Restrictive covenants are a valuable tool in an employers’ armoury when defending its business interests. Get the drafting of the restriction right and they will restrain an ex-employee from competing with your business for a reasonable period.
The drafting though is critical because the presumption of the Courts when applying them is they are illegal unless:
- they protect a legitimate interest of the employer
- extend no further than reasonably necessary
A legitimate interest is an interest of a proprietary nature and includes:
- client and prospective client connections
- supplier connections
- workforce stability
- relationships with those that the employer is in the habit of dealing with such as referrals of work
- confidential information and trade secrets
The restriction to protect that legitimate interest must then be drafted so as to provide no more than reasonable protection for that interest. Courts consider:
- the duration of the restriction
- its scope
- the nature of the employer’s business and the ex-employee’s role when they entered into the restriction
- sector specific factors
- the other employment terms of the ex-employee
Courts are prepared to use a “blue pencil” on a restriction when interpreting it. What does this actually mean? Wikipedia states that a “blue pencil is a pencil traditionally used by an editor or sub-editor to show corrections to a written copy. The colour is used specifically because it will not show in some lithographic or photographic reproduction processes; these are known as non-photo blue pencils...With the introduction of electronic editing using word processors or desktop publishing, literal blue pencils are seen more rarely, but still exist in metaphor.”
Lawyers advise that the “blue pencil” is primarily used by the Court for crossing things out. So if an unreasonable restriction could be made reasonable and still meaningful by crossing some words out that is allowed.
In March this year however much excitement ensued (in legal circles) about blue pencils, with the High Court’s decision in Prophet Plc v Huggett.
The employee was subject to a restrictive covenant that prevented him from competing with, or working for a competitor of, his former employer, Prophet. The restriction though was narrowed by the way it was written as it defined competition as being linked to the provision of computer software systems for the fresh produce industry, produced by Prophet. The employee had moved to a competitor company and Prophet, sought to enforce the covenant.
Based on the way the restrictive covenant had been written, Prophet accepted that the competitor company would never provide software systems produced by them and therefore the covenant could not work as written. The Court though rejected the employee's assertion that the covenant meant to say what it said. Instead, it was decided that the addition of three words to the covenant reflected its true meaning, as that would include software systems produced by Prophet "or similar thereto". The Judge then proceeded to consider Prophet's injunction application on the basis of the covenant's new wording.
The excitement around the High Court’s decision was short lived however because in July when the Court of Appeal got its hand on this case they promptly overturned the decision. The “blue pencil” could not be used to add words in.
No matter what colour pencil you are inclined to use it is imperative your restrictive covenants protect the business interest you want to protect. If in doubt please come to us for a review of what you have.