Unreasonable restraint of trade?
Lord Wilson – who gave the leading judgment, with which the rest of the Supreme Court agreed – succinctly summarised this appeal in the following terms:
“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.”
“Non-competition covenant”
The relevant clause – entitled ‘COVENANTS’ – provided for five restraints following the end of employment, all limited to the immediate six months following it. The “non-competition covenant” was central to all issues. It provided (with emphasis added) that the employee 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.’
“Broad, practical, rule of reason approach”
The restraint of trade doctrine (“the doctrine”) was rightly acknowledged as
“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.”
The “broad, practical, rule of reason approach” to determining whether the doctrine applies in Proactive Sports Management Ltd v Rooney [2011] EWCA Civ 1444, [2012] IRLR 241 was endorsed. On the assumption that ‘interested’ restrains the employee from holding shares in the specified businesses, it falls within the doctrine.
‘Unreasonable restraint’
The employer argued that, when properly construed, the word ‘interested’ in the “non-competition covenant” does not prohibit an employee from holding shares in the businesses there specified. The natural construction of the word ‘interested’, however, consistent with long-standing authority, and in want of a realistic alternative meaning, so as to engage the validity principle, meant that it covers a shareholding. Accordingly, it was in unreasonable restraint of trade.
Severance principle and the Beckett criteria
To sever the impugned part of a restraint of trade covenant, so as to retain the remainder, three criteria prescribed in Beckett Investment Management Group Ltd & Ors v Hall & Ors [2007] EWCA Civ 613, [2007] ICR 1539 had to be satisfied:
- “the unenforceable provision is capable of being removed without the necessity of adding to or modifying the wording of what remains” (“the blue pencil test”);
- “the remaining terms continue to be supported by adequate consideration”; and
- “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’”.
Applying the severance principle: 1) the words ‘or interested’ are capable of being removed from the “non-competition covenant”, without the need to add to, or modify the wording of the remainder; and 2) removal of the prohibition against her being ‘interested’ would not generate any major change in the overall effect of the restraints. Accordingly, ‘or interested’ should be severed, and removed.
The modern employment relationship
Reflecting the modern realities of the relationship between employers and high-ranking employees, the Supreme Court justifiably opined that:
“High-ranking employees can do particular damage to the legitimate interests of their employers following termination of their employment; and it may be that, when they enter into their post-employment covenants, they are able to negotiate with their employers on nearly an equal footing.”