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SELWYN BLOCH QC & CHARLENE HAWKINS COMMENT ON COURT OF APPEAL DECISION IN PROPHET PLC V HUGGETT

The Empire Strikes Back? Triumph of the Literal Interpretation of Restrictive Covenant Prophet Plc V Christopher Huggett [2014] Ewca Civ 1013 (22 July 2014)

Selwyn Bloch QC and Charlene Hawkins
 
Cases such as Arbuthnot Fund Managers Ltd. v Rawlings[2003] EWCA Civ 518 (13 March 2003),TFS Derivatives Ltd v Morgan[2005] IRLR 246,Beckett Investment Management Group Limited v Hall[2007] IRLR 793,East England Schools CIC (trading as 4MySchools) v Palmer[2013] EWHC 4138 andUK Power Reserve Ltd v Read and others[2014] EWHC 66 provide strong support for a "benign” or purposive approach to the interpretation of restrictive covenants in order to uphold them rather than to render them unenforceable by a literal, less "commercial” construction. This has been thought to be consistent with the modern approach to interpretation of contracts generally as exemplified by the Supreme Court decision inRainy Sky SA v Kookmin Bank[2011] 1 WLR 2900. That said, there has always been a residual doubt as the extent to which the approach in the employment cases referred to above is one which applies only in the case of ambiguity of the restrictive covenants or even where there is no ambiguity, some of the authorities appearing to extend the benign or commercial approach beyond cases of ambiguity. 

The Court of Appeal, in a decision handed down yesterday, appears to buck the trend (although surprisingly none of the above cases are referred to in the judgment). 

Mr Huggett resigned from Prophet Plc (a supplier of computer software to the fresh produce sector) to go and work for K3 Business Solutions Ltd (‘K3'), which also targeted the fresh produce sector. His contract of employment with Prophet Plc included a 12 month post termination restriction as follows: 

"The Employee shall not…directly or indirectly, carry on or be engaged, concerned or interested in any business which is similar to, or competes with, any business of the Company in which the Employee shall have worked whilst employed hereunder (in that they provide computer software systems of whatever kind to any company involved in the fresh produce industry within the geographical area (namely the United Kingdom)… Provided that this restriction shall only operate to prevent the Employee from being so engaged, employed, concerned or interested in any area and in connection with any products in, or on, which he/she was involved whilst employed hereunder.” 

It was common ground that the first sentence of the restrictive covenant, if it stood alone, would be unenforceable as an unreasonable restraint of trade. Accordingly, the issue was as to the construction of the second part of the sentence (the proviso), which was an attempt to narrow down the scope of the restriction. 

The problem, however, was that Mr Huggett, during his employment with Prophet Plc had only ever been "involved” with two products, namely Pr2 and Pr3, which neither K3 nor any company other than Prophet Plc provided. Accordingly, a literal interpretation of the restrictive covenant rendered the protection meaningless. 

Prophet Plc offered no less than five possible interpretations of the covenant to afford it the protection it desired. Whilst the High Court did not accept these interpretations, it sought to render the covenant enforceable and meaningful by adding the words "or similar thereto” to the end of the clause in order to cure what was considered to be a drafting mistake and give effect to what it was thought the parties had intended to achieve by the clause. 

The Court of Appeal reversed this decision. Whilst it was accepted that a literal reading of the proviso resulted in the clause having"no relevant teeth and as imposing no material restraint upon Mr Huggett”, the Court of Appeal found that the clause had been specifically and carefully worded, that the meaning of the clause was "unambiguously clear” in that it only caught those products that Mr Huggett had in fact been involved with (namely Pr2 and Pr3) and, as a result, Prophet Plc was stuck with a toothless restriction. 

At paragraph 33 of the judgment, Lord Justice Rimer said: 

"If faced with a contractual provision that can be seen to be ambiguous in meaning, with one interpretation leading to an apparent absurdity and the other to a commercially sensible solution, the court is likely to favour of the latter. Such an approach can, however, only be adopted in a case in which the language of the provision is truly ambiguous and admits of clear alternatives as to the sense the parties intended to achieve.” 

This result may seem surprising – by "products” the draughtsman plainly intended to refer to products of a particular kind - not the products themselves. The proviso was plainly seeking to narrow down the non-competition wording of the first sentence, by referring to competing products - not to render it meaningless by referring to the products themselves (which only Prophet Plc manufactured). 

The difficulty is a familiar one in covenants of this type. The question is one of the degree of abstraction - what is the scope or genus of the prohibited products? Here it could mean products made by Prophet Plc (which rendered the covenant meaningless) or business process software designed for the fresh produce industry or business software for businesses (generally) or simply software. Prophet Plc's preferred interpretation was "business process software designed for the fresh produce industry” but there was a further difficulty as to whether the "fresh produce industry” included dairy products, fish or meat (for which Prophet Plc did not provide its products). One can have some sympathy with the Judge's preferred approach of instead simply adding the words "or similar thereto” at the end of the clause as representing the parties' probable intention. However, it is not without its difficulties; similar products might not necessarily be competing products. 

As submitted by Prophet plc there was a good argument that the problem was indeed one of ambiguity as to which of the meanings the parties intended and the preferred version of Prophet Plc best encapsulated the intended competing products. However, the Court of Appeal would not go that far, regarding it as re-writing the bargain, even though the parties plainly did not intend to enter into a meaningless bargain represented by the literal meaning of the chosen words. The fact that the proviso was "a carefully drafted piece of legal prose in which the draftsman chose his words with deliberate and specific care” inhibited the court from recasting the covenant. The real problem identified by the Court of Appeal was that the draftsman did not think through the concept underlying his chosen words and the language as a whole did not indicate clearly which different result was really intended. 

The decision in this case does not appear to mark a turning away from the benign or purposive approach to the interpretation of restrictive covenants exemplified by the cases referred to at the beginning of this article, given the particular wording of the restrictive covenant. That said, there are limits to the extent to which the court will help to uphold a badly worded covenant – and there are bound to be many other contracts of employments in which the concept of the goods or services (the subject of the covenant) has not been sufficiently considered by the draftsman. 

This case provides a cautionary tale: there is no substitute for taking careful instructions, thinking through the underlying concepts and drafting accordingly. While the court may extend a generous hand where the drafting goes wrong, it will only do so if the covenant is ambiguous in the sense of there being clear rival meanings and one that makes clear commercial sense. If there is no true ambiguity the employer may be stuck with a useless covenant.

Posted: 23.07.2014 at 17:26
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