UK: Court of Appeal overturns High Court's decision to enforce a restrictive covenant despite obvious deficiencies in drafting

We have previously written about a decision of the English High Court which upheld the terms of a restrictive covenant despite certain deficiencies in its drafting.  That decision has now been overturned on appeal in Prophet plc v Huggett [2014] EWCA Civ 1013.  The Court of Appeal's judgment signals a return to a more traditional approach towards the construction of restrictive covenants and makes it clear that the courts will not re-write employment clauses in order to render them effective.   We would expect that this judgment will find favour in future Hong Kong cases.

Background and High Court

The employer, Prophet, sought to enforce the terms of a restrictive covenant against a former employee, Mr Huggett. The clause restricted Mr Huggett from working for a competitor for 12 months, but was qualified by an additional sentence at the end of the clause which read:  “Provided that this restriction shall only operate…in any area and in connection with any products in, or on, which [Mr Huggett] was employed hereunder”.  It was accepted by Prophet that no competitor would ever be selling Prophet products.  Thus, read literally, the clause did not provide any real protection to Prophet.

In the High Court, David Donaldson QC (sitting as a Deputy High Court Judge) upheld the enforceability of the covenant by adding the words “or similar thereto” at the end of the clause.  He regarded it as the minimum change necessary to produce a commercially sensible result and the probable formula which the parties would have employed for that purpose if their attention had been drawn to the drafting of the clause.

Court of Appeal

The Court of Appeal disagreed with the approach taken in the High Court. Rimer LJ (delivering the judgment) agreed with the general principle that, when faced with a contractual provision that is ambiguous in meaning, but with one interpretation leading to an apparent absurdity and the other to a commercially sensible solution, the court is likely to favour the latter.  However, he said that such an approach can only be adopted in a case where the language of the provision is truly ambiguous; this was "manifestly not such a case".

The literal meaning of the clause, although it produced an absurd result in terms of the protection it conferred on the employer, was perfectly clear.  Rimer LJ therefore rejected the lower court  judge's assertion that something had "gone wrong" with the drafting and concluded that it was not for the judge to re-make the parties' bargain.  Prophet had "made its …  bed and it must now lie upon it".  Accordingly, the injunction previously awarded against Mr Huggett preventing him from working for a competitor was discharged.

Comment

The Court of Appeal's decision has tempered what was an unusually proactive attempt by the High Court to render a restrictive covenant enforceable in the face of obvious deficiencies.  Instead, the Court of Appeal has reverted to a more traditional approach, namely  that the courts will not simply re-write the parties' agreement in order to make it effective. Only in cases where the terms of the agreement are ambiguous and capable of more than one meaning will the court consider adopting a commercially sensible outcome in favour of a commercially unworkable one.

The decision brings to the fore the very real risk of employers losing the protection of post-termination restrictive covenants due to careless drafting.  Employers should ensure that the terms of their restrictive covenants are carefully drafted and accurately reflect both the intentions of the parties at the time of entering into the agreement.   In addition, the duration, geographical area and scope of the restrictions must be directly tailored to the particular employee’s circumstances and do no more than is reasonably necessary to protect the legitimate proprietary interests of the employer.

Please contact Gareth Thomas, Helen Beech or David Smail of the Employment Pensions and Incentives team if you have any questions.