UK: Restrictive Covenants In English Law: One Slip Can Be Fatal

Last Updated: 3 October 2014
Article by Michael Bronstein

Wherever in the world they may be situated, most employers like the idea of being able to prevent ex-employees from competing with them. It's therefore surprising how different the approaches taken from one jurisdiction to another can be. As is well known, in California non-competition covenants are generally prohibited. In Germany, at least half of the former employee's salary must be paid during the restricted period.

The starting point under English law appears to be less prescriptive. A post-termination restrictive covenant will be enforceable, so long as it is no wider than is reasonably necessary for the protection of the employer's legitimate proprietary interests. Although the catalogue of protectable interests is not closed, those which are well recognised are: confidential information, customer connection and the stability of the workforce. There is no requirement to make any payment during the period of the restriction.

But appearances can be deceptive. The catch is that, if a restrictive covenant is too wide, it is void. The English courts will not rewrite it to make it enforceable, unless that can be done solely by deleting words, applying the so-called "blue pencil" test. So, if the court decides in a particular case that a non-competition covenant for 12 months is too long, the employee is free to compete. The court cannot substitute a shorter period in order to rescue the covenant by making the restraint reasonable in duration.

A recent decision of the Court of Appeal illustrates how far this aversion to rewriting the contract can go. In Prophet PLC v. Huggett [2014] EWCA Civ 1013, Prophet employed Mr Huggett as a sales manager. Prophet developed and sold software for the fresh produce industry, specifically that part of it dealing in fruit, vegetables, cut flowers and herbs.

During his employment, Mr Huggett was involved in selling two of Prophet's products, known as Pr2 and Pr3. These were suites of integrated software applications developed by Prophet for the fresh produce industry. They were the only Prophet products with which Mr Huggett was involved during his employment.

After he had been working for Prophet for less than two years, Mr Huggett was head-hunted by a competitor of Prophet, K3. He accepted K3's offer and resigned from Prophet.

Mr Huggett's employment contract with Prophet contained a post-termination non-competition covenant which would prevent him, for 12 months after the end of his employment, from working for a competitor of Prophet, but only: "... in any area and in connection with any products in, or on, which he ... was involved ..." whilst he was employed by Prophet. This wording was plainly included to narrow the scope of the covenant, so as to ensure that it was not unreasonably wide and therefore void.

Relying on that covenant, Prophet applied to the High Court for an injunction that would prevent Mr Huggett from working for K3 for 12 months. The injunction was granted but Mr Huggett appealed to the Court of Appeal.

The principal question in the case was not whether the covenant was unreasonably wide but rather how it should be interpreted.

Mr Huggett argued that, construed literally, the covenant could not stop him from working for K3. It applied only to "... products in, or on, which he ... was involved ..." whilst he was employed by Prophet. Those products were Pr2 and Pr3, which were not sold by K3 or any other company apart from Prophet.

The counter-argument advanced by Prophet was, in essence, that this might be what the contract said, but it could not possibly have been what the parties meant. They would not have agreed to an express term of the contract, which had obviously been very carefully drafted, that turned out to be pointless. That would be an absurd result. The reference to "any products" was ambiguous; it was capable of bearing a number of different meanings. In this case, it was clearly intended to mean business process software for the fresh produce industry. Alternatively, as the judge at first instance had found, it meant Pr2 and Pr3 and products similar to them.

The Court of Appeal had no hesitation in rejecting these arguments. In its view, the drafting of the covenant was "... unambiguously clear ...". It applied only to Pr2 and Pr3, because those were the only products with which Mr Huggett had been involved during his employment with Prophet.

Moreover, even if the meaning had been ambiguous, the court could only adopt a different interpretation if there was a clear alternative meaning which the parties must have intended. In this case, there was a range of alternatives, and it was not open to the court to "... re-cast the parties' chosen language with a view to giving effect to what is said to have been their likely commercial intention." Prophet had made a bad bargain, almost a nonsensical one, and was stuck with it. The injunction was discharged and Mr Huggett was therefore free to start work with K3.

So the message for employers is clear. To be effective under English law, restrictive covenants need precise drafting so as not to be unreasonably wide, but the draftsman must not lose sight of the commercial consequences of the language used. Since there is no need under English law for the employer to pay the employee during the period of restraint, it would be wise to invest some of that money in retaining counsel with both the requisite expertise and the necessary business sense to avoid the Catch-22 which ensnared Prophet in this case.

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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