Poor drafting of restrictive covenants is a prophet of doom for employers

19th March 2015

The recent Court of Appeal case of Prophet plc v Huggett reminds employers of the importance of careful drafting of the restrictive covenants in their employees’ employment contracts.

Mr Prophet, sales manager for the software development firm Prophet plc, had a contract that contained various restrictions on him following the termination of his employment – commonly known as restrictive covenants or non-compete clauses.

It has long been established that a post-employment restriction that goes further than necessary will not be enforced by court. Mr Hugget’s contract contained a clause that prevented him from being engaged in a competitive business for 12 months anywhere in the UK.

This quite harsh provision would be vulnerable to challenge, so the draftsman had inserted a sentence to increase the chances of it being enforceable: the non-compete restriction would only apply “in any area and in connection with any products in, or on which her/she was involved whilst employed hereunder”.

Mr Hugget argued that this only applied to products which he was selling, for example Prophet’s own products. As he was working for a competitive developer who sold its own products he fell outside of the restriction. The employer disputed this, citing a drafting error and that the intention of the clause was to apply to products sold by the employer or products “similar thereto”.

The High Court agreed with the employer and upheld the restriction. The Court of Appeal disagreed, refusing to read any words in to the clause as it held the provision was clear.

This acts as a reminder to employers that any restrictive covenants in their contracts of employment need to be clear, unambiguous and go no further than as reasonably necessary. Martin de Ridder, solicitor in the dispute resolution and employment teams at Ansons Solicitors in Cannock, explains how this can be achieved most effectively.

What is a restrictive covenant and when will it be enforceable?

A business can use restrictive covenants to protect its interests by restricting an employee’s activities for a period of time after their employment has ended.

It will only be enforceable if it protects a legitimate business interest, otherwise it will be regarded as an unlawful restraint of trade. The only recognised business interests are:

  • trade connections, including the relationship between the business’s customers and its workforce; and
  • trade secrets and confidential information.

If the business has a legitimate business interest to protect, the restriction will be enforceable provided it is no wider than is necessary to protect that interest. The covenant must be limited in terms of the restrictive activities themselves and also apply:

  • for a limited time; and
  • within a limited geographical area, if appropriate.

Ensure restrictive covenants are drafted carefully

Restrictive covenants must be drafted carefully so that they:

  • accurately reflect each employee’s role;
  • reflect the circumstances of the business; and
  • go no further than is necessary.

The business should regularly review contracts that include restrictive covenants and check whether they need to be updated. For example, if the employee’s role has changed.

Non-solicitation restrictive covenants

A business can include a covenant in an employee’s contract preventing them from soliciting customers after they have left the business. This type of covenant will be particularly useful if the employee has a strong relationship with certain customers.

Generally, it should be restricted to customers that the employee had contact with during a specified period before they left. When trying to establish the length of this period, a business should consider:

  • the amount of time it would take for the employee’s successor to gain influence over the business contacts;
  • the employee’s seniority within the business;
  • the extent of the employee’s role in securing new business;
  • the loyalty (or otherwise) of customers in the particular market; and
  • the length of similar restrictions in the employment contracts of competitors.

A restrictive covenant that attempts to extend the restriction to potential customers will be harder to enforce. However, it may be possible to protect an interest in genuine prospective customers if they are accurately defined.

A restrictive covenant preventing a former employee from poaching your existing employees is likely to be enforceable, as the stability of the business’s workforce is a legitimate business interest. However, the covenant should usually be limited to those employees at the same level as the former employee and those more senior to them. Any clause that attempts to prohibit the poaching of employees will need to consider:

  • how long the former employee’s influence over the other employees will last; and
  • the roles of the employees over whom the influence exists.

Non-dealing restrictive covenants

A restriction on the solicitation of customers can be extended to cover not only enticement or interference, where active steps are taken by the former employee, but also the provision of services where no active steps are required. For example, where the customer approaches the former employee. This is known as a non-dealing covenant.

This avoids the need to prove that the former employee made an approach, which is usually difficult to show. However, it does broaden the prohibition and may make it more difficult to enforce.

Enforceability will depend on the interest the business is trying to protect. For example, enforcement may be more likely if the business can establish a substantial personal connection between the former employee and the business’s customers.

Non-competition restrictive covenants

Employees are prohibited from disclosing confidential information amounting to a trade secret, such as a manufacturing process, after they leave your business. A business can also include confidentiality provisions in employment contracts to protect the information. Additional restrictive covenants may then be regarded as unnecessary and non-competition restrictions in particular may be hard to enforce.

However, there are circumstances in which a non-competition restriction is likely to be enforced. Such as where the former employee’s influence over customers or suppliers is so great that the only effective protection is to ensure they are not engaged in a competing business in any way.

For further information and advice about drafting your restrictive covenants, contact Martin de Ridder in the dispute resolution and employment teams on 01543 431 186 or email Ansons Solicitors has offices in Cannock and Lichfield, Staffordshire.