Guernsey: Restrictive Covenants: It's All Down To The Drafting

Last Updated: 21 August 2014
Article by Hana Plsek

We become involved in restrictive covenants, more often than not, only after the issue has become contentious. In the majority, these issues could have been avoided had enough thought been given at the beginning of the process. It really does come down to the drafting.

The following Court of Appeal matter Prophet plc v Huggett [2014] EWCA Civ 1013, is a recent cautionary tale regarding the proper drafting of restrictive covenants. Not so much in relation to having a restrictive covenant per se - these were always a given in this scenario - but rather, getting them right in the first instance.

Prophet Plc is a company focused on developing computer software for the fresh produce industry, primarily fruit, vegetables, cut flowers and herbs. Prophet does not deal with fresh fish, meat or any dairy products but rather created and sold an integrated suite of software applications known as Pr3 that covers many of the functions such as accounting, purchase and sales, required by those businesses.

The employee, Mr Huggett, was recruited in 2012 as a sales manager, with the particular responsibility of marketing Pr3. Just under two years later, Mr Huggett was head hunted by a company who, like Prophet, sold business solutions in the form of computer software to customers not only in the fresh food sector but many sectors within the agricultural industry. Mr Huggett was head hunted on the basis that he had a wealth of experience in the fresh produce sector, into which the company wished to target with one of their products. The salary on offer was considerably better and Mr Huggett handed in his notice to Prophet.

Prophet, having discovered that Mr Huggett was leaving to join a competitor, sought an injunction requiring Mr Huggett to comply with a restrictive covenant in the employee's contract of employment, namely:

"The Employee shall not ... 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... 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."

Unfortunately for Prophet, on a literal reading this clause provided no protection to the employer. The reason for this is that the inclusion of the second sentence, namely "in any area and in connection with any products in, or on, which he/she was involved whilst employed" (emphasis added) meant that the clause only restricted the Mr Huggett from being engaged with businesses dealing with the product Pr3. Therefore, Counsel sought to argue the Court should give commercial meaning to the clause, interpreting it in a way, that encompassed not Pr3, but also products made by Prophet, business process software designed for the fresh produce industry, business process software for businesses and software generally. On this interpretation Mr Huggett would be barred from working for the company in connection with any company software designed for the fresh produce industry, the desired outcome for Prophet.

Counsel for Mr Huggett submitted that the clause was not wholly redundant given the existence of third party agents who provided services in respect of Pr3 software. On this view a literal interpretation would not render the clause pointless. Of course, taking this interpretation Mr Huggett would not be prevented from taking up employment with the new company.

The judge in the High Court disagreed, in part, with both submissions and held that the clause should be given its literal interpretation. The judge sought to remedy the defunct clause by importing the words "or similar thereto" to the end of the clause. This he saw as the minimum change necessary to produce a "commercially sensible result". The judge then held his re-worded covenant to be enforceable and granted the injunction.

The Court of Appeal however took a different view. It agreed that a literal interpretation of the clause resulted in it having no relevant teeth and imposing no material restraint upon Mr Huggett. It acknowledged where the Court was faced with a contractual clause that was ambiguous as to its meaning, with one interpretation lending itself to absurdity and another providing a commercially sensible solution, the Court would likely favour the latter interpretation. But, this case was not such an instance. In the Court's view the clause was "unambiguously clear", drafted with deliberate and specific care, albeit the result was, in the words of Lord Justice Rimer, a "toothless restrictive covenant".

The Court of Appeal refused to uphold the earlier decision of the High Court to redraft a restrictive covenant, so as to give it the commercial meaning the clause was clearly designed to achieve. The result was that, despite the clause being professionally drafted, Mr Huggett, who was subject to the agreement, was free to compete within weeks of leaving his ex-employer.

This latest decision from the Court of Appeal stresses the importance of ensuring that restrictive covenants are drafted with proper care and thought for their effect, as Courts will not step in and redraft a clear but commercially unhelpful clause. Failure to do so could result in such clauses not being enforceable, placing employers seeking to protect their confidential information in a vulnerable position.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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