Restrictive Covenants and The Blue Pencil Test

Year Published: 2020

Restrictive covenants are commonly incorporated into employment contracts in order to restrict a former employee’s actions post-termination and to protect the company’s legitimate business interests.

Recently, the Supreme Court considered restrictive covenants that appeared to be wider than was reasonable and therefore potentially unenforceable. The question to be determined was whether words could be severed from a clause in order to rescue what would otherwise have been an invalid restrictive covenant.

Tillman v Egon Zehnder Limited

In this case, Ms Tillman worked for a search and recruitment company called Egon Zehnder Limited. Tillman’s contract stated that she must 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”. She argued that this non-compete clause carried an unreasonable restraint as it was far too broad and, by essentially restricting her from being ‘interested’ in a competitor, prevented her from even holding shares in any competing company.

Interestingly, the Supreme Court agreed with the interpretation of the clause – however it held that the words “or interested” could be removed in order to ensure that the remaining restriction was no wider than necessary to protect the company’s legitimate business interests.

It is important to note that in reaching this decision the Supreme Court reversed Court of Appeal authority that had been in place for nearly 100 years.

The Supreme Court had considered the following two factors:

  • The Blue Pencil Test (BPT) – that there can only be removal of words if upon removal there would then be no need to add to or to modify what remains; and
  • Removal should not generate any major change in the overall effect of all the post-employment restraints in the contract.

Is the Blue Pencil Test a Reliable Approach to Amending Restrictive Covenants?

The BPT definitely has its limitations and cannot be a tool to rectify or reword poorly drafted restrictions. Although the court adopted a relatively robust approach, it also reminded employers that “the courts must continue to adopt a cautious approach to the severance of post-termination restraints”.

Some have suggested that this may lead to employers drafting much wider and more onerous restrictions – on the basis that, if all else fails, the Blue Pencil Test can rescue them from any overly restrictive wording.

However, I do not believe that this would be the best course of action. Restrictions should still be drafted to be no wider than necessary to protect legitimate business interests. Appropriate advice should be sought at an early stage for employers looking to introduce or amend restrictions in order to avoid reliance on the BPT as this should only be seen as a last resort option.

The Court also noted that although Zehnder won the case, “there might be a sting in the tail” – suggesting that employers should be held responsible for the unreasonable drafting of post-employment restrictions which create an “unfair burden on others to clear them up”.

For advice on restrictive covenants and employment contracts, contact Charlie Wood in our Employment Law and HR team on 0161 475 7673 or email [email protected].

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