Wednesday, 23 July 2014

Traditional Approach to Restrictive Covenants Reaffirmed

Can a court re-write restrictive covenants to bring them in line with common sense?

No, the Court of Appeal holds, in Prophet plc v Huggett. Prophet was a software company, selling software to the fresh produce industry. A restrictive covenant prevented Mr Hugget from selling Prophet's software after he left. He joined a competitor, which sold competing software but which was not, technically, Prophet software (as only Prophet sold Prophet software). Read literally, the restrictive covenant provided no protection to Prophet as nobody else sold their software.

The High Court held that the clause should be rewritten to give effect to the intention of the parties, to prevent Mr Huggett selling software which was similar to Prophet software (see summary).

The Court of Appeal disagreed. Rimer LJ pointed out that a purposive approach could legitimately be taken where a restrictive covenants was ambiguous. But this one was not ambiguous - it was just badly drafted. Prophet had drafted the covenant, and was stuck with it.

If you want to learn more about restrictive covenant litigation, look at session 3 of the Employment Law MasterClass (only London, Manchester and Edinburgh, in October 2014, still available for booking).

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