Restrictive covenants – beware of bad drafting
Why do you need restrictive covenants?
Restrictions on key employees going to work for a competitor, competing with the business, or poaching employees are increasingly common in employment contracts. However, restrictions are regarded as a breach of the fundamental right of free movement of labour. Courts will only enforce them in favour of the company if they are reasonable and necessary to protect the company’s legitimate commercial interests.
For example, the employer will need to prove that the employee is dealing with sensitive and valuable information and the restriction is necessary to protect this information, preserve its trade secrets or retain its client base.
Courts have traditionally been harsh on restrictions: if they are too wide, or restrict ex-employees for too long a period, the courts will strike them out. Recently however, there has been a trend for the court to re-write restrictions and then enforce the re-written restriction, which has worked in favour of employers. But all that has just changed.
A recent decision
The case of Prophet PLC v Huggett earlier this year concerned a software developer (Prophet) who provided specialist software to the fresh produce industry, and its employee (Mr Huggett), a sales manager. Prophet sought to prevent Mr Huggett from working for any business which provided computer software to the fresh produce industry for 12 months. The non-compete clause in his contract which the dispute centred around, said “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.”
The effect of this wording meant that the clause, when read literally, did not provide any protection to Prophet. This is because the only products which Mr Huggett was involved with were not products that competitors would ever be selling because they were unique to Prophet.
The High Court found that the clause did not give effect to what the parties had intended to achieve by it and as a result inserted the words ‘or similar thereto.’ They granted an injunction to Prophet.
On appeal by Prophet to the Court of the Appeal, the judges took a complete U-turn and found that the words were what the draftsman intended and the judge was not entitled to re-write the restriction. This meant that Prophet could not enforce the covenant and were stuck with its original wording which was meaningless.
This sharp turn marks a change in the trend we have seen of courts, as the High Court did here, in implying words to the clause to give it enforceability.
What does this mean for employers?
It is vital to consider the restrictions in your employees’ employment contracts regularly and ask the following questions:
- What are you protecting, and why is this restriction needed to gain this protection?
- Does it fit with industry norms?
- Does it fit with the employee’s role?
- Have you updated the restriction on promotion or change of role?
It’s important to draft restrictions carefully and for the role – and if you are at all unsure about whether it is reasonable, seek a second opinion from your employment lawyer.
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