Case Studies

Barely a day goes by without a court making a decision about something interesting. This is where we tell you about our favourites and those that we think you should know about.

08/08/2014

Restrictive Covenants: A lesson in the importance of accurate drafting

News

The Court of Appeal has overturned the High Court’s recent decision to imply words into a non-compete restrictive covenant in order to make it enforceable, where otherwise it would have offered the employer no protection at all (Prophet PLC v Huggett).

Implications

 It is common for employers to draft restrictive covenants into employment contracts in order to try and protect against unfair competition from ex-employees. There are various different types of restrictive covenants used including non-compete restrictions. If enforceable, these restrictions can have a wide ranging impact on the activities of ex-employees including preventing them from working for any competitors. As a result, the courts have traditionally taken a strict approach when interpreting these covenants and deciding whether they are enforceable. For instance, courts will very rarely imply words into restrictive covenants to make them enforceable where they would otherwise not be.

Details

Mr Huggett’s employment contract contained a poorly drafted non-compete restrictive covenant that, when read literally, gave no protection for Prophet PLC. The restriction sought to prevent Mr Huggett from competing “in any area and in connection with any products in, or on, which he was involved whilst employed by Prophet”. During his employment Mr Huggett had only ever dealt with products which were exclusively produced by Prophet PLC. As Prophet was the only company who produced its own products, Mr Huggett would never be in breach of the non-compete restriction after his employment had ended and it therefore had no practical effect.

 

When the matter originally came before the High Court, it determined that the clause did not give effect to the intention of the parties and something had gone wrong with the drafting.  The courts concluded the words should be implied into the clause to make it enforceable and produce what it deemed to be a commercially sensible result.  An injunction was therefore granted against Mr Huggett preventing him working for a competitor for 12 months after his employment with Prophet had ended. Mr Huggett appealed to the Court of Appeal. 

The Court of Appeal rejected the High Court’s reasoning and overturned its decision. Whilst it confirmed that the courts should interpret ambiguous clauses in such a way as to provide commercially sensible solutions, the Court of Appeal felt the clause in this case was not ambiguous.  The issue here was that the draftsman of the clause had not thought through how the restriction worked in practice and whether it achieved the desired result. There was no basis upon which the judge in the High Court was entitled to re-cast the parties' bargain in the way he did. Prophet PLC was stuck with its poorly drafted restriction.

Comment:

Nick Benton comments: “This case serves as useful reminder of established principles in respect of the enforceability of restrictive covenants.  These clauses need to be carefully considered and accurately drafted to give you the best chance of having them enforced.  It is unlikely that a court will assist an employer where this is not the case”. If you would like to speak to Howes Percival about restrictive covenants and their enforceability, please contact a member of the employment team.