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Restrictive Covenants: Take care with the drafting!

Posted on Jul 25, 2014 by Hannah Roche  | 0 Comments

Those of you who attended our breakfast seminar on restrictive covenants (Protect Your Business – Restrictive Covenants) in April this year may recall that our guest speaker Russell Bradley (Advocate, Ampersand Stable) spoke about a case called Prophet plc v Huggett (Prophet plc v Huggett [2014] EWCA Civ 1013.), which dealt with the issue of whether a court could rewrite a restrictive covenant to bring it in line with common sense. 

Prophet was a software company selling software to the fresh produce industry, dealing in fruit, vegetable, cut flowers and herbs.  Prophet’s MD was the aptly named Mr Peachey. In February 2012 Prophet took on a new Sales Manager Mr Huggett.  Mr Huggett’s contract of employment with Prophet contained the following restriction:

“The Employee shall not during the continuance of this Agreement, or for a period of twelve months from the determination thereof (for whatever reason or in whatsoever manner), without the consent in writing of the Board of Directors of the Company, either solely or jointly with, or as, a Director, Manager, Agent, Consultant or Employee of any other person, firm or company, directly or indirectly, carry on or be engaged, concerned or interested in any business which is similar to, or competes with, any business of the Company in which the Employee shall have worked whilst employed hereunder (in that they provide computer software systems of whatever kind to any company involved in the fresh produce industry) within the geographical area (namely the United Kingdom), except as a shareholder or debenture holder not having a controlling interest in any Company the shares of which are quoted on a recognised Stock Exchange. Provided that this restriction shall only operate to prevent the Employee from being so engaged, employed, concerned or interested in any area and in connection with any products in, or on, which he/she was involved whilst employed hereunder.” (Emphasis added)

Mr Huggett left Prophet to join a competitor, which also sold software to the fresh produce industry.  However, the software that the new employer sold was not technically Prophet software (as only Prophet sold Prophet software).  Mr Peachey sought to enforce the restriction on behalf of Prophet.  However, read literally, the restrictive covenant provided no protection to Prophet as nobody else sold their product - the software. 

Despite this (and surprisingly), the High Court held that the clause should be re-written to give effect to the intention of Prophet and Mr Huggett when they entered into the contract - i.e. to prevent Mr Huggett from selling software which was similar to Prophet software.  In short, the High Court re-wrote the restriction to bring it into line with common sense.

The decision of the High Court was appealed and the Court of Appeal has recently handed down its judgement: Rimer LJ stated that a purposive approach to restrictive covenants (i.e. an approach whereby a restriction could be re-written to reflect the intention of the parties when it was entered into) can legitimately be taken in circumstances where the restriction is ambiguous.  However, in the Prophet case, the restriction was not ambiguous: it was simply badly drafted.  The Court of Appeal concluded that Prophet was therefore stuck with the restriction as originally drafted. In other words, Prophet was left unprotected.   

As Russell pointed out to us at the seminar (anticipating that the High Court judgement would be overturned), the moral of this story is that restrictive covenants must be carefully drafted, with thought given to the objective, intention and wording of the clause.  Employers cannot rely on a Court to re-write poorly written restrictions.  Therefore, in order to protect your business interests, it’s worth taking time and care over the drafting of the restrictions.  At best, a well-drafted restriction is likely to mean it is never breached (because it acts as a sufficient deterrent).  At worst, it will give you a strong negotiating position in order to settle a dispute with a former employee over restrictions out of court.    

To read the Court of Appeal judgement click here http://www.bailii.org/ew/cases/EWCA/Civ/2014/1013.html

If you require advice in relation to restrictive covenants or any other aspect of employment law, please get in touch.

Meantime, enjoy the sunshine!

Hannah

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