The Court of Appeal in Prophet plc v Huggett has overturned the High Court's earlier decision to read words in a restrictive covenant that was found to be merely poorly drafted.
Prophet plc v Huggett
Mr Huggett was a sales manager for software company Prophet. He left to join a competing software company that sold products similar but not identical to Prophet products. However, the restrictive covenant in Mr Huggett's contract of employment, when read literally, only prevented him from selling Prophet software, rather than similar software, after he left Prophet's employment. The covenant therefore offered Prophet no protection at all, as technically the competitor did not sell Prophet software products.
High Court Decision
Enforceable restrictive covenants can only protect the employer as far as is reasonably necessary to protect their individual legitimate business interests. Consequently, restrictive covenants generally incorporate appropriate limitations regarding scope, the length of time they can be applied, and geographical location.
Moreover, non-competing covenants designed to prevent employees working for competitors are difficult to enforce unless intended to protect confidential information or trade secrets, and this protection cannot be achieved sufficiently by less restricting means - for example through non-solicitation or non-dealing covenants.
The High Court decision was surprising as generally the courts do not read words into a restrictive covenant to allow the employer to enforce the covenant; the High Court was prepared to interpret the covenant in line with 'common sense' and what the parties intended in the drafting of the covenant, to provide a solution that was commercially sensible i.e. to prevent Mr Huggett from selling similar and not just identical software.
Court of Appeal Decision
The Court of Appeal, however, disagreed, the Judge indicating that in the case of ambiguity a purposive approach would be acceptable. However, in this case the wording could not have been clearer and had simply been poorly drafted i.e. there was not an error in the drafting but the thought behind the drafting. The fact that the wording rendered the clause ineffective was neither here nor there; Prophet "made its ... bed and it must now lie upon it".
Tips for Employers
The lesson to be learned here is that employers should be careful when drafting restrictive covenants to ensure they achieve adequate protection, as the courts cannot be relied upon the rewrite a clause if it has merely been badly drafted. Employers are advised to:
- Consider the natural wording of the clause and the underlying intention from the perspective of both the employer and employee.
- Tailor restrictive covenants according to the potential harm that the business could be exposed to by the individual employee should they seek alternative employment e.g. if the employee is being promoted, the employer may then want him or her to agree to further restrictions in accordance with the needs of the new role.
- Review any restrictive covenants regularly to ensure they continue to be appropriate e.g. if the business has undergone a recent structural change that may consequently alter the protection needed.
If you have questions in relation to the content of this article, or for further advice on drafting or enforcing restrictive covenants, please contact Stephen Moore, or another member of our Employment Team.