Rewriting restrictive covenants
01 August 2014
The Court of Appeal has confirmed the scope that the courts have to re-write restrictive covenants in departing employees' contracts which have been poorly or ambiguously drafted.
We are grateful to Employment Law Plus for this report of the hearing:
Restrictive covenants are a crucial tool for employers seeking to protect their business and revenues. They can protect confidential information as well as limiting the threat of employees leaving and taking clients, revenues or colleagues with them. This is particularly important for employers at a time when the recruitment market is becoming more buoyant and team moves and senior hires are on the increase.
However, as these covenants potentially restrict an employee's ability to work elsewhere; they can only be enforced if they can be justified as being necessary to protect the business's legitimate needs. If a court believes that a covenant goes further than this, and is more restrictive than is necessary, it will refuse to enforce it - even if some form of lesser restriction would have been justifiable. This means that careful and appropriate drafting is vital to ensuring that restrictive covenants give you the protection you need, - the recent case summarised below highlights just how small mistakes can render the protection worthless.
In the case of Prophet plc v Huggett, Mr Huggett (H) worked as a sales manager for Prophet Plc (P), a provider of computer software products to the fresh produce industry, before being head-hunted by a competitor firm. H's contract contained a 12 month non-compete restrictive covenant which prevented him from being engaged in the sale of any products in which he was involved whilst employed by P.
P sought to enforce this covenant, applying for an injunction preventing H from working for the new employer or any other software supplier in the UK fresh produce sector in the 12 months following H's termination. The High Court decided that, as drafted, the clause provided no protection to P. The clause sought to prevent H selling products in which he was involved whilst employed by P. On a literal reading of the words, this just prevented H from selling P's products, which were unique to P. It did not prevent him from selling similar, competing products marketed by P's competitors.
However, the High Court felt that the clause as drafted did not give effect to what the parties intended to achieve by it. The Court found that a 'reasonable person' would have understood the parties to have meant this to extend to 'similar' products and effectively added wording into the clause to this effect, upholding the 12 month restriction.
H appealed to the Court of Appeal and his appeal was upheld. The Court's view was that when a contractual provision is ambiguous in meaning "with one interpretation leading to apparent absurdity and the other to a commercially sensible solution" the Court is likely to interpret the clause to produce a commercially sensible result. However, that would only be the case where the clause was truly ambiguous in meaning and that was not the case here. The clause wasn't drafted ambiguously, just poorly. The Court found that there was no basis to read wording into the clause to interpret it differently, even though this meant it was of no practical benefit to P at all, and the clause did not therefore prevent H from his proposed activities at his new employer.
This case highlights the importance of careful and effective drafting if restrictive covenants are to be enforceable and achieve the protection for employers that they are intended to.
With employees becoming more mobile as business confidence returns and employers invest in recruitment, it is important that employers review the level of protection which they have in employment contracts to ensure that it is adequate and that covenants are fit for purpose in the light of changes to the business, the employee's role and the competitive environment.