The ‘blue pencil’ test
Tillman v Zehnder (Supreme Court) [2019]
A restrictive covenant will be void for being in restraint of trade unless there is a legitimate interest to protect and the protection sought is no more than is reasonable having regard to the interests of the parties and the public interest. It is generally the case that a provision which goes too far will be declared unreasonable and therefore unenforceable in its entirety. That is unless the so called ‘blue pencil’ can be applied successfully.
Facts:
Tillman was hired by Zehnder in 2004, a company who specialised in the provision of senior level recruitment services. Tillman was recruited to work in Z's financial services group. She became Global Head of their Investment Banking sector in 2006 and co-Global Head of the Financial Services Practice Group in 2012. In January 2017, Tillman resigned by giving notice. One week later, Z terminated her employment with immediate effect and made a payment in lieu of notice, in accordance with her contract. Ms Tillman subsequently notified Z that she wished to start working for Russell Reynolds a firm carrying on a similar business. Z issued proceedings, alleging that this would constitute a breach of the six-month non-compete clause contained in Ms Tillman's employment contract. If valid, the restricted period would end on 30 July 2017. Z sought an injunction. There was no dispute that Ms Tillman was bound by the non-solicitation, non-dealing and confidentiality terms in her contract.
The relevant provisions of the contract stated: "13.2 You 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 at any time within the period of six months from the Termination Date: 13.2.3 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 the period of twelve months prior to that date and with which you were materially concerned during such period."
and
"13.4 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." Ms Tillman argued that the non-compete clause was void for being wider than reasonably required for the protection of legitimate business interests. She argued that being "interested" in a competing business was too wide as it could prevent her from having a minority shareholding in a competitor for investment purposes.Decision:
The Court of Appeal held that the non-compete restriction was impermissibly wide, and therefore void. The court refused to sever the words "or interested" from the rest of the clause.
The Supreme Court, however, allowed the appeal, finding that although the words "interested in" did prohibit any shareholding (however large or small), these words could be severed from the restriction.
The Supreme Court went on to highlight the way in which the ‘blue pencil’ principle works. The alleged unenforceable element must be capable of being removed without the necessity of adding to or modifying the wording of what remains. Quoting from an earlier case:-
“… the courts will sever in a proper case where the severance can be performed by a blue pencil but not otherwise. To give an illustration, a covenant ‘not to carry on business in Birmingham or within 100 miles’ may be severed so as to reduce the area to Birmingham, but a covenant ‘not to carry on business within 100 miles of Birmingham’ will not be severed so as to read ‘will not carry on business in Birmingham’. The distinction seems artificial, but is I think settled.”
This distinction was confirmed as being settled law. It was said to be inherent in the word “severance” itself, which means cutting things up and does not extend to adding things in. The court said these were the limits of its powers. It went to say that were it ever thought appropriate to confer on the court a power to rewrite a restraint so as to make it reasonable, it would have to be achieved by legislation along the lines of that which apparently applies in New Zealand.
Points to Note:
- The Supreme Court recognised that “Where part of a contract is unenforceable, the enforceability of the remainder represents an issue which arises far more widely than in contracts of employment”. Whilst this was an employment case it does have important lessons for the drafting of general commercial contracts.
- The court emphasised that their power is limited to striking through wording with their ‘blue pencil’ provided that, what remains, continues to make sense. The court will not redraft the provision so as to make it reasonable and therefore enforceable. So in the example referred to above, if it is unreasonable to prohibit business within 100 miles of Birmingham, the court cannot redraft it to apply within just 50 miles of Birmingham even if that is what is required to render the provision reasonable and therefore enforceable.
- The same principle would apply to other provisions such as limitations or exclusions of liability. If a limitation of liability is overly restrictive (say capping liability at £10,000) the court will not and cannot redraft it to refer to a financial limit which they would regard as being enforceable. If a clause seeks to exclude liability for certain categories of loss, it has long been the case that it is sensible to draft the provision as a set of self-contained exclusions so as to facilitate the deletion of one or more whilst leaving the rest standing. That remains the position.
- Interestingly, in applying the ‘blue pencil’ the court made no reference to the provisions of clause 13.4, relying instead upon their residual power at common law.