}

30 October 2019

Tillman v Egon Zehnder [2019] UKSC 32

The exact wording of a non-competition clause matters significantly in the court’s decision as to whether to uphold or strike it down for unreasonableness. Under Singapore law, the courts will not enforce non-competition clauses unless they (a) protect an employer’s legitimate proprietary interests, and (b) are no wider than reasonably necessary to achieve such purpose.

Background

In Tillman v Egon Zehnder (“Egon Zehnder”), Tillman (“Employee”) had entered into an employment agreement with her employer Egon Zehnder Ltd (“Company”). The employment agreement contained a non-competition clause (“Non-Compete”) under which the Employee 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…” (emphasis added).

Subsequently, the Employee left the employment of the Company to join a competitor. The Company applied for an interim injunction to restrain the Employee from doing so. The Employee argued that the Non-Compete was too wide and therefore invalid. In particular, the Employee argued that, by use of the word “interested” in the Non-Compete, the Non-Compete prevented the Employee from holding even a minority shareholding in any of the competing businesses. Such a prohibition would have been unreasonably wide.

The Company disagreed and argued that, properly construed, the Non-Compete was not so wide as to prevent the Employee from holding minority shareholdings in competitors. Even if it were so, the word “interested” could be severed from the Non-Compete, and the remainder of the Non-Compete would still be valid.

Court’s analysis

At first instance, the English High Court took the view that the Non-Compete was ambiguous in wording and was not intended to deal with the question of shareholding, as questions as to shareholding were dealt with in other clauses. The High Court granted the injunction.

The English Court of Appeal disagreed. The Court of Appeal held that the word “interested” in the Non-Compete meant that the Non-Compete prohibited shareholdings in competitors of any kind (whether active or inactive, majority or minority). The Court of Appeal held that this rendered the Non-Compete unreasonably wide.

The Court of Appeal went on to hold that, because the Non-Compete was to be read as a whole, the word “interested” could not be severed. The Non-Compete was struck down, and the injunction was set aside.

The Supreme Court agreed with the Court of Appeal that the word “interested” did cover shareholdings of any form. However, the Non-Compete was still saved by the fact that the word “interested” could be severed. The Supreme Court, applying the Blue-Pencil Test, took the view that severing the word “interested” did not change the overall character and effect of the Non-Compete.

Implications for employers in Singapore

When drafting restrictive covenants, it is tempting for employers to make the covenants as wide as possible. Hence, it is very common for restrictive covenants to include language preventing the employee from “directly or indirectly” seeking to be “employed by, concerned or interested in” a business competitor.

In Egon Zehnder, the UK Supreme Court held that the word interested” refers to any and all shareholdings, even minority and inactive shareholdings. It was conceded by the Company in Egon Zhender that this would be unreasonably wide.

Under Singapore law, when interpreting a contract, the courts look not only to the literal words of a clause, but to other clauses in the contract and other relevant extrinsic evidence. However, the courts will not stretch its exercise in interpretation to such an extent as to contradict/vary the terms, and depart from any reasonable meaning that the words may bear. Based on the Supreme Court’s judgment in Egon Zehnder, it may be difficult for an employer to argue that a non-compete which uses the word “interested” does not in fact prevent the employee from holding a minority, inactive shareholding in competitors.

Nonetheless, it remains to be seen:

  • How the Singapore courts will, in an appropriate case, interpret the word “interested” when used in a non-competition clause;
  • Whether, even if the word “interested” is interpreted to encompass all shareholdings including inactive and minority shareholdings, such an interpretation necessarily renders the non-competition clause impermissibly wide; and
  • Whether, even if the non-competition clause is impermissibly wide because of the word “interested”, the word “interested” could nonetheless be severed to save the remainder of the non-competition clause.

In any event, as the above case of Egon Zehnder demonstrates, the words used in non-competes should be carefully chosen.

We caution that the above should not be taken as laying down a general rule on restrictive covenants. As with every decision involving the interpretation of contracts, much will turn on the specific facts of each case.

 

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