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Expectations relevant to covenant enforceability

This article was published on July 10th, 2017

Egon Zehnder Ltd v Mary Caroline Tillman

A restrictive covenant is only as useful as it is enforceable. Where there is disagreement over the validity of this type of clause, it is often left to the courts to decide whether or not an employee should be prevented from doing certain things – working with clients, or competing with their former employer, for example – after their employment has ended.

In Ms Tillman’s case, the question was whether a non-compete clause in her contract was valid. To be valid, these types of clauses need to be no wider than necessary in order to protect the employer’s legitimate business interests.

She had joined Egon Zehnder (‘Egon’) as a consultant on a higher-than-normal salary and it had been expected that she would rise quickly through the ranks – which she did. But despite her significant promotions, she hadn’t signed new contracts. She remained on the contract she had entered into when her employment began, and that contract contained a restrictive covenant preventing her from working for a competitor of Egon’s for six months after termination.

After resigning, Ms Hillman told Egon that she intended taking up a new job with a competitor before her six-month restraint period was up. Egon applied for an injunction to enforce the non-compete covenant. But was that clause enforceable?

Yes, was the High Court’s answer. The clause was reasonable when Ms Hillman joined Egon as a consultant and signed the contract (which is the appropriate time at which to judge reasonableness), even though very many other consultants didn’t have the same sort of restraint in their contracts. It was relevant that, from the outset, Ms Tillman was expected to be promoted pretty quickly. Given her experience, she had more client engagement, and made much more of a contribution to strategic matters, than would have been expected of a consultant. She became steeped in client affairs more often and to a deeper extent, and that level of engagement was in anticipation of her promotion. Her particular circumstances meant that the non-compete clause was reasonable and enforceable.

The key message is that a restrictive covenant must, at the time the contract is entered into, be tightly suited to the employee’s role and to the employer’s protectable interests. And it seems that evidence of an expectation of likely promotion – and of how that expectation manifested itself – may well help an employer’s enforceability arguments. But it’s important to keep these clauses under review and to update them where necessary as people progress through the business.

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Expectations relevant to covenant enforceability

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