Prophet plc -v- Huggett: The Importance Of Well Drafted Restrictive Covenants

In Prophet plc -v- Huggett the Court of Appeal overturned a High Court judge’s decision to add words to a restrictive covenant which, on a literal interpretation, had originally offered no protection to the employer. Although the clause had been professionally drafted, the writer had not thought through the concept underlying his chosen words. In such circumstances, the Court was not entitled to recast the parties’ bargain.

Prophet plc (the "Company") develops computer software which it supplies to the fresh produce industry, and one of its products is called "Pr3" (an update of an earlier version called "Pr2"). Mr Huggett was employed as the Company’s UK sales manager. In addition to a three month notice period, his contract of employment contained a number of post-termination restrictive covenants. One was a non-competition covenant which purported to prevent Mr Huggett from working for any business which provided computer software to the fresh produce industry for a period of 12 months. However, the wording of the clause was such that the restriction would only operate to prevent Mr Huggett from working "in any area and in connection with any products in which he was involved whilst employed" by the Company. Those products were specifically Pr2 and Pr3. In 2013, Mr Huggett was headhunted for a rival firm and the Company brought injunction proceedings against him to prevent him from working for the competitor until the expiry of 12 months.

The High Court noted that, on a literal interpretation, the clause was "pointless" and provided the Company with no protection, since no competitor would ever be selling Pr2 and Pr3, the only products with which Mr Huggett was involved while employed at the Company. In the Court’s view, "something had gone wrong" in the drafting of the clause that did not give effect to what the parties had intended to achieve. Therefore, the exercise was to identify what a reasonable person would have understood the parties to have meant by their chosen language. Although neither side had suggested it, the Court held that what was required was the addition of the words "or similar thereto" to the end of the clause to identify the essential characteristics of the products that the employer was seeking to protect. The Court regarded this as the minimum change necessary to produce a commercially sensible result. The Court went on to hold that this interpretation of the clause meant that the covenant was enforceable and that it was appropriate to grant an injunction to the Company.

On appeal, the Court of Appeal overturned this decision. It agreed with the High Court that the literal interpretation of the clause resulted in it having no teeth and imposing no material restraint upon Mr Huggett. Furthermore, where there was a clear choice between an interpretation of a clause that gave rise to an apparent absurdity and one that would achieve a commercially common sense approach, the court would ordinarily favour the latter interpretation. However, this was not such a case. The words of the clause reflected exactly what the writer of the clause had intended. What did go wrong was that the writer did not think through to what extent the restriction on competition would be likely to achieve any practical benefit for the Company upon Mr Huggett’s departure to a rival company. In these circumstances, there was no basis upon which the Court was entitled to recast the parties’ bargain in the way that it had.

This case illustrates the importance of having carefully drafted restrictive covenants which are specific to the circumstances of particular employees.  Restrictive covenants which do not make sense in their practical application will not be upheld by the courts: in this case it would have been impossible for Mr Huggett to be involved in products which he was involved with whilst working for a competitor given that he was only involved in products the Company sold.  It is therefore important that employers carefully consider what they are seeking to protect and the risk that particular employees pose to their business. They should then ensure that restrictive covenants are properly drafted to address the business’ particular concerns.

If you would like to discuss this or any other employment issue, please do not hesitate to contact any member of the Employment team.