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28 August 2014

Restrictive covenant could not be redrafted

In a recent decision, the Court of Appeal has held that a non-competition clause could not be redrafted by the High Court in order to make it effective.

The employee in this case, Mr H, worked as a sales manager for a software development company in the fresh produce sector (P plc).  His contract of employment included various restrictive covenants, including a 12 month non-competition clause.

The clause was drafted so that it only prevented Mr H from working for another business if it was in connection with any products with which he was involved during his employment with P plc.  When he went to work for a direct competitor of his employer, P plc sought an injunction to prevent him from working either for the competitor, or any other software supplier in the fresh produce sector, for a period of 12 months.

A literal interpretation of the non-compete clause meant that P plc could not rely on it, since no competitor of the business would ever be selling the products developed by P plc.  However, the High Court upheld P plc’s application for an injunction on the basis that it was satisfied the clause as drafted did not give effect to the parties’ true intentions.  The Court was therefore prepared to interpret the clause as if it was drafted to include products “similar” to those sold by P plc, which would therefore include software developed by its competitors.

Decision

Mr H’s appeal to the Court of Appeal succeeded.  The Court did not agree that the relevant provision should be redrafted, just because it was otherwise meaningless and offered P plc no protection.  The clause had deliberately been limited to certain products only, as otherwise it would have been unenforceable for being unreasonably broad and therefore an unreasonable restraint of trade.  The problem was simply that insufficient thought had been given to the practical effect of the words chosen.

Comment

This case provides an excellent example of why the careful drafting of restrictive covenants is so important, to ensure that they are tailored appropriately to the business they are designed to protect.

The Court of Appeal acknowledged here that a court should generally interpret an ambiguous clause in such a way as to provide a commercially sensible solution.  As a general rule, however, in the context of an employment relationship courts will only redraft contractual provisions in exceptional circumstances.  Previous case law has established that courts should not re-write a restrictive covenant to make it enforceable if it is too broad and, as this case demonstrates, courts will likewise not generally be prepared to correct drafting mistakes in this context.

A copy of the Court’s judgment is available here.