effect would be to prohibit Ms Tillman from .holding even a minority shareholding in any of the competing businesses there specified and that, as such, the covenant was in unreasonable restraint of trade; and it refused to sever the word from the remainder of the clause so as to save the remainder of the prohibition.
---
## Page 4
Issue (A): The Doctrine 18. The hypothesis here is that Ms Tillman is correct to construe the word "interested" in the non-competition covenant as purporting to prohibit her from holding any shares, however small a proportion of those issued, in a company conducting business in competition with such of the businesses of the group as are there specified. On that hypothesis the company concedes that, if the doctrine applied to it, the prohibition reflected in that word, in particular by excluding the sort of minor shareholding which was permitted to Ms Tillman during her employment, would exceed any necessary protection of its interests; that it would therefore be in unreasonable restraint of trade; and that the word would accordingly need to be severed and removed from the remainder in order to justify the injunction sought. But the company contends that the doctrine does not apply at all to a prohibition against holding shares. Not every post-employment restriction agreed in a contract of employment will, says the company , restrain trade. It seeks to make its point by reference to an extreme example: what if (it asks) Ms Tillman had there agreed not to play mah-jong for six months following the end of her employment? 19. The company did not raise Issue (A) in either of the courts below . Wrongly , as I will suggest, it considered that the doctrine of precedent would have obliged both of them to reject its contentio n which the issue reflects. The company seems to have had in mind in particular the decision of the Court of Appeal in Scully UK Ltd v Lee [19981 IRLR 259. An employee had covenanted that throughout the year following termination he would not engage in or be "otherwise interested in, whether as a shareholder ... employee or ... in any other capacity" any business, which was defined in terms not limited to the employer's competitors. The trial judge held that the prohibition against shareholding on the part of the employee was too wide because it would catch even a small holding but that it should be severed and removed and that the remainder should be enforced against him. The Court of Appeal took no issue with the judge's objection to the prohibition against shareholding but upheld the employee's appeal on the basis that there were other unreasonable features of the covenant incapable of severance. 20. It seems clear therefore that in the Scully UK case both courts were making an assumption, rather than reaching a focused determination, that the word "interested" not only represented a prohibition against holding shares but also fell within the doctrine. The same can be said of the decision in Geo Hill and Co v Hill (1886) 55 LT 769. The claimant company acquired the meat export business of the defendant, who covenanted not to "be in any way concerned or interested in any similar business" within ten miles of the Royal Exchange. He became an employee of a similar business within that radius. The judge held that it was unnece ssary to decide whether he was "interested in" the business, which, the judge added, meant in commercial language "entitled to profits", because on any view he was "concerned" in it; and that the covenant should be enforced against him. 21. When a court makes an assumption about the law, instead of reaching a focus ed determination in relation to it, the decision based upon it does not carry binding authority under the doctrine of precedent: National Enterprises Ltd v Racal Communications Ltd [1975] Ch 397, 406 to 408. But, notwithstanding the absence of a decision on Issue (A) which could have been sought in the courts below , this court has grante d permission to the company to raise it and it must therefore receive a focused determination. 22. The doctrine is one of the earliest products of the common law. It epitomises the nation which developed it: a nation which has ascribed central importance to the freedom of all of us to work - in the interests both of the self- sufficiency of ourselves and our families and of our common prosperity . 23. In Dyer's case, 2 Hen 5, f 5, pl 26, 1414, John Dyer, a dyer, was sued in the Court of Common Pleas for breach of a condition in an indenture that he would not work as a dyer for six months. He contended that he had not broken the condition but Justice Hull observed that he should have taken a wider point, namely that the obligation was void. "By God," added the judge, "if the plaintif f was here, he would go to prison until he paid a fine to the King." Two hundred years later the invalidity of restraints of trade remained unqualified. In Colgate v Bacheler (1601) Cro Eliz 872, the defendant agreed that, if for three years his son worked as a haberdasher in Canterbury or Rochester , he would pay the plaintif f 20. The court held the agreement to be void irrespective of its limitations of time and place because it was against the benefit of the commonwealth and because the defendant's son ought not to have been abridged of his trade and living.
---
## Page 5
24. But in the 17th century the absolute nature of the right of the ex-employee or vendor of a business to work or trade elsewhere irrespective of his covenant began to be tempered. For paradoxica lly the doctrine against restraint of trade was positively inhibiting trade. In Nordenfelt v The Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535, 564 , Lord Macnaghten explained: "... it was found that a rule so rigid and far-reaching must seriously interfere with transactions of every-day occurrence. Traders could hardly venture to let their shops out of their own hands; the purchaser of a business was at the mercy of the seller; every apprentice was a possible rival. So the rule was relaxed." The law came to recognise that the employer or the purchaser of a business had legitimate interests which might justify his placing limited. restrictions on his employee or vendor . 25. In 1711 Chief Justice Parker , later Lord Macclesfield, gave the seminal judgment of the Court of Queen's Bench in Mitchel v Reynolds . The immaculate report of it is at (1711) 1 P Wms 181 and any study of the contribution made by law reporters to the development of our law would do well to include it. The defendant had assigned to a purchaser the lease of a bakery in Holborn for five years and had entered into a bond with him not to trade as a baker elsewhere in Holborn for that period. Lord Macclesfield held (a) at p 192 that all restraints of trade were presumed to be bad but that the presumption was rebuttable; (b) at p 193 that Judge Hull's vehemence towards them had been excusable but not his manner of expressing it; (c) at p 191 that a restraint of trade throughout England would always be bad ("for what does it signify to a tradesman in London what another does at Newcastle?"); but (d) at p 197 that this baker's bond, limited to Holborn and to the five years of the assignment, was reasonable and should be enforced. Thus was the concept of reasonableness authoritatively grafted on to the doctrine by way of modification of it. 26. Based as it is on public policy , the doctrine has regularly had to adjust to social change. The need for adjustment is well exemplified by the decision of the appellate committee of the House of Lords in the Nordenfelt case cited in para 24 above. The appellant, who had been a manufacturer of guns and ammunition, had covenanted with the respondent, which had taken over his business, not to engage in manufacture of them anywhere in the world for 25 years. The committee held that, notwithstanding its width, the covenant was reasonable and so enforceable against him. Lord Herschell, the Lord Chancellor , explained at p 547 that changed conditions of commerce and of the means of communication meant that Lord Macclesfield's reference to the irrelevance to a London trader of similar trade in Newcastle was out of date; and that what would once have been "merely a burden on the covenantor may now be essential if there is to be reasonable protection to the covenantee". Lord Watson observed at p 555 that there had been a protracted struggle between the principle of freedom of contract and the doctrine and that the latter had had the worse of the encounter , particularly in courts of equity . Lord Macnaghten held at p 565 that there was a general rule that restraints of trade were void but that there was an exception to the rule where the restriction was reasonable by reference to the interests of both parties and of the public. You cannot, so he observed at p 572 in relation to a vendor's covenant, sell the cow and sup the milk, 27. In Herbert Morris Ltd v Saxelby [1916] 1 AC 688 the members of the appellate committee all stressed that different considerations applied to restraints on a vendor of a business from those which applied to restraints on an ex-employee; that, as Lord Atkinson said at p 701, the purchaser of a business had paid for its goodwill, including for the vendor's covenant which protected and enhanced it; that, as Lord Shaw of Dunfermline said at p 714, an employer was entitled to reasonable protection against dissemination of his trade secrets or solicitation of his customers, in other words against misuse of his property , but not directly against the employee's use of his skill and his manual or mental ability , which were the employee's own property; and that, as Lord Shaw added at p 716, a delicate balance was always required between freedom of trade and freedom of contract. 28. During the last century questions arose about the width of the doctrine, in particular whether it extended beyond contracts of employment and for sale of a business. Did it apply to a contract in which I agree to buy specified goods only from you? Or to sell specified goods only to you? Or to sell to others specified goods bought only from you? An early example was Servais Bouchard v The Prince's-Hall Restaurant (Ltd) (1904) 20 TLR 574. A restaurant in Piccadilly had contracted with a supplier of burgundy not to sell burgundy to its customers other than
---
## Page 6
such as it had purchased from the supplier . The restaurant broke the contract and the Court of Appeal held that the supplier was entitled to enforce it. Sir Richard Henn Collins, the Master of the Rolls, held that the contract fell outside the doctrine; the other members of the court apparently held instead that, albeit within the doctrine, the restraint was reasonable. Later decisions demonstrated a similar slide into a verdict in relation to reasonableness in preference to an attempt to discern the boundaries of the doctrine: Dickson v Pharmaceutical Society of Great Britain [1970] AC 403, 431. 29. The outer reaches of the doctrine were, however , more fully explored, albeit with obvious difficulty , by the appellate committee in Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269. The garage company had entered into "solus" agreem ents with Esso to sell petrol bought only from Esso at two of its filling- stations and to do so at one of them for in effect five years and at the other for 21 years. The committee held that, on balance, both contracts fell within the doctrine and that, while the agreement for the shorter period was reasonable and enforceable against the garage, the other was unreasonable and unenforceable. Lord Reid noted at p 294 that a contract under which a person agreed to work exclusively for another fell outside the doctrine although it detracted from his freedom to work as he pleased; and at p 298 that a restrictive covenant upon land which prohibited its use for trading fell outside the doctrine because the purchaser of the land who became subject to it was not surrendering any freedom to trade there which he had previously enjoyed. Lord Pearce observed at p 325 that fol the same reason, a contract under which a publican took a lease from a brewer of a tied public house fell outside the doctrine; but that the garage company , by contrast, already ran the filling-stations when it accepted Esso's restrictions. He added at p 328 that it was "the sterilising of a man's capacity for work and not its absorption that underlay the objection to restraint of trade"; and he cited Warner Brothers Pictures, Inc v Nelson [1937] 1 KB 209, in which the contract by which Miss Bette Davis had agreed not to work otherwise than for the claimant for one year was enforced against her. Lord Wilberforce, at pp 333 to 335, favoured a pragmatic analysis under which restrictive covenants on land and tied public houses, having long been accepted to fall outside the doctrine, must for that ,reason be taken to have satisfied the demands of public policy on which the doctrine rested. 30. In my view the resolution of Issue (A) does not require any closer study of the boundaries of the doctrine. For the contract in the present case is of the classic type between employer and employee and, as is agreed, it does provide for a restraint of trade which falls within the doctrine and which is therefo re void unless…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.