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Restrictive Covenants: enforceability and construction by Daniel Tatton Brown QC

“Is it enforceable?” It is the most common question posed by clients of the non-competition covenant they wish to enforce against a recently departed employee.

The answer, unhelpfully, often requires some fence-sitting on the part of the lawyer. The courts have emphasised that “the application of familiar principles is highly sensitive to the individual facts of each case” (per Sir Bernard Rix, Coppage v Safety Net Security Ltd [2013] IRLR 970 at para. 24), yet those individual facts are rarely all evident from the initial instruction or an analysis of the contract of which the covenant forms a part. Indeed the same judge held (at para. 9) that “On the whole, cases in this area turn so much on their own facts that the citation of precedent is not of assistance” – an approach that lawyers and judges tend roundly to ignore.

But if the issue of enforceability is inescapably fact specific, the first step of the analysis would appear to be relatively straightforward: identifying what the covenant means.

In practice, however, even this can be problematic.

Three relatively recent cases in which the Court of Appeal (“CA”) disagreed with the first instance judge’s interpretation of the covenant do not just provide gratifying evidence of judicial fallibility: they exemplify the difficulties of construction that can arise.

In Beckett Investment Management Group Ltd v Hall [2007] IRLR 793 the judge at first instance held that a non-compete covenant was of no practical utility as on a literal interpretation of the clause the reference to “the company” – which was expressly defined as a particular corporate entity – meant the departing employees would not be in breach of the clause as they did not provide services that competed with those provided by the “company”: the company provided no services. It was a holding company. The CA disagreed. It held that the judge’s approach “ascribed to the parties and to the reasonable man having all the background knowledge which would have been available to the parties in the situation in which they were at the time of the contract an understanding that they were agreeing upon a pointless provision”.

That decision favoured the ex-employer.

In Prophet Plc v Huggett IRLR 797 the relevant non-compete covenant was limited to being employed in connection with “any product in or on which he/she was involved whist employed hereunder”. In fact the former employer was the only supplier of the relevant products, so the clause (if read literally) would not prevent any competitive activity. To avoid that conclusion the judge interpreted the clause as preventing employment in connection with any products “similar to” the products referred to.

The CA disagreed: although any ambiguity in meaning could be resolved to achieve a commercially sensible solution, rather than an absurd one, that principle applied only to genuinely ambiguous provisions. This clause was not ambiguous, so the principle did not apply. The draughtsman no doubt made a mistake in not thinking through the implications of his suggested wording, but it was not the court’s function to recast the parties’ bargain to avoid the consequences of that mistake.

One-all, employer and employee.

In Tillman v Egon Zehnder Ltd [2017] IRLR 906 the judge upheld a 6 months’ post termination covenant that included a prohibition on being “interested” in a competitive business. He rejected the submission that that restriction prohibited a shareholding, however trivial, and was therefore unenforceably wide. He was influenced by the fact that during her employment the employee was expressly permitted to hold shares in a publicly quoted company if that did not exceed 5% of the company’s total equity. The judge held that it would be anomalous to allow such a shareholding during employment, but to attempt to proscribe any shareholding, however minor, post- employment.  He adopted an interpretation that upheld the covenant.

The CA disagreed: the phrase “interested in” had a well-established meaning (both as a matter of language and as a matter of authority) and that meaning included owning a share. There was no ambiguity: the clause was too wide.

In one sense no lessons can be drawn from these cases – after all, the citation of precedent is said to be of little assistance. Nevertheless, it is tempting to do so.

The anomalous decision seems to be Beckett: it might be thought that the paradigm example of non-ambiguous term is a term that is specifically defined in the contract, yet that did not stop the CA departing from that literal meaning in order to confer some commercial sense on the covenant. 

The two more recent cases provide a helpful guidance as to the limits of an often deployed principle of construction relied upon by claimants to save dodgy covenants.

In Turner & Others v Commonwealth & British Minerals Limited [2000] IRLR 114 Waller LJ said this:

“There is in my view some interconnection between the question of construction and the doctrine of restraint of trade. That, as it seems to me, must be so for a least one reason. If a particular construction was to lead to the view that the clause was unenforceable, then an alternative view, which did not lead to the same result if legitimate, ought to be preferred.”

This principle has been used in numerous cases. Thus in the well- known decision of Cox J in TFS Derivatives Ltd v Morgan, the judge, having referred to this passage said this:

“I accept Mr Reade’s submission that if, having examined the restrictive covenant in the context of the relevant factual matrix, the court concludes that there is an element of ambiguity and that there are two possible constructions of the covenant, one of which would lead to a conclusion that it was in unreasonable restraint of trade and unlawful, but the other would lead to the opposite result, then the court should adopt the latter construction on the basis that the parties are to be deemed to have intended their bargain to be lawful and not to offend against the public interest.”

However, the limits of this approach are now clear. Longmore LJ in Tillman, having referred to Waller LJ’s dictum, said (at para. 12) that “the principle can only go so far since one has to start with the language used by the parties; there must, in my view, be a genuine ambiguity before the principle can be invoked.” Thus “an element of ambiguity”, perhaps created by clever lawyers, will not suffice: the ambiguity has to be “genuine”, having regard to the language used in the covenant.

A similar approach was adopted by Rimer LJ in Huggett (at para. 33):

“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.”

The lesson seems clear: spurious ambiguity can no longer be relied upon to shore up or save a covenant that is too wide or of no practical use.

By Daniel Tatton Brown QC

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