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Asia Pacific – Prophetable Construction: English High Court Upholds Enforceability Of A Restrictive Covenant Despite Obvious Deficiencies In Drafting.

11 April, 2014

 

Legal News & Analysis – Asia Pacific

 

In Prophet plc v Huggett [2014] EWHC 615 (Ch) the Court took a highly flexible approach  to the construction of a non-compete clause which, when read literally in its original form, gave the employer no protection at all.  The decision is representative of a growing number of cases in this area where English courts have stressed the importance of business common sense over literal interpretation.

 

Facts

 

Prophet plc (“Prophet”) specialises in the development of computer software for the fresh produce industry.  In 2012, Mr Huggett was recruited as its UK sales manager and was tasked with developing new business for Prophet throughout the fresh produce industry, as well as within its existing portfolio of customers.  Mr Huggett’s contract of employment contained a clause which prevented him from competing with or working for any competitor of Prophet in the United Kingdom for a period of 12 months after termination.  The contract also contained non-solicitation and non-dealing covenants in respect of customers with whom he had dealt within the last year of his employment (again, for a period of 12 months).

 

In December 2013, Mr Huggett resigned from Prophet and asked to be released early from his 12 week notice period.  After learning that he had in fact been offered a position with a major competitor in the fresh produce software sector, K3 Business Solutions Limited (“K3”), Prophet agreed to release him early, but also sought undertakings that he would not start his employment with K3 until January 2015.  Having failed to do so initially, Prophet issued proceedings for injunctive relief on 16 January 2014.  Mr Huggett then gave a revised undertaking that allowed him to remain on K3’s payroll pending an expedited trial. 

 

Issues And Decision 

 

In deciding whether to grant relief, David Donaldson QC (sitting as a Deputy High Court Judge) applied the well-tested common law principles that apply to the enforcement of restrictive covenants (perhaps best summarised in TFS Derivatives v Morgan [2005] IRLR 256).  In particular, he asked the following questions: 

 

  1. What does the covenant mean when properly construed?
  2. Does the employer have a legitimate business interest that requires protection?
  3. If so, is the covenant no wider than is reasonably necessary for the protection of those interests?
  4. Should the injunction be granted in all the circumstances as a matter of discretion?

 

It was the first of these questions that posed the greatest difficulty for Prophet.  Strangely, the covenant was qualified by an additional sentence at the end of the clause which read:  “Provided that this restriction shall only operate…in any area and in connection with any products in, or on, which [Mr Huggett] was employed hereunder” (emphasis added).  It was accepted by Prophet that no competitor would ever be selling Prophet products.  Thus, read literally, the clause was pointless and gave no protection to Prophet. 

 

Having established that something “had gone wrong in the drafting”, the Judge asked counsel for both parties to put forward their respective interpretations of what had been the intention of the parties at the time of entering the contract .  He rejected the suggestion put forward by counsel for Mr Huggett that the clause was intended to protect Prophet from a handful of third parties providing ongoing assistance to some existing customers or, alternatively, the establishment of a business to advise Prophet’s existing customers; in both cases the new business would not be “providing” computer software systems in competition with Prophet.  Equally, however, he did not endorse the “wholesale reformulation” of the covenant that had been offered by counsel for Prophet. 

 

Instead, the Judge was prepared to add the words “or similar thereto” at the end of the clause to give effect to it.  He regarded it as the minimum change necessary to produce a commercially sensible result and the probable formula which the parties would have employed for that purpose if their attention had been drawn to the drafting glitch.  The Judge also referred to the use of the word “similar” in the non-solicitation and non-dealing covenants, which he felt supported this construction. Having adopted this revised formulation, he went on to find that all of the other elements rested in favour of the employer and proceeded to grant the injunction. 

 

Comment 

 

The decision in Prophet serves as a reminder of the Court’s ability to take a flexible approach towards the construction of restrictive covenant terms which are unclear and/or might otherwise prove unenforceable.  It also features as part of a recent trend of ordinary contract cases that have stressed the importance of giving yield to “business common sense” and a move away from more literal constructions (e.g. Rainy Sky SA and others v Kookmin Bank [2011] UKSC 50). 

 

Nevertheless, it is still relatively surprising for a Court to take such a proactive attitude towards what it perceives to be a drafting error in the employment context.  At least part of the Court’s decision was undoubtedly influenced by the credibility of Mr Huggett, whom it found to be a “thoroughly unreliable witness” and whose evidence would “at the lowest have to be treated most sceptically”.  A Court may take a different approach where the perceived error is less clear-cut and where there may be room for more plausible, competing interpretations. 

 

In order to avoid any inadvertent loss of protection due to careless drafting, employers should ensure that the terms of their restrictive covenants accurately reflect the intentions of the parties at the time of entering the employment contract and are tailored to the particular employee’s circumstances.   In addition, the duration, geographical area and scope must be directly relevant to the employee in question and no more than is reasonably necessary to protect the legitimate interests of the employer. 

 

Prophet remains a first instance decision and we wait to hear any news of an appeal to the Court of Appeal.

 

herbert smith Freehills

 

For further information, please contact:

 

Peter Godwin, Partner, Herbert Smith Freehills

peter.godwin@hsf.com

 

Mark Johnson, Partner, Herbert Smith Freehills

mark.johnson@hsf.com

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