This is an important update to a warning we gave on restrictive covenants in our blog of 22 April 2014 “Can a court rewrite a non-compete restriction in favour of an employer?“, when my colleague Jonathan Golden wrote about the unusual case of Prophet v. Huggett, in which the High Court re-wrote a badly written restrictive covenant, in order to make it “work” in a business context.
The case was surprising, because the High Court didn’t follow the usual principles that (1) a court can’t rewrite a covenant to make it enforceable because it’s too broad, and (2) if there are alternative readings of a clause, the court should use the reading of the clause that would be more enforceable.
The facts: were that Prophet was a software company; a restrictive covenant prevented Mr Huggett from selling Prophet’s software after he left; he joined a competitor that sold competing software, but which wasn’t actually Prophet software (only Prophet sold Prophet software); as a result of which the restrictive covenant provided no protection to Prophet. However the High Court took it upon itself to extend the restriction to “similar” software and, as a result, gave Prophet the protection it wanted.
That judgment has proved to be less than prophetic. It seems that the Court of Appeal has now agreed with the rest of us that the High Court was wrong and has confirmed that if a covenant is badly drafted, then the parties are stuck with it (and with its consequences). The Judge couldn’t have been clearer when he said about the previous decision: “It was not for the judge nor is it for this court to re-make the parties’ … bargain”.
The lesson: make sure your covenants are up to date, accurate and fit for purpose, because you’re going to have to rely on what they say, rather than on what you would have liked them to say.