Restrictive covenants, no change after all… “plus ça change, plus c’est la même chose”

Over the last year, certain High Court decisions seemed to suggest that the courts were applying a more liberal, pro business approach to the interpretation and enforceability of restrictive covenants – interpolating or removing words to give commercial effect to the bargain. However, the Court of Appeal in Prophet v Huggett [2014] EWCA Civ 1013last week allowed an appeal which some believe indicates a return to the traditional, stricter approach..

Facts: Prophet, the employer (a business dealing with software for the fresh produce sector) successfully obtained an injunction in the High Court to prevent a former employee, Mr Huggett, from working for a new employer (K3). K3 targeted Mr Huggett as it hoped to make inroads into the ‘fresh produce’ sector which was precisely why Prophet was seeking to enforce its 12-month restrictive covenant.

The High Court decision and the Court of Appeal’s approach: In the High Court, it was held that despite there being serious drafting errors in the clauses relied on, the restrictive covenant could be interpreted so as to preclude Mr Huggett taking up his new employment and that once interpreted in that way, the covenant was reasonably necessary to protect Prophet’s commercial interests, and an injunction was appropriate.

The decision of the High Court surprised many as demonstrating a departure from the courts’ historical disinclination to “correct” clauses of this nature in any thing other than the most obvious cases – it was a bold move by the High Court on the facts of the case.

On a literal reading, the covenant only restricted Mr Huggett from selling the specific software packages produced and marketed exclusively by Prophet. Of course, if he were to work for a competitor, he would be selling their comparable software packages, but not the actual packages produced by Prophet – because such packages were exclusive to Prophet.

Lord Justice Rimer in the Court of Appeal accepted that the “‘literal’ interpretation of the proviso results in it having no relevant teeth and imposing no material restraint upon Mr Huggett” (judgment at [32]). However, this did not lead the Court to adopt the rewriting approach because “It was not for the judge nor is it for this court to re-make the parties’ clause 19 bargain. Prophet made its clause 19 bed and it must now lie upon it. The meaning of the proviso is clear, there is no basis for interpreting it differently” (judgment at [38]).

Lord Justice Rimer emphasised that creative interpretation of an ambiguous clause which, on one interpretation would be absurd and in another make commercial reality, is only open “where the language of the provision is truly ambiguous and admits clear alternatives as to the sense the parties intended to achieve” (judgment at [33]). This however did not apply in the present case because the provision was not ambiguous– it was merely a “toothless” provision once properly interpreted. Thus, there is a difference between clauses which are clearly defective because they offer no protection at all (clearly indicating that something must have “gone wrong” with the drafting) and ones which are truly ambiguous.

So what should we now be advising in restrictive covenant cases?

In my opinion, Prophet v Huggett [2014] EWCA Civ 1013does notreally advance things in a new direction, nor is it truly a retreat from some of the more liberal interpretation cases – it is more an anomaly. The fact is that with the legal tests that applied, the Court could not take the approach that Prophet wanted – they had drafted a clear clause and that was the end of the matter. So, the High Court’s decision in Croesus Financial Services Ltd v Bradshaw [2013] EWHC 3685 (QB), should be completely unaffected. Likewise, the failure to limit a clause to those customers who the employee had done business was still upheld as enforceable (given that its duration was short – 6 months) in Coppage v Safetynet Security Ltd [2013] EWCA Civ 1176, whichis also unaffected in my view

So, the practical advice to be given appears to be as follows:

  1. Even though there appears to have been some more liberal interpretation of restrictive covenants over the course of the past year this is – as ever – a high litigation risk area, so it is better to have narrowly-confined and well-drafted covenants.
  2. In general, the shorter the covenant duration the more likely it seems that Courts will excuse failure to correctly narrow its other aspects (such as geographical scope or the category of customers etc.).
  3. The best approach is to start with what the business really wants to prevent and draw a specific and clear clause around that interest.
  4. Clauses should be checked by lawyers at the time of contract and these should be rechecked at certain intervals. Each time a new contract is offered to an employee, employers are advised to ensure that the wording used in previous contracts is “fit for purpose” with respect to the new employee (and the specific risks they might pose to the business if and when they leave). Too often I see clients recycling the same wording of covenants from one employee’s contract to the next – totally overlooking the fact that different considerations apply to each employee and what may be reasonable and enforceable against one – might be wholly unreasonable and unenforceable as against another. Similarly, employees’ roles often change, as do circumstances. Long-serving employees’ ‘old’ restrictive covenants may not be appropriate for present circumstances. A good time to check these – and if need be introduce new clauses – is when there are change in roles and new contracts are being handed out. During these times, there are often changes (usually increases) in remuneration which can be partly pegged as the contractual consideration for accepting the new restrictions. In absence of a pay rise, a small increment for such consideration should suffice.

I have also canvassed the opinion of some of my colleagues in the Commercial Group at Cloisters and these are some of the interesting points that they raised:

Jason Galbraith-Marten QC said “Don’t forget that the choice of Division (Chancery or Queen’s Bench) in which proceedings are commenced can often have a bearing on the court’s willingness, or otherwise, to adopt a ‘commercial approach’ i.e. whether it categorises the exercise as one of re-writing or construing”.

Caspar Glyn QC stated “Winning covenant cases is not all about the drafting. It’s about compelling evidence that the other side is in the wrong, not being greedy and trying to enforce more than was agreed and then patiently giving the right notice. Once you’ve done that then you can aggressively enforce”.

Paul Michell made the following point “Don’t forget the assistance the Database Regulations provide in circumstances where issues arise as to whether material is truly confidential”.

By Nathaniel Caiden