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Restrictive covenants – latest case emphasises the importance of careful drafting

Often employers will hope to force the courts to give effect to restrictive covenants which would otherwise be unenforceable due to some minor error in drafting. The courts can amend the wording under what is known as the ‘blue pencil’ test in order to render enforceable a covenant which would otherwise have been unenforceable.

Generic contract

 

The Court of Appeal in the case of Prophet v Huggett has highlighted the limitations on the court in interfering with the drafting of such clauses and the impact of that if the parties do not get it right. Here the court refused to amend a commercially meaningless restrictive covenant to make it effective because the wording in the covenant was unambiguous (although worthless). It may not have said what the employer meant but that was the employer’s fault and did not mean that the clause was wrong.

 

 

Background Facts

P is a software development company. H was employed as P’s UK sales manager. H’s employment contract contained a non-compete clause. That non-compete clause provided that H could not be “…engaged, employed, concerned or interested in any areas and in connection with any products in, or on, which he/she was involved whilst employed hereunder”.

P worked with specific software products called Pr2 and Pr3. When H went to work for a competitor who also worked with software products P considered this to a breach of the covenants. P sought an injunction to prevent H working for the competitor. Although H was working with a direct competitor and working with very similar software products, those products were not exactly the same as the ones which P used (ie Pr2 and Pr3).

Initially, the High Court had decided to add in the wording ‘or similar thereto’ so that the restriction prevented working with the Pr2/Pr3 products and any products similar to that. The High Court considered that the limitation in this drafting could not have been the intention of the parties and that this must have been a drafting mistake. An injunction was granted preventing H from working with the competitor for a 12 month period.

Decision

The Court of Appeal disagreed. They considered that the covenant was more than clear in its wording and meaning and there was no basis for a different meaning. Unfortunately the drafter had not properly considered the potential impact of the wording used. Whilst it may not have been what the employer intended and even though that meant that this clause was effectively useless, the court considered that there was nothing wrong with the drafting and therefore the court could not interfere in order to amend the clause to give it further effect. The draftsman had made the error and must now suffer the consequences.

Practical Impact

This is an important reminder to employers to carefully consider the drafting of any restrictive covenants. The basic principle is that restrictive covenants are generally unenforceable as they are in restraint of trade. It is therefore important to carefully consider the particular covenants in relation to the individual they affect and his/her role. If the drafting is wrong then the courts will go no further than the blue pencil test which will only remove or alter words which would render an otherwise enforceable covenant unenforceable. The courts will not interfere to vary an ill thought out, but unambiguous, provision.

Additional blogs on restrictive covenants include Is everything in the garden rosy? and How can employers protect themselves in the digital age?

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Legal news, views, trends and tools for HR Professionals. Stay ahead. Go further