Restrictive Covenant Clause Enforced Despite it Containing a Drafting Error
The High Court has just handed down its judgment in the case of Prophet Plc v Huggett.
The Court held that a restrictive covenant which contained an error which if adopted would make it meaningless and, therefore, not afford the protection intended could, nonetheless, be enforced by the Court making some changes to it. The case is unusual. It is, also, a first instance decision. It should, therefore, be treated with caution.
Prophet Plc is in the business of developing, selling and updating computer software for use in the fresh produce industry.
Mr Huggett was employed by Prophet Plc as a Sales Manager. His employment contract contained a post termination restriction as follows:
"The Employee shall not during the continuance of this Agreement, or for a period of 12 months from the determination thereof (for whatever reason and in whatsoever manner), without the consent in writing of the Board of Directors of the Company, either solely or jointly with, or as, a Director, Manager, Agent, Consultant or Employee of any other person, firm or company, 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), except as a shareholder or debenture holder not having a controlling interest in any Company the shares of which are quoted on a recognised Stock Exchange. 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. [emphasis added]"
Mr Huggett subsequently left the employment of Prophet Plc and went to work for a competitor.
Prophet Plc then brought a claim against Mr Huggett seeking to enforce the terms of the restrictive covenant.
Construction of the clause
The Judge accepted that on a literal reading of the covenant the competitor would never provide the software systems produced by Prophet Plc and therefore the covenant would not give it the protection sought. The defect in the clause appears as highlighted above – the effect of this sentence qualified the restriction by defining what competition would mean in that it related to the provision of computer software systems for the fresh produce industry, produced by Prophet.
Ultimately the Judge decided that Mr Huggett's assertion that the covenant meant to say what it did was not correct. Instead, the Judge concluded that the addition of the words "or similar thereto" to the covenant reflected its true meaning.
Significance of the decision
It is well established that in certain circumstances judges may to remove words from a clause to give effect to its meaning – this is known as the blue pencil principle. What this case demonstrates is the flexibility the courts may have in the opposite situation where words need to be added to give effect to what the parties intended and agreed at the time. However, the decision does come with a word of caution. The case is a first instance decision and may well be appealed to a higher court. Only time will tell how important the decision will be.