17 May 2023
Law at Work - May 2023 – 4 of 8 Insights
In Boydell v NZP Ltd and others, the Court of Appeal applied the doctrine of severance (which involves deleting certain parts of a restrictive covenant), to uphold a 12-month non-competition covenant. In Tillman v Egon Zehnder Ltd , the Supreme Court established a three-stage test that needs to be considered when deciding whether to sever parts of a post-termination restriction to make the covenant enforceable:
Can the unenforceable parts of the clause be removed without the need to add or modify the remaining wording?
Can the removal of the offending words occur without any major change in the overall effect of the restriction?
Is there adequate consideration for the remaining terms?
While this decision takes a broad rather than narrow approach to the doctrine of severance as set out in Tillman, it would be unwise for employers to adopt the approach that severance will always be available to them. The fact that arguments had to be heard about severance, with associated costs, emphasises the importance of care when drafting post-termination restrictions in the first place. They should be tailored to the particular circumstances and go no further than reasonable to protect the business interest of the employer.
NZP specialises in the development and production of bile acid derivatives for sale to pharmaceutical companies. Dr Boydell was employed as Head of Commercial, Specialty Products for NZP Ltd and was responsible for the global sales and marketing for the group of all bile-derived products. Dr Boydell resigned and stated that he intended to work for a main competitor of NZP to head up their "bile acid business".
Dr Boydell's contract of employment included a non-compete that stated he would not for 12 months after termination be involved in any activity for the benefit of a third party that carried out any competing business activity of the company, its affiliates or group companies, including collection, processing or conversion of bile for pharmaceutical use, and any activities related to the supply chain.
The High Court granted NZP injunctive relief to enforce the non-compete but severed some of the clause, including the reference to group companies and activities related to the supply chain.
Dr Boydell appealed to the Court of Appeal. He argued that, as drafted, the clause prevented him from working at any company which produced general pharmaceutical products such as nasal sprays, including Boots or Superdrug, which went beyond what was reasonably necessary to protect NZP's legitimate interests. Therefore, severance of the group company wording significantly changed the nature of the restraint, contrary to the principles in Tillman. He also argued that the severed restriction was still too wide to be enforceable.
The Court of Appeal rejected the appeal. It found that:
Dr Boydell's construction of the non-compete clause as preventing him from working for companies such as Boots or Superdrug was found to be a fantastical, extravagant, improbable or unlikely consequence that was not within the parties' contemplation when the contract was signed. The clause was clearly directed towards the specialist activities of NZP. It was not plain and obvious that the clause was incapable of severance. This meant the High Court was entitled, at interim stage, to sever the group company wording from the clause.
The clause was not too wide to be enforceable after severance. The clause was wide, but NZP was a highly specialised business and in the context of Dr Boydell's move to a competitor, it was found that it may be unrealistic to insulate him from competitive activity. This was found to be in contrast to a similar non-compete being harder to justify for a larger employer with multiple areas of activity.
The government has just announced that it intends to reform non-compete clauses to limit them to 3 months. A lengthy restriction such as this would not be upheld in future if those proposals become law. Length of restriction aside, employers need to ensure that they adopt a careful approach to drafting restrictive covenants at the time they are entered into. This includes considering the specific business interest being protected as well as the seniority of the employee the restriction is to be enforced against.
Although the employers were successful in obtaining injunctive relief on this occasion, employers should take care to ensure any post-termination restrictions are reasonable. If you have any questions in relation to your post-termination restrictions or need a review in light of changed circumstances or the government's proposals, please contact Ruth Moffett.
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