This case centred upon a post-termination non-competition clause in the employment contract of a former employee.  The term of the contract stated that the employee should not:

‘…within the period of six months from the termination date directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the company which were carried on at the termination date or during such period’

The issue came before the Supreme Court as the former employee had sought employment with a competitor within the six month period.  The Court of Appeal had held that it was unreasonable by virtue of the word ‘interested’ as it could even prohibit the employee from taking a minority shareholding in a competing company.

The Supreme Court stated there were three questions that must be answered. The first was whether the impugned part of the term fell within the restraint of trade doctrine.   This impugned part was the word ‘interested’.  Lord Wilson held that it did form part of a restraint of trade as it should be given a broad and practical application.

The second question was whether it was unreasonable.   The company had attempted to argue that the use of the word ‘interested’ did not prohibit the employees from holding shares but that there was a much more narrow meaning.   The Supreme Court rejected this stating that ‘interested’ had been used in non-competition clauses for a century and that it was regularly held to include a shareholding (as seen in Traditional Financial Services Ltd v Gamberoni [2017] EWHC 768). On this basis, that part of the term was regarded as unreasonable.

The third and final question was whether the unreasonable part of the covenant could be severed allowing the rest of it to stand, i.e. removing the word ‘interested’ but allowing the rest of the term to continue.  The old authority of Attwood v Lamont [1920] 2 KB 146 created a restrictive approach as it could only be severed if it did affect the meaning of the part remaining and that it was only ‘trivial’.  Lord Wilson held that this was too restrictive and that it should be expanded to allow a greater use of severance of part of a term.  Lord Wilson referred to Beckett Investment Management Group Ltd v Hall [2007] EWCA Civ 613 stating that the ‘blue pencil’ test should be used when severing meaning that words may be removed but should not require additional wording.  A further part of the test outlined in Beckett was that the removal of words should change the overall effect of the term.  Lord Wilson held that the word ‘interested’ could be removed and that it would not have an overall change in the term, which would still restrain post-termination competition.

As a result, the appeal was successful as the term was declared valid with the caveat that the word ‘interested’ should be removed thus allowing it to be reasonable.

Practical Lessons

The use of post-termination non-competition terms in employment contracts can be a useful way of protecting business and ensuring employees do not aid competing businesses shortly after leaving.

The Supreme Court has provided come clarification on how these terms are to operate and moreover how they are to be dealt with when it could be regarded as unreasonable.

On the one hand, there is a restriction as the Supreme Court is stating that being ‘interested’ in any competing business is too unreasonable, but they are not pushing the ‘nuclear button’ by declaring the whole term void.

Instead, they are widening the powers of severance allowing the substance of the term to be valid but removing the impugned word.   This is likely to be of greater assistance to employers who wish to restrain trade as the threat of the whole term being declared void has been lessened.
https://www.supremecourt.uk/cases/uksc-2017-0182.html