In Prophet plc v Huggett , the Court of Appeal has overturned the High Court’s decision to read words into a non-compete covenant, rendering it useless. The covenant, upon literal reading, did not work and therefore offered the employer no protection at all.
The court held that the employer had simply not thought through the extent to which its chosen words would in fact provide adequate protection, and therefore had to pay the price.
A contractual term restricting an employee’s activities after termination is void for being in restraint of trade and contrary to public policy, unless the employer can show that:
- It has a legitimate proprietary interest that it is appropriate to protect.
- The protection sought is no more than is reasonable having regard to the interests of the parties and the public interest.
In addition, in any application to enforce a restrictive covenant, the court must decide what the covenant means when properly construed, applying the following general principles:
- If there are two alternative constructions of a covenant, the court should prefer the construction that would be enforceable if legitimate.
- A court will not re-write a covenant to make it enforceable if it is too broad. Nor will it construe a wide (and void) restriction as having implied (and valid) limitations; to do so would mean that employers would have no incentive to pay attention to the accurate drafting of restrictive covenants.
Prophet plc is a software developer and supplier for the fresh produce industry. Its software is aimed at different types of businesses including growers, retailers and intermediaries. Prophet employed Mr Huggett as its sales manager. He was responsible for developing new business and managing account relationships with Prophet’s customers. His employment contract contained the following non-compete restriction:
“The Employee shall not during the continuance of this Agreement, or for a period of 12 months from the determination thereof (for whatever reason and in whatsoever manner), without the consent in writing of the Board of Directors of the Company, either solely or jointly with, or as, a Director, Manager, Agent, Consultant or Employee of any other person, firm or company, 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 hereunder (in that they provide computer software systems of whatever kind to any company involved in the fresh produce industry) within the geographical area (namely the United Kingdom), except as a shareholder or debenture holder not having a controlling interest in any Company the shares of which are quoted on a recognised Stock Exchange. 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.”
Mr Huggett resigned after finding new employment with a direct competitor. After initially allowing Mr Huggett to shorten his notice period, Prophet threatened an application for injunctive relief if he did not undertake to delay his new employment until the end of the 12-month non-compete period. It sought an injunction that precluded Mr Huggett from working for any software supplier in the UK fresh produce sector for 12 months.
The High Court upheld the application. It held that the non-compete restriction, read literally, would provide Prophet with no protection. This was because no competitor would ever be selling Prophet products, which were the only products with which Mr Huggett would have been involved while at Prophet. In the court’s view, the clause did not give effect to the parties’ intentions and something had gone wrong in its drafting. For the court to correct the error would require it to understand what a reasonable person would have understood the parties to have meant by their use of the language.
The court found that the probable true intention of the parties could be reached by adding the words “or similar thereto” to the end of the clause. This would be the minimum change necessary to produce a commercially sensible result. The court went on to hold that the covenant was enforceable and that an injunction was appropriate. The injunction restrained Mr Huggett from being directly involved in competitive activities until the 12-month period expired. Mr Huggett appealed.
The Court of Appeal unanimously allowed the appeal.
The court believed that the natural meaning of the words “any products” in the second sentence of the covenant could only mean the particular Prophet products with which Mr Huggett had been involved while employed by Prophet. The meaning of the clause was clear and there was no basis for a different interpretation. It followed that Mr Huggett’s proposed future activities, which would not involve being involved with Prophet’s products, would involve no breach of the clause.
The Court of Appeal acknowledged that a court should generally interpret an ambiguous clause in such a way as to provide a commercially sensible solution, rather than an absurd one. However, the court rejected the submission that this was an ambiguous clause that led to an absurdity, even though the clause had little commercial effect and the covenant was rendered toothless. Nothing had “gone wrong” with the drafting. The court regarded the clause as reflecting exactly what its draftsman intended.
What went wrong was that the covenant’s draftsman did not think through the concept underlying the words used in the second sentence. Prophet had not thought about the extent to which the restriction would be likely to achieve any practical effect. But there was no basis on which the High Court judge was entitled to re-cast the parties’ bargain as he did. In the court’s words, “Prophet made its … bed and it must now lie upon it”.
Restrictive covenants must be carefully thought through and worded, with rigorous consideration given to the underlying intention and drafting of the clause. An employer cannot rely on a court to rewrite a poorly drafted covenant and remedy its bad bargain.
Employers should therefore seek specialist help with the drafting of their restrictions.
For more information on any of the above, please contact Tom Evans on 01244 354 800 or 0151 321 0000 or firstname.lastname@example.org.