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Are your Restrictive Covenants Enforceable?

The original High Court decision in Prophet plc v Huggett gave employers hope that in the event their restrictive covenants were not quite up to scratch the court would rectify any deficiencies in order for the clause to make sense. 

This was fantastic news for employers looking to protect their business, not so much for those seeking to capitalise on shoddy drafting and impress their new employer by bringing along their old client base.  However, on appeal the decision has been reversed. The Court will not introduce new wording to try and make inadequately drafted clauses make sense. In light of the Court’s decision it is now more important than ever for businesses to ensure that their restrictive covenants are drafted carefully and are fit for purpose, otherwise they run the risk that the employee may be taking more than a bunch of flowers with them as their leaving present!

Prophet plc ("Prophet") is involved in the development of computer software for use by the fresh produce industry. Prophet employed Mr Huggett as its UK Sales Manager and sought to protect itself against the possibility of Mr Huggett leaving to work for a rival by inserting a restrictive covenant into his contract of employment. The aim was to prevent Mr Huggett from working for a competitor for 12 months following the termination of his employment.

In 2013 Mr Huggett left Prophet and commenced working for one of its competitors within the restrictive covenant period. Prophet subsequently issued proceedings against Mr Huggett and sought an injunction preventing him from working for the competitor due to him being in breach of contract.

An analysis of the clause was undertaken by the High Court. It quickly became apparent that Prophet’s non-compete restriction was defective.  Whilst the intention behind the restriction was clear, the individual who had drafted the restriction had included wording which meant that the restriction was worthless. Effectively Mr Huggett was prevented from working in a competing business “in any area and in connection with any products which he was involved with whilst employed”.  The obvious problem with this drafting was that Prophet’s competitors would not have been involved in the sale or supply of Prophet’s own products to their customers as they would have sold their own competing products.  

The High Court Judge departed from convention and decided that the intention and understanding of the parties (notwithstanding the defective drafting) was clear and that the non-compete clause should be read as if it had been drafted to include products that were similar to Prospect’s own products. He therefore granted the injunction, leaving Mr Huggett unable to work for the competitor. Unsurprisingly, Mr Huggett appealed.

The Court of Appeal overturned the High Court’s original decision. They distinguished between the scenario where the covenant can be read in one of 2 ways due to something having “gone wrong” in the drafting process, i.e. where the clause if read one way would give rise to an apparent absurdity and, read the other way would achieve a commercially common sense result. In such cases the latter approach will ordinarily prevail. However, the Court made it clear that in the present case that there was no evidence that something had 'gone wrong' with the drafting. On the contrary, the Court of Appeal stated that the wording of Prophet’s non-compete restriction appeared to reflect exactly what the draftsman intended. The Court of Appeal accepted that in all likelihood something probably had gone wrong insofar as the clause’s original draftsman did not think through the extent to which his chosen wording would achieve the aim that Prophet was seeking. However, that error was of itself insufficient to entitle the Court to 'remake' the parties' original bargain. In short, the clear and deliberate wording of the clause meant that Prophet had been left with a toothless and ineffective restrictive covenant.

The Court of Appeal’s decision in Prophet plc v Huggett emphasises the need for businesses to ensure that the restrictive covenants inserted in the contracts of employment, for their key employees, are properly and expertly drafted. Businesses also need to have their restrictive covenants reviewed and updated from time to time in order to reflect changes in the business and/or the nature of an individual’s role and also to maximise the prospect of their restrictions being enforced in the event that a key employee leaves to join a rival or intends to set up their own competing business. Now that the employment market is starting to pick up, employees are more likely to be considering alternative opportunities. Don’t wait for them to take your business away before you realise there is a problem.

If you would like to discuss any issues raised in this article, we have specific employment law expertise in advising in this area.  For further advice, please contact Nathan Combes.

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