Restrictive Covenants
Restrictive covenants are clauses which seek to protect ex-employers from competition, poaching and leaked secrets by departed employees. As these clauses are a restraint on trade the law regulates how they operate so that they are fair to both parties. Restrictive covenants can go no further than is reasonable and necessary in the circumstances and they must be drafted to protect the legitimate and specific business interests of the employer.
As with all aspects of contract law, the devil is in the detail as Prophet Plc discovered earlier this year in their claim against an ex-employee, Mr Huggett Prophet Plc -v- Christopher Huggett.
Prophet Plc, a company involved in selling software to the fresh produce industry, allowed their employee Mr Huggett, who was head-hunted by a rival company to leave without first having to work his notice period. They then tried to enforce a restrictive covenant in Mr Huggett’s contract to prevent him from selling products he was involved with when working with Prophet Plc for his new employers. However, Prophet Plc only dealt with Prophet products and due to the wording of the non-compete clause, Mr Huggett was free to sell competing products so long as they were not Prophet products.
The judge in the High Court initially allowed words to be read in to the contract to give the restrictive covenant the wide-reaching meaning that Prophet had intended, protecting their business and restricting Mr Huggett’s behaviour.
On appeal however, the Court of Appeal declared that “It was not for the judge nor is it for this court to re-make the parties' clause…. Prophet made its bed and it must now lie upon it.” Prophet Plc was returned to its original position with an ineffective contract and a damagingly competitive ex-employee.
All employers should be aware that the courts will take only the minimum steps required to give effect to a contract and will be reluctant to try and read beyond that. Legal action can result in significant costs in time, money and energy but proper advice, communication with employees, and well drafted contracts can avoid this.
