First restrictive covenant case to be heard in the Supreme Court in over 100 years. Restrictive covenants for senior executives under the spotlight. Contributor Ivor Adair, Partner at Fox & Partners.
The Supreme Court will start to hear a case that will test whether thousands of City employment contracts are void. TYhe case, Tillman v Egon Zehnder Ltd , the executive search and management consulting group, relates to whether a post-termination restrictive covenant in a contract that prevents an ex-employee from being “engaged, concerned or interested in” a competitor for six months is too wide.
The covenant is ruled as being too wide then contracts which include such a provision will need to be rewritten. If this were to happen, then affected employees could refuse to sign a new contract without additional benefits.
The covenant is commonplace in the contracts of senior executives across financial services and professional services, as well as in partnership agreements.
Ivor Adair, Partner at Fox & Partners, says: “The ruling on whether employers will need to rewrite contracts could have huge implications for the City.”
“This important case is the first of its kind in more than a century and puts the contracts of senior executives under the spotlight.”
“Employers may face demands for additional pay or benefits from employees before any new contracts are signed, such as shorter notice periods, one-off bonus awards or longer holidays.”
“The case could also open up the possibility that if employers cannot get employees to sign revised contracts, then they may be forced to fire and rehire them on new terms. However, this could leave employers exposed to unfair dismissal claims and trigger ‘good leaver’ status for employees.”
“A key part of the case is whether the restrictive covenant could prevent an ex-employee from holding shares in a private company even if they didn’t have any interest in doing so.”
“There is an inherent contradiction in many City contracts as they often have clauses that allow ex-employees to hold shares in public companies but not private ones.”
Fox & Partners says knowledge and relationship based businesses, such as investment banking and management consultancy, have traditionally relied on restrictive covenants in contracts to protect their intellectual property and client bases. However, these covenants are often too restrictive or difficult to enforce.