Restrictive Covenants (Prophet plc v Christopher Huggett [2014])

Ensuring that an employee doesn’t leave your company and take valuable information straight to a competitor has often been the reason behind restrictive covenants. Have you got the expertise to accurately draft one? Check out our article on what happened to one Company who made a mistake in the wording.

If an employee leaves a business and goes to work for a competitor, they may be able to use information that they have acquired in the course of their job to assist their new employer and damage the business of their former employer.

Employers have sought to protect themselves against such eventualities by employing what are known as restrictive covenants. These are clauses in a contract which place restrictions on what an employee can do during their employment and even after they leave employment and that contract has come to an end. Typically, restrictive covenants will seek to prohibit an employee from taking part in activity that competes with the employer or former employer for a defined period after the employee has left the business. Such post-termination restrictions are also used to stop former employees from using privileged knowledge of customers or clients against the interests of their former employer.

These clauses are often included in the contracts of senior or highly skilled staff at the commencement of their employment. It is possible, although less straightforward, to introduce restrictions during or on termination of their employment. Employers may hope that by having such restrictions in the employment contract, they will deter employees from joining competitors or prevent approaches to their employees from other companies. However, their enforceability is not guaranteed and will depend on purpose and scope of the restriction.

Such post-termination restrictions are, in effect, a restraint on the former employee’s ability to trade freely after they leave their employment. As a restraint of trade, post-termination restrictions will be unlawful unless they meet the following requirements:

1. The restrictions protect a legitimate business interest;

2. The restriction is reasonable in the public interest; and

3. The restriction is reasonable between the parties.

An employer will need to ensure that each of the above criteria is met when drafting a restrictive covenant so that they can make a good case that the restrictive covenant is enforceable. If an employer has not identified the specific legitimate business interest that it is seeking to protect then the restrictions will not be enforceable. Equally, if the restrictions go any further than is reasonably necessary to protect that interest (i.e. if a Judge considers that a lesser restriction could have protected the interest sufficiently) then the restrictions will also not be enforceable. It is, therefore, fundamentally important that restrictive covenants are well considered and well defined if an employer is hoping to be able to enforce the restrictions against former employees in the future.

There are lots of factors which will be taken into account by a Judge when deciding whether a restriction is enforceable including, the nature of the restriction, the geographical ambit and the duration of the restriction and whether a lesser restriction would provide sufficient protection. There are also several different types of restrictive covenants which may be best suited to the particular legitimate business interest that is being protected.

As such, employers need to be aware of the wording of the restrictive covenant itself. They may find that, regardless of their intention, the way that the covenant is phrased, renders it to all intents and purposes meaningless. This is what happened in the case of Prophet plc v Christopher Huggett [2014]

Prophet Plc was a Company that developed computer software for the fresh produce industry. Mr Huggett had been taken on as a Sales Manager for Prophet and his contract included post-termination restrictions. Clause 19 of his contract contained the following:

‘The Employee shall not…for a period of twelve months …without the consent in writing of the Board of Directors of the Company…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…within the geographical area (namely the United Kingdom)…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.’

Had the first sentence been left as it was, it would have been deemed unenforceable as an unreasonable restraint of trade. To qualify it and avoid this, the second sentence was added by the employer.

In December 2013, when Huggett gave notice that he was leaving Prophet and it was discovered that his new employer was a competitor, Prophet wheeled out the restrictive covenant. It was at this point that they discovered the covenant had been worded in such a way that, if taken literally, it would have had no effect. The clause only applied to ‘any products in, or on, which he/she was involved whilst employed hereunder’, namely products developed and sold by Prophet.

Whilst Huggett’s new employer, K3 Business Solutions, was involved in developing software for use in the same sector as Prophet, that software was its own, not Prophet’s and would therefore not be covered by Clause 19’s second sentence. Even Prophet’s own Counsel was forced to admit this.

The Judge said that since taking the clause literally would render it meaningless, “something had gone wrong in the drafting”. Based on this conclusion, he sought the input of Counsel for both parties to determine what the wording should have said, and then carried out a correction by adding the words “or similar thereto” to the end of the clause. Subject to this correction, he was prepared to grant Prophet’s injunction application. Huggett took his case to the Court of Appeal.

The Court of Appeal considered that the Judge’s actions in the first instance were incorrect.

The Courts should not take it upon themselves to re-write a covenant between two parties.

Prophet should have looked more closely at the wording of its clause to consider whether it would be likely to prove useful if Huggett were to join a competitor.

Although generally speaking, a Court should, when presented with ambiguous clauses, seek to provide a commercially sensible solution, the Court of Appeal did not consider that this was an ambiguous clause. To quote Lord Justice Rimer:

“If the parties’ chosen words result in a restriction of limited, or even no, effect, the explanation may be that…the employer has simply made a bad bargain. The Court should be wary about mending such a bargain so as to improve it.” He went on to say “It was not for the Judge nor is it for this Court to re-make the parties’ Clause 19 bargain. Prophet made its Clause 19 bed and it must now lie upon it.”

How does this affect employers? Since it is clear that Courts will not alter the wording of a restrictive covenant where the meaning of the words used is clear, even if it does not make logical sense, employers should carefully consider the phrasing of such restrictive covenants to ensure that they make sense and achieve what they are intended to achieve. employers should also give careful consideration to the purpose and extent of the covenants to increase the chances of enforceability. If in doubt, they should obtain legal advice.

Further, if employers want to introduce restrictive covenants into the employment contracts of current employees, this will amount to a variation in their employment contract so they should ensure that they comply with the requirements of contract law. Again, if in doubt, employers should obtain legal advice.