Restrictive covenants: blue pencil test confirmed

legal updates

Clause in employment contract that precludes an employee from being engaged, concerned or interested in a competing business.

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The Supreme Court has recently revisited the restrictive covenants in employment contracts in Tillman v Egon Zehnder.

The claimant had a clause in her employment contract that precluded her from being engaged, concerned or interested in a competing business. Holding a minority shareholding in a publicly quoted company was not exempted.

This restrictive covenant was found too broad and an unfair restraint on trade. The blue pencil test came to the rescue: the offending words ‘or interested’ could be deleted without adding anything else and the deletion will not introduce a major change to the overall effect of the restrictive covenant. With the modification, the covenant was enforceable.

The Supreme Court also reminded that the restrictive covenant should be supported by a consideration – legally speaking. This means that the right place for it will be in an employment contract, not in a policy.

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